PRIME HOSPITALITY CORP, 424B3, 1997-10-27

PRIME HOSPITALITY CORP
424B3, 1997-10-27
HOTELS & MOTELS

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<PAGE> 1
As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-38749

HOMEGATE HOSPITALITY, INC.
111 CONGRESS AVENUE
SUITE 2600
AUSTIN, TEXAS 78701

October 27, 1997

Dear Stockholder:

You are cordially invited to attend a Special Meeting of Stockholders of
Homegate Hospitality, Inc. ("Homegate") to be held at 9:00 a.m. local time on
December 1, 1997 at The Four Seasons Hotel, 98 San Jacinto, Austin, Texas 78701.

At the Special Meeting you will be asked to consider a proposal to
authorize and adopt the Agreement and Plan of Merger, dated as of July 25, 1997,
(the "Merger Agreement"), providing for the merger (the "Merger") of a
subsidiary of Prime Hospitality Corp. ("Prime") with and into Homegate and to
authorize the other transactions contemplated by the Merger Agreement. The
consummation of the Merger will result in, among other things, Homegate becoming
a subsidiary of Prime and the issuance and exchange of each outstanding share of
common stock, par value $.01 per share, of Homegate ("Homegate Common Stock")
for 0.6073 of a newly issued share of common stock, par value $.01 per share, of
Prime (the "Exchange Ratio"), all as more fully described in the accompanying
Proxy Statement-Prospectus.

ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING PROXY STATEMENT-PROSPECTUS AND THE ANNEXES THERETO,
WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY. PLEASE DO NOT SEND ANY
SHARE CERTIFICATES AT THIS TIME.

HOMEGATE'S BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS AND
CONDITIONS OF THE PROPOSED MERGER AND HAS DETERMINED THAT THE TERMS OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN
THE BEST INTERESTS OF, HOMEGATE AND ITS STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT AND THE AUTHORIZATION OF THE MERGER AND THE TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT.

Certain stockholders of Homegate beneficially owning 6,096,416 shares of
Common Stock as of October 24, 1997, the Record Date for the Special Meeting
(the "Homegate Record Date"), representing approximately 56.8% of the
outstanding Homegate Common Stock, have advised Homegate that they have granted
irrevocable proxies in favor of Prime to vote all of such stockholders' shares
of Homegate Common Stock owned as of the Homegate Record Date in favor of
approval of the Merger Agreement. The proposal to adopt the Merger Agreement
requires the approval of the holders of at least two-thirds of the outstanding
shares of Homegate Common Stock.

In view of the importance of the action to be taken at this Special Meeting
of Homegate stockholders, we urge you to review carefully the accompanying
Notice of Special Meeting of Stockholders and the Proxy Statement-Prospectus,
including the annexes thereto, which also include information on Homegate and
Prime. Whether or not you expect to attend the Special Meeting, please complete,
sign and date the enclosed proxy and return it to Homegate as promptly as
possible.

Very truly yours,

/s/ ROBERT A. FAITH
-------------------
ROBERT A. FAITH
Chairman of the Board, Chief Executive
Officer and President
<PAGE> 2

HOMEGATE HOSPITALITY, INC.
111 CONGRESS AVENUE
SUITE 2600
AUSTIN, TEXAS 78701

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 1, 1997
------------------------

To the Stockholders of Homegate Hospitality, Inc.:

The Special Meeting of Stockholders of Homegate Hospitality, Inc., a
Delaware corporation ("Homegate"), will be held at The Four Seasons Hotel, 98
San Jacinto, Austin, Texas 78701, on December 1, 1997 at 9:00 a.m. local time,
for the following purposes:

1. To consider and vote on a proposal (the "Merger Proposal") to adopt
the Agreement and Plan of Merger, dated as of July 25, 1997 (the "Merger
Agreement"), among Prime Hospitality Corp., a Delaware corporation
("Prime"), PH Sub Corporation, a wholly owned subsidiary of Prime ("Sub"),
and Homegate, providing for the merger (the "Merger") of Sub with and into
Homegate, and to authorize the Merger and the other transactions
contemplated thereby. The consummation of the Merger will result in, among
other things, Homegate becoming a wholly owned subsidiary of Prime and the
issuance and exchange of outstanding shares of common stock, par value $.01
per share, of Homegate (the "Homegate Common Stock") for newly issued
shares of common stock, par value $.01 per share, of Prime, all as more
fully described in the accompanying Proxy Statement-Prospectus. A copy of
the Merger Agreement is attached as Annex A to the accompanying Proxy
Statement-Prospectus.

2. To transact such other business as may properly come before the
meeting, or any adjournment or postponement thereof.

The Board of Directors of Homegate has fixed the close of business on
October 24, 1997, as the record date for the determination of the holders of
Homegate Common Stock entitled to notice of, and to vote at, the meeting and
adjournments or postponements thereof. The Merger Proposal requires the approval
of the holders of not less than two-thirds of the outstanding shares of Homegate
Common Stock.

Information regarding the proposed Merger, the Merger Agreement and related
matters is contained in the accompanying Proxy Statement-Prospectus and the
annexes thereto, which are incorporated by reference herein and form a part of
this Notice.

All Stockholders are cordially invited to attend the Special Meeting. To
ensure your representation at the Special Meeting, however, you are urged to
complete, date, sign and return the enclosed proxy as promptly as possible. A
postage prepaid envelope is enclosed for that purpose. Any Stockholder attending
the Special Meeting may vote in person even if that Stockholder has returned a
proxy.

By Order of the Board of Directors

/s/ ROBERT A. FAITH
-------------------
ROBERT A. FAITH
Chairman of the Board, Chief Executive
Officer and President

Dated: October 27, 1997

PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
<PAGE> 3

<TABLE>
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Homegate Hospitality, Inc. Prime Hospitality Corp.
111 Congress Avenue, Suite 2600 700 Route 46 East
Austin, Texas 78701 Fairfield, New Jersey 07007
(512) 477-6400 (201) 882-1010
</TABLE>

HOMEGATE HOSPITALITY, INC

PROXY STATEMENT
------------------------

PRIME HOSPITALITY CORP.

PROSPECTUS

This Proxy Statement-Prospectus (the "Proxy Statement-Prospectus") is being
furnished to the holders of common stock, par value $0.01 per share (the
"Homegate Common Stock"), of Homegate Hospitality, Inc., a Delaware corporation
("Homegate"), in connection with the solicitation of proxies by the Board of
Directors of Homegate (the "Homegate Board of Directors") for use at a Special
Meeting of Stockholders of Homegate to be held at The Four Seasons Hotel, 98 San
Jacinto, Austin, Texas 78701, on December 1, 1997, at 9:00 a.m. local time, and
at any and all adjournments or postponements thereof (the "Homegate Special
Meeting").
This Proxy Statement-Prospectus relates to the proposed merger (the
"Merger") into Homegate of PH Sub Corporation ("Sub"), a wholly owned subsidiary
of Prime Hospitality Corp. ("Prime"), pursuant to an Agreement and Plan of
Merger, dated as of July 25, 1997 (the "Merger Agreement"), among Prime, Sub and
Homegate. Upon consummation of the Merger, Homegate will become a wholly owned
subsidiary of Prime. In the Merger, each outstanding share of Homegate Common
Stock (other than shares owned by Homegate or its subsidiaries or by Prime or
its subsidiaries, all of which will be canceled) will be converted into and
represent the right to receive 0.6073 of a share (the "Exchange Ratio") of
common stock, par value $.01 per share, of Prime (the "Prime Common Stock") and
cash in lieu of fractional shares of Prime Common Stock. Consummation of the
Merger is subject to various conditions, including the approval of not less than
two-thirds of the outstanding shares of Homegate Common Stock at the Homegate
Special Meeting.
Pursuant to certain Voting Agreements, dated as of July 25, 1997, among
Prime and certain stockholders of Homegate (the "Voting Agreements"), certain
stockholders of Homegate have granted irrevocable proxies in favor of Prime to
vote all of such stockholders' shares of Homegate Common Stock as of October 24,
1997, the record date for the Homegate Special Meeting (the "Homegate Record
Date"), in favor of the Merger (6,096,416 shares of Homegate Common Stock,
representing approximately 56.8% of the outstanding Homegate Common Stock as of
the Homegate Record Date). Such stockholders have sole voting and investment
power with respect to all the Homegate Common Stock held of record by them.

This Proxy Statement-Prospectus also constitutes the Prospectus of Prime
with respect to 6,513,292 shares of Prime Common Stock to be issued in
connection with the Merger. Upon consummation of the Merger, former holders of
Homegate Common Stock will beneficially own approximately 13.8% of the
outstanding Prime Common Stock. Prime Common Stock is traded on The New York
Stock Exchange (the "NYSE") under the symbol "PDQ." On October 24, 1997, the
closing sales price for Prime Common Stock as reported on the NYSE was $22 5/16
per share. At such price, the equivalent value of a share of Homegate Common
Stock (the "Equivalent Value") would be $13.55, calculated on the basis of the
Exchange Ratio, and the aggregate consideration in the Merger would be
approximately $145.3 million. The actual value of the Prime Common Stock is
subject to fluctuation and could be more or less than the market price of the
Prime Common Stock on the date of this Proxy Statement-Prospectus or the date of
the Homegate Special Meeting. Any such change will cause a corresponding change
in the Equivalent Value and the aggregate consideration in the Merger. Holders
of Homegate Common Stock are urged to obtain more recent market information
relating to the closing sales price for the Prime Common Stock.

The Boards of Directors of Homegate, Prime and Sub, and Prime as the holder
of all the outstanding capital stock of Sub, have approved the Merger Agreement.
THE HOMEGATE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF HOMEGATE
COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. See "The
Merger -- Interests of Certain Persons in the Merger."
Proxies for the Homegate Special Meeting may be revoked, subject to the
procedures described herein, at any time up to and including the date of the
Homegate Special Meeting. See "The Homegate Special Meeting -- Record Date;
Voting Rights; Proxies."
All information contained in this Proxy Statement-Prospectus with respect
to Homegate has been provided by Homegate. All information contained in this
Proxy Statement-Prospectus with respect to Prime and Sub has been provided by
Prime.
This Proxy Statement-Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Homegate on or about October 27, 1997.

SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE EVALUATED IN CONNECTION WITH THE MERGER.
------------------------
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 PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS OCTOBER 27, 1997.
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
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PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. iii
FORWARD LOOKING STATEMENTS............................................................ iii
INCORPORATION OF DOCUMENTS BY REFERENCE............................................... iv
SUMMARY............................................................................... 1
RISK FACTORS.......................................................................... 12
Risk Relating to Integration of Homegate and Prime.................................. 12
AmeriSuites and Homegate Expansion Risks............................................ 12
Risks of the Lodging Industry; Competition.......................................... 13
Hotel Acquisition Risks............................................................. 13
Geographic Concentration of Hotels.................................................. 13
Leverage............................................................................ 14
Employment and Other Government Regulation.......................................... 14
Environmental Regulation............................................................ 14
Importance of Franchisor Relationships.............................................. 15
Dependence on Key Employees......................................................... 15
THE HOMEGATE SPECIAL MEETING.......................................................... 16
Purpose of the Homegate Special Meeting............................................. 16
Record Date; Voting Rights; Proxies................................................. 16
Solicitation of Proxies............................................................. 16
Required Vote....................................................................... 16
THE MERGER............................................................................ 18
General............................................................................. 18
Effective Date...................................................................... 18
Conversion of Shares; Procedures for Exchange of Certificates....................... 18
Background to the Merger............................................................ 19
Recommendation of the Board of Directors of Homegate; Reasons for the Merger........ 24
Interests of Certain Persons in the Merger.......................................... 26
Opinion of Homegate's Financial Advisor............................................. 28
Certain Federal Income Tax Consequences............................................. 31
Accounting Treatment................................................................ 32
Certain Legal Matters............................................................... 33
Federal Securities Law Consequences................................................. 33
Registration Rights................................................................. 33
Listing............................................................................. 34
Appraisal Rights.................................................................... 34
Certain Effects of the Interim Financing and the Termination Fee.................... 34
THE MERGER AGREEMENT.................................................................. 35
The Merger.......................................................................... 35
Effective Date...................................................................... 35
Terms of the Merger................................................................. 35
Exchange Procedures................................................................. 36
Representations and Warranties...................................................... 37
Certain Covenants................................................................... 37
No Solicitation..................................................................... 38
Indemnification and Insurance....................................................... 38
Conditions.......................................................................... 39
Termination; Fees and Expenses...................................................... 39
Amendment; Waiver................................................................... 40
THE INTERIM FINANCING................................................................. 41
</TABLE>

i
<PAGE> 5

<TABLE>
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PAGE
----
<S> <C>
RECENT SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PRIME........................ 42
PRIME MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 45
SELECTED CONSOLIDATED FINANCIAL DATA OF PRIME AND ITS PREDECESSOR..................... 61
BUSINESS OF PRIME..................................................................... 62
MANAGEMENT OF PRIME................................................................... 77
SELECTED CONSOLIDATED FINANCIAL DATA OF HOMEGATE...................................... 79
HOMEGATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 80
BUSINESS OF HOMEGATE.................................................................. 85
MANAGEMENT OF HOMEGATE................................................................ 93
COMPARATIVE PER SHARE DATA............................................................ 96
PRO FORMA CONDENSED FINANCIAL INFORMATION............................................. 98
DESCRIPTION OF PRIME CAPITAL STOCK.................................................... 109
Common Stock........................................................................ 109
Preferred Stock..................................................................... 109
Warrants............................................................................ 109
Anti-Takeover Provisions............................................................ 109
Limitations on Directors' Liability................................................. 110
Certain Provisions of Delaware Law Regarding an Interested Stockholder.............. 110
Transfer Agent and Registrar........................................................ 110
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 111
SECURITY OWNERSHIP OF HOMEGATE........................................................ 113
OTHER MATTERS......................................................................... 115
LEGAL MATTERS......................................................................... 115
EXPERTS............................................................................... 115
HOMEGATE STOCKHOLDER PROPOSALS........................................................ 115
INDEX TO FINANCIAL STATEMENTS......................................................... F-1

Annex A -- Merger Agreement
Annex B -- Opinion of Bear, Stearns & Co. Inc.
</TABLE>

ii
<PAGE> 6

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION
TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE
HEREOF OR INCORPORATED BY REFERENCE HEREIN SINCE THE DATE HEREOF.

AVAILABLE INFORMATION

Homegate and Prime are subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the
following Regional Offices of the Commission: Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. 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 Homegate Common Stock is listed on the Nasdaq
National Market. Material filed by Homegate can be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. The Prime Common Stock is listed on the NYSE. Material
filed by Prime can be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.

This Proxy Statement-Prospectus does not contain all the information set
forth in the Registration Statement on Form S-4 and exhibits relating thereto,
including any amendments (the "Registration Statement"), of which this Proxy
Statement-Prospectus is a part, and which Prime has filed with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). Reference
is made to such Registration Statement for further information with respect to
Prime and the securities of Prime offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission or attached as an
annex hereto. The information in this Proxy Statement-Prospectus concerning
Homegate and Prime has been furnished by Homegate and Prime, respectively.

FORWARD LOOKING STATEMENTS

Certain statements in this Proxy Statement-Prospectus under the captions
"Summary," "Risk Factors," "Prime Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Homegate Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business of Prime" and "Business of Homegate" 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 Prime or Homegate, 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

iii
<PAGE> 7

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 Proxy Statement-Prospectus. See "Risk Factors." These
forward-looking statements speak only as of the date of this Proxy
Statement-Prospectus. Prime and Homegate each expressly disclaims any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in Prime's or Homegate's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.

INCORPORATION OF DOCUMENTS BY REFERENCE

Prime (Commission File No. 1-6869) hereby incorporates by reference into
this Proxy Statement-Prospectus the following documents previously filed with
the Commission pursuant to the Exchange Act:

1. Prime's Annual Report on Form 10-K for the year ended December 31,
1996;

2. Prime's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997 and June 30, 1997;

3. The description of the Prime Common Stock contained in Prime's
Registration Statement on Form 8-A, dated June 5, 1992, as amended on July
9, 1992 and December 21, 1992; and

4. Prime's Current Reports on Form 8-K dated March 3, 1997 and July
25, 1997.

In addition, all reports and other documents filed by Prime pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the consummation of the Merger shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement-Prospectus to the
extent that a statement contained herein, or in any other subsequently filed
document that also is incorporated or deemed to be incorporated by reference
herein, modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement-Prospectus.

THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE FILED
BY PRIME WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR
ORAL REQUEST FROM ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT-PROSPECTUS IS DELIVERED, FROM PRIME HOSPITALITY CORP., 700 ROUTE 46
EAST, FAIRFIELD, NEW JERSEY 07007, ATTENTION: SECRETARY (TEL. (201) 882-1010).
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BY NOVEMBER 21, 1997.

iv
<PAGE> 8

SUMMARY

The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement-Prospectus and the Annexes hereto.
This summary is not intended to be complete and is qualified in its entirety by
the more detailed information contained elsewhere or incorporated by reference
in this Proxy Statement-Prospectus. Stockholders of Homegate and Prime should
read carefully this Proxy Statement-Prospectus in its entirety. 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 Prime 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 Prime's operating performance or as alternatives to cash
flows as a measure of liquidity.

THE COMPANIES

Prime.

Prime is a national hotel company, with a portfolio of 117 hotels
containing 16,631 rooms located in 28 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, Prime'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 positive trends
continued in the first half of 1997. For the six months ended June 30, 1997,
EBITDA increased by 39.2% to $59.4 million and recurring net income increased by
76.2% to $20.5 million over the same period in 1996.

Prime's strategy is to capitalize on two lodging industry trends perceived
by management: (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, Prime owns and operates 105 of the
117 hotels in the Portfolio (the "Owned Hotels") and holds financial or equity
interests in 7 of the remaining 12 hotels managed by Prime for third parties
(the "Managed Hotels"). Furthermore, more than 85% of Prime's capital spending
in 1995 and 1996 was dedicated to the growth of Prime's proprietary AmeriSuites
and Wellesley Inns brands. Through its focus on hotel equity ownership, Prime is
benefiting from the operating leverage inherent in the lodging industry. Through
its development of proprietary brands, Prime 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 nine years. Over the past three years, Prime has achieved rapid
growth in the Portfolio, from 5,092 owned rooms at January 1, 1994 to 14,093
owned rooms at October 1, 1997. At the same time, Prime 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 83 of the 105 Owned Hotels at October 1, 1997.

Prime's hotels serve three major lodging industry segments: the all-suites
segment, under Prime's proprietary AmeriSuites brand; the upscale full-service
segment, under major national franchises; and the limited-service segment,
primarily under Prime's proprietary Wellesley Inns brand.

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<PAGE> 9

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 55 hotels at October 1, 1997, an increase of 323%.
In 1996, AmeriSuites contributed approximately $26.0 million, or 28.6%, of
Prime's Hotel EBITDA. For the six months ended June 30, 1997, AmeriSuites
contributed approximately $23.0 million, or 37.2%, of Prime's Hotel EBITDA, a
percentage which Prime believes will continue to increase significantly during
the second half of 1997 and 1998.

Full-Service: Prime operates 29 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, Prime's full-service hotels contributed approximately $44.5
million, or 48.9%, of Prime's Hotel EBITDA. For the six months ended June 30,
1997, Prime's full-service hotels contributed approximately $26.8 million, or
43.3%, of Prime's Hotel EBITDA.

Limited-Service: Prime operates 33 limited-service hotels, 28 of which are
Wellesley Inns. Prime 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 five limited-service hotels, four of which are managed for third
parties, are operated under franchise agreements with well-known national
chains. In 1996, Prime's limited-service hotels contributed approximately $20.5
million, or 22.5%, of Prime's Hotel EBITDA. For the six months ended June 30,
1997, Prime's limited-service hotels contributed approximately $12.1 million, or
19.5%, of Prime'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. These trends continued in 1997, as Prime achieved REVPAR increases in
the second quarter of 1997 at its comparable AmeriSuites, full-service and
limited-service hotels of 10.7%, 15.3% and 7.5%, respectively, versus 1996
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) Prime's Wellesley Inns are positioned
to benefit from a $9.0 million renovation and reimaging program completed in
March 1997.

Prime'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. These trends continued in 1997, as
gross operating profit in the second quarter of 1997 increased by 13.5%, 26.2%
and 12.7%, respectively, for comparable AmeriSuites, full-service and
limited-service hotels. Prime expects to further improve its operating
performance 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 Ameri-
Suites brand through the construction of new AmeriSuites hotels. Prime 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, 55 AmeriSuites are open, with an additional 44 hotels under
development, including 22 under construction. At these levels, Prime 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. Prime's AmeriSuites franchise initiatives will initially include forming
strategic alliances with regional and national developers and REITs and
developing franchise marketing, training and quality assurance programs.

2
<PAGE> 10

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. Prime 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. Prime is committed to the expansion
of the AmeriSuites brand due to its attractive investment returns, rapid
stabilization, broad customer appeal and positioning in the fast growing
all-suites segment.

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) borrowings under Prime's $100 million revolving
credit facility (the "Revolving Credit Facility"); (ii) internally generated
free cash flow from hotel operations; and (iii) proceeds from anticipated
sale/leaseback transactions with respect to certain of its properties. Prime may
also from time to time seek additional debt or equity financing.

On September 22, 1997, Prime entered into a strategic alliance with Equity
Inns, Inc. ("Equity Inns"), a real estate investment trust, for purposes of
financing its brand development through the sale/leaseback of AmeriSuites
hotels. Under the agreement, Equity Inns has certain rights to acquire
AmeriSuites hotels developed by Prime over the next three years. As part of the
alliance, Prime has entered into an initial agreement with Equity Inns for the
sale of 10 AmeriSuites hotels for aggregate consideration of $86.3 million,
consisting of $77.7 million in cash and $8.6 million in Equity Inns limited
partnership operating units. Prime has also agreed to lease the hotels from
Equity Inns for a term of 10 years, with certain renewal options.

Prime is a Delaware corporation incorporated in 1985. The principal office
of Prime is located at 700 Route 46 East, Fairfield, New Jersey 07007-2700 and
its telephone number is (201) 882-1010.

Homegate.

Homegate's goal is to become a national provider of high quality
extended-stay hotels in strategically selected markets located throughout North
America. Homegate is rapidly developing a chain of mid-price extended-stay
hotels under the HOMEGATE Studios & Suites(R) brand name to capitalize on what
management believes is a large and underserved market for extended-stay
accommodations. This market includes business travelers, professionals on
temporary work assignments, persons between domestic situations, and persons
relocating or purchasing a home, who often desire accommodations for an extended
duration. As of June 30, 1997, Homegate owned 8 hotels and had 34 more under
development, including 17 under construction. Additionally, as of such date
Homegate had 11 sites under contract with letters of intent and other
arrangements. Homegate's objective is to have approximately 65 extended-stay
hotels open or under construction by December 31, 1998.

Homegate was founded by management and by affiliates of the following three
entities: Trammell Crow Residential Company ("TCR"), one of the nation's leading
developers of multi-family housing units with 22 regional offices; Greystar
Capital Partners, L.P. ("Greystar"), a private investment company with
substantial multi-family housing development and construction expertise; and
Crow Realty Investors d/b/a Crow Investment Trust ("Crow"), the real estate
investment arm of the various descendants of Mr. and Mrs. Trammell Crow and
various corporations, partnerships, trusts and other entities beneficially owned
or controlled by such persons known collectively as "Crow Family." In TCR,
Greystar, and Crow, Homegate brings together extensive experience in developing,
constructing and managing properties on a national scale and in structuring,
financing and executing national real estate investment programs. TCR, Greystar,
Crow and their affiliates own approximately 59.6% of the outstanding Homegate
Common Stock. See "Security Ownership of Homegate."

Homegate has entered into a master development agreement with a partnership
(the "Developer Partnership"), comprised of TCR and Greystar (the "Developer
Affiliates"), to provide site selection, construction and development services
for Homegate's objective to open or begin construction on approximately 65
hotels by December 31, 1998 (the "Initial Hotel Program"). Management believes
the Developer Affiliates' expertise and local market presence will significantly
enhance Homegate's ability to execute its Initial Hotel Program, while
minimizing Homegate's development costs and administrative overhead.

3
<PAGE> 11

Homegate also has entered into a master management assistance agreement
(the "Management Agreement") with a subsidiary of Wyndham Hotel Corporation
(together with its predecessors and affiliates "Wyndham"), which owns, operates
or franchises more than 70 hotels in North America, to manage Homegate's hotels
pursuant to 10-year management contracts. Wyndham has agreed to be acquired by
Patriot American Hospitality Corp. ("Patriot"). The Crow Family currently owns
approximately 43.7% of Wyndham's common stock which will be converted into an
ownership interest in Patriot as a result of the acquisition. If the Merger is
consummated, Homegate, Prime and Wyndham have agreed to terminate the Management
Agreement (and each of the underlying contracts).

Homegate's product strategy is to develop a well-recognized national brand
under the HOMEGATE Studios & Suites name by offering consistent, high quality
accommodations in a standard format, providing much of the value offered by
limited service hotels with many of the added features and comforts of apartment
living. HOMEGATE Studios & Suites hotels features three functional room
configurations, each with a fully-equipped kitchen, upscale residential-quality
furnishings and accessories, and separated cooking, living, as well as sleeping
areas. In addition, other amenities, such as weekly maid service, twice-weekly
linen service, resident laundry facilities, direct telephone service with voice
mail messaging and dataport capabilities, cable T.V., a business center and an
exercise facility are also offered. See "Business of Homegate -- Product
Concept."

Homegate currently operates a total of eight hotels located in the
following areas: Austin, Texas on Towne Lake; Grand Prairie, Texas near
Dallas/Fort Worth International Airport and Six Flags Amusement Park; Irving,
Texas also near Dallas/Fort Worth International Airport; two in San Antonio,
Texas located near the airport and Fiesta Park Amusement Center; El Paso, Texas;
Amarillo, Texas; and Phoenix, Arizona near Phoenix Sky Harbor Airport. The
Austin and Grand Prairie hotels were purchased on December 31, 1996, and May 31,
1996, respectively. The Phoenix hotel was developed and built using the TCR
Phoenix office. The other five hotels, referred to as the "Westar" hotels, were
purchased on September 6, 1996.

The Westar hotels contain an aggregate of 622 units, all of which are
studio units similar to the studio units in the HOMEGATE Studios & Suites
prototype. The Westar hotels are being renovated at an aggregate anticipated
cost of $6.6 million, of which $3.7 million has been spent through June 30,
1997, to conform to the quality standards of Homegate's prototype, and will be
operated under the HOMEGATE Studios & Suites brand name. The Grand Prairie
property contains 139 units. The Austin Towne Lake property contains 149 units
which enjoy views of the lake and downtown Austin. The Towne Lake property had
been operated as an extended-stay property by the previous owner. Homegate plans
to "reflag" the property. Homegate does not plan to renovate this property as it
currently conforms to Homegate's quality standards. The Phoenix property
contains 139 units and is prototypical of the Homegate brand and standard.

Homegate was incorporated in August 1996 as a Delaware corporation to
succeed to the business of a predecessor partnership. Homegate's executive
offices are at 111 Congress Avenue, Suite 2600, Austin, Texas 78701, and its
telephone number is (512) 477-6400.

Combined Company.

After giving effect to the Merger, the combined Company, on a pro forma
basis as of June 30, 1997, would have had approximately $1.1 billion in assets,
of which approximately 91.2% is attributable to Prime and 8.8% is attributable
to Homegate. For the six months ended June 30, 1997, on a pro forma basis, the
total revenues of the combined Company would have been approximately $163.5
million, of which approximately 97.5% is attributable to Prime and 2.5% is
attributable to Homegate. The percentage of assets and revenues attributable to
Homegate reflects the start-up nature of the Homegate operations. As the
Homegate brand is developed, the percentage contribution of the Homegate
operations to the combined Company is expected to increase.

Prime intends to rapidly develop both the AmeriSuites and Homegate brands.
Prime plans to have 69 AmeriSuites and 20 Homegate hotels open by the end of
1997 and 100 AmeriSuites and 50 Homegate hotels open by the end of 1998. In
order to accomplish this growth, the Company intends to utilize Homegate's
development alliances with TCR, Greystar and Crow, and the existing internal
development teams at both

4
<PAGE> 12

companies. The Company intends to operate the Homegate hotels as a separate
operating division. The Wyndham management agreement will be terminated and the
Homegate hotels will be managed by Prime's central management team in the same
manner as other Prime hotels. Certain Homegate management, administrative and
financial positions are expected to be eliminated in connection with the
integration of operations. By the end of 1997, the Company expects to have
approximately 150 hotels under operation, including 69 AmeriSuites and 20
Homegate hotels.

Upon consummation of the Merger, former Homegate shareholders will own
approximately 6.5 million shares of Prime Common Stock, which will represent
approximately 13.8% of the outstanding Prime Common Stock.

THE HOMEGATE SPECIAL MEETING

Time, Place and Date

A Special Meeting of the stockholders of Homegate will be held at The Four
Seasons Hotel, 98 San Jacinto, Austin, Texas 78701, on December 1, 1997, at 9:00
a.m. local time (including any and all adjournments or postponements thereof,
the "Homegate Special Meeting").

Purpose of the Meeting

At the Homegate Special Meeting, holders of Homegate Common Stock will
consider and vote upon a proposal to approve and adopt an Agreement and Plan of
Merger, dated as of July 25, 1997, among Homegate, Prime and Sub, a copy of
which is attached as Annex A to this Proxy Statement-Prospectus, providing for
the Merger of Sub with and into Homegate. As a result of the Merger, Homegate
will become a wholly owned subsidiary of Prime. In the Merger, each outstanding
share of Homegate Common Stock will be converted into and represent the right to
receive 0.6073 of a share of Prime Common Stock. Stockholders of Homegate will
also consider and vote upon any other matter that may properly come before the
meeting.

Vote Required; Record Date

The Merger will require approval and adoption of the Merger Agreement by
the affirmative vote of not less than two-thirds of the outstanding shares of
Homegate Common Stock entitled to vote thereon. Holders of Homegate Common Stock
are entitled to one vote per share. Only holders of Homegate Common Stock at the
close of business on October 24, 1997 (the "Homegate Record Date") will be
entitled to notice of and to vote at the Homegate Special Meeting. On the
Homegate Record Date, there were 10,725,000 shares of Homegate Common Stock
outstanding and entitled to vote. Pursuant to the Voting Agreements, certain
stockholders of Homegate have granted irrevocable proxies in favor of Prime to
vote all of such stockholders' shares of Homegate Common Stock as of the
Homegate Record Date in favor of the Merger (6,096,416 shares of Homegate Common
Stock, representing approximately 56.8% of the outstanding Homegate Common Stock
as of the Homegate Record Date). See "The Homegate Special Meeting."

RECOMMENDATION OF THE BOARD OF DIRECTORS OF HOMEGATE; REASONS FOR THE MERGER

The Board of Directors of Homegate believes that the terms of the Merger
are fair to and in the best interests of its stockholders and have approved the
Merger Agreement and the related transactions. The Homegate Board of Directors
unanimously recommends that its stockholders approve and adopt the Merger
Agreement. The Homegate Board believes that the proposed Merger provides its
stockholders the opportunity to participate on attractive terms in a
substantially larger entity that has access to the capital required to continue
aggressive development of the HOMEGATE Studios & Suites brand. In addition, the
Homegate Board believes that the combination of the HOMEGATE Studios & Suites
brand with Prime's AmeriSuites and Wellesley Inns brands will afford Homegate's
stockholders the opportunity to participate, as stockholders of Prime, in an
exciting multi-brand strategy. See "The Merger -- Background of the Merger,"
"-- Recommendation of the Board of Directors of Homegate; Reasons for the
Merger" and "-- Interests of Certain Persons in the Merger."

5
<PAGE> 13

INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the Homegate Board of Directors with
respect to the Merger Agreement and the transactions contemplated thereby,
Homegate stockholders should be aware that certain members of Homegate's
management and the Homegate Board of Directors have certain interests in the
Merger that are in addition to the interests of stockholders of Homegate
generally. These interests arise from, among other things, certain employee
benefit plans, indemnification and insurance arrangements and other matters
which Prime will assume or has agreed to provide after the Merger. See "The
Merger -- Interests of Certain Persons in the Merger."

In connection with the Merger, John Kratzer, the Chief Operating Officer of
Homegate, is expected to enter into an employment agreement with Prime to serve
as Senior Vice President. As of October 27, 1997, the specific terms of such
employment agreement had not been determined. In addition, Tim Keith will
receive a severance payment of $82,500 in connection with the Merger, and Prime
has agreed to pay Mr. Keith his 1997 bonus of $35,000 in January 1998.

As a result of the Merger, all options outstanding under Homegate's 1996
Long-Term Incentive Plan (other than those issued to non-employee directors,
which were fully vested and exercisable when granted) will become immediately
exercisable. Robert A. Faith, John C. Kratzer, Tim V. Keith and Joel Kinzie
Oldham, IV, each an executive officer of Homegate, hold an aggregate of 321,250
of the options granted in October 1996 with exercise prices of $11.50 (having an
aggregate market value of $501,953 based on the closing price of the Homegate
Common Stock on October 24, 1997) and an aggregate of 38,000 of the options
granted in March 1997 with exercise prices of $8.37 (having an aggregate market
value of $178,315 based on the closing price of the Homegate Common Stock on
October 24, 1997). Each of Messrs. Faith, Keith and Oldham, is a beneficiary of
an agreement with Prime pursuant to which, if such executive's employment with
Homegate is terminated within one year following the Merger, such executive's
options will be extended so that they will not expire until their original
expiration dates (ten years from the date of grant).

THE MERGER

Merger Consideration

On the effective date of the Merger (the "Effective Date"), each
outstanding share of Homegate Common Stock (other than shares owned by Homegate
or its subsidiaries and Prime or its subsidiaries, all of which will be
canceled) will be automatically converted (subject to certain provisions
described herein with respect to fractional shares) into and represent the right
to receive 0.6073 of a share of Prime Common Stock. Cash will be paid in lieu of
fractional shares. Upon consummation of the Merger, Sub will be merged with and
into Homegate and Homegate, as the surviving corporation in the Merger, will
become a wholly owned subsidiary of Prime. See "The Merger Agreement -- Terms of
the Merger."

Conditions to the Merger; Termination

The respective obligations of Homegate and Prime to consummate the Merger
are subject to the fulfillment of the following conditions: (a) obtaining
requisite approval of the holders of Homegate Common Stock; (b) the
effectiveness of the Registration Statement; (c) the absence of any order or
injunction against the consummation of the Merger; (d) the receipt of necessary
consents, authorizations, orders and approvals of any governmental commission,
board or other regulatory body; and (e) the approval of the Prime Common Stock
for listing on the NYSE.

6
<PAGE> 14

be expected to have, a material adverse change in the financial condition,
business, results of operations or prospects of either Homegate or Prime and its
subsidiaries, taken as a whole.

The Merger Agreement may be terminated at any time prior to the Effective
Date, before or after the approval by the stockholders of Homegate: (a) by the
mutual consent of Homegate and Prime; (b) by action of the Board of Directors of
either Homegate or Prime if (i) the Merger shall not have been consummated by
December 31, 1997, (ii) the approval of the Merger Agreement by Homegate's
stockholders shall not have been obtained, or (iii) a court or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by the Merger Agreement and
such order, decree, ruling or other action shall have become final and
non-appealable; (c) by action of the Board of Directors of Homegate, if (i) in
the exercise of its good faith judgment as to fiduciary duties to its
stockholders imposed by law, the Board of Directors of Homegate determines that
such termination is required by reason of an Alternative Proposal (as defined in
"The Merger Agreement -- No Solicitation"), (ii) there has been a breach by
Prime or Sub of any representation or warranty contained in the Merger Agreement
which would have or would be reasonably likely to have a material adverse effect
or (iii) there has been a material breach by Prime of any covenant or agreement
contained in the Merger Agreement which is not cured; or (d) by action of the
Board of Directors of Prime, if (i) the Board of Directors of Homegate shall
have withdrawn or modified in a manner adverse to Prime its approval or
recommendation of the Merger Agreement or the Merger, or shall have recommended
an Alternative Proposal to Homegate stockholders, (ii) there has been a breach
by Homegate of any representation or warranty contained in the Merger Agreement
which would have or would be reasonably likely to have a material adverse effect
or (iii) there has been a material breach by Homegate of any covenant or
agreement contained in the Merger Agreement which is not cured.

If (x) Homegate terminates the Merger Agreement because its Board of
Directors, in the exercise of its good faith judgment as to its fiduciary duties
to its stockholders imposed by law, determines that such termination is required
by reason of an Alternative Proposal being made for Homegate, (y) Prime
terminates the Merger Agreement because the Board of Directors of Homegate shall
have withdrawn or modified in a manner adverse to Prime its approval or
recommendation of the Merger Agreement or the Merger or shall have recommended
an Alternative Proposal to Homegate stockholders or (z) any person shall have
made an Alternative Proposal and thereafter the Merger Agreement is terminated
by either party as a result of the requisite approval of the holders of Homegate
Common Stock having not been obtained, or by Prime as a result of Homegate's
intentional failure to perform one of its agreements contained in the Merger
Agreement or intentional breach of one of its representations or warranties
contained in the Merger Agreement, and within 12 months thereafter such
Alternative Proposal shall have been consummated, then Homegate (or the
successor thereto) is required to pay in cash to Prime a termination fee of
$3,325,000 (the "Termination Fee"), within two days after such termination (in
the case of (x) or (y)) or consummation (in the case of (z)).

Certain aspects of the Termination Fee could have the effect of
discouraging a third party from pursuing an acquisition transaction involving
Homegate. See "The Merger -- Certain Effects of the Interim Financing and the
Termination Fee."

Accounting Treatment

It is expected that the Merger will be accounted for as a pooling of
interests for accounting and financial reporting purposes. See "The
Merger -- Accounting Treatment."

Listing

It is a condition to the Merger that the shares of Prime Common Stock to be
issued in the Merger be authorized for listing on the NYSE, subject to official
notice of issuance. See "The Merger -- Listing."

7
<PAGE> 15

Appraisal Rights

Under Delaware law, the holders of Homegate Common Stock are not entitled
to any appraisal rights in connection with the Merger. See "The
Merger -- Appraisal Rights."

Voting Agreements

As a condition to entering into the Merger Agreement, Prime required
certain stockholders of Homegate to enter into the Voting Agreements pursuant to
which such stockholders agreed to vote their shares of Homegate Common Stock in
favor of the approval of the Merger Agreement and granted irrevocable proxies in
favor of Prime to vote all of such stockholders' shares of Homegate Common Stock
held on the Homegate Record Date (equal to approximately 56.8%, or 6,096,416
shares, of the issued and outstanding shares of Homegate Common Stock as of the
Homegate Record Date) in favor of the approval of the Merger.

OPINION OF HOMEGATE'S FINANCIAL ADVISOR

Homegate retained Bear, Stearns & Co. Inc. ("Bear Stearns") to act as its
financial advisor and to render its opinion as to whether the consideration to
be received by the public shareholders of Homegate pursuant to the Merger is
fair, from a financial point of view. Bear Stearns is an internationally
recognized investment banking firm and is continually engaged in the valuation
of businesses and their securities and in rendering opinions in connection with
mergers, acquisitions, corporate transactions and other purposes. Homegate
retained Bear Stearns based on its qualifications, expertise and reputation in
providing advice to companies with respect to transactions similar to the
Merger.

At a meeting held on July 24, 1997, Bear Stearns orally advised Homegate's
Board of Directors of its conclusions and subsequently delivered its written
opinion to the effect that, based upon and subject to the various considerations
set forth in such opinion, as of the date of such opinion, the consideration to
be received by the public shareholders of Homegate pursuant to the Merger is
fair, from a financial point of view, to such shareholders. The summary of Bear
Stearns' opinion set forth in this Proxy Statement-Prospectus is qualified in
its entirety by reference to the full text of such opinion, which is attached as
Annex B to this Proxy Statement-Prospectus. Homegate shareholders are urged to,
and should, read such opinion carefully in its entirety in connection with this
Proxy Statement-Prospectus for assumptions made, matters considered and limits
of the review by Bear Stearns. See "The Merger -- Opinion of Homegate's
Financial Advisor."

THE INTERIM FINANCING

Prime agreed to provide, pending consummation of the Merger, up to $65.0
million of interim secured financing (the "Interim Loans") to Homegate to enable
Homegate to acquire and develop certain hotel properties. As of October 27,
1997, an aggregate of $32.6 million in Interim Loans was outstanding. See "The
Interim Financing."

Certain aspects of the interim financing could have the effect of
discouraging a third party from pursuing an acquisition involving Homegate. See
"The Merger Agreement -- Certain Effects of the Interim Financing and the
Termination Fee."

HOMEGATE PLANS IF THE MERGER IS NOT CONSUMMATED

If the Merger is not consummated, Homegate will face an immediate working
capital shortage that will require it to seek additional financing and take
measures to preserve cash. Homegate would also be required to seek replacement
financing for the Interim Loans, which will mature on April 30, 1998. There can
be no assurance that the required additional financing would be available or
that it would be available on acceptable terms. Measures taken to preserve cash
would most likely include the interruption of construction activity on some or
all projects under development. Interruption of construction activity would
preclude Homegate from meeting its growth plans, which would most likely have at
least a temporary material adverse effect on the market price of Homegate Common
Stock.

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<PAGE> 16

RISK FACTORS

Holders of Homegate Common Stock, in voting on the Merger, should consider
among other factors the following factors: (i) risks relating to integration of
Homegate and Prime; (ii) AmeriSuites expansion risks; (iii) risks of the lodging
industry and competition; (iv) hotel acquisition strategy; (v) geographic
concentration of hotels; (vi) leverage; (vii) employment and other regulation;
(viii) environmental regulation; (ix) importance of franchisor relationships;
and (x) dependence on key employees. See "Risk Factors."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

Consummation of the Merger is conditioned upon Homegate and Prime receiving
opinions of their respective counsel to the effect that the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). See "The Merger --
Certain Federal Income Tax Consequences." Accordingly, except as more fully
described under "The Merger -- Certain Federal Income Tax Consequences," no gain
or loss will be recognized by Homegate stockholders except with respect to cash
received in lieu of fractional shares and no gain or loss will be recognized by
Homegate, Prime or Sub as a result of the Merger.

PRIME COMMON STOCK

There are 75,000,000 shares of Prime Common Stock authorized, of which, as
of October 17, 1997, there were 40,690,463 shares outstanding, an additional
2,602,025 shares issuable upon exercise of outstanding options and 721,465
shares issuable upon exercise of outstanding warrants and 7,187,500 shares
reserved for issuance with respect to $86,250,000 aggregate principal amount of
Convertible Subordinated Notes due 2002. It is anticipated that on the Effective
Date, 6,513,292 shares of Prime Common Stock will be issued to the holders of
Homegate Common Stock, representing approximately 13.8% of the outstanding Prime
Common Stock after such issuance, and an additional 389,431 shares of Prime
Common Stock will be issuable upon the exercise of options which were previously
exercisable for shares of Homegate Common Stock. Prime Common Stock trades on
the NYSE under the symbol "PDQ." See "Description of Prime Capital Stock."

COMPARATIVE RIGHTS OF STOCKHOLDERS

The rights of Homegate stockholders currently are governed by Delaware law,
Homegate's Certificate of Incorporation and Homegate's By-laws. Upon
consummation of the Merger, stockholders of Homegate will become stockholders of
Prime, which is also a Delaware corporation, and their rights as stockholders of
Prime will be governed by Delaware law, Prime's Certificate of Incorporation and
Prime's By-laws. For a comparison of the rights of Homegate stockholders and the
rights of Prime stockholders, see "Comparison of Stockholder Rights."

MARKET AND MARKET PRICES

Prime

Prime Common Stock trades on the NYSE under the symbol "PDQ." The following
table sets forth the high and low sale prices of the Prime Common Stock as
reported by the NYSE for each of the quarters in the two year period ended
December 31, 1996 and for the first, second, third and fourth quarters (through
October 24) of 1997.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
-------------------------------------------------------------
First Quarter................................................ $10 3/8 $ 73/8
Second Quarter............................................... 10 5/8 91/4
Third Quarter................................................ 11 91/2
Fourth Quarter............................................... 10 1/4 93/8
</TABLE>

9
<PAGE> 17

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
-------------------------------------------------------------
First Quarter................................................ $13 5/8 $ 9 5/8
Second Quarter............................................... 17 1/4 12
Third Quarter................................................ 19 7/8 16 3/8
Fourth Quarter............................................... 17 1/4 14
1997
-------------------------------------------------------------
First Quarter................................................ $18 1/8 $14 1/8
Second Quarter............................................... 20 7/8 14 3/4
Third Quarter................................................ 22 1/4 17 1/2
Fourth Quarter (through October 24).......................... 23 3/16 21 1/16
</TABLE>

On October 24, 1997, the last sales price of Prime Common Stock on the NYSE
was $22 5/16. The public announcement of the Merger Agreement occurred on July
25, 1997.

Homegate

Since October 25, 1996, Homegate Common Stock has traded on Nasdaq under
the symbol "HMGT." The following table sets forth the high and low sale prices
of the Homegate Common Stock as reported by Nasdaq for the fourth quarter in the
period ended December 31, 1996 and for the first, second, third and fourth
quarters (through October 24) of 1997.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
-------------------------------------------------------------
Fourth Quarter............................................... $12 1/4 $6 3/4
1997
-------------------------------------------------------------
First Quarter................................................ $ 9 1/4 $6 15/16
Second Quarter............................................... 10 3/8 6
Third Quarter................................................ 13 5/8 8 15/16
Fourth Quarter (through October 24).......................... 13 7/8 12 5/8
</TABLE>

On October 24, 1997, the last sales price of Homegate Common Stock on
Nasdaq was $13 1/16. The public announcement of the Merger Agreement occurred on
July 25, 1997.

EQUIVALENT PER SHARE DATA

The following tables set forth certain data concerning the historical book
value per share, cash dividends declared per share and net income (loss) per
fully diluted share for Prime and Homegate, respectively, on a pro forma basis
after giving effect to the Merger, as if such transaction had occurred at the
beginning of the period presented. The information should be read in conjunction
with the unaudited Pro Forma Condensed Financial Information of Prime contained
elsewhere in this Proxy Statement-Prospectus, the historical financial
statements of Prime incorporated herein by reference and the historical
financial statements of Homegate contained elsewhere herein. The unaudited pro
forma equivalent per share data shows for each share of Prime Common Stock and
Homegate Common Stock before the Merger and its equivalent position after giving
effect to the Merger. Homegate stockholders will receive 0.6073 of a share of
Prime Common Stock for each share of Homegate Common Stock outstanding.

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<PAGE> 18

Historical

<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE THE
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED YEAR ENDED
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31,
JUNE 30, 1997 DECEMBER 31, 1996 1995 1994
----------------- ----------------- ---------------- ----------------
PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE
------ -------- ------ -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book value per share............ $11.01 $ 5.95 $10.55 $ 6.03 $7.51 $ -- $6.71 $ --
Cash dividends per share........ -- -- -- -- -- -- -- --
Net income (loss) per fully
diluted share................. $ .48 $ (.08) $ .80 $ (.08) $ .54 $ -- $ .58 $ --
</TABLE>

Prime -- Pro Forma

Homegate -- Equivalent Pro Forma

SURRENDER OF STOCK CERTIFICATES

On the Effective Date, Prime will instruct Continental Stock Transfer &
Trust Company, in its capacity as exchange agent for the Merger (the "Exchange
Agent"), to mail to each holder of record of Homegate Common Stock a transmittal
letter within three business days. The transmittal letter will contain
instructions with respect to the surrender of certificates representing Homegate
Common Stock to be exchanged for Prime Common Stock. See "The
Merger -- Conversion of Shares; Procedures for Exchange of Certificates."

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<PAGE> 19

RISK FACTORS

Holders of Homegate Common Stock should consider carefully all of the
information contained in this Proxy Statement-Prospectus, including the
following risk factors:

RISK RELATING TO INTEGRATION OF HOMEGATE AND PRIME

The realization of certain benefits anticipated as a result of the Merger
will depend in part on the integration of Homegate's extended-stay hotel
business with Prime and the successful inclusion of Homegate's hotels in Prime's
Portfolio. The dedication of management resources to such integration may
detract attention from the day-to-day business of Prime. Extended-stay lodging
is a market in which Prime does not currently operate. There can be no assurance
that there will not be substantial costs associated with the transition process
or that there will not be other material adverse effects as a result of these
integration efforts. There can be no assurance that Homegate's business can be
operated profitably or integrated successfully into Prime's operations. Such
effects could have a material adverse effect on the financial results of Prime.

AMERISUITES AND HOMEGATE EXPANSION RISKS

Prime is committed to expanding its AmeriSuites hotel brand and, upon
consummation of the Merger, the Homegate hotel brand, to meet growing demand in
the all-suite and extended stay hotel segments. Prime will be required to expend
significant management and financial resources to expand its hotel brands and
develop brand name identification. Prime competes with other companies in the
all-suites segment and, following the Merger, in the extended stay segment, some
of which companies have greater brand recognition and financial resources than
Prime. As a result, there is no assurance that Prime can successfully expand its
hotel brands or compete effectively with these other franchises. Prime will be
expanding into hotel markets where it does not currently operate. There can be
no assurance that Prime 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 Prime's business.

The expansion of its brands will require significant capital. Prime
believes that the availability under the Revolving Credit Facility, cash flow
from operations and proceeds from anticipated sale/leaseback transactions will
be sufficient to fund the near term growth of its brands. However, there can be
no assurance that Prime will be able to obtain financing to fund the growth of
its brands beyond the near term. If Prime is unable to obtain additional
financing, the growth prospects for its brands and the financial results of
Prime would be adversely affected.

Prime's growth strategy of developing new AmeriSuites and Homegate hotels
will subject Prime to pre-opening and pre-stabilization costs. As Prime opens
additional hotels, such costs may adversely affect Prime's results of
operations. Newly opened hotels historically begin with lower occupancy and room
rates that improve over time. While Prime has in the past successfully opened
new hotels, there can be no assurance that Prime 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 Prime seeks to manage its construction activities so
as to minimize such risks, there can be no assurance that its brand expansion
will perform in accordance with Prime's expectations.

The opening of the new AmeriSuites and Homegate 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 hotel. There can
be no assurance that the necessary permits, licenses and approvals for the
construction and operation of the new hotels will be obtained, or that such
permits, licenses and approvals will be obtained within the anticipated time
frame.

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<PAGE> 20

Of Prime's 55 AmeriSuites, 30, or 54.5%, have been open less than one year
and 37, or 67.3%, have been open less than two years. Of the eight Homegate
hotels, all have been acquired or constructed by Homegate within the past year.
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 and Homegate 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

Prime's business is subject to all of the risks inherent in the lodging
industry. These risks include, among other things, adverse effects of general
and local economic conditions, changes in local market conditions, oversupply of
hotel space, a reduction in local demand for hotel rooms, changes in travel
patterns, changes in governmental regulations that influence or determine wages,
prices or construction costs, changes in interest rates, the availability of
credit and changes in real estate taxes and other operating expenses. Prime'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. Prime'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 Prime's hotels are located. Furthermore,
there can be no assurance that, in the markets in which Prime'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 of
Prime -- Industry Overview."

HOTEL ACQUISITION RISKS

Prime from time to time makes selective acquisitions of hotels with
repositioning potential, notably in the full-service segment and in locations
where Prime 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 Prime'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 Prime's hotels open or under development are located in Florida,
New Jersey, New York, Georgia, Texas and Tennessee, and such geographic
concentration exposes Prime'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 Prime. While
Prime's AmeriSuites and Homegate expansion is expected to reduce these risks,
Prime will remain subject to certain risks associated with geographic
concentration.

In addition, Prime owns the Marriott's Frenchman's Reef Beach Resort (the
"Frenchman's Reef ") in St. Thomas, U.S. Virgin Islands. Prime 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 Prime's EBITDA for the year ended December 31, 1996 and
10.1% during the six months ended June 30, 1997. 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

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<PAGE> 21

travel patterns. Adverse developments with respect to the Frenchman's Reef may
have a material adverse effect on the results of operations of Prime.

In September 1995, the Frenchman's Reef suffered hurricane damage when
Hurricane Marilyn struck the U.S. Virgin Islands. Prime and its insurance
carrier settled Prime's property and business interruption insurance claim for
$25.0 million. Due to this insurance coverage, Prime's liquidity was affected
only to the extent of its insurance deductibles, for which Prime provided a
reserve of $2.2 million in 1995. In July 1996, Hurricane Bertha struck the
island and caused further damage to the hotel. Prime is currently reviewing its
claims for property damage and business interruption insurance with its
insurance carrier with respect to the damage caused by Hurricane Bertha.
Although Prime has continued to operate the hotel, the impact of the hurricanes
has caused operating profits to decline. Prime is currently underway with plans
to refurbish and upgrade the Frenchman's Reef. Prime estimates that the cost of
refurbishment will be approximately $35.0 million. Due to the extent of the
renovations and the additional damage caused by Hurricane Bertha, Prime 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 Prime's estimate. Prime 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.

LEVERAGE

As of June 30, 1997, after giving effect to the Merger, Prime's total
long-term debt (including current portion) would have been $489.5 million. Prime
expects it may incur additional indebtedness in connection with the
implementation of its growth strategy. The degree to which Prime is leveraged,
as well as its rent expense, could have important consequences to holders of
Prime Common Stock, including: (i) Prime'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
Prime'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 Prime for its operation; and (iii) certain of Prime's indebtedness,
including the Revolving Credit Facility, contains financial and other
restrictive covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends and sales of
assets, as well as those imposing minimum net worth requirements. See "Prime
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

EMPLOYMENT AND OTHER GOVERNMENT REGULATION

The lodging industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and beverage (such as health and liquor license laws) and building and
zoning requirements. Also, Prime 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 Prime. 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 Prime believes its hotels are substantially in
compliance with these requirements, a determination that Prime 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
Prime 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-

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<PAGE> 22

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, Prime may be potentially liable for any such costs.
Although Prime 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 Prime or against Prime 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 Prime.

IMPORTANCE OF FRANCHISOR RELATIONSHIPS

Prime currently enjoys good relationships with its major franchisors,
Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard
Johnson, and Prime 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, Prime 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

Prime 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 Prime's business
and future operations. See "Management of Prime."

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<PAGE> 23

THE HOMEGATE SPECIAL MEETING

PURPOSE OF THE HOMEGATE SPECIAL MEETING

At the Homegate Special Meeting, holders of Homegate Common Stock will
consider and vote upon a proposal to approve and adopt the Merger Agreement and
such other matters as may properly be brought before the Homegate Special
Meeting.

THE BOARD OF DIRECTORS OF HOMEGATE HAS APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.

RECORD DATE; VOTING RIGHTS; PROXIES

The Homegate Board of Directors has fixed the close of business on October
24, 1997 as the Homegate Record Date for determining holders entitled to notice
of and to vote at the Homegate Special Meeting.

As of the Homegate Record Date, there were 10,725,000 shares of Homegate
Common Stock issued and outstanding, each of which entitles the holder thereof
to one vote. All shares of Homegate Common Stock represented by properly
executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated in such proxies. IF NO
INSTRUCTIONS ARE INDICATED, SUCH SHARES OF HOMEGATE COMMON STOCK WILL BE VOTED
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.

Homegate does not know of any matters other than as described in the Notice
of Special Meeting that are to come before the Homegate Special Meeting. If any
other matter or matters are properly presented for action at the Homegate
Special Meeting, the persons named in the enclosed form of proxy and acting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment, unless such authorization is withheld. A stockholder who
has given a proxy may revoke it at any time prior to its exercise by giving
written notice thereof to the Secretary of Homegate, by signing and returning a
later dated proxy, or by voting in person at the Homegate Special Meeting;
however, mere attendance at the Homegate Special Meeting will not in and of
itself have the effect of revoking the proxy.

The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Homegate Common Stock entitled
to vote is necessary to constitute a quorum at the Homegate Special Meeting.
Votes cast by proxy or in person at the Homegate Special Meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the stockholders for a vote, proxies are marked as abstentions (or
stockholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the stockholders for a vote. If a broker
indicates on the proxy that it does not have discretionary authority as to
certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.

SOLICITATION OF PROXIES

Homegate will bear its own cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by the directors and officers of
Homegate by personal interview, telephone, telegram or electronic mail. Such
directors and officers will not receive additional compensation for such
solicitation but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. Arrangements may also be made with brokerage firms and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of shares of Homegate Common Stock held of record by such
persons, in which case Homegate will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith.

REQUIRED VOTE

The approval of the Merger requires the affirmative vote of the holders of
not less than two-thirds of the outstanding shares of Homegate Common Stock. An
abstention will have the same effect as a vote against the

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<PAGE> 24

Merger. As of the Homegate Record Date, there were 10,725,000 shares of Homegate
Common Stock outstanding and entitled to vote held by approximately 29
stockholders of record. As of the Homegate Record Date, directors and officers
of Homegate as a group beneficially owned 6,309,356 shares of Homegate Common
Stock, or approximately 58.7% of those shares of Homegate Common Stock
outstanding as of such date. All directors and executive officers of Homegate
have indicated that they intend to vote their shares for approval and adoption
of the Merger Agreement. Pursuant to the Voting Agreements, certain stockholders
of Homegate have granted irrevocable proxies in favor of Prime to vote all of
such stockholders' shares of Homegate Common Stock held as of the Homegate
Record Date in favor of the Merger Agreement and the Merger (6,096,416 shares of
Homegate Common Stock, or approximately 56.8% of the outstanding shares of
Homegate Common Stock as of the Homegate Record Date).

THE MATTERS TO BE CONSIDERED AT THE HOMEGATE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF HOMEGATE. ACCORDINGLY, STOCKHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT-PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.

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<PAGE> 25

THE MERGER

GENERAL

The Merger Agreement provides that the Merger will be consummated if the
approval of the Homegate stockholders required therefor is obtained and all
other conditions to the Merger are satisfied or waived. Upon consummation of the
Merger, Sub will be merged with and into Homegate, and Homegate will become a
wholly owned subsidiary of Prime.

Upon consummation of the Merger, each outstanding share of Homegate Common
Stock (other than shares owned by Homegate as treasury stock or by its
subsidiaries or by Prime or its subsidiaries, all of which will be canceled)
will be automatically converted (subject to provisions with respect to
fractional shares) into the right to receive 0.6073 of a share of Prime Common
Stock. Cash will be paid in lieu of fractional shares.

Based upon the capitalization of Homegate and Prime as of the Homegate
Record Date, the stockholders of Homegate will own approximately 13.8% of the
outstanding Prime Common Stock following consummation of the Merger. Such
percentage could change depending on the number of shares of Prime Common Stock
and Homegate Common Stock issued upon exercise of outstanding Homegate and Prime
stock options.

EFFECTIVE DATE

The Effective Date of the Merger will occur upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware (the
"Certificate of Merger") or at such later Prime as is specified on such
certificate. The filing of the Certificate of Merger will occur as soon as
practicable after the satisfaction of the conditions set forth in the Merger
Agreement. The Merger Agreement may be terminated by either party if the Merger
has not been consummated on or before December 31, 1997 and under certain other
conditions. See "The Merger Agreement -- Conditions" and "-- Termination; Fees
and Expenses."

CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES

The conversion, at the Exchange Ratio, of Homegate Common Stock into the
right to receive Prime Common Stock will occur automatically at the Effective
Date.

On the Effective Date, Prime will instruct the Exchange Agent to mail to
each holder of record of Homegate Common Stock within three business days a
transmittal letter and instructions for use in effecting the surrender of
certificates which represented shares of Homegate Common Stock. Upon receipt of
such certificates, the Exchange Agent will deliver full shares of Prime Common
Stock to such stockholder and cash in lieu of fractional shares pursuant to the
terms of the Merger Agreement and in accordance with the transmittal letter,
together with any dividends or other distributions to which such stockholder is
entitled without interest.

If any issuance of shares of Prime Common Stock in exchange for shares of
Homegate Common Stock is to be made to a person other than the holder of
Homegate Common Stock in whose name the certificate is registered at the
Effective Date, it will be a condition of such exchange that the certificate so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the holder of Homegate Common Stock requesting such issuance either pay any
transfer or other tax required or establish to the satisfaction of Prime that
such tax has been paid or is not payable.

After the Effective Date, there will be no further transfers of Homegate
Common Stock on the stock transfer books of Homegate. If a certificate
representing Homegate Common Stock is presented for transfer, it will be
canceled and a certificate representing the appropriate number of full shares of
Prime Common Stock and cash in lieu of fractional shares and any dividends and
distributions will be issued in exchange therefor, without interest.

After the Effective Date and until surrendered, shares of Homegate Common
Stock will be deemed for all corporate purposes, other than the payment of
dividends and distributions, to evidence ownership of the number of full shares
of Prime Common Stock into which such shares of Homegate Common Stock were

18
<PAGE> 26

converted on the Effective Date. No dividends or other distributions, if any,
payable to holders of Prime Common Stock will be paid to the holders of any
certificates for shares of Homegate Common Stock until such certificates are
surrendered. Upon surrender of such certificates, all such declared dividends
and distributions payable after the Effective Date will be paid to the holder of
record of the full shares of Prime Common Stock represented by the certificate
issued in exchange therefor, without interest.

HOLDERS OF HOMEGATE COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HOLDERS OF
HOMEGATE COMMON STOCK SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.

BACKGROUND TO THE MERGER

In early 1997, Homegate began to explore its options for raising the
additional capital that would be required for it to continue its hotel
development program after the expenditure of the remaining funds from its
October 1996 initial public offering and existing credit facility. The Company
sought both conventional first mortgage financing and "mezzanine financing,"
consisting of subordinated debt financing for an additional portion of hotel
development costs (beyond that provided by the first mortgage financing) that
would most likely require returns comparable to an equity investment. The most
promising financing option then being considered included mezzanine financing
that would be dilutive to equity through the issuance of warrants to the party
providing the financing. In this context, Homegate had a number of discussions
with Bear Stearns, which had been the lead managing underwriter of Homegate's
initial public offering.

Prime has announced that it is pursuing a strategy which focuses on the
development of proprietary brands with the objective of evolving into a
multi-brand franchise company.

Against this background, on February 5, 1997 representatives of Homegate
and Prime attending an industry conference in New York met and, at Prime's
suggestion, began to explore the desirability of a business combination
transaction whereby (i) Homegate would become a subsidiary of Prime with
Homegate's stockholders receiving shares of Prime Common Stock in the merger and
(ii) Prime would continue development of the Homegate brand as part of a
multi-brand strategy, together with Prime's AmeriSuites brand. At this meeting,
the parties agreed to share certain confidential information so that they might
further assess their mutual interests in pursuing a possible transaction. On
February 11, 1997, a confidentiality agreement was signed pursuant to which the
parties began to exchange information.

On March 3, 1997, representatives of Prime met with representatives of
Homegate in Dallas, Texas to understand further Homegate's concept, to view a
prototype property and to discuss further their interest in the potential
transaction.

On March 24, 1997, the Board of Directors of Homegate (the "Homegate
Board") met in Dallas and considered various financing alternatives, including
the potential use of mezzanine financing with warrants attached and/or the
issuance of convertible debt securities in a private or public transaction. At
this meeting the Homegate Board was briefed by Homegate's management concerning
the discussions with Prime, and the Homegate Board instructed management to
continue the discussions with Prime. The Homegate Board believed that the
potential business combination with Prime should be explored fully before
committing to a financing that would dilute the existing Homegate stockholders'
percentage ownership in Homegate's extended stay lodging business in order that
such dilution could be avoided if the potential business combination appeared
attractive and was to be pursued in the near term. While the Homegate Board
recognized that a business combination transaction with Prime would dilute the
Homegate stockholders' interest in the extended stay business conducted by
Homegate, the Homegate Board also noted that the Homegate stockholders would
gain an interest in a much larger lodging business conducted by Prime.

On May 1, 1997, representatives of Homegate and Prime met in Phoenix,
Arizona. At this meeting, the parties had their first preliminary discussions of
the terms on which a business combination might be pursued. The parties
contemplated that the transaction would be structured as a tax-free,
stock-for-stock merger and that Prime would provide Homegate with a bridge
financing facility to enable Homegate to continue its hotel

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<PAGE> 27

development program during the pendency of the process. At this meeting, Prime
preliminarily indicated that it was contemplating an exchange ratio that would
value Homegate Common Stock at approximately $10.00 per share, but indicated
that it would continue to refine its valuation analysis as it continued its due
diligence.

On May 5, 1997, in conjunction with Homegate's annual meeting of
stockholders in Austin, Texas, the Homegate Board met to discuss, among other
things, its strategic options, including the pursuit of financing from third
party sources to continue its hotel development program and the potential
business combination transaction with Prime. Representatives of Bear Stearns
attended a portion of the meeting and presented to the Homegate Board certain
background information concerning Prime and, based on published research
reports, indicated its preliminary view that a transaction could be accretive to
Prime with merger consideration per share of Homegate Common Stock in excess of
$11.50. At this meeting, James D. Carreker, a Homegate director and the Chairman
and Chief Executive Officer of Wyndham, made a proposal to the Homegate Board
outlining Wyndham's interest in providing Homegate with alternative mezzanine
financing that would be less dilutive to equity than that currently being
considered by Homegate but would be conditioned upon amendment of the Master
Management Assistance Agreement between Homegate and Wyndham to provide for a
significant increase in the termination fee payable in the event such agreement
was terminated prematurely in connection with a change of control or otherwise.
At this meeting, the Homegate Board had its first of several extensive
discussions of the relative merits of the strategic alternatives before it,
focusing on the potential risks and rewards attendant the more highly leveraged
financing alternative and the benefits to Homegate stockholders of the business
combination alternative. Ultimately, the Homegate Board instructed management to
continue its discussions with Wyndham and the other third party financing source
and its discussions with Prime, focusing in the Prime context on increasing the
value Prime would be willing to provide Homegate stockholders in the business
combination. At this meeting, the Homegate Board also considered the likelihood
of finding another party with which a business combination could then be
negotiated that would provide benefits for Homegate stockholders competitive
with those that might be gained from a combination with Prime. The Homegate
Board concluded that, given (i) Homegate's short existence, (ii) its having only
recently commenced the execution of its business plan and (iii) its general
understanding of other major lodging companies and their strategies, it was not
likely that there were any other attractive acquirors with which a combination
could then be negotiated. Accordingly, other merger candidates were not actively
solicited.

Mr. Carreker and two other Homegate Directors, Harlan R. Crow and Anthony
W. Dona, excused themselves from the May 5 meeting during the discussions
concerning Wyndham and advised that they would refrain from participating in any
subsequent Homegate Board actions or discussions concerning Wyndham because of
the potential conflicts presented by their separate relationships with Wyndham.
CF Securities, L.P., an affiliate of Mr. Crow and Crow Family, owns
approximately 43.7% of the outstanding shares of common stock of Wyndham, and
Mr. Dona is an executive officer of Crow, which is also an affiliate of Mr. Crow
and Crow Family. Thereafter, Messrs. Carreker, Crow and Dona did not participate
in any Homegate Board actions or deliberations concerning Wyndham and related
matters.

On May 14, 1997, Prime provided to Homegate an initial term sheet
indicating Prime's interest in pursuing a transaction pursuant to which Homegate
stockholders would be offered Prime Common Stock pursuant to an exchange ratio
that valued Homegate Common Stock at $11.50 per share. The exchange ratio was to
be set based on the average closing price of Prime Common Stock for the ten
trading days preceding execution of a definitive agreement. The Prime proposal
included an adjustment mechanism providing for a decrease in the exchange ratio
(of up to 6.5%) if the value of Prime Common Stock should increase prior to the
closing of the business combination, without a corresponding increase in the
exchange ratio if the market price of Prime Common Stock should decrease prior
to the closing. The proposal also contemplated, among other terms, the execution
by various Homegate affiliates of agreements providing for the development by
TCR and Greystar of other (non-Homegate) branded hotels for the benefit of
Prime, and noncompetition by Homegate affiliates for two years following the
business combination. Furthermore, the proposal contemplated, as a condition of
closing, that termination of the Master Management Assistance Agreement with
Wyndham should be effected for a termination fee not to exceed $975,000.

20
<PAGE> 28

On May 19, 1997, the Homegate Board held a telephonic meeting to consider,
among other things, the receipt of the initial term sheet from Prime and the
results of continued discussions with Wyndham regarding Wyndham's willingness to
provide mezzanine financing. At this meeting, the Homegate Board of Directors
determined to continue to pursue both alternatives and to continue to seek more
value from Prime in the business combination context. The Board further
requested that management and Bear Stearns prepare preliminary financial
analyses of the strategic alternatives.

On May 27, 1997, the Homegate Board met again and considered further the
strategic alternatives in light of the preliminary financial analyses received
from management and Bear Stearns. At the May 27 meeting, management presented to
the Homegate Board the results of its financial analyses valuing Homegate under
two capitalization scenarios, one assuming continuing operations through the
year 2000 utilizing the proposed Wyndham mezzanine financing as a supplement to
conventional first mortgage financing and the other assuming continuing
operations through the same period with the same financing but with a $50
million equity offering assumed as of January 1, 1999 (with the proceeds of the
offering being used to repay the Wyndham mezzanine financing). The stabilized
occupancy rate used in the analysis was in line with industry norms, and the
construction cost, average weekly room rate and lease-up assumptions were
consistent with comparable figures reported by competitors in the mid-price
segment of the extended stay market. It was assumed for purposes of the analyses
that the market price of Homegate Common Stock would begin to reflect the
following year's earnings estimates half way through a given year. Earnings per
share amounts for each of 1999 and 2000 were then multiplied by a factor of 17.7
and discounted back to December 31, 1997, yielding values ranging from $15.83 to
$23.30. It was noted that the earnings multiple of 17.7, while in line with
multiples for corporations in the lodging business generally, was higher than
the average of 14.4 for corporations in the extended stay lodging business. The
valuation analysis included sensitivity analyses reflecting the effect of
various occupancy rates and lease-up assumptions. A real estate liquidation
analysis was also performed on similar assumptions using net operating income
multiples of 7.0 to 10.0, assuming that a projected portfolio of 50 hotels was
liquidated in 1999. The liquidation analysis yield per share values ranging from
$12.20 to $23.60.

At the May 27 meeting, Bear Stearns presented to the Homegate Board an
analysis of the Prime merger alternative. After reciting the terms of the
current Prime merger proposal, the Bear Stearns report (i) analyzed the premiums
implied by merger consideration amounts ranging from $11.50 to $14.00 per share,
(ii) presented the multiples of projected 1997 and 1998 EBITDA and earnings
implied by such merger consideration amounts, (iii) analyzed one percent
extended stay merger and acquisition transaction, (iv) presented a relative
contribution analysis showing, on a pro forma basis, Prime's and Homegate's
relative contribution to a combined entity's enterprise value, equity value,
revenues, EBITDA, FBIT and net income, (v) summarized certain analysts' reports
concerning Prime; (vi) calculated pro forma implied trading values for Prime
Common Stock based on Prime's current earnings multiple and that for Prime's
peer group as a whole, using published estimates of Prime's 1997 and 1998
earnings, (vii) presented a survey of lodging companies showing their current
market valuation, total debt, operating cash flow, current trading multiples and
coverage ratios, and (viii) presented a preliminary merger consequences
analysis. The preliminary merger consequences analysis calculated
accretion/dilution to Prime implied by merger consideration amounts ranging from
$11.50 to $14.00 per share, assuming both pooling of interests and purchase
accounting, for both 1997 and 1998 projected earnings. Much of the preliminary
analysis reflected in Bear Stearns' report was thereafter finalized and included
in the final report given by it to the Homegate Board in connection with its
fairness opinion. See "-- Opinion of Homegate's Financial Advisor."

After further discussion of the alternatives' relative merits, the Homegate
Board indicated its preference to pursue the financing alternative if the value
of Prime's proposal was to be capped at $11.50.

On June 4, 1997, Prime notified Homegate that it was withdrawing its
earlier proposal in light of Homegate's lack of interest in pursuing a
transaction with an exchange ratio, based on an $11.50 price. On June 5, 1997,
this event was reported to Homegate's Board of Directors, who instructed
management to pursue the financing alternative. Thereafter, Homegate continued
to negotiate with Wyndham and its other financing source in an effort to secure
a satisfactory debt and mezzanine financing package.

21
<PAGE> 29

On June 20, 1997, Prime notified Homegate of its continued interest in
effecting a business combination and of its continued belief that the
combination of Prime's AmeriSuites chain with Homegate would provide a desirable
multi-brand offering. Prime requested Homegate to consider the May 14 term sheet
as reinstated with the exception that Prime would be willing to offer an
exchange ratio that valued the Homegate Common Stock at $12.75 per share, and
that was fixed (as before) by dividing $12.75 by the average closing price of
Prime Common Stock for the ten trading days preceding the execution of a
definitive merger agreement.

On June 23, 1997, representatives of Prime and Homegate met at Prime's
headquarters in New Jersey to negotiate further the terms of the business
combination. At this meeting, there was preliminary discussion of Prime's
willingness to provide a bridge financing facility in the amount of $65 million
and discussion of other transaction terms, including Prime's requirement of a
fixed exchange ratio, without adjustments for increases or decreases in the
market price of Prime Common Stock following the execution of a definitive
agreement.

On June 24, 1997, a representative of Wyndham advised Homegate that Wyndham
believed that it had reached a binding agreement with Homegate concerning the
provision of financing and related amendment of the Master Management Assistance
Agreement to provide for increased termination fees. Wyndham's view in this
regard was subsequently reiterated in a letter from Wyndham to the Homegate
Board in which Wyndham stated that the "loan program" had been agreed to by Mr.
Carreker, on behalf of Wyndham, and Mr. Faith, on behalf of Homegate, at a
meeting in New York on June 3, 1997. In the letter, Wyndham alleged that this
agreement was subsequently approved by the Boards of Directors of both Wyndham
and Homegate and threatened to "vigorously protect [its] rights" if anyone with
which Homegate was discussing "an inconsistent" transaction should seek to
interfere with the alleged agreement. Despite the delivery of this advice and
letter, Wyndham continued to negotiate with Homegate the terms on which it would
be willing to provide mezzanine financing.

On June 28, 1997, Mr. Carreker resigned from the Homegate Board, citing as
the reason for his resignation lender liability issues and the advice of counsel
that it would be unwise for him to continue as a director of an entity to which
Wyndham was lending and/or investing $52 million (the amount of mezzanine
financing that could ultimately be made available to Homegate by Wyndham under
Wyndham's financing proposal).

On June 30, 1997, the Homegate Board met telephonically to discuss the
renewed proposal from Prime, as supplemented by the negotiations of June 23. At
that meeting, the Homegate Board established a special committee of the Homegate
Board (the "Special Committee") comprised of Charles E. Noell, John R. Huff and
William B. Buchanan, Jr. to consider these strategic alternatives, including
both the Prime merger proposal and the financing alternative.

During the week of June 30, 1997, Homegate and Prime conducted further due
diligence and continued their discussions concerning a potential business
combination and the related bridge financing. During that week it became clear
that, in light of the requirement that any business combination involving
Homegate be approved by holders of two-thirds of the outstanding shares of
Homegate Common Stock, Prime would require that Homegate's major stockholders,
at the time of execution of a definitive agreement, to agree to vote the shares
over which they had voting authority in favor of the transaction. Mr. Crow told
Homegate and Prime that, as a major stockholder and director of both Homegate
and Wyndham, he felt Homegate and Wyndham should resolve matters between them
without any involvement or action by Mr. Crow, including then committing to vote
the shares of Homegate Common Stock over which he had voting control
(representing approximately 24.9% of the outstanding shares, assuming Mr. Crow
would direct the voting of one-half of the shares owned by Developer Extended
Stay Partners, L.P.) in connection with the business combination, that might
favor one company over the other. See "Security Ownership of Homegate."

On July 3, 1997, Prime advised Homegate that, in light of Mr. Crow's
unwillingness to commit to vote his shares in favor of the transaction, Prime
was unwilling to devote further resources in pursuit of the transaction. This
position was confirmed in writing by Prime on July 7.

On July 9, 1997, Wyndham delivered to Homegate a revised version of the
term sheet with respect to Wyndham's proposal to provide mezzanine financing.
While the parties conducted some negotiations

22
<PAGE> 30

following the delivery of this term sheet, a further revised term sheet was
never received by Homegate. The final Wyndham financing proposal (as evidenced
by the term sheet delivered on July 9, as modified by these further negotiations
between the parties) contemplated that, in connection with first mortgage
financing to be provided by another party covering 60% of project costs, Wyndham
would provide junior financing for another 20% of project costs on the following
terms:

(i) The obligation to provide the financing was to be capped at $20
million initially and was to increase to $56 million upon the consummation
of the pending acquisition of Wyndham by Patriot. Amounts were to be
advanced under such facility against project costs, including construction
period interest, for approved projects commenced during the first 24 months
following the date on which the facility was established (the "Facility
Closing Date"), with an option to extend the 24-month period to 48 months
upon the occurrence of certain conditions.

(ii) Amounts outstanding under the facility were to bear interest at
LIBOR plus 7% during the first 12 months following the Facility Closing
Date and at LIBOR plus 9% thereafter. Interest was to be payable monthly at
LIBOR plus 5%, with the remaining accrued interest ("Deferred Interest")
payable by Revenue Payments (defined below) and, if not already paid, on
the seventh anniversary (extendable by Homegate to the tenth anniversary in
certain circumstances) of the Facility Closing Date (the "Facility Maturity
Date") or earlier in certain circumstances. Commencing in the 25th month
following the Facility Closing Date, outstanding amounts were to bear
additional interest ("Additional Interest") equal to the lesser of 3.5% per
annum or the difference obtained by subtracting from the Revenue Payments
for each 12-month period an amount equal to 4% per annum on all outstanding
amounts during that 12-month period. The Additional Interest was to be paid
only out of Revenue Payments.

(iii) Beginning with the 37th month of the facility, Homegate was to
make annual payments to Wyndham (the "Revenue Payments") equal to the
lesser of (a) the amount of Additional Interest and Deferred Interest, and
(b) an amount calculated, for each stabilized project, as a percentage of
project revenues during the preceding 12-month period. The applicable
percentage was based on project performance, and ranged from 0% to 3%
initially and, beginning with the payment due on the 61st month, from 0% to
6%. Revenue Payments were also to be made with respect to a project upon
the sale of the project to a third party. Revenue Payments were to be
applied first to the Additional Interest and then to the Deferred Interest.

(iv) Beginning on the fifth anniversary of the Facility Closing Date,
Wyndham was to have the option, exercisable from time to time, to convert
any loans outstanding under the facility into Homegate Common Stock at a
15% discount from the market price at the time of such conversion. Homegate
was to have the right to force such conversion in certain circumstances.
Wyndham was also to have the right to appoint one member of Homegate's
Board of Directors while the facility was in existence, and Homegate was to
pay Wyndham a commitment fee equal to 1.5% of the initial facility amount
and, upon an increase in the commitment, 1.5% of the increased amount. In
connection with such financing, the Wyndham Master Management Assistance
Agreement was to be modified to provide that the exclusivity of such
arrangement would be extended for so long as Wyndham's financing facility
was in effect, that the agreement could not be terminated in connection
with a change in control of Homegate (provided that the exclusivity aspect
of such agreement could be eliminated when 45 individual hotel management
agreements had been executed thereunder) and that the termination fees
payable under the individual management agreements would be increased.
Loans were to be required to be prepaid in connection with the sale of
projects, in connection with any change of control of Homegate and with the
proceeds of future equity or permitted debt financings.

On July 10, 1997, Prime advised Homegate of Prime's willingness to proceed
with a business combination transaction without resolution of Wyndham's claims
and without adjustment of the proposed transaction consideration, provided that
Homegate's principal stockholders would agree to vote their shares of Homegate
Common Stock in favor of the transaction. Communication of Prime's position to
Mr. Crow did not result in a change in his position.

23
<PAGE> 31

On July 10, 1997, Homegate was also informed that Wyndham would require a
cash payment of at least $14 million to settle its claims against Homegate. On
July 12, 1997, Prime advised Homegate that it would be willing to commit to a
settlement with Wyndham that would provide Wyndham with a 25% premium to the
termination payment provided for under the Master Management Assistance
Agreement with Wyndham or, if Wyndham should reject such offer, Prime's
willingness to agree to resolve Wyndham's claims through binding arbitration.
Prime emphasized that it remained unwilling to move forward with a business
combination unless Mr. Crow would agree at the time of execution of the
definitive agreement to vote the shares of Homegate Common Stock he controlled
in favor of the transaction.

The Special Committee met on July 1, July 2, July 7, July 14, July 17 and
July 18 to discuss the relative merits of the Prime business combination and
Wyndham financing alternatives, the progress in the negotiations with Prime, the
status of negotiations with Wyndham concerning the provision of financing,
Homegate's need for liquidity, the litigation threat posed by Wyndham, the
unavailability of a commitment by Mr. Crow to vote his shares in favor of the
Prime transaction prior to resolution of the issues between Homegate and
Wyndham, the suspected derivation of the $14 million amount of Wyndham's
threatened claim, the projected termination fees that would be payable under the
existing Master Management Assistance Agreement with Wyndham, the ongoing
developments in the efforts to negotiate a settlement with Wyndham that would
facilitate Homegate's reaching an agreement with Prime with respect to a
business combination and the relative ranges of value represented by the Wyndham
financing and the Prime transaction. During these meetings the members of the
Special Committee gradually came to the view that there were numerous risks
inherent in pursuing the Wyndham financing alternative that would be avoided in
a merger with Prime. Included in these risks were those associated with a highly
leveraged structure, the need to refinance the Wyndham debt prior to the
prescribed escalation of interest rates and the potential dilution to Homegate's
stockholders in connection with Wyndham's right to convert its Homegate debt
into Homegate Common Stock at a discount from the then current market price if
the Wyndham debt could not be refinanced on a timely basis. The Special
Committee also considered the chilling effect the required changes to the
Wyndham Master Management Assistance Agreement (and underlying management
contracts) would have on any future attempt to effect a business combination or
sale of the company. Based in large part on the foregoing factors, the Special
Committee came to the view that a merger with Prime was the preferable
alternative.

On July 16, 1997, after discussions with Prime, Homegate advised Wyndham
that Homegate would be willing to pay to Wyndham, upon consummation of the Prime
transaction, $8 million in full and final settlement of all Wyndham's claims.
Wyndham indicated in response that it would be unwilling to accept any amount
less than $14 million. At this point, Mr. Crow offered that Crow Hotel Realty
Investors, L.P. ("CHRI"), an affiliate of Mr. Crow, would pay one-half, or $3
million, of the difference between Homegate's settlement offer and Wyndham's
demand, and suggested that other founding stockholders of Homegate (or their
affiliates) might fund the balance of the difference. Homegate believes that Mr.
Crow made such offer (and ultimately agreed, as described below, that CHRI would
pay the entirety of the amount by which Wyndham's settlement demand exceeded $8
million) because he desired that the differences between the two companies
(Wyndham and Homegate) in which his affiliates have significant holdings not
impede Homegate's desire to pursue the Merger with Prime.

On July 18, 1997, Homegate was advised by a representative of Mr. Crow that
CHRI would be willing to fund the entirety of a Wyndham settlement beyond the $8
million offered by Prime/Homegate. Such excess amount was ultimately negotiated
downward to $4 million. The only way in which the Merger will benefit Mr. Crow
(or CHRI, which indirectly owns shares of Homegate Common Stock through its
interest in CRI/ESH Partners, L.P.) differently than the public holders of
Homegate Common Stock is that affiliates of Mr. Crow (including CRI/ESH
Partners, L.P.) receiving shares of Prime Common Stock as a result of the Merger
will be afforded the benefits of a registration rights agreement with Prime
pursuant to which Prime has agreed to register such affiliates' resales of such
shares (which registration is unnecessary to enable non-affiliates of Homegate
to effect public sales of the shares of Prime Common Stock they receive in the
Merger). The settlement with Wyndham will result in the payments by Homegate and
CHRI described above and will otherwise have the effects described in "Homegate
Management's Discussion and Analysis of

24
<PAGE> 32

Financial Condition and Results of Operations -- Wyndham Settlement Agreement."
Another affiliate of Mr. Crow, CF Securities, L.P., owns approximately 43.7% of
the outstanding shares of Wyndham common stock.

Beginning on July 21, 1997, the parties and their counsel met in New York
to finalize their negotiation of the exchange ratio and the other unresolved
issues to be addressed in the definitive agreement and related documentation,
including a settlement agreement with Wyndham and a commitment letter with
respect to Prime's provision of interim financing. The Special Committee met
again on July 22 and 23, 1997, to discuss the progress of negotiations and on
July 23, concluded that the settlement with Wyndham was necessary to permit the
Prime transaction and unanimously resolved to recommend to the Homegate Board
(i) the approval and adoption of the Prime transaction and (ii) the approval of
the Wyndham settlement as fair to and in the best interest of all shareholders.
On July 23, 1997, the Homegate Board met by telephone and received the
recommendation of the Special Committee. Representatives of Bear Stearns
participated in the meetings of both the Special Committee and the Homegate
Board and during each meeting gave a preview of the fairness opinion it expected
to render the following day and the analyses underlying such opinion. Management
and Homegate's counsel described for both the Special Committee and the Homegate
Board the status of negotiation of the final open points, including whether
Homegate would have a representative on Prime's Board of Directors, the general
outline of severance benefits to be provided by Prime for Homegate employees
terminated in connection with the Merger, the situations in which Homegate would
owe a fee in connection with the termination of the Merger Agreement, details of
the indemnification and insurance arrangements to be provided by Prime following
the Merger for the benefit of Homegate's former officers and directors, the
terms of the Voting Agreements to be executed by certain Homegate stockholders
and the terms of a settlement agreement with Wyndham.

On July 24, 1997, the Homegate Board met again by telephone. At this
meeting Bear Stearns rendered to the Homegate Board its fairness opinion and
discussed at length the underlying rationale. See "Opinion of Financial
Advisor." Management and Homegate's counsel advised the Homegate Board of the
resolution of the final open points (ultimately reflected in the definitive
agreements). At the conclusion of the meeting, the Homegate Board determined
that the Merger and Wyndham settlement were in the best interests of Homegate
stockholders and authorized the execution, delivery and performance of the
Merger Agreement and the related agreements.

On July 25, 1997, the Merger Agreement, the Commitment Letter and the
agreement embodying the Wyndham settlement were executed by the parties thereto
and a public announcement of the transactions was made.

By written consent dated October 21, 1997, the Homegate Board unanimously
resolved to recommend to the stockholders of Homegate that they approve and
adopt the Merger Agreement.

RECOMMENDATION OF THE BOARD OF DIRECTORS OF HOMEGATE; REASONS FOR THE MERGER

The Homegate Board of Directors believes that the terms of the Merger are
fair to, and in the best interests of, Homegate and the Homegate stockholders
and has approved the Merger Agreement and the related transactions. The Homegate
Board of Directors unanimously recommends that the Homegate stockholders approve
and adopt the Merger Agreement.

The Homegate Board believes that the proposed Merger provides its
stockholders the opportunity to participate on attractive terms in a
substantially larger entity that has access to the capital required to continue
aggressive development of the HOMEGATE Studios & Suites brand. In addition, the
Homegate Board believes that the combination of the HOMEGATE Studios & Suites
brand with Prime's AmeriSuites and Wellesley Inns brands will afford Homegate's
stockholders the opportunity to participate, as stockholders of Prime, in an
exciting multi-brand strategy.

While the Homegate Board evaluated as an alternative to the Merger
continuing Homegate's initial hotel program as an independent entity by
obtaining financing from third party sources, such alternative was, in the
opinion of the Homegate Board, less attractive to Homegate and its stockholders.
In reaching its determina-

25
<PAGE> 33

tion that the terms of the Merger are fair to and in the best interests of
Homegate and the Homegate stockholders and its decision to approve the Merger
Agreement, the Homegate Board considered the following material factors,
understanding that the implications of some of the factors were negative:

(i) The Homegate Board noted the financial condition, results of
operations, cash flow, business and prospects of Homegate. In particular,
with regard to Homegate's prospects, the Homegate Board considered that,
despite management's continued efforts throughout 1997 to secure the
additional financing necessary to continue Homegate's aggressive pursuit of
its initial hotel program, such financing was not available on attractive
terms. While senior debt financing was available to Homegate on
satisfactory terms, the Homegate Board was advised that, as a result of the
decline in the price of Homegate Common Stock following Homegate's October
1996 initial public offering (from the initial public offering price of
$11.50 to a low of $6.00 during the quarter ended June 30, 1997), it would
be challenging to raise in a public transaction the equity required to take
advantage of the available senior debt financing. Private equity,
convertible debt and mezzanine financing options were investigated as a
means of supplementing the available senior debt financing, but such
options were potentially significantly dilutive to Homegate's stockholders
and ultimately were deemed, in the opinion of the Homegate Board and in
light of the risks inherent in a highly leveraged capital structure, not as
attractive for Homegate and its stockholders as the Merger.

(ii) The Homegate Board considered the benefits to Homegate and its
stockholders that would arise from the Merger through the Homegate
stockholders' participation, as Prime stockholders, in a much larger entity
with a multi-brand strategy and access to the capital required to continue
aggressive development of the HOMEGATE Studios & Suites brand. The Homegate
Board also considered the Merger's synergistic possibilities through
Prime's potential to leverage Homegate's relationships with its development
affiliates, Trammell Crow Residential Company and Greystar Capital
Partners, L.P. Affiliates of TCR and Greystar are limited partners of
Development Extended Stay Partners, L.P., which has contracted to provide
site selection, construction and development services for Homegate's
initial hotel program. As of June 30, 1997, the Developer Partnership owned
approximately 9.8% of the outstanding shares of Homegate Common Stock and,
as a result of the Merger, will own approximately 1.4% of the outstanding
shares of Prime Common Stock.

(iii) The Homegate Board considered the terms of the Merger Agreement,
the consideration to be received by Homegate stockholders in the Merger and
the treatment of the Merger as a tax-free exchange. In this regard, the
Homegate Board considered the opportunity presented to Homegate
stockholders by the Merger, based in part on certain financial compilations
and analyses prepared by and discussed with Bear Stearns. The Homegate
Board considered current financial conditions, market conditions,
historical market prices, volatility and trading information with respect
to Homegate Common Stock. The Homegate Board also considered the historical
and projected financial results of Homegate, the historical performance of
both Homegate Common Stock and Prime Common Stock individually, in
comparison to individual competitors and in comparison to their peer
groups, commentary and analyses prepared by the investment community on
Prime and an analysis of current holders of the common stock of each of
Homegate and Prime. In addition, the Homegate Board considered a review of
similar transactions within the industry, an analysis of the transaction
premium offered over the current market price of Homegate Common Stock, a
review of premiums paid in similar transactions within the industry, a
review of the historical correlation between the market prices of Homegate
Common Stock and Prime Common Stock, and an analysis of Prime's historical
and projected future performance. With respect to the analyses prepared by
Bear Stearns, the Homegate Board did not review any conclusions reached by
Bear Stearns with respect to each separate analysis, nor did the Homegate
Board reach any conclusions with respect to each separate analysis. See
"-- Opinion of Homegate's Financial Advisor."

(iv) The Homegate Board considered the opinion of Bear Stearns as to
the fairness of the consideration to be received by Homegate's public
stockholders pursuant to the Merger Agreement as described under
"-- Opinion of Homegate's Financial Advisor."

The foregoing discussion of the factors considered and given weight by the
Homegate Board is not intended to be exhaustive but is believed to include all
material factors considered by the Homegate Board. In

26
<PAGE> 34

view of the variety of factors considered in connection with its evaluation of
the proposed Merger, the Homegate Board did not deem it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination that the terms of the proposed Merger
are fair to, and in the best interests of, Homegate and its stockholders.

At a telephonic meeting held on July 24, 1997, Homegate's Board of
Directors approved the terms of the proposed Merger as fair to, and in the best
interests of, Homegate and its stockholders and approved the Merger Agreement.
Mr. Dona abstained from the vote to approve the settlement with Wyndham but did
vote, with all other directors present at the meeting, in favor of the approval
of the Merger Agreement. Mr. Crow was not present at the meeting. The Homegate
Board unanimously recommends that Homegate stockholders vote "FOR" approval and
adoption of the Merger Agreement.

In considering the recommendation of the Homegate Board with respect to the
Merger Agreement, Homegate stockholders should be aware that certain officers
and directors of Homegate (or their affiliates) have certain interests in the
proposed Merger that are different from and in addition to the interests of
Homegate stockholders generally. The Homegate Board was aware of these interests
and considered them in approving the Merger Agreement. See "-- Interests of
Certain Persons in the Merger."

THE HOMEGATE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
HOMEGATE COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.

INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the Homegate Board with respect to the
Merger Agreement, Homegate stockholders should be aware that certain officers
and directors of Homegate (or their affiliates) have certain interests in the
proposed Merger and related transactions that are different from and in addition
to the interests of Homegate stockholders generally. The Homegate Board was
aware of these interests and considered them in approving the Merger Agreement.

Homegate Options. By virtue of the Merger, all options (the "Homegate
Options") outstanding as of the Effective Date under the Homegate Hospitality,
Inc. 1996 Long-Term Incentive Plan (the "Homegate Stock Option Plan"), whether
or not then exercisable, will be assumed by Prime and converted into and become
a right with respect to Prime Common Stock. Each Homegate Option assumed by
Prime will be exercisable upon the same terms and conditions as under the
applicable Homegate Stock Option Plan and applicable option agreements issued
thereunder, and Prime will assume the Homegate Stock Option Plan for such
purposes. Pursuant to the Merger Agreement, from and after the Effective Date,
(i) each Homegate Option assumed by Prime may be exercised solely for Prime
Common Stock, (ii) the number of shares of Prime Common Stock subject to each
Homegate Option will be equal to the product (rounded to the nearest whole
share) of (A) the number of shares of Homegate Common Stock subject to the
original Homegate Option immediately prior to the Effective Date, times (B) the
Exchange Ratio and (iii) the per share exercise price for each such Homegate
Option will be equal to (A) the per share exercise price for the share of
Homegate Common Stock otherwise purchasable pursuant to each Homegate Option
immediately prior to the Effective Date divided by (B) the Exchange Ratio
(rounded up to the nearest full cent). Each of the agreements for Homegate
Options provides that the unvested portion of such option will vest
automatically by reason of the Merger. As of the Record Date, there were 641,250
shares of Homegate Common Stock subject to outstanding Homegate Options. The
average exercise price per share of all Homegate Options outstanding as of the
Record Date is $10.90 per share. Assuming the exercise of all such options
immediately after the Effective Date, the holders thereof would hold less than
1% of all Prime Common Stock issued and outstanding immediately after the
Effective Date (without including any Prime Common Stock otherwise held by such
holders).

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<PAGE> 35

Executive officers of Homegate as set forth below hold an aggregate of
321,250 of the options granted in October 1996 with exercise prices of $11.50
and an aggregate of 38,000 of the options granted in March 1997 with exercise
prices of $8.37, which options will be converted as of the Effective Date.

<TABLE>
<CAPTION>
NUMBER OF OPTIONS
---------------------------
OCTOBER 1996 MARCH 1997 MARKET
EXECUTIVE OFFICER AT $11.50 AT $8.37 VALUE(1)
------------------------------------------------- ------------ ---------- --------
<S> <C> <C> <C>
Robert A. Faith.................................. 125,000 10,000 $242,238
John C. Kratzer.................................. 93,750 10,000 193,409
Tim V. Keith..................................... 62,500 10,000 144,581
Joel Kinzie Oldham IV............................ 40,000 8,000 100,040
------- ------ --------
TOTAL.................................. 321,250 38,000 $680,268
======= ====== ========
</TABLE>

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

(1) Based on the closing price of the Homegate Common Stock on October 24, 1997.

Each of Messrs. Faith, Keith and Oldham, is a beneficiary of an agreement
with Prime pursuant to which, if such executive's employment with Homegate is
terminated within one year following the Merger, such executive's options will
be extended so that they will not expire until their original expiration dates
(ten years from the date of grant).

Pursuant to the Merger Agreement, Prime has agreed to cause to be included
under a registration statement on Form S-8 to be filed by Prime with the
Commission as soon as reasonably practicable after the Effective Date all shares
of Prime Common Stock subject to such options and to maintain the effectiveness
of such registration until all such options have expired or been exercised or
forfeited.

Employment Agreement. In connection with the Merger, John Kratzer, the
Chief Operating Officer of Homegate, is expected to enter into an employment
agreement with Prime to serve as a Senior Vice President. As of October 27,
1997, the specific terms of such employment agreement had not been determined.
In addition, Tim Keith will receive a severance payment of $82,500 in connection
with the Merger, and Prime has agreed to pay Mr. Keith his 1997 bonus of $35,000
in January 1998.

Indemnification; Insurance. As provided in the Merger Agreement, Prime is
required to indemnify, defend and hold harmless the officers, directors and
employees of Homegate and its subsidiaries (the "Indemnified Parties") from and
against all losses, expenses, claims, damages or liabilities arising out of the
transactions contemplated by the Merger Agreement to the fullest extent
permitted or required under applicable law, including without limitation the
advancement of expenses. Prime has agreed that all rights to indemnification
existing in favor of the directors, officers or employees of Homegate as
provided in Homegate's Certificate of Incorporation or Bylaws, with respect to
matters occurring through the Effective Date, shall survive the Merger and
continue in full force and effect for a period of not less than six years from
the Effective Date.

For a period of three years after the Effective Date, Prime is obligated to
cause the Surviving Corporation to maintain in effect policies of directors' and
officers' liability insurance covering certain Indemnified Parties presently
covered by Homegate insurance policies that are equivalent to those maintained
by Homegate with respect to matters occurring prior to the Effective Date,
provided that Prime shall not be required in order to maintain such coverage to
pay an annual premium in excess of two times the current annual premium paid by
Homegate for its existing coverage, but in such case shall purchase as much
coverage as possible for such amount.

Management Agreement. If the Merger is consummated, Homegate, Prime and
Wyndham have agreed to terminate the Management Agreement (and each of the
underlying contracts). In settlement of the Wyndham claims relating to the
termination of the Management Agreement, CHRI, an affiliate of Harlan R. Crow, a
director of Homegate and the controlling stockholder of Wyndham, agreed to fund
$4 million of the Wyndham settlement.

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<PAGE> 36

OPINION OF HOMEGATE'S FINANCIAL ADVISOR

Homegate retained Bear Stearns to act as its financial advisor and to
render its opinion as to whether the consideration to be received by the public
shareholders of Homegate pursuant to the Merger is fair, from a financial point
of view. Bear Stearns is an internationally recognized investment banking firm
and is continually engaged in the valuation of businesses and their securities
and in rendering opinions in connection with mergers, acquisitions, corporate
transactions and other purposes. Homegate retained Bear Stearns based on its
qualifications, expertise and reputation in providing advice to companies with
respect to transactions similar to the Merger.

At a meeting held on July 24, 1997, Bear Stearns orally advised Homegate's
Board of Directors of its conclusions and subsequently delivered its written
opinion to the effect that, based upon and subject to the various considerations
set forth in such opinion, as of the date of such opinion, the consideration to
be received by the public shareholders of Homegate pursuant to the Merger is
fair, from a financial point of view, to such shareholders. The summary of Bear
Stearns' opinion set forth in this Proxy Statement-Prospectus is qualified in
its entirety by reference to the full text of such opinion, which is attached as
Annex B to this Proxy Statement-Prospectus. Bear Stearns has consented to the
attachment of its opinion to this Proxy Statement-Prospectus. Homegate
shareholders are urged to, and should, read such opinion carefully in its
entirety in connection with this Proxy Statement-Prospectus for assumptions
made, matters considered and limits of the review by Bear Stearns.

In rendering its opinion, Bear Stearns did not opine as to any other
transactions or contractual arrangements to be entered into or payments to be
made by or to Homegate or any other person concurrently with the Merger. Bear
Stearns' opinion was directed to the Board of Directors of Homegate and
addresses solely the fairness, from a financial point of view, of the
consideration to be received by the public shareholders of Homegate in the
Merger and does not address Homegate's underlying business decision to effect
the Merger and is not a recommendation to Homegate shareholders as to whether to
approve or vote for the Merger.

In arriving at its opinion, Bear Stearns: (i) reviewed the Merger Agreement
and certain related agreements; (ii) reviewed Homegate's Annual Report to
Stockholders and Annual Report on Form 10-K for the fiscal year ended December
31, 1996, and its Quarterly Report on Form 10-Q for the period ended March 31,
1997; (iii) reviewed certain operating and financial information, including
projections provided to Bear Stearns by Homegate's senior management, relating
to Homegate's business and prospects; (iv) met with certain members of
Homegate's senior management to discuss Homegate's business and operations,
historical financial performance, current situation and future prospects; (v)
reviewed Prime's Annual Report to Stockholders and Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, and its Quarterly Report on Form
10-Q for the period ended March 31, 1997; (vi) reviewed certain operating and
financial information, including projections provided to Bear Stearns by Prime's
senior management, relating to Prime's business and prospects; (vii) met with
certain members of Prime's senior management to discuss Prime's business and
operations, historical financial performance, current situation and future
prospects; (viii) reviewed the historical prices and trading volumes of the
common stock of Homegate and Prime; (ix) reviewed publicly available financial
data and stock market performance data of companies that Bear Stearns deemed
generally comparable to Homegate and Prime; (x) reviewed the terms of recent
acquisitions of companies that Bear Stearns deemed generally comparable to
Homegate; and (xi) conducted such other studies, analyses, inquiries and
investigations as Bear Stearns deemed appropriate.

In rendering its opinion, Bear Stearns considered (i) Homegate's recent
financial performance, current financial condition and future prospects; (ii)
Homegate's prospects for raising debt and/or equity in the public and private
capital markets; and (iii) various terms and conditions of the Merger, including
that (x) the Merger is subject to a vote of Homegate's shareholders, (y) the no
solicitation and termination provisions of the Merger Agreement provide the
Board of Directors of Homegate with the flexibility to exercise its fiduciary
duty to pursue certain alternative transactions in lieu of the Merger and (z)
the voting agreements pursuant to which several major stockholders of Homegate
have agreed to vote their shares of Homegate Common Stock in favor of the
Merger.

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<PAGE> 37

The following is a summary of the principal financial and valuation
analyses that were performed by Bear Stearns to arrive at its opinion. Based on
these financial and valuation analyses and the other factors discussed herein,
Bear Stearns determined that, as of the date of its opinion, the consideration
to be received by the shareholders of Homegate pursuant to the Merger is fair,
from a financial point of view, to such shareholders. In arriving at its
opinion, Bear Stearns did not attribute any particular weight to any analysis or
factor considered by it, nor did it express separate conclusions with respect to
each analysis performed, but rather made a single judgment as to fairness based
on its experience and professional judgment and the analyses as a whole.

Review and Analysis of Homegate's Financial and Operating
Performance. Bear Stearns reviewed and analyzed the historical financial and
operating performance of Homegate for fiscal year ended December 31, 1996, and
the quarter ended March 31, 1997. This review and analysis considered Homegate's
reported total revenues, earnings before interest expense, taxes, depreciation
and amortization ("EBITDA"), and net income, adjusted to reflect the elimination
of certain non-recurring items. Bear Stearns noted that Homegate's results for
fiscal year 1996 and the quarter ended March 31, 1997 were total revenues of
$2.2 million and $2.4 million, respectively; EBITDA of $0.06 million and $0.3
million, respectively; and net income/(loss) of ($0.9) million and ($0.5)
million, respectively. Bear Stearns compared these financial and operating
performance measures to those of three publicly traded extended stay hotel
companies that Bear Stearns deemed generally comparable to Homegate and to those
of four companies that were acquired in selected precedent merger and
acquisition transactions that Bear Stearns deemed generally comparable to the
Merger. See "-- Analysis of Selected Publicly Traded Companies" and "-- Analysis
of Selected Precedent Merger and Acquisition Transactions."

Analysis of the Merger Consideration. Bear Stearns calculated the value of
the consideration to be received by the shareholders of Homegate pursuant to the
Merger at approximately $140.3 million based on the closing price for Prime
Common Stock on July 23, 1997, and the aggregate value of the Merger (including
the net indebtedness outstanding as of July 23, 1997, of approximately $28.5
million to be assumed by Prime) at approximately $168.8 million (the
"Transaction Value"). Bear Stearns considered the Transaction Value as a
multiple of estimated EBITDA. Bear Stearns' analysis indicated Transaction Value
multiples of estimated 1997 and 1998 EBITDA of 28.5x and 9.8x, respectively,
assuming average net debt and based on the closing price for Prime Common Stock
of July 23, 1997. See "-- Analysis of Selected Publicly Traded Companies" and
"-- Analysis of Selected Precedent Merger and Acquisition Transactions." Bear
Stearns' analysis indicated that Prime Common Stock had recently traded at
$20.56 per share, and that the range of closing prices for Prime Common Stock in
the preceding 12 months was $14.00 to $20.88 per share. See "-- Analysis of the
Securities to be Issued." Bear Stearns noted that at the fixed exchange ratio of
0.6073, the implied value of the Merger Consideration during this period would
have been $8.50 to $12.68 per share, compared to a range of trading prices for
Homegate Common Stock of $6.00 to $11.50. Bear Stearns noted that the implied
Merger Consideration exceeded Homegate's trading price at all times following
December 1996.

Analysis of Selected Publicly Traded Companies. Bear Stearns compared
certain operating and financial information of Homegate to certain publicly
available operating, financial, trading and valuation information of three
publicly traded extended stay hotel companies, which, in Bear Stearns' judgment,
were reasonably comparable to Homegate for purposes of this analysis. These
companies included Extended Stay America, Candlewood Hotels, and Suburban Lodges
of America (collectively, the "HHI Comparable Companies"). Bear Stearns'
analysis of the HHI Comparable Companies included reviewing their enterprise
values as a multiple of estimated 1997 and 1998 EBITDA and their stock prices as
a multiple of estimated 1998 earnings per share. Bear Stearns' analysis of the
Comparable Companies indicated that (i) the range of enterprise value to
estimated 1997 EBITDA multiples was 17.7x to 39.1x with a harmonic mean (the
reciprocal of the arithmetic mean of reciprocals) of 26.3x; (ii) the range of
enterprise value to estimated 1998 EBITDA multiples was 6.1x to 12.9x with a
harmonic mean of 8.8x and (iii) the range of stock price to estimated 1998
earnings per share multiples was 12.5x to 37.4x with a harmonic mean of 19.0x.
Bear Stearns' analysis indicated that Homegate had estimated 1997 and 1998
EBITDA multiples of 22.5x and 8.6x, respectively, and an estimated 1998 earnings
per share multiple of 12.9x.

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<PAGE> 38

Analysis of Selected Precedent Merger and Acquisition Transactions. Bear
Stearns reviewed and analyzed the publicly available financial terms of four
selected merger and acquisition transactions in the lodging industry, which in
Bear Stearns' judgment, were reasonably comparable to the Merger for purposes of
this analysis. The four transactions consisted of (acquiror/target): Extended
Stay America / Studio Plus, Marriott International / Renaissance Hotel Group,
Patriot American Hospitality / Wyndham Hotel Corporation, and DoubleTree Hotel
Corporation / Red Lion Hotels (collectively, the "Precedent M&A Transactions").
Bear Stearns reviewed the prices paid in the Precedent M&A Transactions and
analyzed various and financial information and imputed valuation multiples. Bear
Stearns' analysis of the Precedent M&A Transactions indicated that the range of
enterprise value to current fiscal year and next fiscal year estimated EBITDA
multiples were 10.0x to 16.5x and 9.0x to 13.9x, respectively, with a harmonic
mean of 13.3x and 10.4x, respectively.

Has/Gets Analysis. Bear Stearns compared the earnings, cash flow (net
income plus depreciation and amortization) and net book value represented by a
share of Homegate Common Stock on a standalone basis (e.g., what a Homegate
shareholder "Has") to the Merger Consideration of 0.6073 shares of Prime, (e.g.,
what a Homegate shareholder "Gets" as a result of the Merger) based on
management projections. Bear Stearns noted that on a Has basis, each Homegate
share represents EPS in 1997, 1998 and 1999 of ($0.15), $0.43 and $0.97,
respectively, compared to $0.47, $0.69 and $0.93 on a Gets basis. Bear Stearns
noted that on a Has basis, each Homegate share represents cash flow (as defined)
in 1997, 1998, 1999 of $(.05), $1.67 and $3.22, respectively, compared to $1.07,
$1.77 and $3.91 on a Gets basis. Bear Stearns noted that on a Has basis, each
Homegate share represents net book value in 1997, 1998 and 1999 of $5.86, $6.22
and $7.12, respectively, compared to $5.62, $7.99 and $9.80 on a Gets basis.

Relative Contribution Analysis. Bear Stearns compared the contribution to
Enterprise Value and Equity Value of Homegate and Prime based on Homegate's
preannouncement trading price of $9.125 and the Merger Consideration. Bear
Stearns noted that on a trading basis Homegate contributed 9.8% and 8.8%,
respectively, of the Enterprise Value and Equity Value of Prime/Homegate
combined compared to 11.6% or 11.5%, respectively, based on the Merger
Consideration. Bear Stearns also compared Homegate's contribution to
Homegate/Prime combined in terms of 1997 and 1998 management estimates of
revenues, EBITDA, EBIT and net income. Bear Stearns noted that based on these
projections, Homegate's contribution of revenues, EBITDA, EBIT and net income in
1997 was 3.5%, 2.3%, 0.2% and (4.2%), respectively, compared to projected
contribution in 1998 of 11.9%, 15.4%, 14.1% and 7.5%, respectively.

Analysis of the Securities to be Issued. Bear Stearns compared certain
operating and financial information of Prime to certain publicly available
operating, financial, trading and valuation information of six publicly traded
companies, which, in Bear Stearns' judgment, were reasonably comparable to Prime
for purposes of this analysis. These companies included Promus Hotel
Corporation, La Quinta Inns, DoubleTree Corporation, Extended Stay America,
Choice Hotels International, and Wyndham Hotel Corporation (collectively, the
"PHI Comparable Companies"). Bear Stearns' analysis of the PHI Comparable
Companies included reviewing their enterprise values as a multiple of estimated
fiscal year 1997 and 1998 EBITDA and their stock prices as a multiple of
estimated 1997 and 1998 earnings per share. Bear Stearns' analysis of the PHI
Comparable Companies indicated that (i) the range of enterprise value to
estimated 1997 EBITDA multiples was 9.9x to 39.1x with a harmonic mean of 13.5x;
(ii) the range of enterprise value to estimated 1998 EBITDA multiples was 8.2x
to 12.9x with a harmonic mean of 10.4x; and (iii) the range of stock price to
estimated 1997 earnings per share multiples was 19.7x to 35.8x with a harmonic
mean of 26.6x; and (iv) the range of stock price to estimated 1998 earnings per
share multiples was 15.2x to 37.3x with a harmonic mean of 22.7x. Bear Stearns
calculated Prime's enterprise value as a multiple of estimated 1997 and 1998
EBITDA of 9.1x and 6.2x, respectively, and Prime's stock price as a multiple of
estimated 1997 and 1998 earnings per share as 22.3x and 18.2x, respectively.

Pro Forma Merger Analysis. Bear Stearns analyzed certain pro forma effects
resulting from the Merger, including among other things, the impact of the
Merger on Prime's projected earnings per share for fiscal years 1997, 1998 and
1999, based on the internal Homegate and Prime management estimates. The results
of the pro forma merger analysis suggested that the Merger could be dilutive to
Prime on an EPS basis in 1997,

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<PAGE> 39

marginally accretive in 1998 and accretive in 1999. The actual results achieved
by the combined company may vary from projected results and variations may be
material.

Discounted Cash Flow Analysis. Based on a review of Homegate's recent
financial performance, current financial condition and projections, and its
prospects for raising required additional capital on a timely basis, Bear
Stearns determined that discounted cash flow methodology was not appropriate
valuation measure.

The foregoing summary does not purport to be a complete description of the
analyses performed and factors considered by Bear Stearns in arriving at its
opinion. The preparation of a fairness opinion is a complex process and is not
susceptible to partial analysis or summary description. Selecting portions of
the analyses or of the summary set forth above, without considering the analysis
as a whole, could create an incomplete view of the processes underlying Bear
Stearns' opinion. In arriving at its opinion, Bear Stearns considered the
results of all such reviews, calculations and analyses. No company or
transaction used in the analyses described above as a comparison is identical to
Homegate, Prime or the proposed transaction. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading or private market values of the company or companies to which they are
being compared.

The analyses were prepared solely for purposes of providing Bear Stearns'
opinion as to the fairness, from a financial point of view, of the consideration
to be received by the public shareholders of Homegate pursuant to the Merger and
do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities might actually be sold to other parties. Analyses based
upon forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based on numerous factors or events beyond the control of the parties or
their respective advisors, neither Homegate nor Bear Stearns or any other person
assumes responsibility if future results are materially different from those
forecast. Bear Stearns' opinion does not imply any conclusion as to the likely
trading range for Prime Common Stock following the consummation of the Merger,
which may vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other factors
that generally influence the price of securities.

In the ordinary course of business, Bear Stearns may actively trade the
securities of Homegate and Prime for its own account and for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. Bear Stearns has previously rendered investment banking and
financial advisory services to Homegate and Prime for which Bear Stearns
received customary compensation.

Pursuant to a letter agreement dated July 1, 1997, entered into by Homegate
and Bear Stearns, Homegate has agreed to pay Bear Stearns (i) a cash fee of
$200,000 upon the rendering of its opinion and (ii) a cash fee equal to 1.25% of
the total consideration paid by Prime in the Merger up to $100 million and 1.0%
on all amounts above that paid by Prime in the Merger in respect of (x) assets
or operations of Homegate, (y) Homegate's securities and (z) the assumption,
directly or indirectly (by operation of law or otherwise), or repayment of
indebtedness for borrowed money (including, without, limitation, indebtedness
secured by assets of Homegate) and other liabilities of Homegate, less a credit
for any amount paid pursuant to (i). Homegate has agreed to reimburse Bear
Stearns for its out-of-pocket expenses, including the fees and disbursements of
counsel. Homegate has agreed to indemnify Bear Stearns and certain related
persons against certain liabilities in connection with the engagement of Bear
Stearns, including certain liabilities under the federal securities laws.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a discussion of the material federal income tax
consequences of the Merger and the exchange by the holders of Homegate Common
Stock of such shares for shares of Prime Common Stock. THIS DISCUSSION DOES NOT
ADDRESS ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO PARTICULAR STOCKHOLDERS
IN LIGHT OF THEIR PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR TO CERTAIN TYPES
OF STOCKHOLDERS (INCLUDING INSURANCE COMPANIES, FINANCIAL INSTITUTIONS,
BROKER-DEALERS, TAX-EXEMPT ORGANIZATIONS, FOREIGN CORPORATIONS

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<PAGE> 40

AND PERSONS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES) SUBJECT TO
SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, NOR DOES IT DISCUSS ANY
STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS.

EACH HOMEGATE STOCKHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX AND
FINANCIAL ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
HOLDER AS A RESULT OF SUCH HOLDER'S OWN PARTICULAR STATUS AND CIRCUMSTANCES,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.

Neither Prime nor Homegate has requested or will receive an advance ruling
from the Internal Revenue Service (the "IRS") as to the federal income tax
consequences of the Merger. However, Prime will receive an opinion of its
counsel, Willkie Farr & Gallagher, and Homegate will receive an opinion of its
counsel, Vinson & Elkins L.L.P., relating to the federal income tax consequences
of the Merger. Such opinions will be based upon facts and assumptions of fact
described therein, and upon customary representations provided by Prime, Sub,
Homegate and certain Homegate stockholders. Counsels' opinions will also be
based upon the Code, the Treasury Regulations thereunder, administrative rulings
and practice by the IRS, and judicial authority, in each case existing at the
time such opinions are delivered. Any change in applicable law or pertinent
facts could affect the continuing validity of such opinions and this discussion.
In addition, an opinion of counsel is not binding upon the IRS, and there can be
no assurance, and none is hereby given, that the IRS will not take a position
contrary to one or more positions reflected in counsels' opinions, or that such
opinions will be upheld by the courts if challenged by the IRS. However, Prime
and Homegate have agreed in the Merger Agreement not to take any action which
would disqualify the Merger as a reorganization which is tax-free to the
stockholders of Homegate pursuant to Section 368(a) of the Code. If it were
determined that the Merger did not qualify as a reorganization, each Homegate
stockholder would be required to recognize gain or loss equal to the difference
between such stockholder's tax basis in the Homegate Common Stock and the fair
market value of the Prime Common Stock received in the Merger.

Based upon and subject to the foregoing, the opinions of counsel will
collectively state, among other matters, that:

(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code and Prime, Sub, and Homegate will each be a
party to the reorganization within the meaning of Section 368(b) of the
Code;

(ii) no gain or loss will be recognized by Prime, Sub or Homegate as a
result of the Merger;

(iii) no gain or loss will be recognized by a Homegate stockholder who
receives solely shares of Prime Common Stock in exchange for Homegate
Common Stock;

(iv) the receipt of cash in lieu of fractional shares of Prime Common
Stock will be treated as if the fractional shares were distributed as part
of the exchange and then were redeemed by Prime;

(v) the tax basis of the shares of Prime Common Stock received by a
Homegate stockholder will be equal to the tax basis of the Homegate Common
Stock exchanged therefor, excluding any basis allocable to a fractional
share of Prime Common Stock for which cash is received; and

(vi) the holding period of the shares of Prime Common Stock received
by a Homegate stockholder will include the holding period or periods of the
Homegate Common Stock exchanged therefor, provided that such Homegate
Common Stock was held as a capital asset by such stockholder within the
meaning of Section 1221 of the Code at the Effective Date.

ACCOUNTING TREATMENT

It is expected that the Merger will be accounted for as a pooling of
interests under APB Opinion No. 16 if the Merger is closed and consummated in
accordance with the Merger Agreement. Prime, Sub and Homegate have agreed not to
intentionally take any action that would disqualify treatment of the Merger as a
pooling of interests for accounting purposes.

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<PAGE> 41

Under the pooling of interests method of accounting, the historical basis
of the assets and liabilities of Prime and Homegate will be combined at the
Effective Date and carried forward at their previously recorded amounts, the
stockholders' equity accounts of Prime and Homegate will be combined on the
consolidated balance sheet of Prime and no goodwill or other intangible assets
will be created. Consolidated financial statements of Prime issued after the
Merger will be restated retroactively to reflect the consolidated operations of
Prime and Homegate as if the Merger had taken place prior to the periods covered
by such consolidated financial statements.

The unaudited pro forma financial information contained in this Proxy
Statement-Prospectus has been prepared using the pooling-of-interests accounting
method to account for the Merger. Consistent with pooling of interests
accounting treatment, the direct costs related to the Merger will be taken as a
non-recurring charge to earnings in the quarter in which the Merger is
consummated. See "Pro Forma Condensed Financial Information."

CERTAIN LEGAL MATTERS

No federal or state regulatory requirements or approvals (other than those
that arise in connection with the registration of Prime Common Stock to be
issued in the Merger and the effectiveness of this Proxy Statement-Prospectus,
those that have already been obtained and certain notice filings after the
Effective Date) must be complied with or obtained in connection with the Merger.

FEDERAL SECURITIES LAW CONSEQUENCES

All Prime Common Stock issued in connection with the Merger will be freely
transferable, except that any Prime Common Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
Homegate or Prime prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act with
respect to affiliates of Homegate, or Rule 144 under the Securities Act with
respect to persons who are or become affiliates of Prime, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Homegate or Prime generally include individuals or entities that control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal stockholders
of such party.

Affiliates may not sell their shares of Prime Common Stock acquired in
connection with the Merger, except pursuant to an effective registration under
the Securities Act covering such shares or in compliance with Rule 145 (or Rule
144 under the Securities Act in the case of persons who become affiliates of
Prime) or another applicable exemption from the registration requirements of the
Securities Act. In general, under Rule 145, for one year following the Effective
Date an affiliate (together with certain related persons) would be entitled to
sell shares of Prime Common Stock acquired in connection with the Merger only
through unsolicited "broker transactions" or in transactions directly with a
"market maker," as such terms are defined in Rule 144. Additionally, the number
of shares to be sold by an affiliate (together with certain related persons and
certain persons acting in concert) within any three-month period for purposes of
Rule 145 may not exceed the greater of 1% of the outstanding shares of Prime
Common Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would only remain available,
however, to affiliates if Prime remained current with its informational filings
with the Commission under the Exchange Act. Beginning one year after the
Effective Date, an affiliate would be able to sell such Prime Common Stock
without such manner of sale or volume limitations provided that Prime was
current with its Exchange Act informational filings and such affiliate was not
then an affiliate of Prime. Two years after the Effective Date, an affiliate
would be able to sell such shares of Prime Common Stock without any restrictions
so long as such affiliate had not been an affiliate of Prime for at least three
months prior thereto. See "-- Registration Rights" and "The Merger
Agreement -- Certain Covenants."

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<PAGE> 42

REGISTRATION RIGHTS

In connection with the Merger, Prime agreed, for the benefit of certain
affiliates of Homegate, to use commercially reasonable efforts to cause such
holders' offering and resale of shares of Prime Common Stock received by them in
the Merger to be registered under the Securities Act and to keep such
registration statement effective until Prime determines in good faith that such
shares are no longer subject to restrictions on transfer under Rule 144 or 145,
up to the first anniversary of the Effective Date. Prime will bear any
registration fee, the listing fee and the fees and expenses of counsel for
Prime, while the respective holders will bear all other fees and expenses in
connection with the registration and sale of such shares.

LISTING

It is a condition to the Merger that the shares of Prime Common Stock to be
issued in connection with the Merger be authorized for listing on the NYSE,
subject to official notice of issuance.

APPRAISAL RIGHTS

UNDER THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, THE HOLDERS OF
HOMEGATE COMMON STOCK ARE NOT ENTITLED TO ANY APPRAISAL RIGHTS WITH RESPECT TO
THE MERGER.

CERTAIN EFFECTS OF THE INTERIM FINANCING AND THE TERMINATION FEE

Certain aspects of the interim financing provided to Homegate by Prime, as
well as certain aspects of the Termination Fee payable by Homegate provided for
in the Merger Agreement, may have the effect of discouraging persons who might
now or prior to the consummation of the Merger be interested in acquiring all of
or a significant interest in Homegate from considering or proposing such an
acquisition. See "The Interim Financing" and "The Merger
Agreement -- Termination; Fees and Expenses."

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<PAGE> 43

THE MERGER AGREEMENT

The following description of the Merger Agreement describes all material
provisions of the Merger Agreement, a copy of which is attached to this Proxy
Statement-Prospectus as Annex A and incorporated herein by reference.
Stockholders of Homegate and Prime are urged to read the Merger Agreement in its
entirety.

THE MERGER

The Merger Agreement provides that, subject to the approval of the Merger
by the stockholders of Homegate and the satisfaction or waiver of the other
conditions to the Merger, Sub will be merged with and into Homegate in
accordance with Delaware law, whereupon the separate existence of Sub will cease
and Homegate will be the Surviving Corporation of the Merger. On the Effective
Date, the conversion of Homegate Common Stock and the conversion of shares of
the common stock of Sub pursuant thereto will be effected as described below.
The Certificate of Incorporation and By-laws of Homegate will be the Certificate
of Incorporation and By-laws of the Surviving Corporation, as amended pursuant
to the terms of the Merger Agreement or otherwise. The directors of Sub
immediately prior to the Effective Date will become the directors of the
Surviving Corporation and the officers of Homegate immediately prior to the
Effective Date will be the officers of the Surviving Corporation, in each case
until their respective successors are duly elected and qualified.

EFFECTIVE DATE

Following the adoption of the Merger Agreement and subject to satisfaction
or waiver of certain terms and conditions, including conditions to closing,
contained in the Merger Agreement, the Merger will become effective on such date
as the Certificate of Merger is duly filed with the Secretary of State of
Delaware or at such time thereafter as is provided in such Certificate. The
filing of the Certificate of Merger will be made as soon as practicable after
all conditions contemplated by the Merger Agreement have been satisfied or
waived.

TERMS OF THE MERGER

At the Effective Date:

(i) each share of Homegate Common Stock held by Homegate or any
subsidiary of Homegate or held by Prime, Sub or any other subsidiary of
Prime on the Effective Date will be canceled, and no payment will be made
with respect thereto;

(ii) each remaining outstanding share of Homegate Common Stock will be
converted into and represent the right to receive 0.6073 of a share of
Prime Common Stock, with cash in lieu of fractional shares; and

(iii) each issued and outstanding share of the capital stock of Sub
will be converted into and represent one fully paid and nonassessable share
of common stock, par value $0.01 per share, of the Surviving Corporation.

As of the Effective Date, present holders of Homegate Common Stock will
cease to have any rights as holders of such shares, but will have the rights of
holders of Prime Common Stock. After the Effective Date, the stock transfer
books of Homegate will be closed and there will be no further transfers of
Homegate Common Stock. See "The Merger -- Conversion of Shares; Procedures for
Exchange of Certificates" and "Comparison of Stockholder Rights."

By virtue of the Merger, all options (the "Homegate Options") outstanding
as of the Effective Date under any Homegate stock option plan (collectively, the
"Homegate Stock Option Plans"), whether or not then exercisable, will be assumed
by Prime and converted into and become a right with respect to Prime Common
Stock. Each Homegate Option assumed by Prime will be exercisable upon the same
terms and conditions as under the applicable Homegate Stock Option Plans and
applicable option agreements issued thereunder, and Prime will assume the
Homegate Stock Option Plans for such purposes. Pursuant to the

36
<PAGE> 44

Merger Agreement, from and after the Effective Date, (i) each Homegate Option
assumed by Prime may be exercised solely for Prime Common Stock, (ii) the number
of shares of Prime Common Stock subject to each Homegate Option will be equal to
the product (rounded to the nearest whole share) of (A) the number of shares of
Homegate Common Stock subject to the original Homegate Option immediately prior
to the Effective Date, times (B) the Exchange Ratio and (iii) the per share
exercise price for each such Homegate Option will be equal to (A) the per share
exercise price for the share of Homegate Common Stock otherwise purchasable
pursuant to each Homegate Option immediately prior to the Effective Date divided
by (B) the Exchange Ratio (rounded up to the nearest full cent). No Homegate
Options will be accelerated by reason of the Merger unless the agreement or
arrangement under which it was granted or by which it is otherwise governed
specifically provides for such acceleration.

EXCHANGE PROCEDURES

Promptly after the Effective Date, the Exchange Agent will mail to each
person who was, as of the Effective Date, a holder of record of shares of
Homegate Common Stock, a letter of transmittal to be used by such holders in
forwarding their certificates representing shares of Homegate Common Stock
("Certificates"), and instructions for effecting the surrender of the
Certificates in exchange for certificates representing shares of Prime Common
Stock. Upon surrender to the Exchange Agent of a Certificate for cancellation,
together with such letter of transmittal, the holder of such Certificate will be
entitled to receive a certificate representing that number of whole shares of
Prime Common Stock, cash in lieu of any fractional shares (as described below)
and unpaid dividends and distributions, if any, which such holder has the right
to receive in respect of the Certificate surrendered (as described below), and
the Certificate so surrendered will be cancelled. HOMEGATE STOCKHOLDERS SHOULD
NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.

No fractional shares of Prime Common Stock will be issued and any holder of
shares of Homegate Common Stock entitled under the Merger Agreement to receive a
fractional share will be entitled to receive only a cash payment in lieu
thereof, which payment will be in an amount equal to such fractional part of a
share of Prime Common Stock multiplied by the average of the closing sales
prices of the Prime Common Stock on the NYSE over the last ten trading days
preceding the Effective Date.

No dividends on shares of Prime Common Stock will be paid with respect to
any shares of Homegate Common Stock or other securities represented by a
Certificate until such Certificate is surrendered for exchange as provided in
the Merger Agreement. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the holder of
certificates representing shares of Prime Common Stock issued in exchange
therefore (i) at the time of such surrender, the amount of any dividends or
other distributions with a record date after the Effective Date theretofore
payable with respect to such shares of Prime Common Stock and not paid, less the
amount of any withholding taxes which may be required thereon, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Date but prior to surrender thereof and a
payment date subsequent to surrender thereof payable with respect to such whole
shares of Prime Common Stock, less the amount of any withholding taxes which may
be required thereon.

On or after the Effective Date, there will be no transfers on the transfer
books of Homegate of shares of Homegate Common Stock which were outstanding
immediately prior to the Effective Date.

Any portion of the monies from which cash payments in lieu of fractional
interests in shares of Prime Common Stock will be made (including the proceeds
of any investments thereof) and any shares of Prime Common Stock that are
unclaimed by the former stockholders of Homegate one year after the Effective
Date will be delivered to Prime. Any former stockholders of Homegate who have
not theretofore complied with the exchange procedures in the Merger Agreement
may thereafter look to Prime only as general creditors for payment of their
shares of Prime Common Stock, cash in lieu of fractional shares, and any unpaid
dividends and distributions on shares of Prime Common Stock, deliverable in
respect of each share of Homegate Common Stock such stockholder holds.
Notwithstanding the foregoing, none of Homegate, Prime, the Exchange Agent or
any other person will be liable to any former holder of shares of Homegate
Common Stock

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<PAGE> 45

for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.

No interest will be paid or accrued on cash in lieu of fractional shares
and unpaid dividends and distributions, if any, which will be paid upon
surrender of Certificates.

In the event that any Certificate has been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by Prime, the posting by such
person of a bond in such reasonable amount as Prime may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Prime Common Stock, cash in lieu of fractional shares,
and any unpaid dividends and distributions on shares of Prime Common Stock, as
described above.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties
relating to, among other things: (a) the due organization, power and standing of
Homegate and Prime and similar corporate matters; (b) the capital structure of
Homegate and Prime; (c) subsidiaries of Homegate and Prime; (d) the
authorization, execution, delivery and enforceability of the Merger Agreement;
(e) conflicts under charters or bylaws, violations of any instruments or law and
required consents or approvals; (f) certain documents filed by each of Homegate
and Prime with the Commission and the accuracy of information contained therein;
(g) the absence of certain changes; (h) litigation; (i) retirement and other
employee benefit plans of Homegate; (j) labor matters involving Homegate; (k)
corporate action approving the Merger Agreement; (l) brokers' and finders' fees
with respect to the Merger; (m) compliance with applicable laws; (n) material
liabilities; (o) taxes and tax returns of Homegate; (p) material agreements and
contracts; (q) absence of material adverse changes; (r) accounting matters; (s)
Homegate real property matters; (t) Homegate hotel zoning and improvement
matters; (v) Homegate environmental matters; and (v) Homegate insurance matters.

CERTAIN COVENANTS

Homegate has agreed (and has agreed to cause its subsidiaries), among other
things, prior to the consummation of the Merger, unless Prime agrees in writing
or as otherwise required or permitted by the Merger Agreement, (i) to conduct
its operations according to its usual, regular and ordinary course in
substantially the same manner as theretofore conducted, (ii) promptly to notify
Prime of any change or event that has had, or could reasonably be expected to
have, a material adverse effect on the business, properties, assets, prospects,
condition (financial or otherwise), liabilities or results of operations of
Homegate and its subsidiaries taken as a whole and (iii) promptly to deliver to
Prime true and correct copies of any filings with the Commission or any other
governmental entity in connection with the Merger Agreement and the transactions
contemplated thereby. In addition, Homegate has agreed that, among other things,
prior to the consummation of the Merger, unless Prime agrees in writing or as
otherwise required or permitted by the Merger Agreement, it shall not (and shall
cause its subsidiaries not to) (i) amend its certificate of incorporation or
bylaws, (ii) except pursuant to the exercise of certain options, warrants,
conversion and certain other contractual rights, issue any shares of capital
stock, effect any stock split or otherwise change its capitalization, (iii)
grant, confer or award any option, warrant, conversion right or other right to
acquire shares of its capital stock, (iv) increase any compensation or enter
into or amend any employment agreement with any of its present or future
officers, directors or employees, except in accordance with pre-existing
contractual provisions and except for annual increases consistent with past
practice, (v) adopt any new employee benefit plan or amend any existing employee
benefit plan, (vi) declare or pay any dividend to its stockholders or make any
other payment on its capital stock, (vii) incur additional indebtedness in
excess of $250,000 in the aggregate or (viii) acquire or dispose of any of its
assets, subject to certain exceptions.

Prime has agreed (and has agreed to cause its subsidiaries), among other
things, prior to the consummation of the Merger, unless Homegate agrees in
writing or as otherwise required or permitted by the Merger Agreement, (i) to
conduct its operations in the usual, regular and ordinary course in
substantially the same manner as theretofore conducted, (ii) promptly to notify
Homegate of any change or event that has had, or could reasonably be expected to
have, a material adverse effect on the business, properties, assets, prospects,

38
<PAGE> 46

condition (financial or otherwise), liabilities or results of operations of
Prime and its subsidiaries taken as a whole and (iii) promptly to deliver to
Homegate true and correct copies of any filings with the Commission or any other
governmental entity in connection with the Merger Agreement and the transactions
contemplated thereby.

Each of Homegate and Prime has agreed that, among other things, unless the
other party agrees in writing or as otherwise required or permitted by the
Merger Agreement, it shall not nor shall it permit any of its subsidiaries to
take or cause to be taken any action, whether before or after the Effective
Date, which would disqualify the Merger as a pooling of interests for accounting
purposes or as a tax-free reorganization.

NO SOLICITATION

Homegate has agreed that it will not, and will direct and use its best
efforts to cause its officers and directors, employees, agents and
representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, Homegate or any of its subsidiaries (any such proposal
or offer being hereinafter referred to as an "Alternative Proposal"), or engage
in any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to an Alternative
Proposal, or release any third party from any obligations under any existing
standstill agreement or arrangement relating to any Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal. Homegate has agreed to cease immediately and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
prior to the date of the Merger Agreement with respect to any of the foregoing
and to take the necessary steps to inform the appropriate individuals or
entities of these obligations. Homegate has also agreed to notify Prime
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with it, provided that the Board of
Directors of Homegate may (i) furnish information to, or enter into discussions
or negotiations with, any person or entity that makes or proposes to make an
unsolicited bona fide proposal to acquire Homegate pursuant to a merger,
consolidation, share exchange, business combination, purchase of a substantial
portion of its assets or other similar transaction, if, and only to the extent
that, (a) the Board of Directors of Homegate determines in good faith that such
action is required for the Board of Directors to comply with its fiduciary
duties to stockholders imposed by law, (b) prior to furnishing such information
to, or entering into discussions or negotiations with, the other person or
entity, Homegate provides written notice to Prime to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
the other person or entity and (c) Homegate keeps Prime promptly informed of the
status and all material terms and conditions of any such discussions or
negotiations (including identities of parties) and (ii) to the extent
applicable, comply with Rule 14c-2 promulgated under the Exchange Act with
regard to an Alternative Proposal.

INDEMNIFICATION AND INSURANCE

As provided in the Merger Agreement, Prime is required to indemnify, defend
and hold harmless the officers, directors and employees of Homegate and its
subsidiaries (the "Indemnified Parties") from and against all losses, expenses,
claims, damages or liabilities arising out of the transactions contemplated by
the Merger Agreement to the fullest extent permitted or required under
applicable law, including without limitation the advancement of expenses. Prime
has agreed that all rights to indemnification existing in favor of the
directors, officers or employees of Homegate as provided in Homegate's
Certificate of Incorporation or Bylaws, with respect to matters occurring
through the Effective Date, shall survive the Merger and continue in full force
and effect for a period of not less than six years from the Effective Date.

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<PAGE> 47

Homegate for its existing coverage, but in such case shall purchase as much
coverage as possible for such amount.

CONDITIONS

The respective obligations of Homegate and Prime to consummate the Merger
are subject to the fulfillment of the following conditions: (a) the Merger
Agreement and the transactions contemplated thereby shall have been approved and
adopted by the requisite vote of the holders of the issued and outstanding
shares of capital stock of Homegate entitled to vote thereon; (b) the
Registration Statement shall have become effective under the Securities Act and
no stop order with respect thereto shall be in effect; (c) none of the parties
to the Merger Agreement shall be subject to any order or injunction against the
consummation of the transactions contemplated by the Merger Agreement; (d) all
consents, authorizations, orders and approvals of (or filings or registrations
with) any governmental commission, board or other regulatory body required in
connection with the execution, delivery and performance of the Merger Agreement
shall have been obtained or made (except where the failure to obtain or make any
such consent, authorization, order, approval, filing or registration would not
have a material adverse effect on the business of Prime and Homegate (and their
respective subsidiaries), taken as a whole, following the Effective Date); and
(e) the Prime Common Stock to be issued to Homegate stockholders in connection
with the Merger shall have been approved for listing on the NYSE, subject to
official notice of issuance.

The obligations of each of Homegate and Prime to effect the Merger are also
subject to the satisfaction or waiver by the other party prior to the Effective
Date of the following conditions: (a) the other party shall have performed in
all material respects all obligations required to be performed by it under the
Merger Agreement and the representations and warranties of the other party and
its subsidiaries set forth in the Merger Agreement shall be true in all material
respects as of the Effective Date; (b) Homegate shall have received the opinion
of Vinson & Elkins L.L.P. that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code; (c) Prime shall have received
the opinion of Willkie Farr & Gallagher that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code; (d) Homegate
and Prime shall have each received a "comfort" letter from the other party's
independent public accountants covering matters customarily included in such
comfort letters relating to transactions similar to the Merger and (e) from the
date of the Merger Agreement through the Effective Date, there shall not have
occurred any change, individually or together with other changes, that has had,
or would reasonably be expected to have, a material adverse change in the
financial condition, business, results of operations or prospects of either
Homegate or Prime and its subsidiaries, taken as a whole.

TERMINATION; FEES AND EXPENSES

The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Date, before or after the approval by the
stockholders of Homegate: (a) by the mutual consent of Homegate and Prime by
action of their respective Boards of Directors; (b) by action of the Board of
Directors of either Homegate or Prime if (i) the Merger shall not have been
consummated by December 31, 1997, (ii) the adoption of the Merger Agreement and
the approval of the transactions contemplated thereby by Homegate's stockholders
shall not have been obtained at a meeting duly convened for such purpose (or at
any adjournment or postponement thereof), or (iii) a United States federal or
state court of competent jurisdiction or a United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
the Merger Agreement and such order, decree, ruling or other action shall have
become final and non-appealable; provided, that the party seeking to terminate
the Merger Agreement pursuant to this clause (iii) shall have used all
reasonable efforts to remove such injunction, order or decree; (c) by action of
the Board of Directors of Homegate, if (i) in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders imposed by law, the
Board of Directors of Homegate determines that such termination is required by
reason of an Alternative Proposal being made for Homegate, (ii) there has been a
breach by Prime or Sub of any representation or warranty contained in the Merger
Agreement which would have or would be reasonably likely to have a material
adverse effect on the business,

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<PAGE> 48

properties, assets, prospects, condition (financial or otherwise), liabilities
or results of operations of Prime and its subsidiaries taken as a whole or (iii)
there has been a material breach by Prime of any covenant or agreement contained
in the Merger Agreement which is not curable or, if curable, is not cured within
30 days after written notice of such breach; or (d) by action of the Board of
Directors of Prime, if (i) the Board of Directors of Homegate shall have
withdrawn or modified in a manner adverse to Prime its approval or
recommendation of the Merger Agreement or the Merger, or shall have recommended
an Alternative Proposal to Homegate stockholders, (ii) there has been a breach
by Homegate of any representation or warranty contained in the Merger Agreement
which would have or would be reasonably likely to have a material adverse effect
on the business, properties, assets, prospects, condition (financial or
otherwise), liabilities or results of operations of Homegate and its
subsidiaries taken as a whole or (iii) there has been a material breach by
Homegate of any covenant or agreement contained in the Merger Agreement which is
not curable or, if curable, is not cured within 30 days after written notice of
such breach. In the event of the termination of the Merger Agreement pursuant to
(b), (c) or (d) above, nothing in the Merger Agreement shall prejudice the
ability of the non-breaching party to seek damages from any other party for any
breach of the Merger Agreement, including without limitation, attorneys' fees
and the right to pursue any remedy at law or in equity; provided, that in the
event Prime has received the Termination Fee, it shall not (i) have any rights
whatsoever in respect of or in connection with the representations, warranties,
covenants and agreements of Homegate, (ii) assert or pursue in any manner,
directly or indirectly, any claim or cause of action based in whole or in part
upon alleged tortious or other interference with rights under the Merger
Agreement against any entity or person submitting an Alternative Proposal or
(iii) assert or pursue in any manner, directly or indirectly, any claim or cause
of action against Homegate or any of its officers or directors based in whole or
in part upon its or their receipt, consideration, recommendation or approval of
an Alternative Proposal; provided, further, that Prime may, in the circumstances
set forth in clause (z) of the next paragraph, waive its right to receive the
Termination Fee, in which case the foregoing proviso shall not be applicable.

If (x) Homegate terminates the Merger Agreement because its Board of
Directors, in the exercise of its good faith judgment as to its fiduciary duties
to its stockholders imposed by law, determines that such termination is required
by reason of an Alternative Proposal being made for Homegate, (y) Prime
terminates the Merger Agreement because the Board of Directors of Homegate shall
have withdrawn or modified in a manner adverse to Prime its approval or
recommendation of the Merger Agreement or the Merger or shall have recommended
an Alternative Proposal to Homegate stockholders or (z) any person shall have
made an Alternative Proposal and thereafter the Merger Agreement is terminated
by either party as a result of the requisite approval of the holders of Homegate
Common Stock having not been obtained, or by Prime as a result of Homegate's
intentional failure to perform one of its agreements contained in the Merger
Agreement or intentional breach of one of its representations or warranties
contained in the Merger Agreement, and within 12 months thereafter such
Alternative Proposal shall have been consummated, then Homegate (or the
successor thereto) is required to pay in cash to Prime the Termination Fee of
$3,325,000, within two days after such termination (in the case of (x) or (y))
or consummation (in the case of (z)).

Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses, except as otherwise
provided in the Merger Agreement. The Merger Agreement provides that the
following expenses will be shared equally by Prime and Homegate: (a) the filing
fee in connection with the filing of the Registration Statement with the
Commission and (b) the expenses incurred in connection with printing and mailing
this Proxy Statement-Prospectus.

AMENDMENT; WAIVER

The parties may modify or amend the Merger Agreement by written agreement
at any time before the Effective Date, provided that following approval of the
Merger by holders of the Homegate Common Stock, no amendment shall be made which
by law requires the further approval of stockholders without obtaining such
further approval. The conditions to each party's obligation to consummate the
Merger may be waived by the other party in whole or in part to the extent
permitted by applicable law.

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<PAGE> 49

THE INTERIM FINANCING

Prime agreed to provide, pending consummation of the Merger, up to $65.0
million of interim secured financing (the "Interim Loans") to Homegate to enable
Homegate to acquire and develop certain hotel properties. The Interim Loans will
not exceed a borrowing base, which will restrict availability to no greater than
75% of the cost basis of Homegate in the properties. No Interim Loans will be
made after the earlier of November 30, 1997 and the date of any termination of
the Merger Agreement (other than a termination solely as a result of a breach by
Prime). All Interim Loans will mature on the earliest of (a) April 1, 1998, (b)
the date Homegate enters into any agreement with a third party (other than the
Merger Agreement) involving the merger or sale of substantially all the assets
of Homegate and (c) four months after the termination of the Merger Agreement.
The Interim Loans bear interest at a rate per annum equal to the one month
London Interbank Offered Rate plus 3.50% (increasing to 5.00% upon the earlier
of November 30, 1997 and the date of any termination of the Merger Agreement).
Homegate is obligated to pay to Prime a facility fee of $650,000 upon the
closing of the initial Interim Loan. The Interim Loans are secured by 18
properties currently under development and by any future development properties.
The loan documentation for the Interim Loans contains various affirmative and
negative covenants concerning the operation of Homegate as well as events of
default (including failure to pay amounts due under the loan documents or to
comply with such covenants or a breach of the Merger Agreement by Homegate). The
loan documents require Homegate to comply with the covenants contained in the
Merger Agreement. See "The Merger Agreement -- Certain Covenants."

As of October 27, 1997, an aggregate of $32.6 million in Interim Loans was
outstanding.

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<PAGE> 50

RECENT SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PRIME

The table below presents recent selected consolidated financial and other
data derived from Prime's historical consolidated financial statements as of and
for the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997. This data should be read in conjunction with "Prime
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Consolidated Financial Data of Prime and its Predecessor"
and the Consolidated Financial Statements, related notes and other financial
information included and incorporated by reference in this Proxy Statement-
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31,(2) 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Revenues:
Lodging.......................... $ 88,753 $146,184 $198,947 $ 94,248 $124,606
Food and beverage................ 18,090 37,955 41,437 19,479 20,706
Management and other fees........ 10,021 8,115 6,729 3,484 3,136
Interest on mortgages and notes
receivable.................... 15,867 11,895 6,090 3,704 3,303
Business interruption
insurance..................... -- -- 13,562 6,629 6,366
Rental and other................. 1,572 1,479 2,103 962 1,370
-------- -------- -------- -------- --------
Total revenues........... 134,303 205,628 268,868 128,506 159,487
-------- -------- -------- -------- --------
Costs and expenses:
Direct hotel operating expenses:
Lodging....................... 25,490 38,383 51,577 24,150 30,476
Food and beverage............. 13,886 28,429 32,053 15,589 15,656
Selling and general........... 27,244 49,753 61,789 29,743 32,593
Occupancy and other operating.... 9,799 11,763 16,833 7,584 11,256
General and administrative....... 15,089 15,515 17,813 8,757 10,105
Depreciation and amortization.... 9,384 15,227 23,632 11,102 15,101
Other expense.................... -- 2,200 -- -- --
-------- -------- -------- -------- --------
Total costs and
expenses............... 100,892 161,270 203,697 96,925 115,187
-------- -------- -------- -------- --------
Operating income................... 33,411 44,358 65,171 31,581 44,300
Investment income.................. 1,966 4,861 4,610 2,121 1,627
Interest expense................... (14,036) (22,350) (22,564) (12,209) (11,760)
Other income....................... 9,089 2,239 4,306 3,432 1,858
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary items.............. 30,430 29,108 51,523 24,925 36,025
Provision for income taxes......... 12,172 11,643 20,609 9,970 14,410
-------- -------- -------- -------- --------
Income before extraordinary
items............................ 18,258 17,465 30,914 14,955 21,615
Extraordinary items(3)............. 172 104 202 176 75
-------- -------- -------- -------- --------
Net income......................... $ 18,430 $ 17,569 $ 31,116 $ 15,131 $ 21,690
======== ======== ======== ======== ========
Earnings per common share(4):
Primary:
Income before extraordinary
items....................... $ 0.57 $ 0.54 $ 0.85 $ 0.45 $ 0.52
Extraordinary items........... 0.01 -- -- 0.01 --
-------- -------- -------- -------- --------
Earnings per common share........ $ 0.58 $ 0.54 $ 0.85 $ 0.46 $ 0.52
-------- -------- -------- -------- --------
Fully diluted:
Income before extraordinary
items....................... $ 0.57 $ 0.54 $ 0.80 $ 0.42 $ 0.48
Extraordinary items........... 0.01 -- -- -- --
-------- -------- -------- -------- --------
Earnings per common share........ $ 0.58 $ 0.54 $ 0.80 $ 0.42 $ 0.48
-------- -------- -------- -------- --------
</TABLE>

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<PAGE> 51

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
-------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT HOTEL DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(5)....................... $ 42,795 $ 59,585 $ 88,803 $ 42,683 $ 59,401
Net cash provided by operating
activities.................... 28,334 38,628 65,936 24,850 32,192
Net cash used in investing
activities.................... (33,910) (88,704) (240,957) (111,946) (121,375)
Net cash provided by (used in)
financing activities.......... (23,469) 87,085 141,485 78,208 151,948
HOTEL DATA(6):
All-suites:
Number of locations........... 12 19 35 25 46
Number of rooms............... 1,494 2,319 4,348 3,024 5,776
REVPAR........................ $ 39.50 $ 43.98 $ 47.28 $ 47.65 $ 49.51
Full-service(6):
Number of locations........... 29 30 30 30 31
Number of rooms............... 5,672 5,821 5,821 5,821 5,971
REVPAR........................ $ 52.52 $ 53.89 $ 61.85 $ 58.14 $ 65.88
Limited-service:
Number of locations........... 32 32 32 32 32
Number of rooms............... 3,359 3,359 3,359 3,359 3,359
REVPAR........................ $ 36.37 $ 38.37 $ 39.80 $ 41.96 $ 43.73
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
marketable securities............ $ 13,641 $ 61,462 $ 16,235 $ 43,045 $ 79,000
Property, equipment and leasehold
improvements, net................ 299,291 398,201 695,253 561,908 812,367
Mortgages and notes receivable, net
of current portion............... 81,260 64,962 24,195 25,053 19,858
Total assets....................... 434,932 573,241 786,098 683,185 972,400
Current portion of debt............ 5,284 5,731 3,419 4,097 3,083
Long-term debt, net of current
portion.......................... 178,545 276,920 298,875 363,132 457,912
Total stockholders' equity......... 204,065 232,916 419,895 252,629 444,153
</TABLE>

- ---------------
(1) In December 1994, Prime 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, Prime 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 and for the six months ended June 30, 1996 and 1997, Prime recorded the
operating revenues and operating expenses related to this hotel.

(2) Certain reclassifications have been made to the December 31, 1994, 1995 and
1996 financial information to conform them to the six months ended June 30,
1996 and 1997 presentations.

(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 and
$117,000 and $50,000 for the six months ended June 30, 1996 and 1997.

(4) 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

44
<PAGE> 52

common share was 32,022,000, 32,461,000 and 36,501,000 for the years ended
December 31, 1994, 1995 and 1996, respectively and 33,003,000 and 41,756,000
for the six months ended June 30, 1996 and 1997, 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 and 40,460,000 and
49,130,000 for the six months ended June 30, 1996 and 1997, respectively.

(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
Prime 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 Prime's operating performance
or as an alternative to cash flows as a measure of liquidity.

(6) Hotel data represents operating data for the hotels in the Portfolio at June
30, 1997. 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 of Prime -- Prime's Lodging Operations."

45
<PAGE> 53

PRIME MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Prime is a national hotel owner/operator which, as of October 1, 1997,
owned or leased 105 hotels and managed 12 hotels for third parties. Prime has a
financial interest in the form of mortgages or profit participations (primarily
incentive management fees) in seven of the Managed Hotels. Prime 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.

Prime'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, Prime is benefiting from the
operating leverage inherent in the lodging industry. Through its development of
its proprietary brands, Prime is positioning itself to generate additional
revenue not dependent on investment in real estate. Prime seeks to achieve
internal growth through the use of sophisticated operating, marketing and
financial systems at its hotels. Prime's external growth has focused on the
accelerated expansion of its AmeriSuites brands 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.

On July 25, 1997, Prime entered into an agreement to merge with Homegate, a
provider of mid-price extended-stay hotels. Under this agreement, Prime will
issue approximately 6.5 million shares of Prime Common Stock based upon a fixed
exchange ratio of 0.6073 share of Prime Common Stock for each of the
approximately 10.7 million outstanding shares of Homegate Common Stock. The
transaction is expected to be accounted for as a pooling of interests. The
Merger Agreement is subject to the approval of the shareholders of Homegate and
other customary terms and conditions and the Merger is expected to be completed
in the fourth quarter of 1997.

Under pooling of interests accounting, all transaction costs are expensed
as incurred and the historical consolidated statements of operations of the
companies are restated on a combined basis without giving effect to operating
synergies. Homegate, which commenced operations in 1996, is expected to generate
1997 results reflecting losses consistent with start-up operations. Therefore,
the merger is expected to have a dilutive effect on earnings for 1997. Although
there can be no assurance, assuming that pooling of interests accounting
treatment is available, Prime expects the impact of the merger to be accretive
to earnings in 1998.

For the three and six months ended June 30, 1997, earnings from recurring
operations increased by 65.1% and 76.2%, respectively, over the same periods in
1996. The earnings gains were the result of strong growth in REVPAR and profit
margins at comparable Owned Hotels and significant new AmeriSuites unit growth.
For the comparable Owned Hotels, REVPAR increased by 12.1% and 11.2% for the
three and six month periods. The combination of strong REVPAR increases and
effective expense controls resulted in increases in gross operating profits of
19.8% and 17.7% for the three and six month periods and improvements in gross
operating margins from 44.8% to 48.0% for the three month period and from 41.8%
to 44.8% for the six month period. The earnings growth was also favorably
affected by the net addition of 38 hotels since January 1, 1996 primarily
through the development of new AmeriSuites hotels.

EBITDA increased by 43.7% to $33.5 million for the three months ended June
30, 1997 and by 39.2% to $59.4 million for the six months ended June 30, 1997.
Hotel EBITDA increased by 43.9% to $34.3 million for the three month period and
by 44.9% to $61.8 million for the six month period. 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.

46
<PAGE> 54

Prime's hotels operate in three segments of the industry: the all-suites
segment, under Prime's proprietary AmeriSuites brand; the upscale full-service
segment, under major national franchises; and the mid-price limited-service
segment, primarily under Prime's proprietary Wellesley Inns brand. Prime's Hotel
EBITDA reflects the shifting mix in Prime's portfolio toward its proprietary
brand AmeriSuites and the sale of certain limited-service hotels operated under
franchise agreements. The Hotel EBITDA contribution from AmeriSuites hotels is
expected to increase in future years as a result of Prime's AmeriSuites
expansion plans. The following table illustrates the Hotel EBITDA contribution
from each segment (in thousands):

HOTEL EBITDA

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------
1996 1997
---------------------- ----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
All-suites........................ $ 7,150 30.1% $14,286 41.7%
Full-service...................... 11,056 46.5 14,727 43.0
Limited-service................... 5,587 23.4 5,235 15.3
------- ----- ------- -----
Total................... $23,793 100.0% $34,248 100.0%
======= ===== ======= =====
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------
1996 1997
---------------------- ----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
All-suites........................ $11,739 27.5% $22,964 37.2%
Full-service...................... 19,909 46.7 26,779 43.3
Limited-service................... 10,994 25.8 12,061 19.5
------- ----- ------- -----
Total................... $42,642 100.0% $61,804 100.0%
======= ===== ======= =====
</TABLE>

47
<PAGE> 55

RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1996

The following table presents the components of operating income, operating
expense margins and other data for Prime and Prime's comparable Owned Hotels for
the three and six months ended June 30, 1996 and 1997. The results of the ten
hotels divested during 1996 and 1997 are not material to an understanding of the
results of Prime's operations in such periods and, therefore, are not separately
discussed.

<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
------------------- -------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1996 1997 1996 1997
------- ------- ------- -------
(IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lodging........................................... $52,274 $66,485 $44,737 $50,185
Food and Beverage................................. 11,456 11,257 9,001 10,020
Management and Other Fees......................... 1,791 1,975
Interest on Mortgages and Notes Receivable........ 1,023 1,574
Business Interruption Insurance................... 2,891 1,376
Rental and Other.................................. 458 740
------- -------
Total Revenues............................ 69,893 83,407
Direct Hotel Operating Expenses:
Lodging........................................... 13,526 15,746 11,198 11,997
Food and Beverage................................. 8,675 7,691 6,486 6,880
Selling and General............................... 15,734 15,604 11,920 12,421
Occupancy and Other Operating....................... 4,102 5,712
General and Administrative.......................... 4,538 5,130
Depreciation and Amortization....................... 6,228 7,681
Operating Income.................................... 17,090 25,843
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue....... 25.9% 23.7% 25.0% 23.9%
Food and Beverage, as a percentage of food and
beverage revenue............................... 75.7% 68.3% 72.1% 68.7%
Selling and General, as a percentage of lodging
and food and beverage revenue.................. 24.6% 20.1% 22.2% 20.6%
Occupancy and Other Operating, as a percentage of
lodging and food and beverage revenue............. 6.4% 7.3%
General and Administrative, as a percentage of total
revenue........................................... 6.5% 6.2%
OTHER DATA(1):
Occupancy........................................... 73.6% 74.5% 74.5% 77.5%
Average Daily Rate ("ADR").......................... $ 68.58 $ 76.23 $ 70.16 $ 75.62
Revenue per Available Room ("REVPAR")............... $ 50.48 $ 56.81 $ 52.30 $ 58.62
Gross Operating Profit.............................. $26,266 $37,834 $24,134 $28,907
</TABLE>

48
<PAGE> 56

<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
-------------------- -------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1996 1997 1996 1997
------- -------- ------- -------
(IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lodging.......................................... $94,248 $124,606 $69,412 $76,776
Food and Beverage................................ 19,479 20,706 14,190 15,265
Management and Other Fees........................ 3,484 3,136
Interest on Mortgages and Notes Receivable....... 3,704 3,303
Business Interruption Insurance.................. 6,629 6,366
Rental and Other................................. 962 1,370
------- -------
Total Revenues........................... 128,506 159,487
Direct Hotel Operating Expenses:
Lodging.......................................... 24,150 30,476 17,501 18,774
Food and Beverage................................ 15,589 15,656 10,858 11,299
Selling and General.............................. 29,743 32,593 20,196 20,732
Occupancy and Other Operating...................... 7,584 11,256
General and Administrative......................... 8,757 10,105
Depreciation and Amortization...................... 11,102 15,101
Operating Income................................... 31,581 44,300
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue...... 25.6% 24.5% 25.2% 24.5%
Food and Beverage, as a percentage of food and
beverage revenue.............................. 80.0% 75.6% 76.5% 74.0%
Selling and General, as a percentage of lodging
and food and beverage revenue................. 26.2% 22.4% 24.2% 22.5%
Occupancy and Other Operating, as a percentage of
lodging and food and beverage revenue............ 6.7% 7.7%
General and Administrative, as a percentage of
total revenue.................................... 6.8% 6.3%
OTHER DATA(1):
Occupancy.......................................... 70.1% 68.4% 70.4% 72.3%
ADR................................................ $ 69.04 $ 78.33 $ 72.42 $ 78.37
REVPAR............................................. $ 48.36 $ 53.58 $ 50.97 $ 56.68
Gross Operating Profit............................. $43,466 $ 64,413 $35,047 $41,236
</TABLE>

- ---------------
(1) For purposes of showing operating trends, the results of the Frenchman's
Reef, which were impacted by hurricane damage, and ten hotels disposed in
1996 and 1997 have been excluded from the Other Data section of the table.
Comparable Owned Hotels refers to the 69 Owned Hotels that were owned or
leased by Prime during all of the three months ended June 30, 1996 and 1997
(excluding the Frenchman's Reef) and the 51 Owned Hotels that were owned or
leased by Prime during all of the six months ended June 30, 1996 and 1997.

Lodging revenues, which include room revenues and other related revenues
such as telephone and vending, increased by $14.2 and $30.4 million, or 27.2%
and 32.2%, respectively, for the three and six months ended June 30, 1997 as
compared to the same periods in 1996. Lodging revenues for the three months
ended June 30, 1997 increased due to incremental revenues of $14.8 million from
new hotels and higher revenues for comparable Owned Hotels, which increased by
$5.5 million, or 12.2%. Lodging revenues for the six months

49
<PAGE> 57

ended June 30, 1997 increased due to incremental revenues of $31.2 million from
new hotels and higher revenues for comparable Owned Hotels, which increased $7.4
million or 10.6%. The revenue gains during the three and six month periods were
partially offset by decreases of $2.8 million and $4.2 million at the
Frenchman's Reef attributable to hurricane-related damage and decreases of $3.2
million and $4.2 million related to the revenue from disposed hotels.

The following table sets forth hotel operating data for the comparable
Owned Hotels for the three and six months ended June 30, 1997 as compared to the
same periods in 1996, by product type:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- % ----------------- %
1996 1997 CHANGE 1996 1997 CHANGE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
AMERISUITES
Occupancy.......................... 72.3% 77.0% 76.1% 72.0%
ADR................................ $73.59 $76.47 $70.06 $73.85
REVPAR............................. $53.23 $58.91 10.7% $49.80 $53.19 6.8%
FULL-SERVICE
Occupancy.......................... 74.5% 78.6% 66.2% 70.3%
ADR................................ $84.28 $92.15 $82.30 $90.41
REVPAR............................. $62.78 $72.41 15.3% $54.52 $63.52 16.5%
WELLESLEY INNS
Occupancy.......................... 77.1% 77.1% 79.3% 78.0%
ADR................................ $50.81 $54.67 $58.52 $62.46
REVPAR............................. $39.20 $42.13 7.5% $46.40 $48.71 5.0%
TOTAL
Occupancy.......................... 74.5% 77.5% 70.4% 72.3%
ADR................................ $70.16 $75.62 $72.42 $78.37
REVPAR............................. $52.30 $58.62 12.1% $50.97 $56.68 11.2%
</TABLE>

Prime achieved solid revenue growth in all three of its industry segments.
The REVPAR increases reflect the results of several repositionings and continued
favorable industry trends in the full-service segment, growing recognition of
AmeriSuites as a leading brand in the fast-growing all-suites segment and the
reimaging program at the Wellesley Inns. The improvements in REVPAR at
comparable Owned Hotels were generated by increases in ADR, which rose by 7.8%
and 8.2%, and occupancy gains of 2.9 and 2.1 percentage points, respectively,
for the three and six months periods.

Food and beverage revenues decreased by $198,000 or 1.7% for the three
months ended June 30, 1997 primarily due to a decrease of $1.4 million at the
Frenchman's Reef, which was closed during the quarter for renovations attributed
to hurricane damage. Food and beverage revenues increased by $1.2 million, or
6.3%, for the six months ended June 30, 1997 as compared to the same period in
1996. The increase was primarily due to the additional revenues from three
full-service hotels added in the past year and strong growth at comparable Owned
Hotels. The revenue gains for the six month period were offset by a $1.3 million
decrease related to the Frenchman's Reef. Food and beverage revenues for
comparable Owned Hotels increased by $1.0 million and $1.1 million, or 11.3% and
7.6%, respectively for the three and six month periods, 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 Prime's national sales group, Market Segments,
Inc. ("MSI"). Management and other fees increased by $184,000, or 10.3%, for the
three months ended June 30, 1997 as compared to the same period in 1996 due to
increased base and incentive management fees associated with the remaining
Managed Hotels. Management and other fees decreased by $348,000, or 9.9%, for
the six months ended June 30, 1997 as compared to the same period in 1996
primarily due to the conversions of Managed Hotels into Owned Hotels.

50
<PAGE> 58

Interest on mortgages and notes receivable primarily relate to mortgages
secured by certain Managed Hotels. Interest on mortgage and notes receivable
increased by $551,000, or 53.9%, for the three months ended June 30, 1997 as
compared to the same period in 1996 due to interest recognized on subordinated
or junior mortgages which remit payments based on hotel cash flow. Interest on
mortgages and notes receivable decreased by $401,000, or 10.8%, for the six
months ended June 30, 1997 as compared to the same period in 1996 primarily due
to conversions of notes receivable into operating hotel assets or cash in 1996.

Business interruption insurance revenue is based on the settlement of
Prime's claim related to the hurricane damage at the Frenchmen's Reef caused by
Hurricane Marilyn in September 1995 and an estimate of lost profits attributed
to damage caused by Hurricane Bertha in July 1996. Prime is currently reviewing
its claim under its business interruption insurance with its insurance carrier
with respect to Hurricane Bertha. Business interruption insurance revenue
decreased by $1.5 million and $263,000, for the three and six months ended June
30, 1997 as compared to the same periods in 1996 due to operating losses in
1996.

Direct lodging expenses increased by $2.2 million and $6.3 million, or
16.4% and 26.2%, for the three and six months ended June 30, 1997, as compared
to the same periods in 1996 due primarily to the addition of new hotels. Direct
lodging expenses, as a percentage of lodging revenue, decreased from 25.9% to
23.7% for the three month period and from 25.6% to 24.5% for the six month
period due to increases in ADR which had lower corresponding increases in
expenses. For comparable Owned Hotels, direct lodging expenses as a percentage
of lodging revenues decreased from 25.0% to 23.9% for the three month period and
from 25.2% to 24.5% for the six month period primarily due to the ADR increases.

Direct food and beverage expenses for the three months ended June 30, 1997
decreased by $984,000, or 11.3%, as compared to the same period in 1996,
primarily due to the Frenchman's Reef which decreased by $1.4 million. This
decrease was primarily offset by an increase of $874,000 due to the addition of
two full-service hotels. Direct food and beverage expenses increased by $67,000,
or 0.4%, for the six months ended June 30, 1997 as compared to the same period
in 1996 primarily due to the addition of three full-service hotels in the past
year offset by a decrease at the Frenchman's Reef. As a percentage of food and
beverage revenues, direct food and beverage expenses decreased from 75.7% to
68.3% for the three month period and from 80.0% to 75.6% for the six month
period. For comparable Owned Hotels, food and beverage expenses as a percentage
of food and beverage revenues decreased from 72.1% to 68.7% for the three month
period and from 76.5% to 74.0% for the six month period. The decreases were
primarily due to the higher margins associated with 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 decreased
by $130,000, or 0.8%, for the three months ended June 30, 1997 due primarily to
a decrease of $2.4 million at the Frenchman's Reef. This is offset by increases
due to the addition of new hotels. Direct hotel selling and general expenses
increased by $2.9 million, or 9.6%, for the six months ended June 30, 1997 as
compared to the same period 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 24.6% to
20.1% for the three month period and from 26.2% to 22.4% for the six month
period. For the comparable Owned Hotels, direct hotel selling and general as a
percentage of hotel revenues decreased from 22.2% to 20.6% for the three month
period and from 24.2% to 22.5% for the six month period. The decreases were
primarily due to the ADR improvements, effective expense controls and decreases
in snow removal and other weather-related costs in the first quarter.

Occupancy and other operating expenses consist primarily of insurance, real
estate and other taxes and rent expense. Occupancy and other operating expenses
increased by $1.6 million and $3.6 million, or 39.2% and 48.4%, as compared to
the same period 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% to 7.3% for the three month period and from 6.7% to
7.7% for the six month period due to rent expense associated with the new leased
hotels.

51
<PAGE> 59

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 $592,000 and $1.4 million, or 13.1% and 15.4%, for the
three and six months ended June 30, 1997 as compared to the same periods 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 6.5% to 6.2% for the three month
period and from 6.8% to 6.3% for the six month period due to increased operating
leverage.

Depreciation and amortization expense increased by $1.5 million and $4.0
million, or 23.3% and 36.0%, for the three and six months ended June 30, 1997 as
compared to the same periods in 1996 due to the impact of new hotel properties
and refurbishment efforts at several hotels.

Investment income increased by $540,000, or 63.1%, for the three months
ended June 30, 1997 and decreased by 494,000, or 23.3% for the six months ended
June 30, 1997 as compared to the same periods in 1996 due to changes in the
weighted average cash balances.

Interest expense increased by $1.8 million and $213,000, for the three and
six months ended June 30, 1997 as compared to the same periods in 1996 primarily
due to the issuance of $200 million of Senior Subordinated Notes in March 1997
offset by capitalized interest related to new AmeriSuites construction. Prime
capitalized interest of $1.7 million and $3.7 million for the three months ended
June 30, 1996 and 1997, and $3.0 million and $7.4 million for the six months
ended June 30, 1996 and 1997.

Other income consists of items which are not part of Prime's recurring
operations. For 1996, other income consisted of a gain on the settlement of a
note receivable of $1.8 million and a gain on the sale of a hotel of $1.6
million. For the six months ended June 30, 1997, other income consisted of net
gains on property transactions of $1.9 million.

Pretax extraordinary gains of approximately $27,000 and $88,000 for the
three and six months ended June 30, 1996 and 1997 and $176,000 and $125,000 for
the six months ended June 30, 1996 and 1997 relate to the retirement of debt.

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 Prime and Prime'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 Prime'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
</TABLE>

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<PAGE> 60

<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
1995 1996 1995 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
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................... 15,227 23,632
Other Expense................................... 2,200 --
Operating Income................................ 44,358 65,171
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 Prime during all of 1995 and 1996 (excluding the Frenchman's
Reef).

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.

Prime 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>

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<PAGE> 61

The REVPAR growth at comparable Owned Hotels reflects strong results in
each of Prime'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 Prime'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 Prime's claim related to the hurricane damage caused by
Hurricane Marilyn in September 1995 at the Frenchman's Reef. Prime 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 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.

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

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<PAGE> 62

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 $8.4 million, or 55.2%,
from $15.2 million in 1995 to $23.6 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 increased slightly by $214,000, from $22.4 million in 1995
to $22.6 million in 1996, due to increases in the amortization of deferred loan
fees offset by 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 Prime'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.

55
<PAGE> 63

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 Prime and Prime'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 Prime'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..................... 9,384 15,227
Other Expense..................................... -- 2,200
Operating Income.................................. 33,411 44,358
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 Prime
during all of 1994 and 1995.

Lodging revenues, which include room revenues and other related revenues
such as telephone and vending, increased by $57.4 million, or 64.7%, from $88.8
million in 1994 to $146.2 million in 1995. The increase was due to $52.1 million
of lodging revenues generated by the conversion of Prime's interest in the
Frenchman's Reef from a mortgage note receivable to a hotel asset and the 19 new
hotels added during 1994

56
<PAGE> 64

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.

<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 Prime'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 Prime'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 Prime'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 Prime 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 Prime'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.

57
<PAGE> 65

$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 $5.8 million, or 62.3%,
from $9.4 million in 1994 to $15.2 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 $8.3 million, or 59.2%, from $14.0 million in
1994 to $22.4 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 Prime'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
proprietary brands through new construction. As of October 1, 1997, Prime had 55
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 also intends to expand the Homegate brand following its proposed
Merger with Homegate. As of October 1, 1997, there were 10 Homegate hotels in
operation with plans to expand to approximately 20 Homegate hotels by the end of
1997 and approximately 50 Homegate hotels by the end of 1998. There can be no
assurance that the Merger will be consummated as proposed or that the Homegate
operations can be effectively integrated or expanded.

58
<PAGE> 66

Prime believes that it has access to sufficient resources to implement its
planned expansion of the AmeriSuites and Homegate brands, including capital from
the following sources: (i) net proceeds of $92.4, after expenses and debt
repayments, related to the issuance of $200.0 million of 9 3/4% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") in March 1997;
(ii) borrowing availability under Prime's $100 million Revolving Credit
Facility; (iii) internally generated free cash flow and (iv) proceeds from
anticipated sale/leaseback transactions with respect to certain of its
properties. Prime may also from time to time seek additional debt or equity
financing.

At June 30, 1997, Prime had cash, cash equivalents and current marketable
securities of $79.0 million. In addition, at June 30, 1997, Prime had $100.0
million available under the Revolving Credit Facility.

Prime's major sources of cash for the six months ended June 30, 1997 were
net proceeds, after expenses, of approximately $193.5 million from the issuance
of the Senior Subordinated Notes in March 1997, gross borrowings under the
Revolving Credit Facility of $67.5 million, cash flow from operations of $31.0
million, and proceeds from sales of hotels of $25.6 million. Prime's major uses
of cash during the period were capital expenditures of $153.3 million relating
primarily to acquisitions and development and debt repayments of $108.8 million,
including repayments of $80.0 million under the Revolving Credit Facility.

Cash flow from operations was positively impacted by the utilization of net
operating loss carryforwards ("NOLs") and other tax basis differences of $1.8
million in 1997 and $4.1 million in 1996, respectively. At June 30, 1997, Prime
had federal NOLs relating primarily to its predecessor, Prime Motor Inns, Inc.,
of approximately $90.0 million which are subject to annual utilization
limitations and expire beginning in 2005 and continuing through 2007.

Sources of Capital. On September 22, 1997, Prime entered into a strategic
alliance with Equity Inns, Inc. ("Equity Inns"), a real estate investment trust,
for purposes of financing its brand development through the sale/leaseback of
AmeriSuites hotels. Under the agreement, Equity Inns has certain rights to
acquire AmeriSuites hotels developed by Prime over the next three years. As part
of the alliance, Prime has entered into an initial agreement with Equity Inns
for the sale of 10 AmeriSuites hotels for aggregate consideration of $86.3
million, consisting of $77.7 million in cash and $8.6 million in Equity Inns
limited partnership operating units. Prime has also agreed to lease the hotels
from Equity Inns for a term of 10 years, with certain renewal options.

In order to finance the development of its proprietary brands, Prime has
retained an investment bank as its advisor for the purpose of evaluating and
entering into a sale/leaseback of nine of its full-service hotels. For the
twelve months ended June 30, 1997, these nine hotels generated revenues and
EBITDA of $54.6 million and $19.6 million, respectively. Prime intends to
maintain a beneficial interest in the hotels as manager/lessee pursuant to the
new lease structure. Prime is seeking to consummate the transaction by the end
of 1997. Prime expects to pursue a second sale/leaseback transaction in 1998
involving certain of its remaining full-service hotels. There can be no
assurance that these sale/leaseback transactions will be completed.

In January 1996, Prime issued the Senior Subordinated Notes in reliance
upon Rule 144A under the Securities Act. Interest on the Senior Subordinated
Notes is payable semi-annually on April 1 and October 1 at the rate of 9 3/4%
per year. The Notes are general unsecured obligations 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 Prime on or after January 15, 2001 at premiums to principal which
decline on each anniversary date thereafter. Prime utilized a portion of the
proceeds to pay down approximately $101.1 million of indebtedness, with the
remainder of the proceeds used to finance the development of AmeriSuites hotels.
Until used, the net proceeds will be invested in short-term investment grade
marketable securities or money market funds. The indebtedness repaid with the
proceeds from the Senior Subordinated Notes included $75.6 million of borrowings
outstanding under the Revolving Credit Facility, $10.8 million of 10% Senior
Secured Notes and $13.9 million of debt secured by the Frenchmen's Reef. Prime
has signed a commitment letter with a commercial bank to provide up to $40.0
million of new financing in connection with the refurbishment plans at the
Frenchman's Reef.

Prime established a Revolving Credit Facility in 1996 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.

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<PAGE> 67

The Revolving Credit Facility is secured by certain of Prime's hotels with
recourse to Prime. 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 Prime 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
Prime. 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. During the
three months ended March 31, 1997, Prime borrowed $67.5 million under the
Revolving Credit Facility. The proceeds were used primarily for the development
of AmeriSuites hotels. In March 1997, Prime repaid the total outstanding
borrowings of $80.0 million under the Revolving Credit Facility primarily with
the proceeds from the issuance of the Senior Subordinated Notes. Prime currently
has $100.0 million available under the Revolving Credit Facility.

In October 1996, Prime 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,
Prime effectively fixed interest rates for approximately seven years at a
Treasury yield of 6.4% on a $98.4 million notional principal amount. In April
1997, Prime terminated the agreement for a gain of $500,000 which will be
amortized as a reduction of interest expense over a seven year period.

Capital Investments. Prime's capital spending in 1997 is focused primarily
on the development of its AmeriSuites hotel chain. For the six months ended June
30, 1997, Prime spent $122.0 million on new construction funded primarily by
existing cash balances, internally generated cash flow, proceeds from borrowings
under the Revolving Credit Facility and the issuance of the Senior Subordinated
Notes.

Prime intends to rapidly expand its AmeriSuites chain through new
construction. Prime has opened 18 new AmeriSuites hotels since January 1, 1997
bringing the total to 55 hotels as of October 1, 1997. Prime plans to have 69
AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998.
As of October 1, 1997, Prime had 44 AmeriSuites hotels under development,
including 22 under construction. Prime expects to spend a total of approximately
$300 million on development of new AmeriSuites hotels in each of 1997 and 1998.

Following the consummation of the Merger, Prime also intends to
aggressively develop the Homegate brand through new construction. Prime plans to
have approximately 20 Homegate hotels open by the end of 1997 and approximately
50 Homegate hotels open by the end of 1998. There are currently 10 Homegate
hotels in operation with 37 Homegate hotels under development, including 27
hotels under construction. In order to facilitate uninterrupted development of
the Homegate hotels, Prime has agreed to provide up to $65.0 million of Interim
Loans to Homegate pending completion of the merger. All Interim Loans will
mature on the earliest of (a) April 1, 1998, (b) the date Homegate enters into
any agreement with a third party (other than the Merger Agreement) involving the
merger or sale of substantially all the assets of Homegate and (c) four months
after the termination of the Merger Agreement. The Interim Loans bear interest
at a rate per annum equal to the one month London Interbank Offered Rate plus
3.50% (increasing to 5.00% upon the earlier of November 30, 1997 and the date of
any termination of the Merger Agreement). As of October 27, 1997, an aggregate
of $32.6 million in Interim Loans was outstanding. Prime expects to spend
approximately $200 million in 1998 on development of new Homegate hotels.

In March 1997, Prime completed a $9.0 million renovation of the 14
Wellesley Inns acquired in 1996. Prime believes that the renovations position
the Wellesley Inns chain for strong growth in 1997, with a high degree of
consistency and product quality.

In February 1997, Prime acquired a Holiday Inn in Monroe Township, NJ for
$11.2 million in cash. Prime intends to spend an additional $3.5 million
relating to the refurbishing of the hotel. Prime may from time to time acquire
full-service hotels having operating synergies with other Prime hotels, although
no such acquisitions are currently pending.

In September 1995, the Frenchman's Reef in St. Thomas U.S. Virgin Islands
suffered damage when Hurricane Marilyn struck the island. Prime and its
insurance carrier settled Prime's property and business

60
<PAGE> 68

interruption insurance claim with respect to Hurricane Marilyn for $25.0
million. In July 1996, Prime received the final installment under its
settlement, bringing the net proceeds to $22.8 million, net of deductibles, for
which Prime 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.
Prime is currently reviewing its claim for property damage and business
interruption insurance with its insurance carrier with regard to Hurricane
Bertha.

Prime is currently underway with plans to refurbish the Frenchman's Reef.
Redevelopment plans provide for significant hurricane-related renovations and
certain enhancements. Prime estimates that the cost of refurbishment will be
approximately $35.0 million. Due to the extent of the renovations, Prime closed
the hotel on April 1, 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 Prime's estimate. Prime
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.

For the six months ended June 30, 1997, Prime spent approximately $19.6
million on capital improvements at its Owned Hotels, of which approximately
$12.6 million related to refurbishments and repositionings of hotels.

In order to facilitate future tax-free exchanges of hotel properties, Prime
from time to time enters into arrangements with an unaffiliated third party
under Section 1031 of the Internal Revenue Code of 1986, as amended. As of June
30, 1997, Prime had advanced approximately $48.8 million to such third party
which advances are classified as property, equipment and leasehold improvements.

Asset Realizations. As part of Prime's brand development strategy, Prime
has sold the majority of its limited-service hotels operated under franchise
agreements. Through June 30, 1997, Prime received $25.6 million in cash on sales
of seven hotel properties resulting in gains of $1.9 million.

61
<PAGE> 69

SELECTED CONSOLIDATED FINANCIAL DATA
OF PRIME AND ITS PREDECESSOR

Prime is the successor in interest to Prime's predecessor, Prime Motor
Inns, Inc. ("PMI"), which emerged from chapter 11 reorganization on July 31,
1992 (the "Reorganization Date"). PMI had filed for protection under chapter 11
of the United States Bankruptcy Code in September 1990. Prime 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 Reorganization
Date. Accordingly, the consolidated financial statements of Prime are not
comparable in all material respects to any such financial statement as of any
date or for any period prior to the Reorganization Date. Subsequent to the
Reorganization Date, Prime changed its fiscal year end from June 30 to December
31. The table below presents selected consolidated financial data derived from:
(i) Prime's historical financial statements for the years ended December 31,
1993, 1994, 1995 and 1996, and the six months ended June 30, 1996 and 1997 (ii)
Prime's historical financial statements as of and for the five-month period
ended December 31, 1992, (iii) Prime's "fresh start" balance sheet as of the
Reorganization 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 Proxy Statement-Prospectus.

<TABLE>
<CAPTION>
POST-REORGANIZATION
PRE-REORGANIZATION ----------------------------------------------------------------------------------
--------------------- AS OF AND
AS OF AND FOR THE FOR THE AS OF AND FOR THE
FOR THE ONE MONTH FIVE MONTHS AS OF AND FOR THE YEAR ENDED DECEMBER SIX MONTHS ENDED
YEAR ENDED ENDED AS OF ENDED 31, JUNE 30,
JUNE 30, JULY 31, JULY 31, DEC. 31, -------------------------------------- ------------------
1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 1996 1996 1997
---------- --------- -------- ------------ -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <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 $128,506 $159,487
Valuation writedowns
and reserves...... (62,123) (13,000) -- -- -- -- -- -- -- --
Reorganization
items............... (23,194) 1,796 -- -- -- -- -- -- -- --
Other income.......... -- -- -- -- 3,809 9,089 2,239 4,306 3,432 1,858
Income (loss) from
continuing
operations before
extraordinary
items(2)............ (71,965) (10,274) -- 1,393 8,175 18,258 17,465 30,914 24,925 36,025
Extraordinary
items-gains on
discharge of
indebtedness (net of
income taxes)....... -- 249,600 -- -- 3,989 172 104 202 176 75
Net income (loss)..... (71,965) 239,326 -- 1,393 12,164 18,430 17,569 31,116 15,131 21,690
Balance sheet data:
Total assets.......... $ 554,118 -- $468,650 $403,314 $410,685 $434,932 $573,241 $786,098 $683,185 $972,400
Long-term debt, net of
current portion..... 8,921 -- 204,438 192,913 168,618 178,545 276,920 298,875 363,132 457,912
Stockholders'
equity
(deficiency).... (229,292) -- 135,600 137,782 171,364 204,065 232,916 419,895 252,629 444,153
</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 Reorganization Date, Prime 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.

62
<PAGE> 70

BUSINESS OF PRIME

PRIME

Prime's strategy is to capitalize on two lodging industry trends perceived
by management: (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, Prime owns and operates 105 of the
117 hotels in the Portfolio and holds financial or equity interests in 7 of the
remaining 12 hotels managed by Prime for third parties. Furthermore, more than
85% of Prime's capital spending in 1995 and 1996 was dedicated to the growth of
Prime's proprietary AmeriSuites and Wellesley Inns brands. Through its focus on
hotel equity ownership, Prime is benefiting from the operating leverage inherent
in the lodging industry. Through its development of proprietary brands, Prime is
positioning itself to generate additional revenue not dependent on investment in
real estate.

All-Suites: Prime owns and operates 55 all-suite hotels under the
AmeriSuites brand name, and currently has another 44 AmeriSuites under
development, including 22 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 55 hotels at October
1, 1997, an increase of 323%. In 1996, AmeriSuites contributed approximately
$26.0 million, or 28.6%, of Prime's Hotel EBITDA. For the six months ended June
30, 1997, AmeriSuites contributed approximately $23.0 million, or 37.2%, of
Prime's Hotel EBITDA, a percentage which Prime believes will continue to
increase significantly during the second half of 1997 and in 1998.

63
<PAGE> 71

parties, are operated under franchise agreements with well-known national
chains. In 1996, Prime's limited-service hotels contributed approximately $20.5
million, or 22.5%, of Prime's Hotel EBITDA. For the six months ended June 30,
1997, Prime's limited-service hotels contributed approximately $12.1 million, or
19.5%, of Prime'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 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. These trends continued in 1997, as Prime achieved REVPAR increases in
the second quarter of 1997 at its comparable AmeriSuites, full-service and
limited-service hotels of 10.7%, 15.3% and 7.5%, respectively, versus 1996
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) Prime's Wellesley Inns are positioned
to benefit from a $9.0 million renovation and reimaging program completed in
March 1997.

AMERISUITES EXPANSION

Prime's external growth focuses on the accelerated expansion of its
AmeriSuites brand through the construction of new AmeriSuites hotels. Prime
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, 53 AmeriSuites are open, with an additional 44 hotels under
development, including 22 under construction. At these levels, Prime 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. Prime's AmeriSuites franchise initiatives will initially include forming
strategic alliances with regional and national developers and REITs and
developing franchise marketing, training and quality assurance programs.

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) borrowings under Prime's $100 million Revolving
Credit Facility; (ii) internally generated free cash flow from hotel operations;
and (iii) proceeds from anticipated sale/leaseback transactions with respect to
certain of its properties. Prime may also from time to time seek additional debt
or equity financing.

64
<PAGE> 72

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 increasing 6.7% in 1996 over 1995
levels. For the six months ended June 30, 1997, room supply exceeded demand
(3.0% vs. 2.3%). However, due to the relatively high levels of occupancy (64.1%
for the six month period), the industry as a whole has been able to increase ADR
by 6.6%, resulting in a 5.8% REVPAR increase. 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 Prime'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 two price levels (of the five price
levels classified by Smith Travel Research) in which Prime competes: upscale and
mid-price. REVPAR data was calculated by Prime based on occupancy and ADR data
supplied by Smith Travel Research.

<TABLE>
<CAPTION>
% CHANGE IN:
------------------------------------------------------------------------------------------------
ROOM SUPPLY ROOM DEMAND REVPAR
------------------------------ ------------------------------ ------------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
1997 V. 1997 V. 1997 V.
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
1995 V. 1996 V. JUNE 30, 1995 V. 1996 V. JUNE 30, 1995 V. 1996 V. JUNE 30,
1994 1995 1996 1994 1995 1996 1994 1995 1996
------- ------- ---------- ------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States.................. 1.6% 2.3% 3.0% 3.0% 3.1% 2.3% 6.1% 7.8% 5.8%
BY REGION:
Middle Atlantic.............. 1.1 1.0 1.1 1.2 3.3 2.7 5.8 10.1 10.8
South Atlantic............... 1.3 2.0 3.1 3.6 3.3 2.1 6.9 7.9 5.8
BY SERVICE (PRICE LEVEL):
Upscale...................... 1.9 3.4 4.4 2.6 3.4 4.4 4.7 5.4 5.2
Mid-Price.................... 2.4 3.3 4.0 3.8 3.3 3.2 5.9 6.7 5.8
</TABLE>

65
<PAGE> 73

PRIME'S LODGING OPERATIONS

The following table sets forth information with respect to the Owned Hotels
and Managed Hotels as of October 1, 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........................ 55 6,928 0 0 0 0 55 6,928
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 2 552 0 0 4 942
Ramada............................. 8 1,256 3 671 1 125 12 2,052
Howard Johnson..................... 0 0 1 116 0 0 1 116
Independent........................ 1 149 0 0 0 0 1 149
--- ------ ----- ----- --- ------
- -
Total Full-Service......... 21 4,245 1,339 650 29 6,234
6 2
Limited-Service:
Wellesley Inn...................... 28 2,812 0 0 0 0 28 2,812
Howard Johnson..................... 1 108 1 149 3 400 5 657
--- ------ ----- ----- --- ------
- -
Total Limited Service........... 29 2,920 149 400 33 3,469
1 3
--- ------ ----- ----- --- ------
- -
Total...................... 105 14,093 1,488 1,050 117 16,631
7 5
=== ====== ===== ===== === ======
= =
</TABLE>

- ---------------
(1) Of the 105 Owned Hotels, 12 are operated under lease agreements. The leases
covering Prime'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 Prime to pay the cost of
repairs, insurance and real estate taxes. In addition, some of Prime'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) Seven Managed Hotels in which Prime holds a mortgage or profit participation
on the property.

66
<PAGE> 74

The following table sets forth the location of Prime's hotels as of October
1, 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>
Alabama.............................. 2 256 -- -- -- -- 2 256
Arizona.............................. 1 118 -- -- -- -- 1 118
Arkansas............................. 1 130 -- -- -- -- 1 130
California........................... -- -- -- -- 1 96 1 96
Connecticut.......................... 4 589 -- -- -- -- 4 589
Florida.............................. 21 2,228 -- -- 1 115 22 2,343
Georgia.............................. 7 927 -- -- 1 189 8 1,116
Illinois............................. 4 497 -- -- -- -- 4 497
Indiana.............................. 1 126 -- -- -- -- 1 126
Kansas............................... 2 254 -- -- -- -- 2 254
Kentucky............................. 1 123 -- -- -- -- 1 123
Louisiana............................ 1 128 -- -- -- -- 1 128
Maryland............................. 1 128 -- -- 1 525 2 653
Michigan............................. 1 128 -- -- -- -- 1 128
Minnesota............................ 2 256 -- -- -- -- 2 256
Nevada............................... 2 350 -- -- -- -- 2 350
New Jersey........................... 15 2,505 7 1,488 1 125 23 4,118
New Mexico........................... 1 128 -- -- -- -- 1 128
New York............................. 8 938 -- -- -- -- 8 938
North Carolina....................... 2 254 -- -- -- -- 2 254
Ohio................................. 4 508 -- -- -- -- 4 508
Oklahoma............................. 2 256 -- -- -- -- 2 256
Oregon............................... 1 161 -- -- -- -- 1 161
Pennsylvania......................... 2 376 -- -- -- -- 2 376
South Carolina....................... 2 239 -- -- -- -- 2 239
Tennessee............................ 5 635 -- -- -- -- 5 635
Texas................................ 6 768 -- -- -- -- 6 768
U.S. Virgin Islands.................. 1 517 -- -- -- -- 1 517
Virginia............................. 5 570 -- -- -- -- 5 570
--- ------ ----- ----- --- ------
-- --
Total...................... 105 14,093 1,488 1,050 117 16,631
7 5
=== ====== ===== ===== === ======
== ==
</TABLE>

67
<PAGE> 75

The following table sets forth for the five years ended December 31, 1996
and the six months ended June 30, 1996 and 1997 operating data for the hotels in
Prime's portfolio as of June 30, 1997. 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 24 Owned Hotels that were managed by Prime prior to their acquisition
by Prime are presented as if they had been Owned Hotels from the dates Prime
began managing the hotels.

<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>
1992..... 49 6,433 8 1,627 2 650 59 8,710
1993..... 52 6,782 8 1,627 3 765 63 9,174
1994..... 59 7,848 8 1,627 5 1,050 72 10,525
1995..... 67 8,822 8 1,627 5 1,050 80 11,499
1996..... 81 10,551 8 1,627 5 1,050 94 13,228
1996*.... 73 9,527 8 1,627 5 1,050 86 12,204
1997*.... 95 12,429 8 1,627 5 1,050 108 15,106
</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...... 69.6% $55.68 $38.73 71.7% $58.20 $41.73 64.9% $87.81 $56.96 69.6%
1993...... 72.1 57.63 41.56 74.1 61.50 45.57 64.9 86.91 56.41 71.9
1994...... 70.8 61.55 43.59 74.6 67.46 50.32 68.2 73.66 50.27 71.2
1995...... 69.3 65.71 45.51 74.2 70.64 52.39 70.5 77.58 54.71 70.1
1996...... 69.6 71.85 49.97 76.9 75.44 57.56 76.9 83.06 63.83 71.8
1996*..... 69.4 71.03 49.32 78.1 72.90 54.81 69.4 79.25 61.89 71.0
1997*..... 69.2 77.00 53.25 74.1 80.33 59.51 69.2 89.34 66.18 70.1

<CAPTION>
ADR REVPAR
------ ------
<S> <C><C> <C>
1992...... $58.42 $40.66
1993...... 60.32 43.39
1994...... 63.83 45.43
1995...... 67.64 47.43
1996...... 73.40 52.17
1996*..... 72.10 51.18
1997*..... 78.35 54.90
</TABLE>

- ---------------
* Through June 30.

All-Suite Hotels

Prime currently owns 55 AmeriSuites hotels and has 44 AmeriSuites hotels
under development, including 22 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, Prime 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, Prime will be able to swiftly implement marketing and
yield management strategies. Additionally, the system will provide Prime with
detailed guest history data

68
<PAGE> 76

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.
Through June 30, 1997, the REVPAR contribution from the central reservations
system for the AmeriSuites hotels has increased by 46.1% over prior year levels.

Prime believes it has outlined a comprehensive strategy for the rapid
development of the AmeriSuites brand while maintaining control of the
development process.

Detailed Site Selection. Prime 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, Prime qualifies
the sites before entering into a letter of intent. After a letter of intent is
signed, Prime assesses the feasibility of the sites, which includes extensive
reconnaissance by Prime's operations and sales and marketing staffs as well as
independent consultants. Upon satisfactory completion of economic feasibility,
Prime 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. Prime 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, Prime 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. Prime intends to expand into new regions by first
developing hotels in cities which it has targeted as "key" cities. Prime will
then add additional hotels in that region in cities which are logical
destinations from the "key" cities. This strategy permits Prime to quickly build
brand recognition of AmeriSuites in a particular region. Key cities where
AmeriSuites are open or under development include Atlanta (8), Dallas/Ft. Worth
(7), Chicago (6), Miami/Ft. Lauderdale (4) and Denver (3).

Prime is approaching the critical mass necessary to begin development of
franchising programs. Prime's AmeriSuites franchising initiatives will initially
include forming strategic alliances with regional and national developers and
REITs and developing franchise marketing, training and quality assurance
programs.

69
<PAGE> 77

The following table sets forth for the five years ended December 31, 1996
and the six months ended June 30, 1996 and 1997 certain data with respect to
AmeriSuites hotels, all of which are owned by Prime. 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 and the six months ended June 30, 1996 and 1997.

<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........................... 19 1,494 19 2,319
1996........................... 19 1,494 35 4,348
1996*.......................... 19 2,319 25 3,024
1997*.......................... 19 2,319 46 5,776
</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
1996*.......................... 71.1 70.06 49.80 67.1 71.05 47.65
1997*.......................... 72.0 73.85 53.19 65.9 75.11 49.51
</TABLE>

- ---------------
* Through June 30.

As of June 30, 1997, many of the Company's hotels were located in the
Middle Atlantic and South Atlantic regions. The following table sets forth for
the five years ended December 31, 1996 and the six months ended June 30, 1996
and 1997 certain data by significant geographic region for the AmeriSuites
hotels owned by the Company as of June 30, 1997.

Middle Atlantic

There were no owned AmeriSuites hotels located in the Middle Atlantic
region as of June 30, 1997.

South Atlantic

<TABLE>
<CAPTION>
HOTELS ROOMS OCCUPANCY ADR REVPAR
------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1992....................................... 1 114 71.0% $48.80 $34.64
1993....................................... 1 114 78.3 52.70 41.29
1994....................................... 2 240 73.3 59.14 43.34
1995....................................... 8 952 67.4 65.96 44.42
1996....................................... 13 1,529 69.4 73.29 50.83
1996*...................................... 10 1,145 71.5 73.41 52.48
1997*...................................... 19 2,361 69.5 76.98 53.50
</TABLE>

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

* Through June 30.

Prime 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. This trend

70
<PAGE> 78

continued in 1997, with comparable AmeriSuites generating a 10.7% increase in
REVPAR for the three months ended June 30, 1997.

Prime 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 October 1, 1997 was approximately three years. Prime
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 one year generated an average EBITDA of $1.26 million,
representing an average unleveraged 18.1% return on total invested capital.
Prime believes that returns from AmeriSuites development have generally equaled
or exceeded those prevalent in the hotel acquisition markets. Since January 1,
1997 Prime has opened 20 new AmeriSuites hotels, bringing the number of
AmeriSuites owned and operated by Prime to 55.

Full-Service Hotels

Prime operates 29 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, Prime's sales force markets to companies which have a significant
number of employees traveling in Prime's operating regions who consistently
produce a high volume demand for hotel room nights. In addition, Prime'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.

Prime'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, Prime also has theme
concept lounges in a number of its hotels. In recent years, Prime has received
recognition from various franchisors and associations for its hotel quality and
service.

Prime 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, Prime and its
insurance carrier settled Prime'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. Prime is currently reviewing its
claim for property damage with its insurance carrier. Prime is currently
underway with plans to refurbish and upgrade the Frenchman's Reef. Redevelopment
plans provide for significant hurricane-related renovations and certain
enhancements. Prime estimates that the cost of refurbishment will be
approximately $35.0 million. Prime has continued to operate the hotel. However,
due to the extent of the renovations and the additional damage caused by
Hurricane Bertha, Prime closed the hotel on April 1, 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 Prime's estimate. Prime 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.

71
<PAGE> 79

The following table sets forth for the five years ended December 31, 1996
and the six months ended June 30, 1996 and 1997, operating data for the
full-service hotels in Prime's portfolio as of June 30, 1997. 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 eight Owned Hotels that were managed by Prime
prior to their acquisition by Prime during the five-year period are presented as
if they had been Owned Hotels from the dates Prime began managing the hotels.

<TABLE>
<CAPTION>
OWNED TOTAL
------------------------------- -------------------------------
HOTELS ROOMS HOTELS ROOMS
--------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
1992........................... 17 3,074 27 5,202
1993........................... 17 3,074 28 5,317
1994........................... 18 3,429 29 5,672
1995........................... 19 3,578 30 5,821
1996........................... 19 3,578 30 5,821
1996*.......................... 20 3,578 30 5,821
1997*.......................... 21 3,728 31 5,971
</TABLE>

<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1992........................... 65.6% $67.02 $43.97 67.6% $67.34 $45.49
1993........................... 68.0 69.64 47.37 69.7 69.65 48.55
1994........................... 67.0 76.05 50.93 69.6 75.21 52.52
1995........................... 65.6 78.93 51.79 68.7 78.46 53.89
1996........................... 69.9 86.88 60.71 72.7 85.13 61.85
1996*.......................... 67.1 83.99 56.32 70.5 82.43 58.14
1997*.......................... 70.7 92.29 65.29 72.8 90.48 65.88
</TABLE>

- ---------------
* Through June 30.

As of June 30, 1997, many of the Company's hotels were located in the
Middle Atlantic and South Atlantic regions. The following table sets forth for
the five years ended December 31, 1996 and the six months ended June 30, 1996
and 1997 certain data by significant geographic region for the full-service
hotels owned by the Company as of June 30, 1997.

Middle Atlantic

<TABLE>
<CAPTION>
HOTELS ROOMS OCCUPANCY ADR REVPAR
------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1992......................................... 12 2,226 64.5% $68.60 $44.27
1993......................................... 12 2,226 67.2 70.47 47.37
1994......................................... 13 2,581 66.6 76.29 50.80
1995......................................... 13 2,581 63.5 78.24 49.68
1996......................................... 13 2,581 68.5 85.91 58.82
1996*........................................ 13 2,581 64.4 81.63 52.57
1997*........................................ 14 2,731 70.3 91.39 64.26
</TABLE>

- ---------------
* Through June 30.

South Atlantic

There were no owned full-service hotels located in the South Atlantic
region as of June 30, 1997.

Prime 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, Prime acquired the 151 room Ramada

72
<PAGE> 80

Plaza Suites in Secaucus, NJ and repositioned the hotel as a Radisson Suite
hotel. In February 1997, Prime acquired the 150-room Holiday Inn in Monroe
Township, NJ.

The majority of Prime's repositioning efforts have been performed at the
full-service hotels. Since 1994, Prime successfully completed the repositioning
of 13 of its full-service hotels which included changing the franchise
affiliations of 6 such hotels. Prime recently completed the repositioning of the
Hasbrouck Heights, NJ Sheraton Hotel to a Crowne Plaza and the Secaucus Ramada
Plaza Suites to a Radisson Suites hotel.

Limited-Service Hotels

Prime's limited-service hotels consist of 28 Wellesley Inns and 5 other
hotels operated under franchise agreements, primarily with Howard Johnson. On
March 6, 1996, Prime acquired 18 hotels consisting of 16 Wellesley Inns and two
other limited-service hotels for approximately $65.1 million in cash. The
acquisition enabled Prime to establish full control over its proprietary
Wellesley Inns brand with all 28 Wellesley Inns owned and operated by Prime. The
acquisition provides Prime with significant new opportunities to maximize the
value of its brand.

Of Prime'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, Prime 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 Prime's
AmeriSuites, are marketed under the new reservation system developed by Anasazi
Travel Resources, Inc. Through June 30, 1997, the REVPAR contribution from the
central reservations system for Wellesley Inns has increased by 24.5% over prior
year levels. In Florida, where the population has grown rapidly and development
opportunities continue to exist, Prime 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 eight years.

Prime'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, Prime has
divested a number of these hotels. Of the five other limited-service hotels,
four are managed for third parties.

The following table sets forth for the five years ended December 31, 1996
and six months ended June 30, 1996 and 1997 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 Prime
prior to their acquisition by Prime are presented as if they had been Owned
Hotels from the dates Prime began managing the hotels.

<TABLE>
<CAPTION>
OWNED TOTAL
------------------------------- -------------------------------
HOTELS ROOMS HOTELS ROOMS
--------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
1992........................... 26 2,610 27 2,759
1993........................... 27 2,715 28 2,864
1994........................... 29 2,925 32 3,359
1995........................... 29 2,925 32 3,359
1996........................... 29 2,925 32 3,359
1996*.......................... 29 2,925 32 3,359
1997*.......................... 29 2,925 32 3,359
</TABLE>

73
<PAGE> 81

<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1992........................... 76.7% $44.36 $34.01 75.8% $44.06 $33.41
1993........................... 79.6 45.94 36.57 78.6 45.83 36.03
1994........................... 77.1 48.29 37.24 75.7 47.89 36.27
1995........................... 74.8 52.23 39.09 74.1 51.77 38.37
1996........................... 73.2 54.09 39.61 73.3 54.32 39.80
1996*.......................... 74.5 56.78 42.31 74.5 56.01 41.96
1997*.......................... 72.8 61.29 44.64 72.8 61.11 43.73
</TABLE>

- ---------------
* Through June 30.

As of June 30, 1997, many of the Company's hotels were located in the
Middle Atlantic and South Atlantic regions. The following table sets forth for
the five years ended December 31, 1996 and the six months ended June 30, 1996
and 1997 certain data by significant geographic region for the limited-service
hotels owned by the Company as of June 30, 1997.

Middle Atlantic

<TABLE>
<CAPTION>
HOTELS ROOMS OCCUPANCY ADR REVPAR
------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1992....................................... 11 1,088 65.2% $44.66 $29.14
1993....................................... 11 1,088 71.0 43.12 30.61
1994....................................... 11 1,088 70.3 45.55 32.00
1995....................................... 11 1,088 69.4 48.37 33.57
1996....................................... 11 1,088 67.3 51.32 34.55
1996*...................................... 11 1,088 66.0 49.45 32.64
1997*...................................... 11 1,088 61.0 55.17 33.66
</TABLE>

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

* Through June 30.

South Atlantic

<TABLE>
<CAPTION>
HOTELS ROOMS OCCUPANCY ADR REVPAR
------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1992....................................... 14 1,419 87.4% $44.31 $38.71
1993....................................... 15 1,524 87.7 47.97 42.09
1994....................................... 17 1,734 83.0 50.03 41.53
1995....................................... 17 1,734 79.3 54.61 43.32
1996....................................... 17 1,734 77.6 55.91 43.39
1996*...................................... 17 1,734 81.2 60.94 49.45
1997*...................................... 17 1,734 81.2 64.63 52.47
</TABLE>

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

* Through June 30.

OPERATIONS

As a national hotel operating company, Prime enjoys a number of operating
advantages over other lodging companies. With 117 hotels covering a number of
price points and broad geographic regions, Prime possesses the critical mass to
support sophisticated operating, marketing and financial systems. Prime 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, Prime'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.

Prime'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.

74
<PAGE> 82

Prime'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 Prime. 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 operations management is employee training,
with a staff of professionals dedicated to training in sales, housekeeping, food
service, front desk services and leadership. Prime believes these efforts
increase employee effectiveness, reduce turnover and improve the level of guest
services.

Prime'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, Prime's
central management has assumed certain of the operational responsibilities which
previously had been performed by the on-site hotel management. In addition,
Prime 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 Prime's
national sales group, Market Segments, Inc. ("MSI"). In cooperation with the
regional marketing staff, on-site sales management develops and implements short
and intermediate-term marketing plans. Prime focuses on yield management
techniques, which optimize the relationship between hotel rates and occupancies
and seek to maximize profitability. Prime is in the process of initiating a new
internally developed proprietary yield management system which will be
implemented in all of Prime's hotels. In addition, Prime assumes prominent roles
in franchise marketing associations to obtain maximum benefit from franchise
affiliations. Prime'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 Prime'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. Prime'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. Prime'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 Prime's hotels. Additionally,
Prime directs safety/risk management activities and provides central legal
services.

75
<PAGE> 83

REFURBISHMENT PROGRAM

Prime continuously refurbishes its Owned Hotels in order to maintain
consistent quality standards. Prime 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. Prime believes that its
Owned Hotels are in generally good physical condition, with over half of the
Owned Hotels being five years old or less. Prime 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 Prime's interest as
a mortgagee.

In addition to making normal capital improvements, Prime 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, Prime has implemented a program of
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, Prime 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, Prime completed the repositioning of the Hasbrouck
Heights Crowne Plaza and five of the recently acquired Wellesley Inns. In 1997,
Prime completed the refurbishing of nine other recently acquired Wellesley Inns
and began the renovation of the Monroe Township Holiday Inn.

MORTGAGES AND NOTES RECEIVABLE

As of June 30, 1997, mortgages and notes receivable totaled $22.5 million
(including the current portion) and consisted primarily of an aggregate
principal amount of $8.5 million of mortgages and notes secured by Managed
Hotels and $10.9 million of mortgages secured by hotels that are leased by Prime
from third parties. Prime 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.

MANAGEMENT AGREEMENTS

As of June 30, 1997, Prime 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. Prime'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% and 56.9%, or $3.9 million and $1.8 million, of
the total management and other fees for 1996 and the first half of 1997. 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 Prime's
other financial interests in these hotels. Prime holds financial interests in
the form of mortgages or profit participations in 8 of the 13 Managed Hotels.

FRANCHISE AGREEMENTS

Prime enters into non-exclusive franchise licensing agreements with
franchisors, which agreements typically have a ten year term and allow Prime to
benefit from franchise brand recognition and loyalty. The nonexclusive nature of
the franchise agreement allows Prime 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 Prime'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, Prime 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

76
<PAGE> 84

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). Prime believes its relationships with numerous nationally
recognized franchisors provides significant benefits for both its existing hotel
portfolio and prospective hotel acquisitions. While Prime 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.

LITIGATION

Prime currently and from time to time is involved in litigation arising in
the ordinary course of its business. Prime 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.

77
<PAGE> 85

MANAGEMENT OF PRIME

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below are the names, ages and positions of the directors and
executive officers of Prime:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
David A. Simon................ 45 President, Chief Executive Officer and Chairman of the
Board of Directors
John M. Elwood................ 43 Executive Vice President, Chief Financial Officer and
Director
Howard M. Lorber(1)........... 49 Director
Herbert Lust, II(1)........... 70 Director
Jack H. Nusbaum............... 57 Director
Allen J. Ostroff(1)........... 61 Director
A.F. Petrocelli(1)............ 54 Director
Paul H. Hower................. 63 Executive Vice President
Timothy E. Aho................ 54 Senior Vice President/Development
Denis W. Driscoll............. 52 Senior Vice President/Human Resources
John H. Leavitt............... 45 Senior Vice President/Sales and Marketing
Joseph Bernadino.............. 50 Senior Vice President, Secretary and General Counsel
Richard T. Szymanski.......... 40 Vice President and Corporate Controller
Douglas W. Vicari............. 38 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 Prime:

David A. Simon has been President, Chief Executive Officer and a Director
since 1992 and Chairman of the Board of Directors of Prime 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 Prime
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 Prime 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

78
<PAGE> 86

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 Prime 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 Prime 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 Prime 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 Prime 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 Prime 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
Prime since 1992. Mr. Szymanski was Corporate Controller of PMI during 1992.

Douglas W. Vicari has been a Vice President and Treasurer of Prime since
1992 and was Vice President and Treasurer of PMI during 1992.

79
<PAGE> 87

SELECTED CONSOLIDATED FINANCIAL DATA OF HOMEGATE

The selected financial data set forth below has been derived from the
historical consolidated financial statements of Homegate and from the historical
financial statements of its predecessor Extended Stay Limited Partnership
("ESLP"). Homegate was incorporated on August 16, 1996, to succeed to the
business of its predecessor, ESLP, and prior to its initial public offering in
October 1996, had minimal assets and operations of its own. The financial
statements of Homegate as of and for the period ended December 31, 1996 have
been audited by Ernst & Young LLP, independent auditors, whose reports thereon
appear elsewhere herein. The financial data for such period is not necessarily
indicative of results for subsequent periods or the full year. The information
for the six months ended June 30, 1996 is derived from the audited consolidated
financial statements of ESLP and the information as of and for the six months
ended June 30, 1997 is derived from the unaudited consolidated financial
statements of Homegate. The unaudited financial information includes all
adjustments that Homegate considers necessary for a fair presentation of the
financial position and results of operations for such period. Results for the
interim periods are not necessarily indicative of results for the full year. The
following information should be read in conjunction with "Homegate Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of Homegate, including the Notes thereto,
included elsewhere in this Proxy Statement-Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1996 SIX MONTHS ENDED
THROUGH JUNE 30,
DECEMBER 31, -------------------------------
1996 1996 1997
----------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Total revenue............................................... $ 2,690 $ 27 $ 4,729
Property operating expenses................................. 1,676 30 2,710
Corporate operating expenses................................ 951 204 1,416
Depreciation and amortization............................... 344 10 623
Interest expense............................................ 585 22 881
-------- ------- --------
Net loss.................................................... $ (866) $ (239) $ (901)
======== ======= ========
Net loss per share.......................................... $ (.08) $ (.02) $ (.08)
Weighted average number of shares of common stock
outstanding............................................... 10,725 10,725 10,725

OTHER DATA:
EBITDA(1)................................................... $ 63 $ (207) $ 603
======== ======= ========

Cash flows provided by (used in):
Operating activities...................................... $ (716) $ 313 $ 53
Investing activities...................................... (35,808) (8,264) (35,455)
Financing activities...................................... 68,000 9,226 7,013
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
----------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 31,476 $ 1,274 $ 3,087
Property and equipment, net................................. 51,107 8,201 84,549
Total assets................................................ 88,533 9,725 94,336
Total debt.................................................. 21,387 2,869 28,550
Total stockholders equity................................... 64,688 6,156 63,788
</TABLE>

- ---------------
(1) EBITDA means operating income before mortgage and other interest, income
taxes, depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, is not to be
considered as an alternative to net income or any other GAAP measurement as
a measure of operating performance and is not necessarily indicative of cash
available to fund cash needs. Homegate has included EBITDA herein because
Homegate believes that it is one measure used by certain investors to
determine operating cash flow. EBITDA, as calculated above, may not be
comparable to other similarly titled measures of other companies.

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<PAGE> 88

HOMEGATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Homegate was incorporated in August 1996, to succeed to the business of
Extended Stay Limited Partnership ("ESLP"), which was organized in February 1996
to become a provider of high quality midprice extended-stay hotels. In October
1996, ESLP was merged into Homegate, in exchange for 6,386,087 shares of
Homegate Common Stock. Hereinafter, Homegate, its predecessor, ESLP and its
subsidiaries, are collectively referred to as "Homegate." On October 29, 1996,
Homegate completed an initial public offering of 4,325,000 shares of Homegate
Common Stock at $11.50 per share.

Homegate, during the period from its inception through June 30, 1997,
completed its concept and product design, market study and initial site
selection activities, and acquired and/or constructed its first properties. As
of June 30, 1997, Homegate had 23 employees.

Homegate operated eight hotels during the second quarter of 1997. Three of
the hotels were operated as extended-stay facilities and the remaining five
hotels (the "Westar hotels") were operated as nightly stay hotels. Seven of the
eight hotels have been reflagged as HOMEGATE Studio & Suites.

As of June 30, 1997, Homegate had 22 hotels under construction and
development, consisting of 2,791 units. The sites were located in the following
metropolitan areas:

<TABLE>
<S> <C>
Austin, Texas........................................... 2
Dallas, Texas........................................... 2
Denver, Colorado........................................ 1
Pompano Beach, Florida.................................. 1
Houston, Texas.......................................... 3
Indianapolis, Indiana................................... 2
Kansas City, Kansas..................................... 2
Las Vegas, Nevada....................................... 1
Orlando, Florida........................................ 1
Phoenix, Arizona........................................ 3
Portland, Oregon........................................ 2
Raleigh, North Carolina................................. 1
Webster, Texas.......................................... 1
--
22
==
</TABLE>

The 22 sites currently under construction and development are due to be
completed at various times during 1997 and 1998. As of June 30, 1997, Homegate
had 11 sites subject to letters of intent, contracts or other purchase
arrangements and was evaluating another 15 sites.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997

Property Operations. Homegate's results of operations reflect the
operation of eight hotels for the second quarter, with Phoenix's 44th and Oak
property beginning operations on April 4, 1997. The Company's predecessor, ESLP,
had limited operations in the second quarter of 1996 opening its first hotel
(the Grand Prairie hotel) on June 17, 1996.

The Company generated $2,106,000 in room revenue for the quarter ended June
30, 1997. This represented a $190,000 increase over the first quarter of 1997 or
a 10% increase. The Phoenix 44th and Oak hotel opening contributed heavily
towards this increase. Occupancy rose to 60% in the second quarter of 1997 from
59.3% in the first quarter of 1997; however, Company weekly REVPAR decreased to
$155.12 from $165.62, or a 6% decrease, and the Average Weekly Rate dropped to
$258.46 from $279.36, or a 7% decrease. These decreases are primarily due to the
loss of 15% of available room nights due to the Westar renovations

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<PAGE> 89

(see below). After reducing the available room nights by the number of Westar
rooms under renovation, REVPAR would have been $180.88 and $180.53 in the first
quarter and second quarter of 1997, respectively.

The three hotels being operated as extended-stay hotels increased their
average occupancy to 77.2% in the second quarter of 1997 from 75.4% in the first
quarter of 1997. However, weekly REVPAR decreased to $196.70 from $208.81 in the
first quarter or a 6% decrease and the Average Weekly Rate dropped to $254.64
from $276.78 or an 8% decrease. The Phoenix 44th and Oak contributed heavily to
these decreases during the start-up period, with weekly REVPAR of $119.49 and
Average Weekly Rate of $212.49 for the second quarter of 1997.

Four of the five Westar hotels have been reflagged as HOMEGATE Studios &
Suites; however, the renovation and refurbishment program is still in process at
all five hotels. During the second quarter of 1997, the Westar hotels lost
14,199 room nights out of a possible 56,602 room nights due to rooms being
renovated. This represented a 25% loss of potential revenue from these hotels,
with an additional loss of revenue due to guests not wanting to stay at hotels
under construction. Occupancy dropped to 48.3% in the second quarter of 1997
from 51.8% in the first quarter. Average daily rates fell from $40.16 in the
first quarter to $37.52 in the second quarter, or 7%, for the Westar hotels. The
renovation and refurbishment programs is anticipated to be completed during the
third quarter of 1997. At that time the properties will begin operations as
extended-stay hotels.

Property operating expenses rose from $1,288,000 in the first quarter to
$1,422,000 in the second quarter, an increase of 10%, which reflects the
addition of the Phoenix 44th and Oak property. Net operating margins for the
Company stayed constant at 33% reflecting the daily operating nature of the five
Westar hotels. Net operating margins for the three extended-stay hotels averaged
51.7% for the second quarter of 1997.

Corporate Operations. Corporate operating expenses include all expenses
related to the administration of the corporate offices and all expenses not
directly related to individual developments and hotels. Corporate operating
expenses were $628,000 for the quarter ended June 30, 1997. This was a decrease
of $160,000 compared with the first quarter of 1997. The decrease was primarily
due to expenses of $131,000 incurred in the first quarter of 1997 to relocate
employees and the Homegate offices from Dallas and Houston to Austin.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996

Property Operations. Homegate's results of operations for the year (the
period from inception, February 9, 1996 through December 31, 1996) include ESLP
from February 1996, through October 1996, along with the operations of the five
Westar hotels from the date of acquisition (September 6, 1996). The Studio
Suites hotel in Grand Prairie began operations on June 17, 1996. During 1996,
the Westar hotels had not been, nor were they being, operated as extended-stay
facilities. In 1996, renovation and refurbishment began on the Westar hotels,
which will be operated as extended-stay facilities when such renovations are
completed.

Annual "REVPAR" for Homegate in 1996 was $23.05 computed on a daily basis.
Occupancy in 1996 was 56.4% with an average daily rate ("ADR") of $40.90. The
1996 fourth quarter REVPAR dropped to $22.55 from $25.84 in the third quarter of
1996. Occupancy was down from 60.3% in the third quarter of 1996 to 55.3% in the
fourth quarter of 1996. ADR was also down from the third quarter of 1996 from
$42.87 to $40.79 in the fourth quarter of 1996.

Homegate believes that the downward movement of Homegate's operating
statistics in the fourth quarter of 1996 resulted from a decrease in demand over
the holiday season, as well as disruptions for potential guests resulting from
the refurbishment program for the Westar hotels. The fourth quarter of 1996 was
also the first full quarter for the Westar hotels to be operated by Homegate.
None of the six operating hotels had been designated as HOMEGATE Studio & Suites
at December 31, 1996. The five Westar hotels were also not operated as extended
stay hotels for the fourth quarter of 1996.

The operating properties generated $1,582,689 of revenue in the fourth
quarter of 1996. This represents an increase of $947,794 over the third quarter
of 1996. Revenues were $2,240,161 for the year. Property operating expenses were
$1,184,384 for the fourth quarter of 1996 and $1,675,936 for the year. Fourth
quarter

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<PAGE> 90

operating expenses were 75% of revenues compared with 73% in the third quarter
of 1996. Property operating expenses were also 75% of revenues for the period.
The Westar hotels reflect their operation as daily night-stay accommodations as
opposed to extended-stay accommodations. Property operating expenses include
salaries and wages, administration, advertising, repairs and maintenance,
energy, property taxes, insurance and property management fees.

Interest income of approximately $450,000 for the fourth quarter of 1996
and year was the result of investing the proceeds of the initial public
offering.

Interest. Interest expense reflects the interest on the Studio Suites
mortgage from May 31, 1996, through December 31, 1996, as well as interest from
September 6, 1996 through December 31, 1996 on the mortgage secured by the
Westar hotels.

Corporate Operations. Corporate operating expenses include all expenses
related to the administration of the corporate offices and all expenses not
directly related to individual developments and hotels. Corporate operating
expenses for the fourth quarter of 1996 and for the year were $436,608 and
$951,261, respectively. Increased corporate operating expenses relate to the
increase in corporate personnel needed to effectuate Homegate's growth plans.
Homegate anticipates increased operating expenses as Homegate continues to
expand.

Homegate incurred a $.08 loss on a pro forma basis for the year (as if the
shares of Homegate Common Stock issued in Homegate's initial public offering and
other formation transactions had been outstanding since inception).

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, Homegate had cash and cash equivalents of $3,087,000.
Cash proceeds are currently deposited in a money market account invested in
Treasury obligations and in short-term investment grade interest-bearing
securities.

Homegate owes approximately $17.9 million on a 9.71% secured promissory
note for the purchase of the Westar hotels. This debt is payable on a fixed
25-year amortization schedule in monthly installments through January 11, 2021.

Homegate has a $30 million mortgage loan facility (the "Existing Mortgage
Facility") with Bank One, Texas, N.A. ("BOA"), which provides Homegate with
construction financing for eight extended-stay hotels. Homegate is permitted to
borrow under the Existing Mortgage Facility through November 30, 1997. Each
project may be funded under the Existing Mortgage Facility through a separate
loan, with all loans being cross-collateralized and cross-defaulted. Initially,
such loans will be advanced as construction loans, payable over twenty-four
months (the "Construction Term") with interest at either the BOA prime rate plus
0.5% or LIBOR plus 2.25%. Homegate must make interest payments on each
construction loan for the first twelve months of the loan, followed by principal
and interest payments based upon a fifteen-year amortization schedule for the
remaining twelve months of the loan. Homegate may elect to extend each loan for
three additional years (the "Mini-perm Term") if certain conditions are met and
upon payment of a specified extension fee. If Homegate elects to extend the loan
as a mini-permanent financing, Homegate will be obligated to make principal and
interest payments on a fifteen-year amortization schedule during each year of
the three-year extension period, and the interest rate may, in certain
circumstances, be reduced. During the Construction Term, the amount of any loan
may not exceed 55% of the total project costs of the related project. During the
Mini-perm Term, the loan amount to costs-of-project ratio may be increased to
65% if certain conditions are met. BOA will have full recourse against Homegate
for the loans, including environmental indemnities.

As of June 30, 1997, Homegate had incurred indebtedness under the Existing
Mortgage Facility of approximately $10.3 million, of which $4.9 million was
attributed to the Town Lake hotel in Austin, $2.9 million was attributed to the
Studio Suites hotel in Grand Prairie and $2.5 million was attributed to the 44th
and Oak hotel in Phoenix. The Austin Town Lake hotel and Grand Prairie loans
bear interest at LIBOR plus 2.25% and the Phoenix hotel loan bears interest at
LIBOR plus 2.5%. The Austin debt is due on February 4,

83
<PAGE> 91

2000; Grand Prairie debt is due on May 31, 1999. The Phoenix debt is due on
August 15, 1998; however, the debt may be extended for an additional three years
as described above.

On July 25, 1997, Homegate entered into a definitive Merger Agreement with
Prime pursuant to which Homegate will merge with a wholly-owned subsidiary of
Prime. Under the Merger Agreement, Prime will issue 0.6703 shares of its common
stock for each of the 10,725,000 outstanding shares of Homegate Common Stock. In
connection with the Merger Agreement, Prime agreed to provide, pending
consummation of the Merger, up to $65.0 million of interim secured financing
(the "Interim Loans") to Homegate to enable Homegate to acquire and develop
certain hotel properties. The Interim Loans will not exceed a borrowing base,
which will restrict availability to no greater than 75% of the cost basis of
Homegate in the properties. No Interim Loans will be made after the earlier of
November 30, 1997 and the date of any termination of the Merger Agreement (other
than a termination solely as a result of a breach by Prime). All Interim Loans
will mature on the earliest of (a) April 1, 1998, (b) the date Homegate enters
into any agreement with a third party (other than the Merger Agreement)
involving the merger or sale of substantially all the assets of Homegate and (c)
four months after the termination of the Merger Agreement. The Interim Loans
bear interest at a rate per annum equal to the one month London Interbank
Offered Rate plus 3.50% (increasing to 5.00% upon the earlier of November 30,
1997 and the date of any termination of the Merger Agreement). Homegate is
obligated to pay to Prime a facility fee of $650,000 upon the closing of the
initial Interim Loan. Monthly interest payments commence December 15, 1997 at a
rate of the one month LIBOR plus 3.5%; provided that the interest rate will
increase to the one month LIBOR plus 5% on the date that is the earlier of (a)
November 30, 1997 and (b) the date of the termination of the Merger Agreement
(other than a termination as a result of a breach by Prime).

The Interim Loans are secured by 18 properties currently under development
and by any future development properties. The amount of any Interim Loan may not
exceed 75% of the total project costs of the related project. The loan
documentation for the Interim Loans contains various affirmative and negative
covenants concerning the operation of Homegate as well as events of default
(including failure to pay amounts due under the loan documents or to comply with
such covenants or a breach of the Merger Agreement by Homegate). The loan
documents require Homegate to comply with the covenants contained in the Merger
Agreement. See "The Merger Agreement -- Certain Covenants."

As of October 27, 1997, an aggregate of $32.6 million in Interim Loans was
outstanding.

Although Homegate has access to financing under the Existing Mortgage
Facility and the Interim Loan Facility, Homegate may need to procure substantial
additional financing over time to complete its Initial Hotel Program, which
calls for 65 hotels to be opened or under construction by December 31, 1998. The
exact amount of financing will depend upon a number of factors including the
number of properties Homegate constructs or acquires and the cash flow generated
by its properties. In particular, Homegate anticipates spending an aggregate of
approximately $6.6 million to renovate the Westar facilities, of which $3.7
million had been spent through June 30, 1997, to conform to the HOMEGATE Studios
& Suites prototype, and expects that it will spend between $4 million and $9
million on each development or acquired hotel.

The Existing Mortgage Facility, Interim Loan facility and any future debt
financings or issuances of preferred stock by Homegate will be senior to the
rights of the holders of common stock, and any future issuances of common stock
will result in the dilution of the then-existing stockholders' proportionate
equity interests in Homegate. In addition, future debt facilities may materially
impair Homegate's ability to pay dividends.

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<PAGE> 92

Homegate generated $53,171 in cash flow from operating activities for the
six months ended June 30, 1997. This compares to $312,653 generated for the
inception period through June 30, 1996. The Company invested $35,454,669 for the
six months ended June 30, 1997. The majority of this investment was used to fund
the Company's growth plan in land acquisition, construction in progress,
property and equipment and earnest money deposits for its hotel development. For
the same period in 1996, the Company invested $8,264,381. The majority was
comprised of $2,911,123 for land acquisition and $4,991,486 for a hotel
purchase. Financing activities raised $7,013,243 for the six months ending June
30, 1997 comprised primarily of mortgage proceeds. For the same period ending
June 30, 1996, the Company financed $9,225,610 comprised principally of mortgage
proceeds and contributions from partners.

For the period ending December 31, 1996, the Company invested $35,808,400
primarily for its hotel development and raised financing of $68,000,691
consisting primarily of capital contributions from ESLP partners and issuance of
common stock. There was no comparable period to December 31, 1996.

WYNDHAM SETTLEMENT AGREEMENT

In connection with the execution of the Merger Agreement, Homegate, Prime,
CHRI, and Wyndham Hotel Corporation and certain of its affiliates entered into
an Agreement Regarding Termination of Management Agreements pursuant to which,
upon completion of the Merger, either Homegate or Wyndham will have the right to
terminate all management agreements providing for Wyndham's management of
Homegate's properties, thereby obligating Homegate to pay to Wyndham $8 million
and CHRI to deliver to Wyndham a $4 million, six-month, secured promissory note,
which payment and delivery will be in full satisfaction of any and all claims
Wyndham may have against Homegate relating to termination of the management
agreements.

SEASONALITY

The lodging industry is seasonal in nature. Quarterly earnings may be
adversely affected by events beyond Homegate's control, such as poor weather
conditions, economic factors and other considerations affecting travel. In
addition, occupancy rates and room revenues typically decline during the fourth
calendar quarter as business travel decreases during the holiday season. The
timing of openings of new properties could also lead to fluctuations in
Homegate's quarterly earnings.

INFLATION

The rate of inflation as measured by changes in the consumer price index
has not had a material effect on the revenue or operating results of Homegate.
There can be no assurance, however, that inflation will not affect future
operating or construction costs.

FACTORS AFFECTING FUTURE RESULTS OF OPERATIONS

Homegate's future results of operations may be impacted by a number of
factors. Among such factors are local, regional and national economic
conditions, competition from other lodging properties, changes in real property
tax rates and in the availability, cost and terms of financing, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, changes in operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war and adverse changes in zoning laws.

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<PAGE> 93

BUSINESS OF HOMEGATE

Homegate's goal is to become a national provider of high quality
extended-stay hotels in strategically selected markets located throughout North
America. Homegate is rapidly developing a chain of mid-price extended-stay
hotels under the HOMEGATE Studios & Suites(R) brand name to capitalize on what
management believes is a large and underserved market for extended-stay
accommodations. This market includes business travelers, professionals on
temporary work assignments, persons between domestic situations, and persons
relocating or purchasing a home, who often desire accommodations for an extended
duration. As of June 30, 1997, Homegate owned 8 hotels and had 34 more under
development, including 17 under construction. Additionally, Homegate has 11
sites under contract with letters of intent and other arrangements. Homegate's
objective is to have approximately 65 extended-stay hotels open or under
construction by December 31, 1998.

Homegate was founded by management and by affiliates of the following three
entities: Trammell Crow Residential Company ("TCR"), one of the nation's leading
developers of multi-family housing units with 22 regional offices; Greystar
Capital Partners, L.P. ("Greystar"), a private investment company with
substantial multi-family housing development and construction expertise; and
Crow Realty Investors d/b/a Crow Investment Trust ("Crow"), the real estate
investment arm of the various descendants of Mr. and Mrs. Trammell Crow and
various corporations, partnership trusts and other entities beneficially owned
or controlled by such persons known collectively as "Crow Family." In TCR,
Greystar, and Crow, Homegate brings together extensive experience in developing,
constructing and managing properties on a national scale and in structuring,
financing and executing national real estate investment programs. TCR, Greystar,
Crow and their affiliates own approximately 60% of the outstanding Homegate
Common Stock. See "Security Ownership of Homegate."

Homegate also has entered into a master management assistance agreement
(the "Management Agreement") with a subsidiary of Wyndham Hotel Corporation
(together with its predecessors and affiliates "Wyndham"), which owns, operates
or franchises more than 70 hotels in North America, to manage Homegate's hotels
pursuant to 10-year management contracts. Wyndham has agreed to be acquired by
Patriot American Hospitality Corp. ("Patriot"). The Crow Family currently owns
over 48% of Wyndham's common stock, which will be converted into an ownership
interest in Patriot as a result of the acquisition. If the Merger is
consummated, Homegate, Prime and Wyndham have agreed to terminate the Management
Agreement (and each of the underlying contracts).

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<PAGE> 94

GROWTH STRATEGY

Homegate's growth strategy is to develop rapidly a chain of high quality,
mid-price extended-stay hotels. Although Homegate expects that the construction
and development of new extended-stay hotels will be its primary means of
expansion, Homegate may consider, as part of its growth strategy, franchising
opportunities or acquisitions of existing extended-stay hotels or other
properties that are suitable for conversion to Homegate's extended-stay concept.
Homegate regularly pursues and evaluates acquisition opportunities of
extended-stay lodging facilities or facilities that may be converted to
Homegate's extended-stay lodging concept, and at any given time may be in
various stages of evaluating such opportunities.

Pursuant to the master development agreement, the Developer Partnership has
agreed to develop up to 60 HOMEGATE Studios & Suites hotels, and that neither
it, its partners, nor their respective affiliates will own, operate or develop a
competing extended-stay facility, subject to certain exceptions, within the
continental United States during the duration of such agreement. This agreement
will terminate upon the earlier of the commencement of the 60th facility or
December 31, 1998. Pursuant to this agreement, the Developer Affiliates'
regional offices will, under Homegate's direction, provide site sourcing, obtain
entitlements and building permits, and provide construction, architectural and
engineering oversight. In addition, individual affiliates of the Developer
Affiliates will provide business asset guaranties for construction cost overruns
on each project. Homegate believes its utilization of the regional office
network will produce competitive advantages and cost efficiencies in Homegate's
site selection, development and construction operations, by providing local
expertise and minimizing Homegate's development and administrative overhead
costs during its Initial Hotel Program.

Homegate's developmental plan calls for identification of multiple markets
in which construction can occur within Homegate's targeted time frame and
budget. Homegate has developed a list of target markets and submarkets based
upon local hotel market conditions, the availability of development sites and
local construction capabilities, the existence of developmental barriers to
entry, the overall health and growth trends of the local economies, and the
presence of multiple corporate, residential and leisure travel demand
generators. Having identified its target markets, Homegate reviews each market
to determine if operational efficiencies can be achieved by either locating its
hotels close to existing hotels or by clustering two or more hotels within the
market.

In selecting sites within Homegate's targeted markets, Homegate considers
demographics analysis, including surrounding population and employment data. The
prototypical site includes the following attributes:

- located close to an employment center (Fortune 500 companies and
corporate headquarters preferred) and to a freeway or major traffic
thoroughfare with good visibility;

- located in a clean, accessible area that provides some buffer from noise
generators and is close to restaurants and retail services;

- located in an area with residential density; and

- site size of approximately 2.5 to 3.0 acres that allows for the
construction of 80 to 150 units.

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<PAGE> 95

As of June 30, 1997, Homegate had 22 hotels under construction and
development, consisting of 2,791 units. The sites were located in the following
metropolitan areas:

<TABLE>
<S> <C>
Austin, Texas........................................... 2
Dallas, Texas........................................... 2
Denver, Colorado........................................ 1
Houston, Texas.......................................... 3
Indianapolis, Indiana................................... 2
Kansas City, Kansas..................................... 2
Las Vegas, Nevada....................................... 1
Orlando, Florida........................................ 1
Phoenix, Arizona........................................ 3
Pompano Beach, Florida.................................. 1
Portland, Oregon........................................ 2
Raleigh, North Carolina................................. 1
Webster, Texas.......................................... 1
--
22
==
</TABLE>

As of June 30, 1997, Homegate had contracted for 11 sites (the "Planned
Hotels Sites") in 9 different states illustrated in the following schedule:

<TABLE>
<CAPTION>
NUMBER
LOCATION OF SITES
---------------------------------------------------- --------
<S> <C>
Tampa, Florida...................................... 1
Denver, Colorado.................................... 1
Austin, Texas....................................... 1
Orlando, Florida.................................... 1
Albuquerque, New Mexico............................. 1
Atlanta, Georgia.................................... 1
Columbus, Ohio...................................... 1
Indianapolis, Indiana............................... 1
Columbia, Maryland.................................. 1
Miami, Florida...................................... 1
Salt Lake City, Utah................................ 1
--
11
==
</TABLE>

The purchase prices for these Planned Hotel Sites range from $600,000 to
$2,200,000. The arrangements that Homegate enters into for the purchase of
potential hotel sites provide for numerous investigations and other due
diligence, including environmental studies and title reports, prior to the
acquisition of the real property. Homegate reserves the right to terminate each
contract if the results of its investigations and due diligence are not
satisfactory. There can be no assurance that Homegate will be successful in
purchasing or developing any of the sites that are under contract or are subject
to a letter of intent or other arrangement. However, Homegate is currently
evaluating a variety of sites for construction of HOMEGATE Studios & Suites
hotels, and does not believe that the failure to acquire any or all of these
sites currently under some form of purchase arrangement would have a material
adverse effect upon its ability to complete its Initial Hotel Program.

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<PAGE> 96

Homegate currently operates a total of eight hotels located in the
following areas: Austin, Texas on Towne Lake, Grand Prairie, Texas near
Dallas/Fort Worth International Airport and Six Flags Amusement Park, Irving,
Texas also near Dallas/Fort Worth International Airport, two in San Antonio,
Texas located near the airport and Fiesta Park Amusement Center, El Paso, Texas,
Amarillo, Texas and Phoenix, Arizona near Phoenix Sky Harbor Airport. The Austin
and Grand Prairie hotels were purchased on December 31, 1996, and May 31, 1996,
respectively. Five hotels, referred to as the "Westar" hotels, were purchased on
September 6, 1996. The Phoenix hotel was developed and built using the TCR
Phoenix office.

PRODUCT CONCEPT

Homegate's hotels are designed to compete primarily in the mid-price
segment of the extended-stay industry segment, but Homegate believes, based on
the quality of its interior design elements and furnishings, the separation
between cooking, sleeping and living areas, and the available amenities that
HOMEGATE Studios & Suites hotels will offer a superior price/value relationship
and appeal to extended-stay guests of both upscale and economy facilities and
contain a variety of features that are attractive to the extended-stay guest,
such as fully equipped kitchens, resident laundry facilities, twice-weekly linen
service, weekly maid service, business centers and exercise facilities. The
facilities consist of an apartment-style complex with two or three story
buildings containing, on average, approximately 136 guest rooms. Homegate
utilizes both interior and exterior corridor building designs, depending
primarily on local market standards, building codes and weather factors.

The hotels typically feature three functional room configurations: studio,
deluxe, and one bedroom. Management believes that the price/value relationship
of its guest rooms is enhanced by offering the following features:

- a fully equipped kitchen with full-size refrigerator, stove, microwave,
coffee maker, dishwasher and cooking utensils;

- separate cooking, living and sleeping areas;

- residential-quality interior design elements;

- upscale furnishings and accessories;

- an oversized work desk;

- two telephone jacks with dataports;

- direct dial telephone with voice mail messaging;

- fax and copy services available to guests;

- cable TV; and

- a sleeper sofa.

OPERATIONS

Homegate's operating objective is to establish a well-organized national
brand of extended-stay hotels, while maximizing operating performance. Homegate
intends to achieve its goals by (i) developing and

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<PAGE> 97

offering consistent, high quality accommodations; (ii) capitalizing on the
attractive operating characteristics of the extended-stay segment of the lodging
industry; and (iii) leveraging Wyndham's (or, following the Merger, Prime's)
significant hotel management expertise.

Extended-stay hotels typically experience longer average guest stays than
traditional hotels, resulting in higher average occupancies and a more stable
revenue stream. Homegate requires minimum stays of one week at its hotels (after
conversion to extended-stay facilities, if necessary, in the case of acquired
hotels), and provides daily rates only after the minimum stay requirement has
been satisfied.

In addition, the staffing levels of extended-stay hotels are much lower
than those of traditional hotels, because many labor intensive services offered
by full-service hotels are de-emphasized or excluded entirely, resulting in
lower labor costs. At Homegate's hotels, there is no food and beverage service
and limited common area amenities. The front desk typically offers a limited
operating schedule (7:00 a.m. to 9:00 p.m. Monday through Friday plus 9:00 a.m.
to 1:00 p.m. Saturday and 1:00 p.m. to 5:00 p.m. Sunday). Voice mail messaging
eliminates the need for a telephone switchboard. Homegate has developed a system
to allow for after-hours check-in, eliminating the need for 24-hour front desk
operations. Housekeeping services are offered weekly, and linen service is
available twice weekly. Several common area amenities that do not substantially
increase operating expenses are included, such as an exercise room, resident
laundry, and a business center.

Wyndham Hotel Management. Pursuant to the Management Agreement, Wyndham
has agreed to manage up to 60 Company hotels, each pursuant to a 10-year
management contract. Each Company hotel has a Wyndham hotel manager, who shares
administrative responsibilities with and oversees a Wyndham-employed and
- -trained staff generally consisting of approximately 10 employees. In addition,
Wyndham provides Homegate with market research, a preferred vendor program, a
proprietary property management software system, and national and local
marketing efforts. If the Merger is consummated, Homegate, Prime and Wyndham
have agreed to terminate the Management Agreement (and each of the underlying
contracts). See "The Merger -- Interests of Certain Persons in the
Merger -- Management Agreement.

COMPETITION

The U.S. lodging industry is highly competitive. Competition in the U.S.
lodging industry is based generally on convenience of location, price, range of
services and guest amenities offered, and quality of customer service. Each of
Homegate's facilities will be located in a developed area that includes
competing lodging facilities. Homegate believes the location of its hotels, the
high quality of its accommodations, the reasonableness of its room rates, and
its services and guest amenities will be among the most important factors in its
business. Demographics or other changes in one or more of Homegate's markets
could impact the convenience or desirability of the sites of certain hotels,
which would adversely affect their operations.

Homegate anticipates that competition within the extended-stay industry
segment will increase substantially in the foreseeable future. In the mid-price
category of the extended-stay industry segment, several other lodging chains and
developers have recently announced plans to develop or are currently developing
extended-stay hotels which may compete with Homegate's hotels. Homegate may
compete for guests and for development sites with certain of these entities and
other entities which have greater financial resources and brand awareness than
Homegate and better relationships with lenders and real estate sellers. Further,
there can be no assurance that new or existing competitors, including
traditional hotels with nationally recognized brand names, will not
significantly lower rates or offer greater convenience, services, or amenities
or significantly expand or improve facilities in a market in which Homegate's
facilities compete, thereby adversely affecting Homegate's operations.

ENVIRONMENTAL MATTERS

Under various federal, state, and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
liability without regard to whether the owner knew of, or was responsible for,
the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal of or transports for disposal

90
<PAGE> 98

or treatment of a hazardous substance at a property owned by another may be
liable for the costs of removal or remediation of hazardous substances released
into the environment at that property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances or the
failure to remediate properly such substances, may adversely affect the owner's
ability to sell real estate or to borrow using such real estate as collateral.
In connection with the ownership of its properties, Homegate may be potentially
liable for any such costs.

Homegate has obtained recent Phase I Surveys on its existing properties and
intends to obtain Phase I Surveys prior to the purchase of any future
properties. The Phase I Surveys are intended to identify potential environmental
contamination and regulatory compliance concerns. Phase I Surveys generally
include historical reviews of the properties, reviews of certain public records,
preliminary investigations of the sites and surrounding properties and the
preparation and issuance of written reports. Phase I Surveys generally do not
include invasive procedures, such as soil sampling or ground water analysis.

The Phase I Surveys have not revealed any environmental liability or
compliance concern that Homegate believes would have a material adverse effect
on Homegate's business, assets, results of operations, or liquidity, nor is
Homegate aware of any such liability or concern. Nevertheless, it is possible
that Phase I Surveys will not reveal all environmental liabilities or compliance
concerns or that there will be material environmental liabilities or compliance
concerns of which Homegate will not be aware. Moreover, no assurances can be
given that (i) future laws, ordinances, or regulations will not impose any
material environmental liability, or (ii) the current environmental condition of
Homegate's existing and future properties will not be affected by the condition
of the neighboring properties (such as the presence of leaking underground
storage tanks) or by third parties unrelated to Homegate.

GOVERNMENTAL REGULATION

The lodging industry is subject to numerous federal, state and local
government regulations including those relating to building and zoning
requirements. Many states also regulate the licensing of hotels by requiring
registration, disclosure statements, and compliance with specific standards of
conduct. In addition, Homegate is subject to employment laws, including minimum
wage requirements, overtime, working conditions and work permit requirements.
Recent amendments to the minimum wage laws went into effect in October 1996
which increased Homegate's labor costs. Homegate believes that all of its hotels
have the necessary permits, approvals and licenses to operate their respective
business and that collectively they comply with the applicable employment laws,
and Homegate intends to continue to comply with such laws and regulations. A
change in such building, zoning, or licensing requirements or a further increase
in the minimum wage rate, employee benefit costs or other costs associated with
employees could materially and adversely affect Homegate.

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 Homegate believes that all of its
hotels are substantially in compliance with these requirements, a determination
that Homegate is not in compliance with the ADA could result in the imposition
of fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the facilities, including changes to building codes and fire and
life-safety codes, may occur. If Homegate were required to make substantial
modifications at its hotels to comply with the ADA or other governmental rules
and regulations, Homegate's financial condition and ability to develop or
acquire new hotels could be materially and adversely affected.

TRADEMARKS

Homegate has registered its name and service mark as "HOMEGATE Studios &
Suites" with the United States Patent and Trademark office. In addition,
Homegate may have certain common law rights to the Westar Suites and InnHome
America trade names.

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<PAGE> 99

LIABILITY INSURANCE

Homegate currently has the types and amounts of insurance coverage that it
considers appropriate for a company in its business. While management believes
that its insurance coverage is adequate, if Homegate were held liable for
amounts exceeding limits of its insurance coverage or for claims beyond the
scope of its insurance coverage, Homegate's business, results of operations, and
financial condition could be materially and adversely affected.

EMPLOYEES

As of June 30, 1997, Homegate employed approximately 22 people. Homegate
expects that it will add additional employees as it expands its business.
Homegate's employees are not subject to any collective bargaining agreements,
and management believes that its relationship with its employees is good.

PROPERTIES

On May 31, 1996, Homegate purchased Studio Suites, a 139-unit extended-stay
facility located in Grand Prairie, Texas. The property opened for business on
June 17, 1996.

On September 6, 1996, Homegate acquired beneficial ownership of five hotels
(the "Westar hotels"). The Westar hotels are located in San Antonio (two), El
Paso, Amarillo, and Irving, Texas. These hotels contain a total of 622 units and
are being renovated to conform to the quality standards of the HOMEGATE Studio &
Suites prototype. Homegate is currently operating four of these hotels under the
HOMEGATE Studio & Suites as extended-stay facilities and intends to convert the
remaining hotel.

Homegate purchased the existing InnHome America extended-stay hotel in
Austin, Texas on December 31, 1996. The property consists of 149 rooms with 37
enjoying lakeside views. The property was renovated in early 1995 and flagged as
a dedicated extended-stay hotel.

As of June 30, 1997, Homegate had commenced development of extended-stay
hotels in the following locations:

<TABLE>
<CAPTION>
HOTEL SUITES UNITS
------------ -----
<S> <C> <C>
Phoenix, Arizona........................... 3 396
Denver, Colorado........................... 1 143
Kansas City, Kansas........................ 2 250
Dallas, Texas.............................. 2 267
Houston, Texas............................. 3 358
Austin, Texas.............................. 2 254
Indianapolis, Indiana...................... 2 255
Orlando, Florida........................... 1 134
Pompano Beach, Florida..................... 1 129
Raleigh, North Carolina.................... 1 138
Portland, Oregon........................... 2 258
Las Vegas, Nevada.......................... 1 127
Webster, Texas............................. 1 82
--
-----
22 2,791
== =====
</TABLE>

As of June 30, 1997, Homegate had entered into contracts, letters of intent
or other arrangements with respect to the acquisition of 11 additional sites and
is evaluating 15 other sites for potential acquisitions. The 22 sites currently
under development are expected to be completed at various dates in 1997 and
1998. Homegate also intends to commence development on additional sites in 1997.

LEGAL PROCEEDINGS

Homegate is not a party to any litigation or claims, other than routine
matters incidental to the operation of the business of Homegate. To date, no
claims have had a material adverse effect on Homegate nor does Homegate expect
that the outcome of any pending claims will have such an effect.

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<PAGE> 100

MANAGEMENT OF HOMEGATE

The following table sets forth certain information regarding Homegate's
directors and executive officers, including their respective ages, at June 30,
1997.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert A. Faith........................ 33 Chairman of the Board, Chief Executive Officer and
President
John C. Kratzer........................ 34 Chief Operating Officer and Executive Vice President
Tim V. Keith........................... 44 Chief Financial Officer and Treasurer
Anthony W. Dona........................ 38 Senior Vice President and Director
Joel Kinzie Oldham IV.................. 35 Senior Vice President and Secretary
William B. Buchanan, Jr. .............. 38 Director
Harlan R. Crow......................... 47 Director
John R. Huff........................... 51 Director
John J. Moores......................... 53 Director
Charles E. Noell....................... 45 Director
Leonard W. Wood........................ 50 Director
</TABLE>

Robert A. Faith joined Homegate in February 1996 as its Chairman of the
Board, Chief Executive Officer and President. Since August 1991, Mr. Faith has
served as the Chairman of the Board of Faith Holdings, Inc., a private holding
and management company with various business interests. Mr. Faith also currently
serves as the Chairman of the Board of the corporate general partner of Greystar
Capital Partners, L.P., a private holding company with investments in real
estate, apartment buildings and apartment management firms, a position which he
has held since May 1993. In August 1991, Mr. Faith co-founded Starwood Capital
Partners, a private real estate investment firm, for which he served as Chief
Executive Officer until May 1993.

John C. Kratzer is the Chief Operating Officer and Executive Vice President
of Homegate. Before joining Homegate in February 1996, Mr. Kratzer served as a
Principal with Benton Resources, which invested over $100 million in land, notes
and income producing assets. Mr. Kratzer served in this capacity from February
1994 to February 1996. From September 1993 to November 1994, Mr. Kratzer served
as Vice President of Crow Family, Inc., a private investment company. From
September 1993 to February 1994, Mr. Kratzer served as Vice President of Mill
Spring Holdings, Inc., a private investment company, and in such capacity served
as an asset manager of residential properties held in a limited partnership.
During the period from September 1993 to February 1996, Mill Spring Holdings,
Inc. was the general partner of a separate limited partnership related to
commercial properties, which held interests in approximately 55 partnerships or
corporations that filed for protection under federal bankruptcy laws. In
addition, during the same period, Mr. Kratzer was a general partner, executive
officer or director in approximately 15 partnerships or corporations, or
affiliates of such partnerships or corporations, that were placed in
receivership. As an asset manager for residential properties, Mr. Kratzer was
not involved in the management of any commercial properties which filed for
bankruptcy or were placed in receivership. From September 1990 to August 1993,
Mr. Kratzer was with Trammell Crow Realty Advisors, an institutional real estate
investment management company that acquired a multi-asset portfolio of
apartments valued at over $250 million. At the time of his departure, Mr.
Kratzer served as the director of Multi-Family Acquisitions for Trammell Crow
Realty Advisors.

Tim V. Keith joined Homegate in July 1996 as its Chief Financial Officer
and Treasurer. Prior to joining Homegate, Mr. Keith served as the
Controller/Treasurer of David Weekley Homes, a private single-family home
builder, from June 1994 to July 1996. From March 1989 to June 1994, Mr. Keith
served as Vice President of Finance for Coscan Florida Inc., a subsidiary of
Coscan Development Corporation, a Canadian public real estate developer and
builder. Mr. Keith has accumulated 17 years of experience in real estate
accounting and finance, as well as three years in public accounting.

93
<PAGE> 101

Anthony W. Dona is a Senior Vice President and director of Homegate. In
addition, Mr. Dona is the Managing Director of Crow Realty Investors d/b/a Crow
Investment Trust, a position which he has held since 1994, and is a director of
Trammell Crow Company and TCR. Mr. Dona has served in these capacities since
1994 and 1996, respectively. In addition, Mr. Dona serves on the advisory board
of Trammell Crow Interest Company. From 1985 until 1994, Mr. Dona served in
various capacities with the Crow entities including Chief Financial Officer of
the Texas region of Trammell Crow Company, a partner in the Dallas Office
Building Division of Trammell Crow Company, Chief Executive Officer of the Asset
Management Group of Trammell Crow Company and director of Crow Family
Administration. As part of his asset management role, Mr. Dona managed a large
portfolio of distressed real estate partnerships during the recent real estate
down-cycle. In connection with the restructuring of that portfolio, Mr. Dona has
served during the last five years as an officer or director in approximately 90
partnerships or corporations, or affiliates of such partnerships or
corporations, that filed for protection under federal bankruptcy laws. In
addition, in the past five years, Mr. Dona was an executive officer or director
in approximately 15 partnerships or corporations, or affiliates of such
partnerships or corporations, that were placed in receivership.

Joel Kinzie Oldham IV joined Homegate in February 1996 as a Senior Vice
President and Secretary of Homegate. Mr. Oldham is also the Senior Vice
President of Greystar Capital Partners, L.P., a private holding company with
investments in real estate, apartment buildings and apartment management firms.
Mr. Oldham joined Greystar in May 1993. Prior to joining Greystar, Mr. Oldham
was the Vice President of Starwood Capital Partners, a position he held from
September 1992 to June 1993. Prior to joining Starwood, Mr. Oldham was a
Marketing Director with Trammell Crow Company, which he joined in 1988.

William B. Buchanan, Jr. is a director of Homegate. Mr. Buchanan is Deputy
Head of the Equity Capital Markets Department of Smith Barney Inc. ("Smith
Barney") and serves on the Issues and Valuation and Commitment Committees of
Smith Barney. Prior to joining Smith Barney, Mr. Buchanan was Head of the Equity
Capital Markets Group at Bear, Stearns & Co. Inc. and sat on the Equity
Sub-Committee. Prior to that, Mr. Buchanan was a director at The First Boston
Corporation responsible for originating and executing equity transactions in the
media, telecommunications, health care, real estate and other high growth
industries. At separate times during his career at First Boston, Mr. Buchanan
was Head of New Issue Marketing and Head of Syndication.

Harlan R. Crow is a director of Homegate. Mr. Crow is the Chief Executive
Officer of Crow Family Holdings, a private investment company managing
investments in a variety of real estate related and other businesses, a position
he has held since 1986. Mr. Crow currently serves as a director of Trammell Crow
Company and TCR. In addition, Mr. Crow serves as a director of Wyndham, a
publicly-traded corporation. In any given year within the past five years, Mr.
Crow has indirectly owned interests in over 1,000 partnerships (or affiliates of
partnerships) or corporations. In the past five years, Mr. Crow was a general
partner, officer or director in approximately 90 partnerships or corporations,
or affiliates of such partnerships or corporations, that filed for protection
under federal bankruptcy laws. In addition, in the past five years, Mr. Crow was
a general partner, executive officer or director in approximately 15
partnerships or corporations, or affiliates of such partnerships or
corporations, that were placed in receivership.

John R. Huff is a director of Homegate. Mr. Huff has been a director,
President and Chief Executive Officer of Oceaneering International, Inc.
("Oceaneering") since 1986. Mr. Huff was elected Chairman of the Board of
Oceaneering in August 1990. Prior to joining Oceaneering, Mr. Huff served as
Chairman and President of Western Oceanic, Inc., the offshore drilling
subsidiary of The Western Company of North America. Mr. Huff is also a director
of BJ Services Company, Triton Energy Limited an Production Operators Corp.

John J. Moores is a director of Homegate. Mr. Moores founded BMC Software,
Inc., a vendor of system software utilities for IBM mainframe computing
environments in 1980. Prior to founding BMC Software, Mr. Moores was employed by
International Business Machines, Inc. and Shell Oil Corporation in various of
their technical divisions. Mr. Moores is Chairman of the Board of the San Diego
Padres, L.P., JMI Services, Inc., a private investment company, Peregrine
Systems, Inc., a computer software designer, and Neon Systems, Inc., a computer
software designer, all of which are privately-held companies.

94
<PAGE> 102

Charles E. Noell is a director of Homegate. Mr. Noell is President of JMI,
Inc., a private investment company, which he joined in 1992 after 11 years in
the corporate finance department of Alex. Brown & Sons Incorporated. Mr. Noell
is the Managing Partner of JMI Equity Fund, L.P., a private equity investment
fund, and is a director of two publicly-traded companies: Transactions Systems
Architects, Inc. and Expert Software, Inc.

Leonard W. Wood is a director of Homegate. Mr. Wood is currently a Group
Managing Partner for TCR and oversees the activities of TCR throughout Northern
Florida and the Southeastern and Midwestern United States. Mr. Wood joined TCR
in 1982.

95
<PAGE> 103

COMPARATIVE PER SHARE DATA

MARKET AND MARKET PRICES

Prime

Prime Common Stock trades on the NYSE under the symbol "PDQ." The following
table sets forth the high and low sale prices of Prime Common Stock as reported
by the NYSE for each of the quarters in the two year period ended December 31,
1996 and for the first, second, third and fourth quarters (through October 24)
of 1997.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter................................................ $10 3/8 $ 7 3/8
Second Quarter............................................... 10 5/8 9 1/4
Third Quarter................................................ 11 9 1/2
Fourth Quarter............................................... 10 1/4 9 3/8
1996
First Quarter................................................ $13 5/8 $ 9 5/8
Second Quarter............................................... 17 1/4 12
Third Quarter................................................ 19 7/8 16 3/8
Fourth Quarter............................................... 17 1/4 14
1997
First Quarter................................................ $18 1/8 $14 1/8
Second Quarter............................................... 20 7/8 14 3/4
Third Quarter................................................ 22 1/4 17 1/2
Fourth Quarter (through October 24).......................... 23 3/16 21 1/16
</TABLE>

On October 24, the last sales price of Prime Common Stock on the NYSE was
$22 5/16. The public announcement of the Merger Agreement occurred on July 25,
1997.

Homegate

Since October 25, 1996, Homegate Common Stock has traded on Nasdaq under
the symbol "HMGT." The following table sets forth the high and low sale prices
of Homegate Common Stock as reported by Nasdaq for the fourth quarter in the
period ended December 31, 1996 and for the first, second, third and fourth
quarters (through October 24) of 1997.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
Fourth Quarter............................................... $12 1/4 $ 6 3/4
1997
First Quarter................................................ $ 9 1/4 $ 6 15/16
Second Quarter............................................... 10 3/8 6
Third Quarter................................................ 13 5/8 8 15/16
Fourth Quarter (through October 24).......................... 13 7/8 12 5/8
</TABLE>

On October 24, the last sales price of Homegate Common Stock on Nasdaq was
$13 1/16. The public announcement of the Merger Agreement occurred on July 25,
1997.

96
<PAGE> 104

EQUIVALENT PER SHARE DATA

Historical

<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- ------------------- ------------------- -------------------
PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE
------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book value per share................ $11.01 $ 5.95 $10.55 $ 6.03 $ 7.51 $ -- $ 6.71 $ --
Cash dividends per share............ -- -- -- -- -- -- -- --
Net income (loss) per fully diluted
share.............................. $ .48 $ (.08) $ .80 $ (.08) $ .54 $ -- $ .58 $ --
</TABLE>

Prime -- Pro Forma

Homegate -- Equivalent Pro Forma

97
<PAGE> 105

PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)

The following pro forma condensed financial information for the combined
companies gives effect to the Merger as a pooling of interests. All of the
following selected pro forma financial information should be read in conjunction
with the pro forma financial information, including the notes thereto, appearing
elsewhere in this Proxy Statement-Prospectus. The pro forma financial
information set forth in this Proxy Statement-Prospectus is not necessarily
indicative of the results that actually would have occurred had the Merger been
consummated on the inception date of Homegate's predecessor ESLP (February 9,
1996).

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.............................................. $134,303 $205,628 $271,100
Costs and expenses:
Direct hotel operating expenses.......................... 66,620 116,565 146,857
Occupancy and other operating............................ 9,799 11,763 17,071
General and administrative............................... 15,089 15,515 18,764
Depreciation and amortization............................ 9,384 15,227 23,976
Other expenses........................................... -- 2,200 --
-------- -------- --------
Total costs and expenses................................... 100,892 161,270 206,668
-------- -------- --------
Operating income........................................... 33,411 44,358 64,432
Investment income.......................................... 1,966 4,861 5,061
Interest expense........................................... (14,036) (22,350) (23,149)
Other income............................................... 9,089 2,239 4,313
-------- -------- --------
Income before income taxes and extraordinary items......... 30,430 29,108 50,657
Income tax expense......................................... 12,172 11,643 20,609
-------- -------- --------
Income before extraordinary items.......................... 18,258 17,465 30,048
Extraordinary items, net................................... 172 104 202
-------- -------- --------
Net income................................................. $ 18,430 $ 17,569 $ 30,250
======== ======== ========
Fully diluted earnings per common share(1)................. $0.58 $0.54 $0.69
Number of shares used in fully diluted earnings per common
share calculations(1)(2)................................. 32,022 37,423 49,764
</TABLE>

98
<PAGE> 106

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1996 1997 1996 1997
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue..................................... $69,920 $85,512 $128,533 $163,510
Costs and expenses:
Direct hotel operating expenses................. 37,960 40,298 69,507 81,082
Occupancy and other operating................... 4,107 5,877 7,589 11,609
General and administrative...................... 4,742 5,758 8,961 11,520
Depreciation and amortization................... 6,238 8,035 11,112 15,725
------- ------- -------- --------
Total costs and expenses.......................... 53,047 59,968 97,169 119,936
------- ------- -------- --------
Operating income.................................. 16,873 25,544 31,364 43,574
Investment income................................. 856 1,618 2,121 2,229
Interest expense.................................. (6,030) (7,926) (12,231) (12,640)
Other income...................................... -- 1,904 3,432 1,961
------- ------- -------- --------
Income before income taxes and extraordinary
items........................................... 11,699 21,140 24,686 35,124
Income tax expense................................ 4,775 8,627 9,970 14,410
------- ------- -------- --------
Income (loss) before extraordinary items.......... 6,924 12,513 14,716 20,714
Extraordinary items, net.......................... 27 53 176 75
------- ------- -------- --------
Net income........................................ $ 6,951 $12,566 $ 14,892 $ 20,789
======= ======= ======== ========
Fully diluted net earnings per common share(1).... $0.17 $0.24 $0.35 $0.41
Number of shares used in fully diluted earnings
per common share calculations(1)(2)............. 47,004 55,675 45,888 55,643
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 81,849
Working capital................................................................ 60,767
Total assets................................................................... 1,066,737
Long-term debt, less current portion........................................... 485,679
Total stockholders' equity..................................................... 507,941
</TABLE>

- ---------------
(1) Pro forma earnings per share is computed by dividing net income by the
number of common equivalent shares outstanding during the periods in
accordance with the applicable rules of the Commission. All stock options
and warrants issued have been considered as outstanding common share
equivalents for all periods presented, unless anti-dilutive.

(2) Number of shares used in pro forma earnings per share gives effect to the
Merger by using the fixed Exchange Ratio of 0.6073 shares of Prime Common
Stock for each share of Homegate Common Stock.

99
<PAGE> 107

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 78,762 $ 3,087 -- $ 81,849
Accounts receivable, net of reserves.... 16,738 339 -- 17,077
Restricted cash......................... -- 824 -- 824
Current portion of mortgage notes
receivable........................... 2,622 -- -- 2,622
Other current assets.................... 13,628 1,346 -- 14,974
-------- ------- --------- ----------
Total current assets............ 111,750 5,596 -- 117,346
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization........... 812,367 84,549 -- 896,916
Mortgages and notes receivable, net of
current portion......................... 19,858 3,094 -- 22,952
Other assets.............................. 28,425 1,098 29,523
-------- ------- --------- ----------
Total assets.................... $972,400 $94,337 -- $1,066,737
======== ======= ========= ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....... $ 3,083 $ 783 -- $ 3,866
Other current liabilities............... 50,714 1,999 -- 52,713
-------- ------- --------- ----------
Total current liabilities....... 53,797 2,782 -- 56,579
Long-term debt, net of current portion.... 457,912 27,767 -- 485,679
Other liabilities......................... 16,538 -- -- 16,538
-------- ------- --------- ----------
Total liabilities............... 528,247 30,549 -- 558,796

Stockholders' equity:
Preferred stock......................... -- -- -- --
Common stock............................ 404 107 (42)(A) 469
Capital in excess of par value.......... 342,425 65,448 42(A) 407,915
Retained earnings....................... 102,362 (1,767) -- 100,595
Treasury stock.......................... (1,038) -- -- (1,038)
-------- ------- --------- ----------
Total stockholders' equity........... 444,153 63,788 -- 507,941
-------- ------- --------- ----------
Total liabilities and
stockholders equity........... $972,400 $94,337 -- $1,066,737
======== ======= ========= ==========
</TABLE>

100
<PAGE> 108

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenue................................... $83,407 $ 2,105 $ -- $85,512
Costs and expenses:
Direct hotel operating expenses............... 39,041 1,257 -- 40,298
Occupancy and other operating................. 5,712 165 -- 5,877
General and administrative.................... 5,130 628 -- 5,758
Depreciation and amortization................. 7,681 354 -- 8,035
------- ------- ------- -------
Total costs and expenses........................ 57,564 2,404 -- 59,968
Operating income (loss)......................... 25,843 (299) -- 25,544
Investment income............................... 1,396 222 -- 1,618
Interest expense................................ (7,530) (396) -- (7,926)
Other income.................................... 1,858 46 -- 1,904
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items........................... 21,567 (427) -- 21,140
Income tax expense.............................. 8,627 -- -- 8,627
------- ------- ------- -------
Income (loss) before extraordinary items........ 12,940 (427) -- 12,513
Extraordinary items, net........................ 53 -- -- 53
-------
Net income (loss)............................... $12,993 ($ 427) -- $12,566
======= ======= ======= =======
Fully diluted earnings (loss) per common
share......................................... $ 0.28 ($ 0.04) $ -- $ 0.24
Number of shares used in fully diluted earnings
(loss) per common share calculations.......... 49,162 10,725 (4,212)(B) 55,675
</TABLE>

101
<PAGE> 109

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenue................................... $69,893 $ 27 $ -- $69,920
Costs and expenses:
Direct hotel operating expenses............... 37,935 25 -- 37,960
Occupancy and other operating................. 4,102 5 -- 4,107
General and administrative.................... 4,538 204 -- 4,742
Depreciation and amortization................. 6,228 10 -- 6,238
------- ------- ------- -------
Total costs and expenses........................ 52,803 244 -- 53,047
Operating income (loss)......................... 17,090 (217) -- 16,873
Investment income............................... 856 -- -- 856
Interest expense................................ (6,008) (22) -- (6,030)
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items........................... 11,938 (239) -- 11,699
Income tax expense.............................. 4,775 -- -- 4,775
------- ------- ------- -------
Income (loss) before extraordinary items........ 7,163 (239) -- 6,924
Extraordinary items, net........................ 27 -- -- 27
------- ------- ------- -------
Net income (loss)............................... $ 7,190 ($ 239) $ -- $ 6,951
======= ======= ======= =======
Fully diluted earnings (loss) per common
share......................................... $ 0.20 ($ 0.02) $ -- $ 0.17
Number of shares used in fully diluted earnings
(loss) per common share calculations.......... 40,491 10,725 (4,212)(B) 47,004
</TABLE>

102
<PAGE> 110

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenue.................................. $159,487 $ 4,023 $ -- $ 163,510
Costs and expenses:
Direct hotel operating expenses.............. 78,725 2,357 -- 81,082
Occupancy and other operating................ 11,256 353 -- 11,609
General and administrative................... 10,105 1,415 -- 11,520
Depreciation and amortization................ 15,101 624 -- 15,725
------- ------- ------- -------
Total costs and expenses....................... 115,187 4,749 -- 119,936
Operating income (loss)........................ 44,300 (726) -- 43,574
Investment income.............................. 1,627 602 -- 2,229
Interest expense............................... (11,760) (880) -- (12,640)
Other income................................... 1,858 103 -- 1,961
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items.......................... 36,025 (901) -- 35,124
Income tax expense............................. 14,410 -- -- 14,410
------- ------- ------- -------
Income (loss) before extraordinary items....... 21,615 (901) -- 20,714
Extraordinary items, net....................... 75 -- -- 75
=======
------- ------- -------
Net income (loss).............................. $ 21,690 ($ 901) $ -- $ 20,789
======= ======= ======= =======
Fully diluted earnings (loss) per common
share........................................ $ 0.48 ($ 0.08) -- $ 0.41
Number of shares used in fully diluted earnings
(loss) per common share calculations......... 49,130 10,725 (4,212)(B) 55,643
</TABLE>

103
<PAGE> 111

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenue.................................. $128,506 $ 27 $ -- $ 128,533
Costs and expenses:
Direct hotel operating expenses.............. 69,482 25 -- 69,507
Occupancy and other operating................ 7,584 5 -- 7,589
General and administrative................... 8,757 204 -- 8,961
Depreciation and amortization................ 11,102 10 -- 11,112
------- ------- ------- -------
Total costs and expenses....................... 96,925 244 -- 97,169
Operating income (loss)........................ 31,581 (217) -- 31,364
Investment income.............................. 2,121 -- -- 2,121
Interest expense............................... (12,209) (22) -- (12,231)
Other income................................... 3,432 -- -- 3,432
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items.......................... 24,925 (239) -- 24,686
Income tax expense............................. 9,970 -- -- 9,970
------- ------- ------- -------
Income (loss) before extraordinary items....... 14,955 (239) -- 14,716
Extraordinary items, net....................... 176 -- -- 176
------- ------- ------- -------
Net income (loss).............................. $ 15,131 ($ 239) $ -- $ 14,892
======= ======= ======= =======
Fully diluted earnings (loss) per common
share........................................ $ 0.42 ($ 0.02) $ -- $ 0.35
Number of shares used in fully diluted earnings
(loss) per common share calculations......... 40,460 10,725 (5,297)(B) 45,888
</TABLE>

104
<PAGE> 112

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Total revenue................................. $268,868 $ 2,232 $ -- $ 271,100
Costs and expenses:
Direct hotel operating expenses............. 145,419 1,438 -- 146,857
Occupancy and other operating............... 16,833 238 -- 17,071
General and administrative.................. 17,813 951 -- 18,764
Depreciation and amortization............... 23,632 344 -- 23,976
-------- -------- -------- --------
Total costs and expenses...................... 203,697 2,971 -- 206,668
-------- -------- -------- --------
Operating income (loss)....................... 65,171 (739) -- 64,432
Investment income............................. 4,610 451 -- 5,061
Interest expense.............................. (22,564) (585) -- (23,149)
Other income.................................. 4,306 7 -- 4,313
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items......................... 51,523 (866) -- 50,657
Income tax expense............................ 20,609 -- -- 20,609
-------- -------- -------- --------
Income (loss) before extraordinary items...... 30,914 (866) -- 30,048
Extraordinary items, net...................... 202 -- -- 202
-------- -------- -------- --------
Net income (loss)............................. $ 31,116 ($ 866) -- $ 30,250
======== ======== ======== ========
Fully diluted earnings (loss) per common
share....................................... $ 0.80 ($ 0.08) $ -- $ 0.69
Number of shares used in fully diluted
earnings (loss) per common share
calculations................................ 43,794 10,725 (4,755)(B) 49,764
</TABLE>

105
<PAGE> 113

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Total revenue.................................... $205,628 $ -- $ -- $ 205,628
Costs and expenses:
Direct hotel operating expenses................ 116,565 -- -- 116,565
Occupancy and other operating.................. 11,763 -- -- 11,763
General and administrative..................... 15,515 -- -- 15,515
Depreciation and amortization.................. 15,227 -- -- 15,227
Other expenses................................. 2,200 -- -- 2,200
-------- -------- -------- --------
Total costs and expenses......................... 161,270 -- -- 161,270
-------- -------- -------- --------
Operating income................................. 44,358 -- -- 44,358
Investment income................................ 4,861 -- -- 4,861
Interest expense................................. (22,350) -- -- (22,350)
Other income..................................... 2,239 -- -- 2,239
-------- -------- -------- --------
Income before income taxes and extraordinary
items.......................................... 29,108 -- -- 29,108
Income tax expense............................... 11,643 -- -- 11,643
-------- -------- -------- --------
Income before extraordinary items................ 17,465 -- -- 17,465
Extraordinary items, net......................... 104 -- -- 104
-------- -------- -------- --------
Net income....................................... $ 17,569 $ -- $ -- $ 17,569
======== ======== ======== ========
Fully diluted earnings per common share.......... $ 0.54 $ -- $ -- $ 0.54
Number of shares used in fully diluted earnings
per common share calculations.................. 37,423 -- -- 37,423
</TABLE>

106
<PAGE> 114

PRIME HOSPITALITY CORP.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
PRIME HOMEGATE ADJUSTMENTS COMBINED
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Total revenue................................. $134,303 $ -- $ -- $ 134,303
Costs and expenses:
Direct hotel operating expenses............. 66,620 -- -- 66,620
Occupancy and other operating............... 9,799 -- -- 9,799
General and administrative.................. 15,089 -- -- 15,089
Depreciation and amortization............... 9,384 -- -- 9,384
-------- -------- -------- --------
Total costs and expenses...................... 100,892 -- -- 100,892
-------- -------- -------- --------
Operating income.............................. 33,411 -- -- 33,411
Investment income............................. 1,966 -- -- 1,966
Interest expense.............................. (14,036) -- -- (14,036)
Other income.................................. 9,089 -- -- 9,089
-------- -------- -------- --------
Income before income taxes and extraordinary
items....................................... 30,430 -- -- 30,430
Income tax expense............................ 12,172 -- -- 12,172
-------- -------- -------- --------
Income before extraordinary items............. 18,258 -- -- 18,258
Extraordinary items, net...................... 172 -- -- 172
-------- -------- -------- --------
Net income.................................... $ 18,430 $ -- $ -- $ 18,430
======== ======== ======== ========
Fully diluted earnings per common share....... $0.58 $ -- $ -- $0.58
Number of shares used in fully diluted
earnings per common share calculations...... 32,022 -- -- 32,022
</TABLE>

107
<PAGE> 115

NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION

The proposed Merger between Prime and Homegate is intended to be accounted
for as a pooling of interests. Accordingly, the pro forma financial statements
have been prepared assuming the companies have been together for all periods
presented. Shares issued by Prime for the acquisition of Homegate have been
assumed to be outstanding from the inception date of Homegate's predecessor,
ESLP (February 9, 1996).

The pro forma financial information contains no adjustments to conform the
accounting policies of the companies because any such adjustments have been
determined to be immaterial. Certain reclassifications have been made to the
December 31, 1994, 1995 and 1996 financial information to conform them to the
six months ended June 30, 1996 and 1997 presentations.

The following adjustments are necessary to reflect the Merger (in
thousands):

The pro forma combined statements of operations for the three and six
months ended June 30, 1997, do not reflect nonrecurring costs and charges
resulting directly from the Merger nor their related tax effect. These
costs and charges are estimated as follows:

<TABLE>
<S> <C>
Cost of terminating the management agreement............................... $12,000
Transaction related costs.................................................. 3,433
Transition costs........................................................... 325
------
Total............................................................ $15,758
======
</TABLE>

Costs to terminate the management agreement represent amounts to be
paid to Wyndham Hotel Corporation pursuant to the termination agreement.
These amounts are to be funded: $8.0 million by Prime and $4.0 million by a
shareholder of Homegate. The amount paid by the shareholder will be
reflected as a contribution to capital and will be included as a Merger
expense.

Transaction related costs primarily represent management's best
estimate of fees to be paid for investment banking, legal, accounting and
other professional services.

Transition costs represent management's best estimate of the costs to
consolidate operations. This plan was formulated by Prime and Homegate
management in order to more efficiently provide services in markets where
multiple locations will exist as a result of the Merger. The plan of
consolidation calls for affected operations to be merged over a period of
three months. These costs include costs associated with the merging of
Prime and Homegate operations, including the combining of systems,
facilities and management resources as well as costs associated with the
formation of a regional operating and reporting infrastructure. Included
are $175,000 related to severance and related benefits. These costs
represent anticipated payments to identified employees, as required by
their respective employment agreements, who will be terminated after the
Merger and certain other anticipated payments to be made to certain
employees.

A. To reflect the exchange of approximately 6.5 million shares of
Prime Common Stock for all the issued and outstanding shares of Homegate
Common Stock. Cash paid for fractional shares has been ignored, since the
amounts are not expected to be material.

B. To adjust pro forma amounts based on historical share amounts,
converting each outstanding share of Homegate Common Stock into Prime
Common Stock based on the fixed Exchange Ratio of 0.6073 per share. For the
six months ended June 30, 1996 and the year ended December 31, 1996, the
adjusted pro forma share amounts were prorated to reflect the inception
date of Homegate's predecessor, ESLP, as of February 9, 1996.

108
<PAGE> 116

DESCRIPTION OF PRIME CAPITAL STOCK

The authorized capital stock of Prime consists of 75,000,000 shares of
Common Stock and 20,000,000 shares of Preferred Stock.

COMMON STOCK

At June 30, 1997, 40,378,502 shares of Common Stock were issued and
outstanding. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of Prime's stockholders, including the election of
directors. The Common Stock does not have cumulative voting rights. Subject to
the preferential rights of any outstanding series of Preferred Stock, the
holders of Common Stock will be entitled to such dividends as may be declared
from time to time by the Board of Directors from funds legally available
therefor, and will be entitled to receive pro rata all assets of Prime available
for distribution to such holders upon liquidation. All shares of Common Stock
are fully paid and non-assessable.

PREFERRED STOCK

The Board of Directors has authority to establish the designations,
liquidation preferences, dividend rights, terms of redemption, conversion
rights, sinking fund terms and all other preferences and rights (including
voting rights) of any series of Preferred Stock. The ability of the Board of
Directors to issue Preferred Stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could, among other
things, adversely affect the voting powers of holders of Common Stock and, under
certain circumstances, may discourage an attempt by others to gain control of
Prime.

WARRANTS

Warrants to purchase 2,106,383 shares of Common Stock were issued to former
shareholders of Prime's predecessor, PMI, in partial settlement of their
bankruptcy interests. The warrants became exercisable on August 31, 1993 at an
exercise price of $2.71 per share. The exercise price was determined from the
average per share daily closing price of the Common Stock during the year
following the effective date of the PMI reorganization. As of June 30, 1997,
warrants to purchase 1,223,679 shares of Common Stock had been exercised.

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Certificate of Incorporation and Bylaws of Prime
summarized below may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interest, including an attempt that might result in a
premium over the market price for the shares held by stockholders.

Staggered Board of Directors. The Certificate of Incorporation and the
Bylaws provide that the Board of Directors will be divided into three classes of
Directors, each class constituting approximately one-third of the total number
of Directors and with the classes serving staggered three-year terms. The
classification of Directors will have the effect of making it more difficult for
shareholders to change the composition of the Board of Directors. Prime
believes, however, that the longer time required to elect a majority of a
classified Board of Directors will help to ensure continuity and stability of
Prime's management and policies.

The classification provisions could also have the effect of discouraging a
third party from accumulating large blocks of Prime's stock or attempting to
obtain control of Prime, even though such an attempt might be beneficial to
Prime and its stockholders. Accordingly, stockholders could be deprived of
certain opportunities to sell their shares of Common Stock at a higher market
price than might otherwise be the case.

Fair Price Provisions. Provisions of the Certificate of Incorporation (the
"Fair Price Provisions") limit the ability of an Interested Stockholder (defined
as the beneficial owner of 20% of outstanding voting shares) to effect certain
transactions involving Prime. Unless the Fair Price Provisions are satisfied, an
Interested Stockholder may not engage in a business combination involving Prime
unless approved by 75% of Prime's outstanding voting shares or a majority of the
Disinterested Directors (as defined therein). A business

109
<PAGE> 117

combination includes a merger, consolidation, sale of assets valued at over
$25.0 million or issuance or transfer of securities valued at over $25.0
million, or a similar transaction. In general, the Fair Price Provisions require
that an Interested Stockholder pay shareholders at least the same amount of cash
or the same amount and type of consideration paid by the Interested Stockholder
when it initially acquired Prime's shares.

The Fair Price Provisions are designed to discourage attempts to take over
Prime in non-negotiated transactions utilizing two-tier pricing tactics, which
typically involve the accumulation of a substantial block of the target
corporation's stock followed by a merger or other reorganization of the acquired
Prime on terms determined by the purchaser. Due to the difficulties of complying
with the requirements of the Fair Price Provisions, the Fair Price Provisions
generally discourage attempts to obtain control of Prime.

LIMITATIONS ON DIRECTORS' LIABILITY

Prime's Certificate of Incorporation provides that no director of Prime
shall be liable to Prime or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to Prime or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) in respect of certain unlawful dividend payments or
stock redemptions or redemptions or repurchases pursuant to Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions is
to eliminate the rights of Prime and its stockholders (through stockholders'
derivative suits on behalf of Prime) to recover monetary damages against a
director for breach of fiduciary duty as a director (including breaches
resulting from grossly negligent behavior), except in the situations described
above. These provisions will not limit the liability of directors under Federal
securities laws.

CERTAIN PROVISIONS OF DELAWARE LAW REGARDING AN INTERESTED STOCKHOLDER

Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates or associates of
such person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder becomes an interested stockholder, unless (i) the business
combination is approved by the corporation's board of directors prior to the
date the interested stockholder becomes an interested stockholder; (ii) the
interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder; or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for Prime Common Stock is Continental
Stock Transfer & Trust Company in New York, New York.

110
<PAGE> 118

COMPARISON OF STOCKHOLDER RIGHTS

The following is a summary of material differences between the rights of
holders of Prime Common Stock and the rights of holders of Homegate Common
Stock.

Each of Prime and Homegate is organized under the laws of the State of
Delaware. Any material differences in the rights of their respective
stockholders would arise from various provisions of the Certificate of
Incorporation and By-laws of each of Prime and Homegate. Among the differences
between the rights of the holders of Prime Common Stock and Homegate Common
Stock are the following: (i) the total number of authorized shares of capital
stock of Prime is 95,000,000 shares, consisting of 75,000,000 shares of Prime
Common Stock and 20,000,000 shares of Prime preferred stock, par value $.10 per
share, while the total number of authorized shares of capital stock of Homegate
is 25,000,000 shares, consisting of 20,000,000 shares of Homegate Common Stock
and 5,000,000 shares of Homegate preferred stock, par value $.01 per share; (ii)
the Certificate of Incorporation of Prime includes a fair price provision that
limits the ability of an interested stockholder (defined as the beneficial owner
of 20% of the outstanding voting shares) to effect certain transactions
involving Prime without the approval of 75% of Prime's outstanding voting shares
or a majority of the disinterested directors, while the Certificate of
Incorporation of Homegate requires the approval of two-thirds of the Homegate
voting shares for the adoption of an agreement of merger or consolidation or a
sale or lease of substantially all of Homegate's assets; (iii) the By-laws of
Prime provide that special meetings of the stockholders may be called by the
Board of Directors, the President or by the President at the request of the
holders of a majority of the outstanding shares of capital stock entitled to
vote, while the Certificate of Incorporation of Homegate provides that only the
Board of Directors or the Chairman of the Board of Directors, unless otherwise
required by law, may call such meeting; (iv) the By-laws of Prime provide that
to propose business to be transacted at a meeting, a stockholder's timely notice
must be received by Prime not less than 50 days nor more than 75 days prior to
such meeting, while the Certificate of Incorporation of Homegate provides that a
stockholder's notice is timely if received by Homegate not less than 60 days nor
more than 90 days prior to the scheduled date of the meeting regardless of any
postponement, deferral or adjournment of that meeting to a later date; (v) the
Certificate of Incorporation of Prime provides that the By-laws of Prime may be
amended or repealed by the Board of Directors or by the affirmative vote of 75%
of the voting power of all shares of Prime entitled to vote generally in the
election of the directors, voting together as a single class, while the
Certificate of Incorporation of Homegate requires the affirmative vote of the
holders of at least 66 2/3% of the voting power of all shares of Homegate
entitled to vote generally in the election of directors, voting together as a
single class, to amend the By-laws of Homegate; (vi) the Certificate of
Incorporation of Homegate provides that the Board of Directors, each committee
and each individual director, in discharging their respective duties, may
consider the effects of any action taken or proposed to be taken on employees,
franchisees, associates, customers, suppliers and/or creditors and the
communities in which Homegate owns or leases properties or conducts business;
and (vii) the Certificate of Incorporation of Prime may be amended by the
affirmative vote of a majority of the holders or of: (a) at least 75% of the
voting power of all shares of Prime entitled to vote generally in the election
of the directors, voting together as a single class, regarding the provision of
the Certificate of Incorporation relating to the amendment of the By-Laws, (b)
at least 75% of the outstanding shares of Prime capital stock entitled to vote
on such amendment regarding the provision of the Certificate of Incorporation
relating to the approval of a compromise or arrangement to be entered into by
Prime and its creditors, and (c) at least 75% of the votes entitled to be cast
by the holders of all the then outstanding shares of voting stock, excluding
voting stock owned by any interested stockholder, regarding the provision of the
Certificate of Incorporation relating to the fair price provision regarding
transactions with an interested stockholder, while the Certificate of
Incorporation of Homegate requires the affirmative vote of the holders of at
least 66 2/3% of the voting power of all Homegate securities entitled to vote
generally in the election of directors to amend the Certificate of Incorporation
regarding the number, classes, vacancies, removal and election of directors,
annual and special meetings of stockholders, adoption of an agreement of merger
or consolidation or a sale or lease of substantially all of Homegate's assets,
amendment of the By-Laws, factors to be considered by the Board of Directors
when taking a decision, approval of an agreement to be entered into by Homegate
and its creditors or its stockholders, liability of directors, and
indemnification.

111
<PAGE> 119

Both the Certificate of Incorporation of Prime and the Certificate of
Incorporation of Homegate provide for a staggered board of directors divided
into three classes, with the classes serving staggered three-year terms, and for
action to be taken at an annual or special meeting only upon the vote of the
stockholders and not by written consent. Neither the Certificate of
Incorporation nor the By-laws of either Prime or Homegate contain any other
provisions designed to delay or impede a change of control or supermajority
voting provisions. Nor are there other material differences in the rights of
holders of Prime Common Stock and Homegate Common Stock.

112
<PAGE> 120

SECURITY OWNERSHIP OF HOMEGATE

The following table sets forth certain information regarding the beneficial
ownership of the Homegate Common Stock as of June 30, 1997 by (i) each person
known by Homegate to own beneficially more than 5% of any class of Homegate's
outstanding voting securities, (ii) each of Homegate's directors, (iii) each
named executive officer of Homegate and (iv) all current directors and executive
officers of Homegate as a group. Unless otherwise indicated, Homegate believes
that each person or entity named below has sole voting and investment power with
respect to all shares shown as beneficially owned by such person or entity,
subject to community property laws where applicable and the information set
forth in the footnotes to the table below.

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS
- ----------------------------------------------------------- --------------------- ----------------
<S> <C> <C>
JMI/Greystar Extended Stay Partners, L.P................... 2,274,992 21.2%
Two Riverway, Suite 850
Houston, TX 77056
Developer Extended Stay Partners, L.P.(1).................. 1,055,759 9.8%
Two Riverway, Suite 850
Houston, TX 77056
CRI/ESH Partners, L.P.(2).................................. 2,033,424 18.9%
3200 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Robert A. Faith(3)......................................... 3,720,923 34.6%
Two Riverway, Suite 850
Houston, TX 77056
William B. Buchanan, Jr.................................... 5,000 *
James D. Carreker(4)....................................... 5,000 *
Harlan R. Crow(5).......................................... 3,206,739 29.8%
Anthony W. Dona............................................ 45,903 *
John R. Huff............................................... 5,000 *
John J. Moores(6).......................................... 390,172 3.6%
Charles E. Noell(4)........................................ 0 *
Leonard W. Wood(7)......................................... 126,777 1.2%
John C. Kratzer............................................ 229,513 2.1%
Tim V. Keith............................................... 4,348 *
Joel Kinzie Oldham IV...................................... 4,348 *
Directors and named executive officers of Homegate as a
group.................................................... 6,309,356 58.7%
</TABLE>

- ---------------
* Less than 1%.

(1) Shares owned by Developer Extended Stay Partners, L.P. will be voted by its
general partner, DESP General Partner, L.L.C., until such time as such
shares are distributed by such partnership to its partners, TCR Extended
Stay I Limited Partnership and Greystar Realty Services, L.P.

(2) Crow indirectly owns an approximate 74% limited partner interest in such
partnership.

(3) Includes 2,274,992 shares owned by JMI/Greystar Extended Stay Partners, L.P.
which may be deemed to be beneficially owned by Mr. Faith, who is the sole
stockholder of Greystar Holdings, Inc., the sole general partner of such
partnership. Mr. Faith disclaims beneficial ownership of all such shares
held by such partnership beyond his percentage ownership therein. Includes
1,055,759 shares owned by Developer Extended Stay Partners, L.P. as to which
Mr. Faith has shared voting power as a result of his indirect ownership of a
percentage interest in DESP General Partner, L.L.C., the sole general
partner of such partnership. Mr. Faith disclaims beneficial ownership of all
such shares beyond his percentage ownership therein. Includes 390,172 shares
owned by JMI/Greystar Realty Partners, L.P. as to which Mr. Faith has shared
voting power as a result of his being the sole stockholder of Greystar
Holdings, Inc.,

113
<PAGE> 121

one of the two general partners of such partnership. Mr. Faith disclaims
beneficial ownership of all such shares held by such partnership beyond his
percentage ownership therein.

(4) Includes fully vested options granted under the Homegate Hospitality, Inc.
1996 Long-Term Incentive Plan (the "1996 Plan") to non-employee directors to
acquire 5,000 shares of Homegate Common Stock.

(5) Includes 13,865 shares owned by Crow Family, Inc., of which Mr. Crow is the
sole director. Includes 2,033,424 shares owned by CRI/ESH Partners, L.P. and
98,691 shares owned by Crow Hotel Realty Investors, L.P., as Crow Family,
Inc. is the sole general partner of each such partnership. Also includes
1,055,759 shares owned by Developer Extended Stay Partners, L.P., as to
which Mr. Crow has shared voting power as a result of Crow Family, Inc.'s
ownership of a percentage interest in DESP General Partner, L.L.C., the sole
general partner of such partnership and fully vested options granted under
the 1996 Plan to non-employee directors. Mr. Crow disclaims beneficial
ownership of all shares other than the shares subject to an option to
acquire 5,000 shares of Homegate Common Stock.

(6) Includes 390,172 shares owned by JMI/Greystar Realty Partners, L.P., as to
which Mr. Moores has shared voting power as a result of his ownership of JMI
Realty, Inc., one of the two general partners of such partnership. Mr.
Moores disclaims beneficial ownership of all such shares held by such
partnership beyond his percentage ownership therein. Also includes fully
vested options granted under the 1996 Plan to non-employee directors to
acquire 5,000 shares of Homegate Common Stock. Excludes 574,436 shares owned
by JMI/Greystar Extended Stay Partners, L.P. attributable to Mr. Moores'
percentage interest in such partnership.

(7) Includes 121,777 shares of Homegate Common Stock held directly and fully
vested options granted under the 1996 Plan to non-employee directors to
acquire 5,000 shares of Homegate Common Stock.

114
<PAGE> 122

OTHER MATTERS

It is not expected that any matters other than those described in this
Proxy Statement -- Prospectus will be brought before the Homegate Special
Meeting. If any other matters are presented, however, it is the intention of the
persons named in the Homegate proxy to vote the proxy in accordance with the
discretion of the persons named in such proxy.

LEGAL MATTERS

Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon for Prime by Willkie Farr & Gallagher, New
York, New York. Jack H. Nusbaum, a director of Prime who beneficially owns
10,000 shares of Prime Common Stock and an additional 55,000 shares of Prime
Common Stock underlying stock options, is a partner in the law firm of Willkie
Farr & Gallagher.

EXPERTS

The Consolidated Financial Statements of Prime Hospitality Corp. included
and incorporated by reference in this Proxy Statement-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 and incorporated
by reference herein in reliance upon the authority of said firm as experts in
giving said report.

The Consolidated Financial Statements of Homegate Hospitality, Inc. at
December 31, 1996 and for the period from inception (February 9, 1996) through
December 31, 1996, included in this Proxy Statement-Prospectus, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
the authority of said firm as experts in accounting and auditing.

HOMEGATE STOCKHOLDER PROPOSALS

If the Merger is not consummated, Homegate will hold a 1998 Annual Meeting
of Stockholders. As noted in Homegate's proxy statement relating to the 1997
Annual Meeting of Stockholders, any stockholder proposals intended to be
presented at Homegate's 1998 Annual Meeting of Stockholders, if the Merger is
not consummated prior thereto, must have been received by Homegate on or before
December 1, 1997 to be eligible for inclusion in the Proxy Statement and form of
proxy to be distributed by the Homegate Board of Directors in connection with
such meeting.

115
<PAGE> 123

INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited)................... F-2
Statements of Income (Unaudited) for the Six Months Ended June 30, 1996 and June 30,
1997............................................................................. F-3
Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1996 and June
30, 1997......................................................................... F-4
Notes to Interim Consolidated Financial Statements.................................. F-5
Report of Independent Public Accountants.............................................. F-8
Balance Sheets at December 31, 1995 and 1996........................................ F-9
Statements of Income for the Years Ended December 31, 1994, 1995 and 1996........... F-10
Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and
1996............................................................................. F-11
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... F-12
Notes to Consolidated Financial Statements.......................................... F-13
</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.

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HOMEGATE HOSPITALITY, INC.
Financial Statements and Schedule:
Consolidated Balance Sheets at June 30, 1997 (Unaudited) and December 31, 1996...... F-28
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 1997 and June 30, 1996.................................................. F-29
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30,
1997 and June 30, 1996........................................................... F-30
Notes to Consolidated Financial Statements.......................................... F-31
Report of Independent Auditors........................................................ F-34
Consolidated Balance Sheet at December 31, 1996..................................... F-35
Consolidated Statement of Operations for the Period from Inception (February 9,
1996) through December 31, 1996.................................................. F-36
Consolidated Statement of Changes in Stockholders' Equity for the Period from
Inception (February 9, 1996) through December 31, 1996........................... F-37
Consolidated Statement of Cash Flows for the Period from Inception (February 9,
1996) through December 31, 1996.................................................. F-38
Notes to Financial Statements....................................................... F-39
Schedule III -- Real Estate Investments and Accumulated Depreciation -- December 31,
1996................................................................................ F-46
</TABLE>

F-1
<PAGE> 124

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 15,997 $ 78,762
Marketable securities available for sale......................... 238 238
Restricted cash.................................................. 2,637 --
Accounts receivable, net of reserves............................. 12,653 16,738
Current portion of mortgages and notes receivable................ 1,338 2,622
Other current assets............................................. 11,228 13,390
-------- --------
Total current assets..................................... 44,091 111,750
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization.................................... 695,253 812,367
Mortgages and notes receivable, net of current portion............. 24,195 19,858
Other assets....................................................... 22,559 28,425
-------- --------
Total Assets............................................. $786,098 $ 972,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt.......................................... $ 3,419 $ 3,083
Other current liabilities........................................ 45,887 50,714
-------- --------
Total current liabilities................................ 49,306 53,797
Long-term debt, net of current portion............................. 298,875 457,912
Other liabilities.................................................. 18,022 16,538
-------- --------
Total liabilities........................................ 366,203 528,247
-------- --------
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; 39,804,917 and 40,378,502 shares issued and
outstanding at December 31, 1996 and June 30, 1997,
respectively.................................................. 398 404
Capital in excess of par value................................... 338,825 342,425
Retained earnings................................................ 80,672 102,362
Treasury stock................................................... -- (1,038)
-------- --------
Total stockholders' equity.................................... 419,895 444,153
-------- --------
Total Liabilities and Stockholders' Equity............... $786,098 $ 972,400
======== ========
</TABLE>

See Accompanying Notes to Interim Consolidated Financial Statements.

F-2
<PAGE> 125

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1996 1997 1996 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Lodging.......................................... $52,274 $66,485 $94,248 $124,606
Food and beverage................................ 11,456 11,257 19,479 20,706
Management and other fees........................ 1,791 1,975 3,484 3,136
Interest on mortgages and notes receivable....... 1,023 1,574 3,704 3,303
Business interruption insurance.................. 2,891 1,376 6,629 6,366
Rental and other................................. 458 740 962 1,370
------- ------- ------- --------
Total revenues........................... 69,893 83,407 128,506 159,487
------- ------- ------- --------
Costs and expenses:
Direct hotel operating expenses:
Lodging....................................... 13,526 15,746 24,150 30,476
Food and beverage............................. 8,675 7,691 15,589 15,656
Selling and general........................... 15,734 15,604 29,743 32,593
Occupancy and other operating.................... 4,102 5,712 7,584 11,256
General and administrative....................... 4,538 5,130 8,757 10,105
Depreciation and amortization.................... 6,228 7,681 11,102 15,101
------- ------- ------- --------
Total costs and expenses................. 52,803 57,564 96,925 115,187
------- ------- ------- --------
Operating income................................... 17,090 25,843 31,581 44,300
Investment income.................................. 856 1,396 2,121 1,627
Interest expense................................... (6,008) (7,530) (12,209) (11,760)
Other income....................................... -- 1,858 3,432 1,858
------- ------- ------- --------
Income before income taxes and extraordinary 11,938 21,567 24,925 36,025
items............................................
Provision for income taxes......................... 4,775 8,627 9,970 14,410
------- ------- ------- --------
Income before extraordinary items.................. 7,163 12,940 14,955 21,615
Extraordinary items -- Gains on discharges of 27 53 176 75
indebtedness (net of income taxes)...............
------- ------- ------- --------
Net income......................................... $ 7,190 $12,993 $15,131 $ 21,690
======= ======= ======= ========
Earnings per common share:
Primary:
Income before extraordinary items................ $ .22 $ .31 $ .45 $ .52
Extraordinary items.............................. -- -- .01 --
------- ------- ------- --------
Net earnings....................................... $ .22 $ .31 $ .46 $ .52
======= ======= ======= ========
Fully diluted:
Income before extraordinary items................ $ .20 $ .28 $ .42 $ .48
Extraordinary items.............................. -- -- -- --
------- ------- ------- --------
Net earnings....................................... $ .20 $ .28 $ .42 $ .48
======= ======= ======= ========
</TABLE>

See Accompanying Notes to Interim Consolidated Financial Statements.

F-3
<PAGE> 126

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 15,131 $ 21,690
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 11,102 15,101
Amortization of deferred financing costs........................ 685 1,319
Business interruption insurance revenue......................... (6,629) (6,366)
Utilization of net operating loss carryforwards................. 4,131 1,824
Gain on settlement of a note receivable......................... (1,771) --
Gains on discharges of indebtedness............................. (293) (125)
Gain on disposal of assets...................................... (2,879) (1,858)
Increase (decrease) from changes in other operating assets and
liabilities:
Accounts receivable........................................... (1,571) (4,084)
Other current assets.......................................... 1,901 (2,883)
Other liabilities............................................. 5,043 7,574
--------- ---------
Net cash provided by operating activities.................. 24,850 32,192
--------- ---------
Cash flows from investing activities:
Net proceeds from mortgages and notes receivable................... 8,407 509
Disbursements for mortgages and notes receivable................... (800) --
Proceeds from sales of property, equipment and leasehold
improvements.................................................... 3,706 25,614
Purchases of property, equipment and leasehold improvements........ (142,256) (153,020)
Proceeds from insurance settlement................................. -- 2,500
Decrease in restricted cash........................................ 5,875 2,637
Proceeds from sales of marketable securities....................... 10,752 --
Proceeds from retirement of debt securities........................ 1,068 800
Other.............................................................. 1,302 (415)
--------- ---------
Net cash used in investing activities...................... (111,946) (121,375)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt................................. 152,992 260,003
Payments of debt................................................... (75,233) (108,799)
Proceeds from the exercise of stock options and warrants........... 449 744
--------- ---------
Net cash provided by financing activities.................. 78,208 151,948
--------- ---------
Net increase (decrease) in cash and cash equivalents............... (8,888) 62,765
Cash and cash equivalents at beginning of period................... 49,533 15,997
--------- ---------
Cash and cash equivalents at end of period......................... $ 40,645 $ 78,762
========= =========
</TABLE>

See Accompanying Notes to Interim Consolidated Financial Statements.

F-4
<PAGE> 127

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

In the opinion of management, the accompanying interim unaudited
consolidated financial statements of Prime Hospitality Corp. and subsidiaries
(the "Company") contain all material adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of the Company
as of June 30, 1997 and the results of its operations for the three and six
months ended June 30, 1996 and 1997 and cash flows for the six months ended June
30, 1996 and 1997.

The consolidated financial statements for the three and six months ended
June 30, 1996 and 1997 were prepared on a consistent basis with the audited
consolidated financial statements for the year ended December 31, 1996. Certain
reclassifications have been made to the June 30, 1996 consolidated financial
statements to conform them to the June 30, 1997 presentation.

The consolidated results of operations for the three and six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year. These interim unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.

NOTE 2 -- ACQUISITIONS

In February 1997, the Company acquired the Monroe Township, NJ Holiday Inn
for approximately $11.2 million in cash. The acquisition was accounted for as a
purchase and, accordingly, the revenues and expenses 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, 1997,
reported results would not have been materially different.

NOTE 3 -- DEBT

In March 1997, the Company issued $200.0 million of 9-3/4% Senior
Subordinated Notes due 2007 ("Senior Subordinated Notes") in reliance upon Rule
144A under the Securities Act of 1933, as amended. Interest on the notes is paid
semi-annually on April 1 and October 1. The notes are unsecured obligations of
the Company and contain certain covenants including limitations on the
incurrence of debt, dividend payments, certain investments, transactions with
affiliates, asset sales and mergers and consolidations. These notes are
redeemable, in whole or in part, at the option of the Company on or after April
1, 2002 at premiums to principal which decline on each anniversary date. The
Company utilized a portion of the proceeds to pay $101.1 million of debt and
intends to utilize the remainder to finance its AmeriSuites expansion.

The Company established a revolving credit facility (the "Revolving Credit
Facility") in 1996 with a group of financial institutions providing for
availability of funds up to the lesser of $100.0 million and a borrowing base
determined under the agreement. The Revolving Credit Facility is secured by
certain of the Company's hotels with recourse to the Company. The Revolving
Credit Facility bears interest at LIBOR plus 2.25% and is available through June
2001. During the three months ended March 31, 1997, the Company borrowed $67.5
million under the Revolving Credit Facility and proceeds were used primarily for
the development of AmeriSuites hotels. In March 1997, the Company repaid the
outstanding borrowings under the Revolving Credit Facility with the proceeds
from the issuance of the Senior Subordinated Notes. As of June 30, 1997, the
Company has borrowing availability of $100.0 million under the Revolving Credit
Facility.

NOTE 4 -- EARNINGS PER COMMON SHARE

Primary earnings per common share was computed based on the weighted
average number of common shares and common share equivalents (dilutive stock
options and warrants) outstanding during each period.

F-5
<PAGE> 128

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average number of common shares used in computing primary earnings
per share was 33.2 million and 41.8 million for the three months ended June 30,
1996 and 1997, respectively, and 33.0 million and 41.8 million for the six
months ended June 30, 1996 and 1997, 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 40.5 million and 49.2 million for the three months ended June 30, 1996
and 1997, respectively, and 40.5 million and 49.1 million for the six months
ended June 30, 1996 and 1997, respectively.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Under SFAS 128, primary earnings per share will be replaced by basic earnings
per share which will exclude the dilutive effect of stock options and warrants.
In addition, fully diluted earnings per share will be called diluted earnings
per share and will include a change in applying the treasury stock method.

The Company is required to adopt SFAS 128 for the year ended December 31,
1997 and to restate all prior periods. The Company believes that adoption of
SFAS 128 will increase reported primary earnings per share and will have no
impact on fully diluted earnings per share.

NOTE 5 -- BUSINESS INTERRUPTION INSURANCE REVENUE

In September 1995, the Company-owned Marriott's Frenchman's Reef Hotel (the
"Frenchman's Reef") in St. Thomas, U.S. Virgin Islands suffered 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
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
with regard to Hurricane Bertha.

Although the Company continued to operate the hotel through March 31, 1997,
the impact of the hurricanes has caused operating profits to decline from prior
years' levels. In addition to recording the operating revenues and expenses of
the Frenchman's Reef, the Company also recorded business interruption insurance
revenue of $2.9 million and $1.4 million for the three months ended June 30,
1996 and 1997, respectively, and $6.6 million and $6.4 million for the six
months ended June 30, 1996 and 1997, respectively. The 1997 amount includes an
estimated recovery of insurance proceeds arising out of Hurricane Bertha.

The Company has begun the redevelopment of the Frenchman's Reef.
Redevelopment plans provide for significant hurricane-related renovations and
certain enhancements. Due to the extent of the renovations, the Company closed
the hotel on April 1, 1997 and plans to reopen it in December 1997.

NOTE 6 -- INTEREST EXPENSE

The Company capitalized $1.7 million and $3.7 million, for the three months
ended June 30, 1996 and 1997, respectively, and $3.0 million and $7.4 million
for the six months ended June 30, 1996 and 1997 respectively, of interest
related to borrowings used to finance hotel construction. Also included in
interest expense is the amortization of deferred financing fees of $312,000 and
$755,000, for the three months ended June 30, 1996 and 1997, respectively, and
$685,000 and $1.3 million for the six months ended June 30, 1996 and 1997,
respectively.

F-6
<PAGE> 129

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- OTHER INCOME

Other income consists of items which are not considered part of the
Company's recurring operations. For the six months ended June 30, 1996, other
income consisted of a gain on the settlement of a note receivable of $1.8
million and a gain on the sale of a hotel of $1.6 million. For the six months
ended June 30, 1997, other income consisted of a net gain on property
transactions of $1.9 million.

NOTE 8 -- TREASURY STOCK

In connection with the exercise of certain stock options, the Company
re-acquired 50,039 shares of its common stock.

NOTE 9 -- SUBSEQUENT EVENT

On July 25, 1997, the Company entered into an agreement to merge with
Homegate Hospitality, Inc. ("Homegate"), a provider of mid-price extended-stay
hotels. Under this agreement, the Company will issue approximately 6.5 million
shares of common stock based upon a fixed exchange ratio of 0.6073 per share of
the Company's common stock for each of the approximately 10.7 million
outstanding shares of Homegate. The transaction is expected to be accounted for
as a pooling of interests. The merger agreement is subject to the approval of
the shareholders of Homegate and other customary terms and conditions and is
expected to be completed in the fourth quarter of 1997.

F-7
<PAGE> 130

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-8
<PAGE> 131

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-9
<PAGE> 132

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............................ 9,384 15,227 23,632
Other expense............................................ -- 2,200 --
-------- -------- --------
Total costs and expenses......................... 100,892 161,270 203,697
-------- -------- --------
Operating income........................................... 33,411 44,358 65,171

Investment income.......................................... 1,966 4,861 4,610
Interest expense........................................... (14,036) (22,350) (22,564)
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-10
<PAGE> 133

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-11
<PAGE> 134

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-12
<PAGE> 135

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 108 hotels, as of February 28, 1997, located in 25 states and the
U. S. Virgin Islands. The Company owns and operates 95 hotels and manages the
remaining 13 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-13
<PAGE> 136

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-14
<PAGE> 137

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-15
<PAGE> 138

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-16
<PAGE> 139

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-17
<PAGE> 140

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-18
<PAGE> 141

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-19
<PAGE> 142

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-20
<PAGE> 143

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-21
<PAGE> 144

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-22
<PAGE> 145

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-23
<PAGE> 146

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-24
<PAGE> 147

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-25
<PAGE> 148

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-26
<PAGE> 149

PRIME HOSPITALITY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of the various stock option plans:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION PRICE PRICE
OF SHARES PER SHARE PER SHARE
---------- -------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994....................... 1,442,000
Granted................................................ 773,000 $ 9.25-$10.88 $ 9.57
Exercised.............................................. (222,000) $ 2.71-$ 7.63 $ 3.25
Canceled............................................... (165,000) $ 3.63-$ 9.63 $ 4.66
---------
Outstanding at December 31, 1995....................... 1,828,000
---------
Granted................................................ 646,000 $14.75-$18.00 $ 16.45
Exercised.............................................. (149,000) $ 3.63-$10.81 $ 5.35
Canceled............................................... (59,000) $ 3.63-$16.63 $ 8.28
---------
Outstanding at December 31, 1996....................... 2,266,000
=========
Exercisable at December 31, 1996....................... 1,101,000 $ 2.71-$10.88 $ 5.38
=========
</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-27
<PAGE> 150

HOMEGATE HOSPITALITY, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................... $ 3,087,424 $31,475,679
Restricted cash.............................................. 824,098 959,198
Accounts receivable
Hotel..................................................... 339,148 241,403
Other..................................................... 194,307 256,939
Interest.................................................. 138,263 208,411
Earnest money deposits....................................... 501,000 546,000
Prepaid expenses............................................. 511,547 552,054
----------- -----------
Total current assets................................. 5,595,787 34,239,684
Property and equipment, net (Note 2)........................... 84,549,655 51,106,541
Loans receivable (Note 3)...................................... 3,094,337 1,900,500
Deferred loan costs, net....................................... 358,783 335,547
Other assets, net.............................................. 737,960 951,136
----------- -----------
Total assets................................................... $ 94,336,522 $88,533,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................. $ 878,376 $ 1,101,225
Accrued expenses............................................. 399,842 224,694
Payables to affiliates....................................... 720,557 1,132,274
Current maturities of mortgage and other notes payable....... 782,614 425,738
----------- -----------
Total current liabilities............................ 2,781,389 2,883,931
Mortgage and other notes payable (Note 4)...................... 27,767,199 20,961,009
Stockholders' equity (Note 5)
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued............................................... -- --
Common stock, $.01 par value; 20,000,000 shares authorized;
10,725,000 shares issued and outstanding.................. 107,250 107,250
Additional paid in capital................................... 65,447,625 65,447,625
Retained earnings (deficit).................................. (1,766,941) (866,407)
----------- -----------
Total stockholders' equity........................... 63,787,934 64,688,468
----------- -----------
Total liabilities and stockholders' equity..................... $ 94,336,522 $88,533,408
=========== ===========
</TABLE>

See accompanying notes.

F-28
<PAGE> 151

HOMEGATE HOSPITALITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Room revenue............................ $2,105,812 $ 24,803 $4,021,929 $ 24,803
Other revenue........................... 45,662 1,703 103,393 1,703
Interest income......................... 221,603 -- 603,218 --
---------- ---------- ---------- ----------
Total revenues.................. 2,373,077 26,506 4,728,540 26,506
COSTS AND EXPENSES
Property operating expenses............. 1,421,580 30,313 2,709,680 30,313
Corporate operating expenses............ 628,132 204,273 1,415,755 204,273
Depreciation and amortization........... 354,468 9,533 623,498 9,533
Interest................................ 395,628 21,457 880,145 21,457
---------- ---------- ---------- ----------
Total costs and expenses........ 2,799,808 265,576 5,629,078 265,576
---------- ---------- ---------- ----------
Net loss.................................. $ (426,731) $ (239,070) $ (900,538) $ (239,070)
========== ========== ========== ==========
Net loss per share........................ $ (.04) $ (.02) $ (.08) $ (.02)
========== ========== ========== ==========
Weighted average number of shares
outstanding............................. 10,725,000 10,725,000 10,725,000 10,725,000
========== ========== ========== ==========
</TABLE>

See accompanying notes.

F-29
<PAGE> 152

HOMEGATE HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss......................................................... $ (900,538) $ (239,070)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization.................................. 623,498 9,533
Amortization of loan costs..................................... 15,833 --
Accrued interest added to mortgage note payable................ 40,319 21,457
Changes in operating assets and liabilities
Restricted cash............................................. 135,100 --
Accounts receivable......................................... 35,035 (7,184)
Prepaid expenses............................................ 40,507 (3,078)
Accounts payable............................................ (65,392) 136,403
Accrued expenses............................................ 175,148 45,803
Payables to affiliates...................................... (46,339) 348,789
------------ ----------
Net cash provided by operating activities........................ 53,171 312,653
------------ ----------
INVESTING ACTIVITIES
Acquisition of land.............................................. (14,347,211) (2,911,123)
Acquisition of hotel facility.................................... -- (4,991,486)
Construction in progress, net of development costs payable....... (14,546,258) --
Additions to property and equipment, net of payables............. (4,813,337) (133,038)
Additions to loan receivable..................................... (793,837) --
Additions to earnest money deposits.............................. (371,000) (95,000)
Additions to other assets........................................ (583,026) (133,734)
------------ ----------
Net cash used in investing activities............................ (35,454,669) (8,264,381)
------------ ----------
FINANCING ACTIVITIES
Proceeds from mortgage and other notes payable................... 7,360,325 2,847,930
Principal payments on mortgage and other notes payable........... (237,578) --
Payment of deferred loan costs................................... (109,504) (17,240)
Contributions from partners...................................... -- 6,394,920
------------ ----------
Net cash provided by financing activities........................ 7,013,243 9,225,610
------------ ----------
Net decrease in cash and cash equivalents........................ (28,388,255) 1,273,882
Cash and cash equivalents at beginning of period................. 31,475,679 --
------------ ----------
Cash and cash equivalents at end of period....................... $ 3,087,424 $ 1,273,882
============ ==========
</TABLE>

See accompanying notes.

F-30
<PAGE> 153

HOMEGATE HOSPITALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997

1. ORGANIZATION AND BASIS OF PRESENTATION

Homegate Hospitality, Inc. (the "Company") was organized in Delaware on
August 16, 1996. The Company was capitalized with the issuance of 10 shares of
common stock to Extended Stay Limited Partnership ("ESLP"). The Company was
formed to continue the extended-stay lodging facility development, acquisition
and management operations of ESLP, and to acquire, develop and maintain
extended-stay lodging facilities throughout the United States.

ESLP, a Delaware limited partnership, was formed on February 9, 1996, by
ESH Partners, L.P. ("Crow") and JMI/Greystar Extended Stay Partners, L.P.
("Greystar"), as the general partners and various limited partners. On October
24, 1996, ESLP was merged with and into the Company. Accordingly, the financial
results of ESLP, the predecessor to the Company, for the period from inception
(February 9, 1996) through June 30, 1996, have been included herein. ESLP had no
operations for the three month period ended March 31, 1996.

The financial statements included herein have been prepared in accordance
with instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do
not include all disclosures required under generally accepted accounting
principles for complete financial statements. In the opinion of management, the
financial statements reflect all adjustments which consist only of normal
recurring adjustments necessary for a fair presentation of the financial
statements for the interim periods presented. Interim results of operations are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.

2. PROPERTY AND EQUIPMENT

At June 30, 1997 and December 31, 1996, property and equipment consisted of
the following:

<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Land................................................... $ 31,236,509 $16,473,296
Buildings and improvements............................. 32,144,175 28,300,127
Construction in progress............................... 17,537,328 4,623,153
Furniture, fixtures, and equipment..................... 4,492,000 1,985,837
----------- -----------
85,410,012 51,382,413
Less accumulated depreciation.......................... 860,357 275,872
----------- -----------
$ 84,549,655 $51,106,541
</TABLE>

During the second quarter of 1997, the Company acquired one land parcel in
Webster, Texas that is under development for hotel construction. Additionally,
the Company acquired one land parcel in each of the following cities:
Indianapolis; Phoenix; Portland; Pompano Beach, Florida; and Las Vegas for
future development of hotel facilities. As of June 30, 1997, the Company had
entered into agreements, letters of intent, contracts, or other arrangements for
the future purchase of eleven additional land parcels.

Trammell Crow Residential (TCR) and Greystar Realty Services (GRS) are
developing the hotel facilities under an agreement that expires at the earlier
of the completion of the sixtieth hotel or December 31, 1998.

F-31
<PAGE> 154

HOMEGATE HOSPITALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LOANS RECEIVABLE

During 1996, the Company advanced $1,900,500 under two promissory notes to
an unrelated party for the purchase of two parcels of land in Austin, Texas (the
"Rutherford and Jolleyville sites"), on which extended-stay hotel facilities are
to be developed. During the first quarter and second quarters of 1997, the
Company advanced an additional $400,000 and $793,837, respectively, under the
notes for various development costs. These notes accrue interest at ten percent
and mature on the sooner of November 2000 or five business days after demand.
Monthly interest payments of $15,838 were to begin on February 1, 1997. The
accrued interest of $107,167 was not paid during the second quarter. On June 30,
1997, the Company and the unrelated party entered an agreement whereby the
Company would purchase the Rutherford and Jolleyville sites for a total purchase
price of $508,713 and extinguishment of the debt and the related accrued
interest (See Note 6).

4. MORTGAGE AND OTHER NOTES PAYABLE

Mortgage Notes Payable

The Company has entered into a Master Loan Agreement (the "Note") with Bank
One, Arizona, N.A. ("BOA"). The Note provides up to $30 million in
construction/mini-perm mortgage loans for the acquisition and development of
land and hotel facilities for up to five years. A loan was committed under the
Note in connection with the acquisition of Studio Suites. This loan, secured by
Studio Suites, accrues interest at either LIBOR plus 2.25% or prime plus .5%
based on the election of the Company (LIBOR plus 2.25%; 8.00% at June 30, 1997),
and requires interest payments for the first ten months of the loan, followed by
principal and interest payments based upon a fifteen year amortization until
maturity, May 31, 1999. The outstanding balance at June 30, 1997 was $2,884,987.

On March 7, 1997, the Company borrowed $5,070,000 under the Note, secured
by the Austin Town Lake hotel facility. The funding of this loan by BOA occurred
on May 12, 1997. This loan accrues interest at either LIBOR plus 2.25% or prime
plus .5% based on the election of the Company (LIBOR plus 2.25%; 8.00% at June
30, 1997), and requires principal and interest payments based upon a fifteen
year amortization until maturity, February 4, 2000. The outstanding balance at
June 30, 1997 was $4,901,404.

Another loan, in the amount of $3,509,885, was committed under the Note in
connection with the construction of the hotel in Phoenix, Arizona. This loan,
secured by the hotel at 44th and Oak, accrues interest at either LIBOR plus 2.5%
or prime plus .5% based on the election of the Company (LIBOR plus 2.5%; 8.25%
at June 30, 1997), and requires interest payments for the first twelve months of
the loan, followed by principal and interest payments based upon a fifteen year
amortization until maturity, August 15, 1998. The maturity date may be extended
for thirty-six months with the payment of an extension fee of .25% of the loan
amount. The outstanding balance at June 30, 1997 was $2,505,805.

In connection with the acquisition of Westar, the Company assumed an
$18,100,000 mortgage note due to Nomura Asset Capital Corporation ("Nomura"),
with interest at 9.71% through January 11, 2011 and thereafter at the greater of
14.71% or the Treasury Rate plus 9%. The note is due in monthly installments of
$160,789, including interest, from February 1996 through January 2021, and is
secured by the Westar hotel properties and improvements. The outstanding balance
at June 30, 1997 was $17,876,318.

Restricted cash includes cash retained by Nomura's mortgage servicer for
payment of taxes, insurance and debt service.

The mortgage note payable to Nomura does not allow for prepayment of the
debt until January 11, 2011, except by providing the lender with U.S.
obligations that produce payments which replicate the payment obligations of the
Company under the note. This restriction represents a substantial prepayment
penalty. On or after January 11, 2011, the loan can be prepaid at any time with
no prepayment penalty.

F-32
<PAGE> 155

HOMEGATE HOSPITALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER NOTES PAYABLE

The Company has two unsecured notes payable for the purchase of directors
and officers insurance. The notes accrue interest at 6.98% and require monthly
principal and interest payments of $16,497 through July 1999. The outstanding
balance at June 30, 1997 was $381,299.

5. STOCKHOLDERS' EQUITY

Earnings per Share

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"),
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will be
excluded. Management believes that adoption of SFAS No. 128 will not have a
material effect on earnings per share.

6. SUBSEQUENT EVENTS

On July 3, 1997, the Company purchased the Rutherford and Jolleyville sites
from an unrelated party for a purchase price of $508,713 and extinguishment of
debt owed by the unrelated party to the Company (See Note 3).

On July 25, 1997, the Company entered a definitive agreement to merge with
a wholly owned subsidiary of Prime Hospitality Corp. (Prime). Under the
agreement, Prime will issue 0.6073 shares of its common stock for each of the
10,725,000 outstanding shares of the Company. The merger is expected to close in
the fourth quarter of 1997. In conjunction with the merger agreement, Prime has
executed a commitment letter with respect to its provision to the Company of a
$65 million construction term loan facility to the Company to facilitate
uninterrupted development of the Company's extended stay hotels.

F-33
<PAGE> 156

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Homegate Hospitality, Inc.

We have audited the accompanying balance sheet of Homegate Hospitality,
Inc. as of December 31, 1996, and the related statements of operations, changes
in stockholders' equity and cash flows for the period from inception (February
9, 1996) through December 31, 1996. Our audit also included the financial
statement schedule listed in the index. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.

We conducted our audit 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 audit provides 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 Homegate Hospitality, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for the period from inception (February 9, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
February 20, 1997

F-34
<PAGE> 157

HOMEGATE HOSPITALITY, INC.

BALANCE SHEET
DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $31,475,679
Restricted cash............................................................... 959,198
Accounts receivable
Hotel......................................................................... 241,403
Other......................................................................... 256,939
Interest...................................................................... 208,411
Prepaid insurance............................................................. 552,054
-----------
Total current assets.................................................. 33,693,684
Property and equipment, net (Note 2).......................................... 51,106,541
Loans receivable (Note 3)..................................................... 1,900,500
Deferred loan costs, net of accumulated amortization of $16,113............... 335,547
Other assets, net of accumulated amortization of $68,586...................... 1,497,136
-----------
Total assets.......................................................... $88,533,408
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 1,101,225
Accrued expenses.............................................................. 224,694
Payables to affiliates (Note 6)............................................... 1,132,274
Current maturities of mortgage and other notes payable........................ 425,738
-----------
Total current liabilities............................................. 2,883,931
Mortgage and other notes payable (Note 4)..................................... 20,961,009
Stockholders' equity (Note 7)
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued..... --
Common stock, $.01 par value; 20,000,000 shares authorized; 10,725,000 shares
issued and outstanding........................................................ 107,250
Additional paid in capital.................................................... 65,447,625
Retained earnings (deficit)................................................... (866,407)
-----------
Total stockholders' equity................................................. 64,688,468
-----------
Total liabilities and stockholders' equity............................ $88,533,408
===========
</TABLE>

See accompanying notes.

F-35
<PAGE> 158

HOMEGATE HOSPITALITY, INC.

STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (FEBRUARY 9, 1996)
THROUGH DECEMBER 31, 1996

<TABLE>
<S> <C>
Revenues:
Room revenue.................................................................. $ 2,233,391
6,770
Interest income............................................................... 450,536
----------
2,690,697
Costs and expenses:
Property operating expenses................................................... 1,675,936
Corporate operating expenses.................................................. 951,261
Depreciation and amortization................................................. 344,459
Interest...................................................................... 585,448
----------
3,557,104
----------
Net loss........................................................................ $ (866,407)
==========
Pro forma net loss per share.................................................... $ (.08)
==========
Pro forma weighted average number of shares outstanding......................... 10,725,000
</TABLE>

See accompanying notes.

F-36
<PAGE> 159

HOMEGATE HOSPITALITY, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
NUMBER COMMON PAID IN RETAINED PARTNERS'
OF SHARES STOCK CAPITAL EARNINGS CAPITAL TOTAL
---------- -------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Capital contributed at
inception (February 9,
1996)................. -- $ -- $ -- $ -- $ 20,000,000 $20,000,000
Net loss of ESLP
(February 9, 1996
through October 23,
1996)................. -- -- -- -- (732,642) (732,642)
Issuance of common stock
to ESLP partners...... 6,386,087 63,861 19,936,139 (732,642) (19,267,358) --
Sale of common stock in
initial public
offering, net of
offering costs........ 4,325,000 43,250 45,351,625 -- -- 45,394,875
Issuance of common stock
to employees and
others................ 13,913 139 159,861 -- -- 160,000
Net loss of the Company
(October 24, 1996
through December 31,
1996)................. -- -- -- (133,765) -- (133,765)
--------- -----------
Balance at December 31,
1996.................. 10,725,000 $107,250 $65,447,625 $(866,407) $ -- $64,688,468
========== ======== =========== ========= ============ ===========
</TABLE>

See accompanying notes.

F-37
<PAGE> 160

HOMEGATE HOSPITALITY, INC.

STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (FEBRUARY 9, 1996)
THROUGH DECEMBER 31, 1996

<TABLE>
<S> <C>
Operating activities
Net loss..................................................................... $ (866,407)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization................................................ 344,459
Amortization of loan costs................................................... 16,113
Accrued interest added to mortgage note payable.............................. 70,000
Changes in operating assets and liabilities:
Restricted cash.............................................................. (959,198)
Accounts receivable.......................................................... (706,753)
Prepaid insurance, net of financing.......................................... (67,368)
Accounts payable............................................................. 1,101,225
Accrued expenses............................................................. 224,694
Payables to affiliates....................................................... 126,623
------------
Net cash used in operating activities................................ (716,612)
Investing activities
Acquisition of hotel facilities, net of debt assumed......................... (19,501,988)
Acquisition of land.......................................................... (8,835,000)
Additions to property and equipment, net of development costs payable........ (4,037,851)
Advances under loans receivable.............................................. (1,900,500)
Additions to other assets.................................................... (1,533,061)
------------
Net cash used in investing activities........................................ (35,808,400)
------------
Financing activities
Proceeds from mortgage note payable.......................................... 2,893,092
Principal payments on mortgage and other notes payable....................... (62,955)
Payment of deferred loan costs............................................... (384,322)
Capital contribution from ESLP partners...................................... 20,000,000
Payment of initial public offering costs..................................... (861,997)
Proceeds from issuance of common stock....................................... 46,416,873
------------
Net cash provided by financing activities............................ 68,000,691
------------
Net increase in cash and cash equivalents.................................... 31,475,679
Cash and cash equivalents at beginning of period............................. --
Cash and cash equivalents at end of period................................... $ 31,475,679
============
</TABLE>

See accompanying notes.

F-38
<PAGE> 161

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. ORGANIZATION AND ACCOUNTING POLICIES

ORGANIZATION

Homegate Hospitality, Inc. (the "Company") was organized in Delaware on
August 16, 1996. The Company was capitalized with the issuance of 10 shares of
common stock to Extended Stay Limited Partnership ("ESLP"). The Company was
formed to continue the extended-stay lodging facility development, acquisition,
and management operations of ESLP, and to acquire, develop and maintain
extended-stay lodging facilities throughout the United States.

ESLP, a Delaware limited partnership, was formed on February 9, 1996, by
ESH Partners, L.P. ("Crow") and JMI/Greystar Extended Stay Partners, L.P.
("Greystar"), as the general partners and various limited partners. On October
24, 1996, ESLP was merged with and into the Company (see Note 7). Accordingly,
the financial results of ESLP, the predecessor to the Company, for the period
from inception (February 9, 1996) through October 23, 1996, have been included
herein.

CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, VPS I, L.P. All material
intercompany accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from these estimates.

REVENUE RECOGNITION

Room revenue and other income are recognized when earned, utilizing the
accrual method of accounting.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.

PROPERTY AND EQUIPMENT

The Company capitalizes costs directly related to the acquisition,
renovation or development of property and equipment while maintenance and
repairs are charged to operating expense when incurred. Interest costs during
construction periods are also capitalized. Property and equipment is recorded at
cost. The building and improvements and furniture and fixtures are depreciated
over their estimated useful lives, which are 40 years and 7 years, respectively,
using the straight-line method.

DEFERRED LOAN COSTS

Costs incurred in obtaining financing have been deferred and are amortized
over the life of the loan.

F-39
<PAGE> 162

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

OTHER ASSETS

Other assets include site deposits, pursuit costs, pre-opening costs, and
organization costs. Site deposits have been paid to escrow agents in conjunction
with executed purchase agreements, whereby the Company is considering the
purchase of certain land parcels.

Costs related to the acquisition of property sites are capitalized when it
is probable that a site will be acquired and are reclassified to property and
equipment upon acquisition. In the event the acquisition is not consummated, the
costs are expensed.

Compensation, promotional and other costs relating to the opening of new
properties are capitalized. Amortization is provided using the straight line
method over a twelve-month period.

Organization costs incurred in conjunction with the formation of the ESLP
have been capitalized and are being amortized over sixty months using the
straight-line method.

PRO FORMA NET LOSS PER SHARE

The pro forma net loss per share was calculated by dividing the net loss by
the pro forma weighted average shares outstanding which assume the initial
public offering occurred as of the beginning of the period.

2. PROPERTY AND EQUIPMENT

At December 31, 1996, property and equipment consists of the following:

<TABLE>
<S> <C>
Land............................................................ $ 16,473,296
Buildings and improvements...................................... 28,300,127
Construction in progress........................................ 4,623,153
Furniture, fixtures, and equipment.............................. 1,985,837
-----------
51,382,413
Less accumulated depreciation................................... 275,872
-----------
$ 51,106,541
===========
</TABLE>

On May 31, 1996, ESLP acquired Studio Suites in Grand Prairie, Texas.
Operations of the Studio Suites commenced during June 1996 and are included in
the accompanying statement of operations since acquisition.

During 1996, the Company acquired two land parcels in Phoenix, one parcel
of land in Denver, two parcels of land in Kansas, and one parcel of land in
Dallas, all of which are under development for hotel construction. Estimated
costs to complete development on these projects total approximately $24.9
million. Additionally, the Company acquired one parcel in Indianapolis, for
future development of a hotel facility. As of December 31, 1996, the Company has
entered into agreements, letters of intent, contracts, or other arrangements to
purchase eighteen additional land parcels.

Long-lived assets are evaluated when indicators of impairment are present
and provisions for possible losses are recorded when the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.

ACQUISITION OF WESTAR

On September 6, 1996, ESLP acquired all the interests in VPS I, L.P. an
unaffiliated Delaware limited partnership that owned five hotels in several
Texas cities operating under the name Westar Suites ("Westar"). ESLP paid
$7,738,696 and assumed debt of $18,001,924 (See Note 4). The acquisition was
accounted for as a purchase with the excess of the purchase price over the net
book value of the Westar assets acquired allocated

F-40
<PAGE> 163

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

to property and equipment. The Company's statement of operations includes the
operations of Westar from the date of acquisition.

Assuming that Westar had been acquired at the beginning of the period
presented (February 9, 1996), operating results of the Company would have been
as follows:

<TABLE>
<S> <C>
Room revenue..................................................... $6,854,060
Net income (loss)................................................ (746,024)
Proforma earnings (loss) per share (.07)
</TABLE>

ACQUISITION OF INNHOME AMERICA -- TOWNE LAKE

On December 31, 1996, the Company acquired, from an unrelated party, an
extended-stay hotel in Austin, Texas operating under the name InnHome
America -- Towne Lake ("InnHome") for a total purchase price of $7.7 million.
The acquisition was accounted for as a purchase with the excess of the purchase
price over the net book value of the InnHome assets acquired allocated to
property and equipment.

Assuming that InnHome had been acquired at the beginning of the period
presented (February 9, 1996), operating results of the Company would have been
as follows:

<TABLE>
<S> <C>
Room revenue..................................................... $3,916,343
Net income (loss)................................................ (198,465)
Proforma earnings (loss) per share............................... (.02)
</TABLE>

3. LOANS RECEIVABLE

The Company advanced $1,900,500 under two promissory notes to two unrelated
parties for the purchase of two parcels of land in Austin, Texas, on which
extended-stay hotel facilities will be developed. These notes accrue interest at
ten percent and mature on the sooner of November 2000 or five business days
after demand. Monthly interest payments of $15,838 begin on February 1, 1997.
The Company has a letter agreement to purchase the hotels upon completion for a
total price equal to the lesser of $14.1 million or actual costs.

4. MORTGAGE AND OTHER NOTES PAYABLE

MORTGAGE NOTES PAYABLE

The Company has entered into a Master Loan Agreement (the "Note") with Bank
One, Arizona. The Note provides up to $30 million in construction/mini-perm
mortgage loans for the acquisition and development of land and hotel facilities
for up to five years. A loan was committed under the Note in connection with the
acquisition of Studio Suites. This loan, secured by Studio Suites, accrues
interest at either LIBOR plus 2.25% or prime plus .5% based on the election of
the Company (7.75% at December 31, 1996), and requires interest payments for the
first ten months of the loan, followed by principal and interest payments based
upon a fifteen year amortization until maturity, May 31, 1999. The outstanding
balance at December 31, 1996, includes $2,847,930 of original principal borrowed
and $70,000 of accrued interest added from an interest reserve.

Another loan, in the amount of $3,509,885, was committed under the Note in
connection with the construction of the hotel in Phoenix, Arizona. This loan,
secured by the hotel at 44th and Oak, accrues interest at either LIBOR plus
2.25% or prime plus .5% based on the election of the Company (7.75% at December
31, 1996), and requires interest payments for the first twelve months of the
loan, followed by principal and interest payments based upon a fifteen year
amortization until maturity, August 15, 1998. The maturity date may be extended
for thirty-six months with the payment of an extension fee of .25% of the loan
amount. The outstanding balance at December 31, 1996 was $45,162.

F-41
<PAGE> 164

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

In connection with the acquisition of Westar, the Company assumed an
$18,100,000 mortgage note due to Nomura Asset Capital Corporation, with interest
at 9.71% through January 11, 2011 and the greater of 14.71% or the Treasury Rate
plus 9% thereafter. The note is due in monthly installments of $160,789,
including interest, commencing February 1996 through January 2021, and is
secured by the Westar hotel properties and improvements. The outstanding balance
at December 31, 1996 was $17,961,075.

Restricted cash includes cash retained by the mortgage servicer for payment
of taxes, insurance and debt service.

The mortgage note payable to Nomura Asset Capital Corporation does not
allow for prepayment of the debt until January 11, 2011, except by providing the
lender with U.S. obligations that produce payments which replicate the payment
obligations of the Company under the note. This restriction represents a
substantial prepayment penalty. On or after January 11, 2011, the loan can be
prepaid at any time with no prepayment penalty.

OTHER NOTES PAYABLE

Principal maturities of the mortgages and other notes payable at December
31, 1996, are as follows:

<TABLE>
<CAPTION>
MORTGAGE OTHER
NOTES NOTES TOTAL
----------- --------- ------------
<S> <C> <C> <C>
1997.................................. $ 257,582 $ 168,156 $ 425,738
1998.................................. 300,549 183,089 483,638
1999.................................. 2,920,239 111,335 3,031,574
2000.................................. 221,514 -- 221,514
2001.................................. 249,377 -- 249,377
Thereafter............................ 16,974,906 -- 16,974,906
----------- -------- -----------
$20,924,167 $ 462,580 $ 21,386,747
=========== ======== ===========
</TABLE>

Interest incurred during 1996 was $718,298, of which $132,850 was
capitalized. The Company paid interest totaling $532,596 during 1996.

The carrying value of the mortgage and other notes payable as of December
31, 1996 approximates fair value as the interest rate approximates market rate
for similar debt instruments.

5. INCOME TAXES

The Company accounts for income taxes using the liability method. Deferred
income taxes result from temporary differences between the carrying amounts of
assets for financial reporting purposes and the amounts used for income tax
purposes and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

The portion of the loss included in the accompanying financial statements
that was incurred by ESLP prior to its merger into the Company will be included
in a separate partnership tax return. The loss incurred by the Company
subsequent to the merger will be reflected in its corporate income tax return.

F-42
<PAGE> 165

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

The differences between the provision for income taxes ($0) and the amounts
computed by applying the statutory federal income tax rates to loss before
income taxes are:

<TABLE>
<S> <C>
Statutory rate applied to loss before income taxes............... $(294,578)
ESLP partnership loss............................................ 249,098
---------
(45,480)
Provision for valuation allowance................................ 45,480
---------
$ --
=========
The components of the Company's deferred taxes at December 31, 1996, are:
Deferred tax asset -- net operating loss carryforward............ $ 45,480
Valuation allowance.............................................. (45,480)
---------
Net deferred tax asset (liability)............................... $ --
=========
</TABLE>

At December 31, 1996, the Company has unused net operating loss
carryforwards of approximately $134,000 for income tax purposes, that expire in
the year 2011.

No tax payments were made in 1996.

6. RELATED PARTY TRANSACTIONS

Wyndham Management Corporation ("Wyndham") an affiliate of Crow,
administered and funded payroll and insurance benefits for all employees of the
Company through September 30, 1996 and continues to administer payroll for the
employees of the Studio Suites and Westar hotels. Payables to affiliates
includes $46,267 due to Wyndham at December 31, 1996, for reimbursement of
payroll and insurance expenditures. Payroll and insurance expenditures
reimbursed to Wyndham was $179,123 during 1996.

Wyndham is entitled to receive a management fee equal to 3% of gross
revenues, as defined, for management of the Company's hotels. Management fees
were $69,265 in 1996. Payables to affiliates includes $51,710 due to Wyndham at
December 31, 1996, for management fees and marketing fees.

Trammell Crow Residential (TCR), an affiliate of Crow, and Greystar Realty
Services (GRS), an affiliate of Greystar, have collectively agreed to develop up
to 60 hotel facilities for the Company, under an agreement that expires at the
earlier of the completion of the sixtieth hotel or December 31, 1998.
Development fees paid to TCR and GRS were $460,175 and $50,000, respectively,
during 1996.

Payables to affiliates includes $879,523, $28,420 and $126,353 due to TCR,
Wyndham, and Greystar, respectively, at December 31, 1996, for reimbursement of
construction costs and out-of-pocket expenditures incurred in conjunction with
the pursuit and acquisition of land and property.

7. STOCKHOLDERS' EQUITY

COMMON STOCKHOLDERS VOTING RIGHTS

Common stockholders are entitled to one vote for each share held on all
matters presented for a vote of stockholders. Stockholders are entitled to
receive pro rata, such dividends, if any, as may be declared by the Board of
Directors in their discretion from funds legally available. Upon liquidation or
dissolution, stockholders are entitled to receive pro rata, all of the remaining
assets of the Company available for distribution to its stockholders.

F-43
<PAGE> 166

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

ISSUANCE OF COMMON STOCK TO ESLP PARTNERS

On October 24, 1996, ESLP merged with and into the Company. The Company
issued 6,386,087 shares of common stock to the partners of ESLP in exchange for
their partnership interests. The cost basis of the partnership interests
acquired for stock was $19,267,358.

INITIAL PUBLIC OFFERING

On October 24, 1996, the Company completed an initial public offering of
4,325,000 shares of its common stock at a public offering price of $11.50 per
share (the "Offering"). The proceeds to the Company from the offering were
$45,394,875, net of offering expenses.

LONG-TERM INCENTIVE PLAN

The Company has adopted the 1996 Long-Term Incentive Plan (the "1996 Plan")
to attract and retain employees and consultants. Under the plan, options and
stock awards may be granted with respect to a total of not more than 1,250,000
shares of common stock, subject to antidilution and other adjustment provisions.
The options generally vest over a four-year period and may be exercised over a
period of 10 years from the date of grant, subject to the vesting provisions.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

On October 24, 1996, the Company granted options to acquire an aggregate of
511,250 shares of common stock to certain employees and Company advisors. The
exercise price for these options is the initial public offering price of $11.50.
The stock option grants include 336,250 shares granted to Company officers and
employees, 25,000 shares granted to advisors from Greystar, 55,000 shares
granted to advisors from TCR, 45,000 shares granted to advisors from Crow Realty
Investors, L.P., and 50,000 shares granted to advisors from Wyndham Hotel
Company. The options granted to advisors from TCR vested immediately and the
remaining stock options will vest ratably over a four-year period. No options
were exercised, forfeited or expired in 1996.

The effect of applying the fair value method prescribed by Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
to the Company's stock based awards to employees would have increased net loss
by $146,000 or $.01 per share. The fair value was estimated using the Black-
Scholes option-pricing model based on the weighted average market price at grant
date of $11.50 and the following weighted average assumptions: risk-free
interest rate of 6.12%, volatility of 10% and dividend yield of 0%.

COMMON STOCK AWARDS

In connection with the Offering, the Company granted 13,913 shares of
common stock under the Plan to certain employees and consultants of the Company.
As a result, $64,998 has been recorded to compensation expense and $34,995 has
been capitalized to property and equipment for stock granted to employees. In
addition, $60,007 has been recorded to offering costs for services provided by
consultants in connection with the Offering.

8. PROFIT SHARING AND SAVINGS PLAN

The Company has a 401(k) plan for all full-time employees. Employees may
contribute up to 15% of their gross pay, subject to certain limitations. The
Company's 401(k) plan was effective December 1, 1996.

F-44
<PAGE> 167

HOMEGATE HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

The Company matches 50% of the amount contributed by each employee, up to 6% of
the employee's gross pay. In 1996, expenses included $2,298 representing the
employer's matching contribution to the plan.

9. SUBSEQUENT EVENTS

Subsequent to December 31, 1996, the Company purchased three land sites for
an aggregate purchase price of $3,224,066. Additionally, the Company began
development on two more hotel facilities. Total expected development costs for
the two facilities are approximately $8,077,374.

10. QUARTERLY FINANCIAL DATA (UNAUDITED)

Unaudited summarized financial data by quarter for 1996 is as follows:

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues.................. $-- $ 24,803 $ 634,895 $ 2,029,296
Net loss........................ -- (239,070) (412,723) (214,614)
Pro forma loss per share........ -- (.02) (.04) (.02)
</TABLE>

F-45
<PAGE> 168

HOMEGATE HOSPITALITY, INC.

SCHEDULE III -- REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996

<TABLE>
<CAPTION>
COSTS CAPITALIZED
INITIAL COSTS SUBSEQUENT TO ACQUISITION
------------------------------------- ------------------------------------
BUILDINGS FURNITURE, BUILDINGS FURNITURE,
RELATED AND FIXTURES & AND FIXTURES & CONSTRUCTION
DESCRIPTION ENCUMBRANCES LAND IMPROV. EQUIPMENT IMPROV. EQUIPMENT IN PROGRESS
- ------------------------------------- ------------ ----------- ----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Studio Suites-Arlington, TX.......... $2,917,930 $ 825,000 $ 3,911,029 $ 191,090 $ 76,119 $ 244,106 $ 0
44th and Oak-Phoenix, AZ............. 45,162 1,310,000 0 0 0 0 2,340,741
Denver Tech.-Denver, CO.............. 750,000 0 0 0 0 881,210
Metro Center-Phoeniz, AZ............. 850,000 0 0 0 0 0
Overland Park-Kansas................. 1,200,000 0 0 0 0 353,701
Lenexa-Kansas City................... 800,000 0 0 0 0 225,173
Park Central-Dallas, TX.............. 1,075,000 0 0 0 0 358,551
I-10 and Chandler- Phoenix, AZ....... 1,550,000 0 0 0 0 197,056
Indianapolis Airport/Marion-
Indianapolis, IN................... 1,300,000 0 0 0 0 33,959
InnHome Towne Lake- Austin, TX....... 1,896,000 4,567,845 1,106,430 0 0 0
Westar-Irving........................ (a) 757,234 3,028,937 29,955 17,252 34,143 59,026
Westar-San Antonio Airport........... (a) 1,189,940 4,759,759 47,071 15,071 23,849 56,306
Westar-San Antonio Fiesta............ (a) 860,464 3,441,974 34,039 14,640 19,546 50,083
Westar-El Paso....................... (a) 1,249,135 4,995,780 49,406 15,026 26,569 30,051
Westar-Amarillo...................... (a) 864,963 3,441,974 34,039 14,720 22,107 37,296
----------- ----------- ---------- -------- -------- ----------
$16,473,296 $28,147,298 $1,492,030 $152,829 $ 370,320 $4,623,153
=========== =========== ========== ======== ======== ==========
</TABLE>

GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD

<TABLE>
<CAPTION>
BUILDINGS FURNITURE,
AND FIXTURES & CONSTRUCTION ACCUM. DATE OF
DESCRIPTION LAND IMPROV. EQUIPMENT IN PROGRESS TOTAL(C) DEPRES. CONSTRUC.
- --------------------------------------- ----------- ----------- ----------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Studio Suites-Arlington, TX............ $ 825,000 $ 3,987,148 $ 435,196 $ 0 $ 5,247,344 $ 88,831 1996
44th and Oak-Phoenix, AZ............... 1,310,000 0 0 2,340,741 3,650,741 0 06/96-12/96
Denver Tech.-Denver, CO................ 750,000 0 0 881,210 1,631,210 0 06/96-12/96
Metro Center-Phoeniz, AZ............... 850,000 0 0 0 850,000 0
Overland Park-Kansas................... 1,200,000 0 0 353,701 1,553,701 0 08/96-12/96
Lenexa-Kansas City..................... 800,000 0 0 225,173 1,025,173 0 08/96-12/96
Park Central-Dallas, TX................ 1,075,000 0 0 358,551 1,433,551 0 10/96-12/96
I-10 and Chandler- Phoenix, AZ......... 1,550,000 0 0 197,056 1,747,056 0 11/96-12/96
Indianapolis Airport/Marion-
Indianapolis, IN..................... 1,300,000 0 0 33,959 1,333,959 0 1/97
InnHome Towne Lake- Austin, TX......... 1,986,000 4,567,845 1,106,430 0 7,570,275 0 (b)
Westar-Irving.......................... 757,234 3,046,189 64,098 59,026 3,926,547 27,710 1985
Westar-San Antonio Airport............. 1,189,940 4,774,830 70,920 56,306 6,091,996 42,676 1986
Westar-San Antonio Fiesta.............. 860,494 3,456,614 53,585 50,083 4,420,776 30,908 1985
Westar-El Paso......................... 1,249,135 5,010,506 75,975 30,051 6,365,967 44,835 1986
Westar-Amarillo........................ 860,493 3,456,695 56,146 37,296 4,410,630 30,988 1985
----------- ----------- ---------- ---------- ---------- -------- -----------
$16,473,296 $28,300,127 $1,862,350 $4,623,153 $51,258,926 $265,948
=========== =========== ========== ========== ========== ========
</TABLE>

F-46
<PAGE> 169

<TABLE>
<CAPTION>
DEPRECIABLE
DATE LIVES IN
DESCRIPTION ACQUIRED YEARS
- -------------------------------------------------------------------------------------------- -------- -----------
<S> <C> <C>
Studio Suites-Arlington, TX................................................................. 05/31/96 7 to 40
44th and Oak-Phoenix, AZ.................................................................... 02/15/96 7 to 40
Denver Tech.-Denver, CO..................................................................... 05/24/96 7 to 40
Metro Center-Phoeniz, AZ.................................................................... 7 to 40
Overland Park-Kansas........................................................................ 08/09/96 7 to 40
Lenexa-Kansas City.......................................................................... 07/22/96 7 to 40
Park Central-Dallas, TX..................................................................... 09/30/96 7 to 40
I-10 and Chandler- Phoenix, AZ.............................................................. 11/05/96 7 to 40
Indianapolis Airport/Marion- Indianapolis, IN............................................... 12/31/96 7 to 40
InnHome Towne Lake- Austin, TX.............................................................. 12/31/96 7 to 40
Westar-Irving............................................................................... 09/06/96 7 to 40
Westar-San Antonio Airport.................................................................. 09/06/96 7 to 40
Westar-San Antonio Fiesta................................................................... 09/06/96 7 to 40
Westar-El Paso.............................................................................. 09/06/96 7 to 40
Westar-Amarillo............................................................................. 09/06/96 7 to 40
</TABLE>

- ---------------
(a) These properties are collateral for the $18,100,000 loan from Nomura Asset
Capital Corporation dated 12/29/95. The outstanding balance of the loan at
December 31, 1996 is $17,961,075.

(b) This property was built in the 1960's as a dormitory for the University of
Texas. This property was renovated in late 1994/early 1995 as an extended-
stay hotel facility.

NOTES TO SCHEDULE III -- REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Real Estate Investments:
Balance, beginning of period............................................... $ --
Additions during period:
Purchase of hotel properties............................................... 37,277,624
Purchase of land........................................................... 8,835,000
Improvements............................................................... 5,146,302
-----------
Balance, end of period..................................................... $ 51,258,926
-----------
</TABLE>

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Accumulated Depreciation:
Balance, beginning of period............................................... $ --
Additions during period:
Depreciation............................................................... 265,948
--------
Balance, end of period..................................................... $ 265,948
--------
</TABLE>

F-47
<PAGE> 170

ANNEX A

AGREEMENT AND PLAN
OF MERGER
DATED AS OF
JULY 25, 1997
AMONG
PRIME HOSPITALITY CORP.
PH SUB CORPORATION
AND
HOMEGATE HOSPITALITY, INC.
<PAGE> 171

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER................................................................... 1
Section 1.1 The Merger............................................................. 1
Section 1.2 Effective Date of the Merger........................................... 1
ARTICLE II THE SURVIVING CORPORATION................................................... 1
Section 2.1 Certificate of Incorporation........................................... 1
Section 2.2 By-Laws................................................................ 1
Section 2.3 Board of Directors; Officers........................................... 1
Section 2.4 Effects of Merger...................................................... 2
ARTICLE III CONVERSION OF SHARES....................................................... 2
Section 3.1 Exchange Ratio......................................................... 2
Section 3.2 Parent to Make Certificates Available.................................. 2
Section 3.3 Dividends; Stock Transfer Taxes........................................ 2
Section 3.4 No Fractional Shares................................................... 3
Section 3.5 Stock Options.......................................................... 3
Section 3.6 Stockholders' Meetings................................................. 3
Section 3.7 Closing of the Company's Transfer Books................................ 4
Section 3.8 Assistance in Consummation of the Merger............................... 4
Section 3.9 Closing................................................................ 4
Section 3.10 Transfer Taxes......................................................... 4
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT.................................... 4
Section 4.1 Organization and Qualification......................................... 4
Section 4.2 Capitalization......................................................... 4
Section 4.3 Subsidiaries........................................................... 5
Section 4.4 Authorization; Binding Agreement....................................... 5
Section 4.5 No Violations.......................................................... 5
Section 4.6 Governmental Approvals................................................. 5
Section 4.7 Reports and Financial Statements....................................... 5
Section 4.8 Absence of Certain Changes or Events................................... 6
Section 4.9 Litigation............................................................. 6
Section 4.10 Parent Action.......................................................... 6
Section 4.11 Financial Advisor...................................................... 6
Section 4.12 Compliance with Applicable Laws........................................ 7
Section 4.13 Liabilities............................................................ 7
Section 4.14 No Material Adverse Effect............................................. 7
Section 4.15 Accounting Matters..................................................... 7
Section 4.16 Disclosure............................................................. 7
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ 7
Section 5.1 Organization and Qualification......................................... 7
Section 5.2 Capitalization......................................................... 8
Section 5.3 Subsidiaries........................................................... 8
Section 5.4 Authorization; Binding Agreement....................................... 8
Section 5.5 No Violations.......................................................... 9
Section 5.6 Governmental Approvals................................................. 9
Section 5.7 Reports and Financial Statements....................................... 9
Section 5.8 Absence of Certain Changes or Events................................... 9
Section 5.9 Litigation............................................................. 10
</TABLE>

i
<PAGE> 172

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 5.10 Employee Benefit Plans................................................. 10
Section 5.11 Labor Matters.......................................................... 12
Section 5.12 Company Action......................................................... 12
Section 5.13 Financial Advisor...................................................... 12
Section 5.14 Compliance with Applicable Laws........................................ 12
Section 5.15 Liabilities............................................................ 13
Section 5.16 Taxes.................................................................. 13
Section 5.17 Certain Agreements..................................................... 13
Section 5.18 Contracts.............................................................. 13
Section 5.19 Trademarks............................................................. 14
Section 5.20 No Material Adverse Effect............................................. 14
Section 5.21 Accounting Matters..................................................... 14
Section 5.22 Required Vote of Company Common Stock.................................. 14
Section 5.23 Real Property.......................................................... 14
Section 5.24 Hotel Zoning; Improvements............................................. 15
Section 5.25 Environmental Matters.................................................. 15
Section 5.26 Development Agreement.................................................. 16
Section 5.27 Insurance.............................................................. 16
Section 5.28 Disclosure............................................................. 16
ARTICLE VI REPRESENTATIONS AND WARRANTIES REGARDING SUB................................ 16
Section 6.1 Organization........................................................... 16
Section 6.2 Capitalization......................................................... 16
Section 6.3 Authority Relative to this Agreement................................... 16
ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER..................................... 17
Section 7.1 Conduct of Business by the Company Pending the Merger.................. 17
Section 7.2 Conduct of Business by Parent Pending the Merger....................... 18
Section 7.3 Conduct of Business of Sub............................................. 18
ARTICLE VIII ADDITIONAL AGREEMENTS..................................................... 19
Section 8.1 Access and Information................................................. 19
Section 8.2 Registration Statement/Proxy Statement................................. 19
Section 8.3 Affiliate and Pooling Agreements....................................... 19
Section 8.4 Stock Exchange Listing................................................. 20
Section 8.5 Employee Plans......................................................... 20
Section 8.6 Indemnification and Insurance.......................................... 20
Section 8.7 Board Representation................................................... 21
Section 8.8 Additional Agreements.................................................. 21
Section 8.9 Alternative Proposals.................................................. 21
Section 8.10 Advice of Changes; SEC Filings......................................... 22
Section 8.11 Letter of the Company's Accountants.................................... 22
Section 8.12 Letter of Parent and Sub's Accountants................................. 22
Section 8.13 Tax Certificate........................................................ 22
ARTICLE IX CONDITIONS PRECEDENT........................................................ 22
Section 9.1 Conditions to Each Party's Obligation to Effect the Merger............. 22
Section 9.2 Conditions to Obligation of the Company to Effect the Merger........... 23
Section 9.3 Conditions to Obligations of Parent and Sub to Effect the Merger....... 24
ARTICLE X TERMINATION, AMENDMENT AND WAIVER............................................ 24
Section 10.1 Termination by Mutual Consent.......................................... 24
Section 10.2 Termination by Either Parent or the Company............................ 24
</TABLE>

ii
<PAGE> 173

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 10.3 Termination by the Company............................................. 25
Section 10.4 Termination by Parent.................................................. 25
Section 10.5 Effect of Termination and Abandonment.................................. 25
ARTICLE XI GENERAL PROVISIONS.......................................................... 26
Section 11.1 Non-Survival of Representations, Warranties and Agreements............. 26
Section 11.2 Notices................................................................ 26
Section 11.3 Fees and Expenses...................................................... 27
Section 11.4 Publicity.............................................................. 27
Section 11.5 Specific Performance................................................... 27
Section 11.6 Assignment; Binding Effect............................................. 27
Section 11.7 Entire Agreement....................................................... 27
Section 11.8 Amendment.............................................................. 28
Section 11.9 Governing Law.......................................................... 28
Section 11.10 Counterparts........................................................... 28
Section 11.11 Headings and Table of Contents......................................... 28
Section 11.12 Interpretation......................................................... 28
Section 11.13 Waivers................................................................ 28
Section 11.14 Incorporation of Exhibits.............................................. 28
Section 11.15 Severability........................................................... 28
Section 11.16 Certain Definitions.................................................... 28
Section 11.17 Waiver of Jury Trial................................................... 29
Section 11.18 Jurisdiction; Service of Process....................................... 29

Schedules:
3.5(a) Stock Options
4.1 Organization and Qualification
5.1 Organization and Qualification
5.3 Subsidiaries
5.5 No Violations
5.8 Absence of Certain Changes or Events
5.9 Litigation
5.10 Employee Benefit Plans
5.13 Financial Advisor
5.16 Taxes
5.17 Certain Agreements
5.18 Contracts
5.19 Trademarks
5.23 Real Property
5.24 Hotel Zoning; Improvements
5.25 Environmental Matters
5.26 Development Agreement
7.1 Conduct of Business by the Company Pending the Merger
8.5 Employee Plans
</TABLE>

iii
<PAGE> 174

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of July 25,
1997, by and among Prime Hospitality Corp., a Delaware corporation ("Parent"),
PH Sub Corporation, a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and Homegate Hospitality, Inc., a Delaware corporation (the
"Company"):

W I T N E S S E T H:

WHEREAS, Parent and the Company desire to effect a business combination by
means of the merger of Sub with and into the Company (the "Merger");

WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;

WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests"; and

WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").

NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:

ARTICLE I

THE MERGER

Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged
into the Company and the separate existence of Sub shall thereupon cease, and
the Company, as the corporation surviving the Merger (the "Surviving
Corporation"), shall by virtue of the Merger continue its corporate existence
under the laws of the State of Delaware.

Section 1.2 Effective Date of the Merger. The Merger shall become
effective at the date and time (the "Effective Date") when a properly executed
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate of Merger.

ARTICLE II

THE SURVIVING CORPORATION

Section 2.1 Certificate of Incorporation. The Certificate of
Incorporation of the Company as in effect on the Effective Date shall be the
Certificate of Incorporation of the Surviving Corporation, provided that such
Certificate of Incorporation shall be amended and restated immediately following
the Merger in a form satisfactory to Parent and the Surviving Corporation.

Section 2.2 By-Laws. The By-laws of the Sub as in effect on the Effective
Date shall be the By-laws of the Surviving Corporation, and thereafter may be
amended in accordance with its terms and as provided by law and this Agreement.

Section 2.3 Board of Directors; Officers. The directors of Sub
immediately prior to the Effective Date shall be the directors of the Surviving
Corporation, and the officers of the Company immediately prior to the Effective
Date shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly elected and qualified.

A-1
<PAGE> 175

Section 2.4 Effects of Merger. The Merger shall have the effects set
forth in Section 259 of the Delaware General Corporation Law (the "DGCL").

ARTICLE III

CONVERSION OF SHARES

Section 3.1 Exchange Ratio. On the Effective Date, by virtue of the
Merger and without any action on the part of any holder of any common stock,
$.01 par value, of the Company ("Company Common Stock"):

(a) All shares of Company Common Stock which are held by the Company
or any Subsidiary (as defined in Section 11.16) of the Company, and any
shares of Company Common Stock owned by Parent, Sub or any other Subsidiary
of Parent, shall be canceled.

(b) Subject to Section 3.4, each remaining outstanding share of
Company Common Stock shall be converted into 0.6073 (the "Exchange Ratio")
fully paid and nonassessable shares of the common stock, $.01 par value, of
Parent ("Parent Common Stock").

(c) In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or
rights issued in respect of, Parent Common Stock or Company Common Stock
after the date hereof, the Exchange Ratio shall be adjusted accordingly.

(d) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of common
stock of the Surviving Corporation.

Section 3.2 Parent to Make Certificates Available.

(a) Prior to the Effective Date, Parent shall select an Exchange Agent,
which shall be Parent's transfer agent or such other person or persons
reasonably satisfactory to the Company, to act as Exchange Agent for the Merger
(the "Exchange Agent"). As soon as practicable after the Effective Date, Parent
shall make available, and each holder of Company Common Stock will be entitled
to receive, upon surrender to the Exchange Agent of one or more certificates
("Certificates") representing such stock for cancellation, certificates
representing the number of shares of Parent Common Stock into which such shares
are converted in the Merger and cash in consideration of fractional shares as
provided in Section 3.4 (the "Share Consideration"). Parent Common Stock into
which Company Common Stock shall be converted in the Merger shall be deemed to
have been issued on the Effective Date.

(b) Any holder of shares of Company Common Stock who has not exchanged his
Certificates for Parent Common Stock in accordance with subsection (a) within 12
months after the Effective Date shall have no further claim upon the Exchange
Agent and shall thereafter look only to Parent and the Surviving Corporation for
payment in respect of his shares of Company Common Stock. Until so surrendered,
Certificates shall represent solely the right to receive the Share
Consideration.

Section 3.3 Dividends; Stock Transfer Taxes. No dividends or other
distributions that are declared or made on Parent Common Stock will be paid to
persons entitled to receive certificates representing Parent Common Stock
pursuant to this Agreement until such persons surrender their Certificates
representing Company Common Stock. Upon such surrender, there shall be paid to
the person in whose name the certificates representing such Parent Common Stock
shall be issued (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Date theretofore
payable with respect to such whole shares of Parent Common Stock and not paid,
less the amount of any withholding taxes which may be required thereon, and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Date but prior to surrender and a payment
date subsequent to surrender payable with respect to such whole shares of Parent
Common Stock, less the amount of any withholding taxes which may be required
thereon. In no event shall the person entitled to receive such dividends be
entitled to receive interest on such dividends. In the event that any
certificates representing shares of Parent Common Stock are to be issued in a
name other than that in which the Certificates surrendered in exchange therefor
are registered, it shall be a condition of such exchange that the Certificate or

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Certificates so surrendered shall be properly endorsed or be otherwise in proper
form for transfer and that the person requesting such exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than that of
the registered holder of the Certificate or Certificates surrendered, or shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to a holder of shares of Company Common
Stock for any shares of Parent Common Stock or dividends thereon delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar laws. In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the shares
of Parent Common Stock and cash in lieu of fractional shares, and unpaid
dividends and distributions on shares of Parent Common Stock as provided in this
Section 3.3, deliverable in respect thereof pursuant to this Agreement.

Section 3.4 No Fractional Shares. No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates pursuant to Section 3.2. Notwithstanding any other
provision of this Agreement, each holder of Company Common Stock exchanged
pursuant to the Merger who would otherwise be entitled to receive a fraction of
a share of Parent Common Stock (after taking into account all Certificates
delivered by such holder) shall receive, in lieu thereof, cash in an amount
equal to such fractional part of a share of Parent Common Stock multiplied by
the per-share value of the Parent Common Stock, with such per-share value being
deemed equal to the average composite closing sale price for Parent Common Stock
on the New York Stock Exchange (the "NYSE") for the 10 business days next
preceding the Effective Date, as reported in each case in the following day's
edition of The Wall Street Journal.

Section 3.5 Stock Options. (a) Each of the Company's stock option plans
(the "Option Plans"), and options to acquire shares of Company Common Stock
outstanding on the date hereof, are set forth in Section 3.5(a) of the Company
Disclosure Schedule (as defined in Section 5.1). Each Option Plan and all such
options which are outstanding immediately prior to the Effective Date, whether
vested or unvested (each, an "Option" and collectively, the "Options"), shall be
assumed by Parent at the Effective Date, and each such Option shall become an
option to purchase a number of shares of Parent Common Stock (a "Substitute
Option") equal to the number of shares of Company Common Stock subject to such
Option multiplied by the Exchange Ratio (rounded to the nearest whole share).
The per share exercise price for each Substitute Option shall be the current
exercise price per share of Company Common Stock divided by the Exchange Ratio
(rounded up to the nearest full cent), and each Substitute Option otherwise
shall be subject to all of the other terms and conditions of the original Option
to which it relates. Prior to the Effective Date, the Company shall take such
additional actions as are necessary under applicable law and the applicable
agreements and Option Plans to ensure that each outstanding Option shall, from
and after the Effective Date, represent only the right to purchase, upon
exercise, shares of Parent Common Stock. There shall not occur as a result of
the Merger any acceleration of vesting or exercisability with respect to any
Option, or any lapse of vesting restrictions with respect to any share of
restricted stock, other than pursuant to the terms of the original grant
agreement, and any such acceleration shall occur without the exercise of
discretion by any person or entity.

(b) As soon as reasonably practicable after the Effective Date, Parent
shall cause to be included under a registration statement on Form S-8 of Parent
all shares of Parent Common Stock which are subject to Substitute Options, and
shall maintain the effectiveness of such registration statement until all
Substitute Options have been exercised, expired or forfeited.

Section 3.6 Stockholders' Meetings. Subject to Section 8.9, the Company
shall take all action necessary, in accordance with applicable law and its
Certificate of Incorporation and By-laws, to convene a special meeting of the
holders of Company Common Stock (the "Company Meeting") as promptly as
practicable for the purpose of considering and taking action upon this
Agreement. Subject to Section 8.9, the

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Board of Directors of the Company will recommend that holders of Company Common
Stock vote in favor of and approve the Merger and the adoption of the Agreement
at the Company Meeting.

Section 3.7 Closing of the Company's Transfer Books. At the Effective
Date, the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made thereafter. In the event that,
after the Effective Date, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for Parent Common Stock and/or
cash as provided in Sections 3.1(b) and 3.4.

Section 3.8 Assistance in Consummation of the Merger. Subject to Section
8.9, each of Parent, Sub and the Company shall provide all reasonable assistance
to, and shall cooperate with, each other to bring about the consummation of the
Merger as soon as possible in accordance with the terms and conditions of this
Agreement. Parent shall cause Sub to perform all of its obligations in
connection with this Agreement.

Section 3.9 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place (i) at the offices of Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
at 9:00 A.M. local time on the first business day following the day on which the
last of the conditions set forth in Article IX (other than those that can only
be fulfilled on the Effective Date) is fulfilled or waived or (ii) at such other
time and place as Parent and the Company shall agree in writing.

Section 3.10 Transfer Taxes. Parent and Company shall cooperate in the
preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary or
other taxes and any other fees and similar taxes which become payable in
connection with the Merger (other than transfer or stamp taxes payable in
respect of transfers pursuant to Section 3.3) (collectively, "Transfer Taxes").
From and after the Effective Date, Parent shall pay or cause to be paid, without
deduction or withholding from any amounts payable to the holders of Company
Common Stock, all Transfer Taxes.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PARENT

Parent represents and warrants to the Company as follows:

Section 4.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not, individually or in the aggregate, have a
material adverse effect on the business, properties, assets, prospects,
condition (financial or otherwise), liabilities or results of operations of
Parent and its Subsidiaries taken as a whole (a "Parent Material Adverse
Effect"). Complete and correct copies as of the date hereof of the Certificate
of Incorporation and By-laws of Parent have been delivered to the Company as
Section 4.1 of the disclosure schedule delivered by Parent to the Company in
connection with this Agreement (the "Parent Disclosure Schedule"). The
Certificate of Incorporation and By-laws of Parent and each of its Subsidiaries
are in full force and effect. Neither Parent nor any of its Subsidiaries is in
violation of any provision of its respective Certificate of Incorporation or
By-laws.

Section 4.2 Capitalization. The authorized capital stock of Parent
consists of 75,000,000 shares of Parent Common Stock and 20,000,000 shares of
preferred stock, $.10 par value. As of March 31, 1997, 39,926,662 shares of
Parent Common Stock were issued and outstanding, and no shares of preferred
stock were issued and outstanding. All of the shares of Parent Common Stock
issuable in accordance with this Agreement in exchange for Company Common Stock
at the Effective Date in accordance with this Agreement will be, when so issued,
duly authorized, validly issued, fully paid and nonassessable and shall be
delivered free and clear of all liens, claims, charges and encumbrances of any
kind or nature whatsoever. As of July 23, 1997, except for (i) options to
acquire an aggregate of 1,979,499 shares of Parent Common Stock

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pursuant to the 1995 Employee Stock Option Plan, the 1995 Non-Employee Director
Stock Option Plan and the 1992 Stock Option and Performance Incentive Plans,
(ii) warrants to acquire an aggregate of 854,713 shares of Parent Common Stock
and (iii) $75,000,000 aggregate principal amount of Convertible Subordinated
Notes due 2002, agreements or commitments presently outstanding obligating
Parent to issue, deliver or sell shares of its capital stock or debt securities,
or obligating Parent to grant, extend or enter into any such option, warrant,
call or other such right, agreement or commitment.

Section 4.3 Subsidiaries. Each Subsidiary of Parent is a corporation,
limited partnership or limited liability company duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation and has the corporate, partnership or other power to
carry on its business as it is now being conducted or currently proposed to be
conducted. Each Subsidiary of Parent is duly qualified as a foreign corporation,
partnership or limited liability company to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified, when taken together with
all such failures, has not had, or would not reasonably be expected to have, a
Parent Material Adverse Effect.

Section 4.4 Authorization; Binding Agreement. Parent has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by Parent's Board of
Directors. No other corporate proceedings on the part of Parent (or its
stockholders) are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement constitutes a valid and binding obligation
of Parent enforceable against Parent in accordance with its terms.

Section 4.5 No Violations. Parent is not subject to or obligated under
(i) any charter, by-law, indenture or other loan document provision or (ii) any
other contract, license, franchise, permit, order, decree, concession, lease,
instrument, judgment, statute, law, ordinance, rule or regulation applicable to
Parent or any of its Subsidiaries or their respective properties or assets,
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation, modification or acceleration of any
obligation or the loss of a material benefit, by its entering into and
performing this Agreement, other than, in the case of clause (ii) only, any
breaches, violations, defaults, terminations, cancellations, modifications,
accelerations or losses which, either singly or in the aggregate, have not had,
or would not reasonably be expected to have, a Parent Material Adverse Effect or
prevent or unreasonably delay the consummation of the transactions contemplated
hereby.

Section 4.6 Governmental Approvals. Except in connection or in compliance
with the provisions of the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or approval
of, any public body or authority is necessary for the consummation by Parent of
the Merger or the other transactions contemplated by this Agreement other than
filings, registrations, authorizations, consents or approvals the failure of
which to make or obtain have not had, or would not reasonably be expected to
have, either singly or in the aggregate, a Parent Material Adverse Effect or
prevent the consummation of the transactions contemplated hereby or thereby.

Section 4.7 Reports and Financial Statements. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report on
Form 10-K for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission (the "Commission"), (ii) Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, as filed with the Commission, (iii) proxy
statements related to all meetings of its stockholders (whether annual or
special) since January 1, 1996, and (iv) all other reports or registration
statements filed by Parent with the Commission since January 1, 1996 (except for
preliminary material in the case of clauses (iii) and (iv) above) (clauses (i)
through (iv) being referred to herein collectively as the "Parent SEC Reports").
As of their respective dates, the Parent SEC Reports complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the Commission thereunder
applicable to such Parent SEC Reports. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the

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circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated financial
statements of Parent included in the Parent SEC Reports comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto. The consolidated
financial statements included in the Parent SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto); present fairly, in all
material respects, the consolidated financial position of Parent and its
Subsidiaries as at the dates thereof and the consolidated results of their
operations and consolidated cash flows for the periods then ended subject, in
the case of the unaudited interim consolidated financial statements, to normal
year-end audit adjustments, any other adjustments described therein and the fact
that certain information and notes have been condensed or omitted in accordance
with the Exchange Act and the rules promulgated thereunder; and are in
accordance with the books of account and records of the Parent and its
Subsidiaries.

Section 4.8 Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports and as contemplated by this Agreement, since December 31,
1996 through the date hereof, Parent and its Subsidiaries have conducted their
business only in the ordinary and usual course, and there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
individually or in the aggregate that has had, or would reasonably be expected
to have, a Parent Material Adverse Effect; (ii) any material damage, destruction
or loss, whether or not covered by insurance; (iii) any investment by Parent or
any of its Subsidiaries in any corporation, partnership or other entity in
excess of $25,000,000 in the aggregate; (iv) any sale, disposition or other
transfer of assets or properties of Parent or any of its Subsidiaries (other
than in the ordinary course of business consistent with past practice) in excess
of $15,000,000 in the aggregate; (v) the incurrence or guarantee of any
indebtedness (other than in the ordinary course of business consistent with past
practice) in excess of $5,000,000 in the aggregate; (vi) any entry into any
other commitment or transaction material to Parent and its Subsidiaries taken as
a whole (other than in the ordinary course of business consistent with past
practice); (vii) any declaration, setting aside or payment of any dividend or
distribution (whether in cash, stock or property) with respect to its capital
stock; (viii) any change in its accounting principles, practices or methods;
(ix) any split, combination or reclassification of any of Parent's capital stock
or the issuance or authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for, shares of Parent's capital stock;
(x) any repurchase or redemption with respect to its capital stock; (xi) any
revaluation by Parent of any of its assets (including, without limitation, the
write-off of notes or accounts receivable) in excess of $500,000 in the
aggregate; or (xii) any agreement (whether or not in writing), arrangement or
understanding to do any of the foregoing.

Section 4.9 Litigation. Except as disclosed in Parent's Annual Report on
Form 10-K for the year ended December 31, 1996, or the Parent's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997, there is no suit, action or
proceeding pending or, to the knowledge of Parent, threatened against Parent or
any of its Subsidiaries which, either alone or in the aggregate, would
reasonably be expected to have a Parent Material Adverse Effect, nor is there
any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against Parent or any of its Subsidiaries having, or which would reasonably be
expected to have, either alone or in the aggregate, a Parent Material Adverse
Effect.

Section 4.10 Parent Action. The Board of Directors of Parent (at a
meeting duly called and held) has by the requisite vote of all directors present
(a) determined that this Agreement is advisable and in the best interests of
Parent and its stockholders and (b) approved the Merger in accordance with the
provisions of Section 251 of the DGCL.

Section 4.11 Financial Advisor. Parent represents and warrants that,
except for Montgomery Securities, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent or any of its Subsidiaries.

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Section 4.12 Compliance with Applicable Laws. Parent and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders and approvals of all
courts, administrative agencies or commissions or other governmental authorities
or instrumentalities, domestic or foreign (each, a "Governmental Entity")
necessary in connection with the conduct of their business (the "Parent
Permits"), except for such permits, licenses, variances, exemptions, orders and
approvals the failure of which to hold have not had, or would not reasonably be
expected to have, either singly or in the aggregate, a Parent Material Adverse
Effect. The Parent and its Subsidiaries are in compliance with the terms of the
Parent Permits, except for such failures to comply which, singly or in the
aggregate, have not had, or would not reasonably be expected to have, a Parent
Material Adverse Effect. The businesses of Parent and its Subsidiaries are not
being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for violations which individually or in the
aggregate have not had, or would not reasonably be expected to have, a Parent
Material Adverse Effect. No investigation or review by any Governmental Entity
with respect to Parent or any of its Subsidiaries is pending or, to the
knowledge of Parent, threatened, nor has any Governmental Entity indicated an
intention to conduct the same, other than those the outcome of which have not
had, or would not reasonably be expected to have, either singly or in the
aggregate, a Parent Material Adverse Effect.

Section 4.13 Liabilities. Since the date of the latest consolidated
balance sheet of Parent contained in the Parent SEC Reports through the date
hereof, neither Parent nor any of its Subsidiaries has incurred any material
liabilities or obligations (absolute, accrued, contingent or otherwise) of the
type that is required to be reflected or reserved against in a consolidated
balance sheet of Parent and its Subsidiaries, or in the notes thereto, prepared
in accordance with generally accepted accounting principles, other than
liabilities incurred in the ordinary course of business and liabilities which
are fully disclosed or provided for in the most recent Parent SEC Reports. To
the knowledge of Parent, there is no basis for any contingent or unknown
liability of any nature against Parent or its Subsidiaries, which has had, or
would reasonably be expected to have, either singly or in the aggregate, a
Parent Material Adverse Effect, other than as reflected in the Parent SEC
Reports.

Section 4.14 No Material Adverse Effect. Except as disclosed in the
Parent SEC Reports, Parent is not aware of any fact or facts which has or have
had, or would reasonably be expected to have, either singly or in the aggregate,
a Parent Material Adverse Effect.

Section 4.15 Accounting Matters. Neither Parent nor, to its knowledge,
any of its affiliates, has through the date hereof, taken or agreed to take any
action that would prevent the Company from accounting for the business
combination to be effected by the Merger as a "pooling of interests" in
accordance with Accounting Principles Board Opinion No. 16, the interpretive
releases issued pursuant thereto and the pronouncements of the Commission. To
the knowledge of Parent, Parent has not taken any action which would prevent the
Merger from constituting a reorganization within the meaning of Section 368(a)
of the Code.

Section 4.16 Disclosure. No representation or warranty by Parent in this
Agreement, and no schedule or certificate delivered by Parent and furnished to
the Company pursuant hereto, or in connection with the transactions contemplated
hereby, is false and misleading in any material respect or contains any material
misstatement of fact or omits to state any material facts required to be stated
to make such information not misleading.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Parent and Sub as follows:

Section 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except

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where the failure to be so qualified will not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, prospects,
condition (financial or otherwise), liabilities or results of operations of the
Company and its Subsidiaries taken as a whole (a "Company Material Adverse
Effect"). Complete and correct copies of the Certificate of Incorporation and
By-laws of the Company and each of its Subsidiaries have been delivered to
Parent as Section 5.1 of the disclosure schedule delivered by the Company to
Parent in connection with this Agreement (the "Company Disclosure Schedule").
The Certificate of Incorporation and By-laws of the Company and each of its
Subsidiaries are in full force and effect. Neither the Company nor any of its
Subsidiaries is in violation of any provision of its respective Certificate of
Incorporation or By-laws.

Section 5.2 Capitalization. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock and 5,000,000 shares of
preferred stock, $.01 par value. As of the date hereof, 10,725,000 shares of
Company Common Stock were issued and outstanding, and no shares of preferred
stock were issued and outstanding. There are no bonds, debentures, notes or
other indebtedness issued and outstanding having the right to vote, or which are
convertible into or exercisable for securities having the right to vote, on any
matters on which the Company's shareholders may vote. Except for options to
acquire 641,250 shares of Company Common Stock pursuant to the Company's 1996
Long Term Incentive Plan (the "1996 Plan"), there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating the Company to issue, deliver or sell shares of its capital stock or
debt securities, or obligating the Company to grant, extend or enter into any
such option, warrant, call or other such right, agreement or commitment. All of
the shares of Company Common Stock outstanding at the Effective Date will be
duly authorized, validly issued, fully paid and nonassessable. After the
Effective Date, the Surviving Corporation will have no obligation to issue,
transfer or sell any shares of capital stock of the Company or the Surviving
Corporation pursuant to any Company Employee Benefit Plan (as defined in Section
5.10).

Section 5.3 Subsidiaries. The only Subsidiaries of the Company are
disclosed in Section 5.3 of the Company Disclosure Schedule. Each Significant
Subsidiary (as such term is defined in Rule 1-02 of Regulation S-X under the
Securities Act) ("Significant Subsidiary") of the Company has been named in the
Company SEC Reports (as hereinafter defined). Each Subsidiary of the Company is
a corporation or limited partnership duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or formation
and has the corporate or partnership power to carry on its business as it is now
being conducted or currently proposed to be conducted. Each Subsidiary of the
Company is duly qualified as a foreign corporation or partnership to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified, when
taken together with all such failures, has not had, or would not reasonably be
expected to have, a Company Material Adverse Effect. Section 5.3 of the Company
Disclosure Schedule contains, with respect to each Subsidiary of the Company,
its name and jurisdiction of incorporation and, with respect to each Subsidiary
that is not wholly owned, the number of issued and outstanding shares of capital
stock and the number of shares of capital stock owned by the Company or a
Subsidiary. All the outstanding shares of capital stock of each Subsidiary of
the Company are validly issued, fully paid and nonassessable, and those owned by
the Company or by a Subsidiary of the Company are owned free and clear of any
liens, claims or encumbrances. There are no existing options, warrants, calls or
other rights, agreements or commitments of any character to which the Company or
any of its Subsidiaries is a party relating to the issued or unissued capital
stock or other securities of any of the Subsidiaries of the Company. Except as
set forth in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, the Company does not directly or indirectly own any interest
in any other corporation, partnership, joint venture or other business
association or entity.

Section 5.4 Authorization; Binding Agreement. The Company has the
corporate power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Company's
Board of Directors. Except for the approval of the holders of not less than
two-thirds of the outstanding shares of Company Common Stock, no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the transactions contemplated hereby. This Agreement constitutes a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.

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Section 5.5 No Violations. Except as set forth in Section 5.5 of the
Company Disclosure Schedule, the Company is not subject to or obligated under
(i) any charter, by-law, indenture or other loan document provision or (ii) any
other contract, license, franchise, permit, order, decree, concession, lease,
instrument, judgment, statute, law, ordinance, rule or regulation applicable to
the Company or any of its Subsidiaries or their respective properties or assets,
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation, modification or acceleration of any
obligation or the loss of a material benefit, by its entering into and
performing this Agreement, other than, in the case of clause (ii) only, any
breaches, violations, defaults, terminations, cancellations, modifications,
accelerations or losses which, either singly or in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect or prevent or
unreasonably delay the consummation of the transactions contemplated hereby.

Section 5.6 Governmental Approvals. Except in connection or in compliance
with the provisions of the Securities Act, the Exchange Act, and the
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by the Company of the
Merger or the other transactions contemplated hereby, other than filings,
registrations, authorizations, consents or approvals the failure of which to
make or obtain have not had, or would not reasonably be expected to have, either
singly or in the aggregate, a Company Material Adverse Effect or prevent the
consummation of the transactions contemplated hereby or thereby.

Section 5.7 Reports and Financial Statements. The Company has previously
furnished Parent with true and complete copies of its (i) Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the Commission, (ii)
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, as filed
with the Commission, (iii) proxy statements related to all meetings of its
shareholders (whether annual or special) since October 24, 1996 and (iv) all
other reports or registration statements filed by the Company with the
Commission since October 24, 1996 (except for preliminary material in the case
of clauses (iii) and (iv) above) (clauses (i) through (iv) being referred to
herein collectively as the "Company SEC Reports"). As of their respective dates,
the Company SEC Reports complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such Company SEC Reports.
As of their respective dates, the Company SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated financial
statements of the Company included in the Company SEC Reports comply in all
material respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto. The consolidated
financial statements included in the Company SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto); present fairly, in all
material respects, the consolidated financial position of the Company and its
Subsidiaries as at the dates thereof and the consolidated results of their
operations and consolidated cash flow for the periods then ended subject, in the
case of the unaudited interim consolidated financial statements, to normal
year-end audit adjustments and any other adjustments described therein and the
fact that certain information and notes have been condensed or omitted in
accordance with the Exchange Act and the rules promulgated thereunder; and are
in accordance with the books of account and records of the Company and its
Subsidiaries.

Section 5.8 Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports filed prior to the date hereof, as contemplated by this
Agreement, for changes permitted by this Agreement or as set forth in Section
5.8 of the Company Disclosure Schedule, since December 31, 1996, the Company and
its Subsidiaries have conducted their business only in the ordinary and usual
course, and there has not been (i) any transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) individually or in the aggregate that has had,
or would reasonably be expected to have, a Company Material Adverse Effect; (ii)
any material damage, destruction or loss, whether or not covered by insurance;
(iii) any investment by the Company or any of its Subsidiaries in

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any corporation, partnership or other entity in excess of $250,000 in the
aggregate; (iv) any sale, disposition or other transfer of assets or properties
of the Company or any of its Subsidiaries (other than in the ordinary course of
business consistent with past practice) in excess of $250,000 in the aggregate;
(v) the incurrence or guarantee of any indebtedness (other than in the ordinary
course of business consistent with past practice) in excess of $5,000,000 in the
aggregate; (vi) any entry into any other commitment or transaction material to
the Company and its Subsidiaries taken as a whole (other than in the ordinary
course of business consistent with past practice); (vii) any declaration,
setting aside or payment of any dividend or distribution (whether in cash, stock
or property) with respect to its capital stock; (viii) any change in its
accounting principles, practices or methods; (ix) any split, combination or
reclassification of any of the Company's capital stock or the issuance or
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for, shares of the Company's capital stock; (x) any
repurchase or redemption with respect to its capital stock; (xi) any grant of or
any amendment of the terms of any option to purchase shares of capital stock of
the Company; (xii) any granting by the Company or any of its Subsidiaries to any
director, officer or employee of the Company or any of its Subsidiaries of (A)
any increase in compensation, except for annual increases in the base rates and
bonuses of officers or employees in the ordinary course of business, or (B) any
increase in severance or termination pay; (xiii) any entry by the Company or any
of its Subsidiaries into any employment, severance, bonus or termination
agreement with any director, officer or employee of the Company or any of its
Subsidiaries; (xiv) any revaluation by the Company of any of its assets
(including, without limitation, the write-off of notes or accounts receivable);
or (xv) any agreement (whether or not in writing), arrangement or understanding
to do any of the foregoing.

Section 5.9 Litigation. Except as disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, or the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, or on
Section 5.9 of the Company Disclosure Schedule, there is no suit, action or
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any of its Subsidiaries which, either alone or in the aggregate,
would reasonably be expected to have a Company Material Adverse Effect, nor is
there any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against the Company or any of its Subsidiaries having, or which would reasonably
be expected to have, either alone or in the aggregate, a Company Material
Adverse Effect.

Section 5.10 Employee Benefit Plans. (a) Section 5.10 of the Company
Disclosure Schedule hereto sets forth a list of all "employee benefit plans", as
defined in Section 3(3) of ERISA, and all other material employee benefit
arrangements or payroll practices, including, without limitation, any such
arrangements or payroll practices providing severance pay, sick leave, vacation
pay, salary continuation for disability, retirement benefits, deferred
compensation, bonus pay, incentive pay, stock options (including those held by
directors, employees, and consultants), hospitalization insurance, medical
insurance, life insurance, scholarships or tuition reimbursements, that are
maintained by the Company, any Subsidiary of the Company or any Company ERISA
Affiliate (as defined below), with respect to which the Company, any Subsidiary
of the Company or any Company ERISA Affiliate has any present or contingent
liability, or is obligated to contribute thereunder for current or former
employees, independent contractors, consultants and leased employees of the
Company, any Subsidiary of the Company or any Company ERISA Affiliate (the
"Company Employee Benefit Plans"). Copies of Company Employee Benefit Plans have
been provided to Parent.

(b) None of the Company Employee Benefit Plans is a "multiemployer plan",
as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and neither
the Company nor any Company ERISA Affiliate presently maintains such a plan.
None of the Company, any Subsidiary or Company ERISA Affiliate (subject to the
knowledge of the Company, in the case of any Subsidiary or Company ERISA
Affiliate acquired by the Company, for periods prior to such acquisition), has
withdrawn in a complete or partial withdrawal from any Multiemployer Plan, nor
has any of them incurred any material liability due to the termination or
reorganization of such a Multiemployer Plan.

(c) Neither the Company nor any Company Benefit Plan has incurred any
material liability or penalty under Section 4975 of the Code or Section 502(i)
of ERISA.

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(d) Except as set forth in Section 5.10 of the Company Disclosure Schedule
or as required by applicable law, the Company does not maintain or contribute to
any plan or arrangement which provides or has any liability to provide life
insurance or medical or other employee welfare benefits to any employee or
former employee upon his retirement or termination of employment, and the
Company has never represented, promised or contracted (whether in oral or
written form) to any employee or former employee that such benefits would be
provided.

(e) Except as set forth on Section 5.10 of the Company Disclosure Schedule,
the execution of, and performance of the transactions contemplated by, this
Agreement will not, either alone or upon the occurrence of subsequent events,
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee. The only employment
agreements, consulting agreements, severance agreements or severance policies
applicable to the Company or its Subsidiaries are the agreements and policies
specifically referred to in Section 5.10 of the Company Disclosure Schedule,
copies of which have been provided to Parent. No compensation payable pursuant
to any Company Employee Benefit Plan, severance agreements, employment
agreements or otherwise will fail to be deductible for Federal income tax
purposes by reason of Section 280G or Section 162(m) of the Code.

(f) None of the Company Employee Benefit Plans is a "single employer plan",
as defined in Section 4001(a)(15) of ERISA, that is subject to Title IV of
ERISA, and neither the Company nor any Company ERISA Affiliate presently
maintains such a plan. None of the Company, any of its Subsidiaries or any ERISA
Affiliate has any material present or contingent liability under Section 4062 of
ERISA to the Pension Benefit Guaranty Corporation or to a trustee appointed
under Section 4042 of ERISA. None of the Company, any of its Subsidiaries or any
Company ERISA Affiliate (subject to the knowledge of the Company, in the case of
any Subsidiary of the Company or Company ERISA Affiliate acquired by the
Company, for periods prior to such acquisition) has engaged in any transaction
described in Section 4069 of ERISA.

(g) Each Company Employee Benefit Plan that is intended to qualify under
Section 401 of the Code, and each trust maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the IRS, and, to the Company's knowledge, nothing has occurred with
respect to the operation or organization of any such Company Employee Benefit
Plan and there have been no amendments to any such Company Employee Benefit Plan
that would cause the loss of such qualification or exemption or the imposition
of any material liability, penalty or tax under ERISA or the Code.

(h) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under any of the
Company Employee Benefit Plans to any funds or trusts established thereunder or
in connection therewith have been made by the due date thereof and no
contributions have been made to the Company Employee Benefit Plans that would be
considered non-deductible under the Code.

(i) There has been no material violation of ERISA or the Code or any other
applicable law with respect to the filing of applicable reports, documents and
notices regarding the Company Employee Benefit Plans or the furnishing of
required reports, documents or notices to the participants or beneficiaries of
the Company Employee Benefit Plans.

(j) True, correct and complete copies of the following documents, with
respect to each of the Company Benefit Plans, have been delivered or made
available to Parent by the Company: (i) all plans and related trust documents
and any other instruments or contracts under which the Company Employee Benefit
Plans are operated, and amendments thereto; (ii) the Forms 5500 since inception;
(iii) summary plan descriptions and (iv) IRS determination letters.

(k) There are no pending actions, claims or lawsuits which have been
asserted, instituted or, to the Company's knowledge, threatened, against the
Company Employee Benefit Plans, the assets of any of the trusts under such plans
or the plan sponsor or the plan administrator, or, to the Company's knowledge,
against any fiduciary of the Company Employee Benefit Plans with respect to the
operation of such plans (other than routine benefit claims).

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(l) The Company Employee Benefit Plans have been maintained, in all
material respects, in accordance with their terms and with all provisions of
ERISA and the Code (including rules and regulations thereunder) and other
applicable federal and state laws and regulations.

For purposes of this Agreement, "Company ERISA Affiliate" means any
business or entity which is a member of the same "controlled group of
corporations," under "common control" or an "affiliated service group" with the
Company within the meanings of Sections 414(b), (c) or (m) of the Code, or
required to be aggregated with the entity under Section 414(o) of the Code, or
is under "common control" with the Company, within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.

Section 5.11 Labor Matters. Neither the Company nor any of its
Subsidiaries is a party to, or bound by, any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization. There is no unfair labor practice or labor arbitration proceeding
pending or, to the knowledge of the Company, threatened against the Company or
its Subsidiaries relating to their business. There are no organizational efforts
with respect to the formation of a collective bargaining unit presently being
made or, to the knowledge of the Company, threatened involving employees of the
Company or any of its Subsidiaries. There is no labor strike, material slowdown
or material work stoppage or lockout pending or, to the knowledge of the
Company, threatened against or affecting the Company or its Subsidiaries and
neither the Company nor any Subsidiary has experienced any strike, material
slowdown or material work stoppage or lockout since January 1, 1996.

Section 5.12 Company Action. The Board of Directors of the Company (at a
meeting duly called and held) has by the requisite vote of its directors (a)
determined that the Merger is fair to and in the best interests of the Company
and its shareholders, (b) approved the Merger in accordance with the provisions
of Section 251 of the DGCL and (c) resolved to recommend the approval of this
Agreement and the Merger by the holders of the Company Common Stock and directed
that the Merger be submitted for consideration by the Company's stockholders at
the Company Meeting.

Section 5.13 Financial Advisor. The Company has received the opinion of
Bear, Stearns & Co. Inc. to the effect that, as of the date hereof, the Exchange
Ratio is fair to the holders of Company Common Stock from a financial point of
view. The Company represents and warrants that (i) except for Bear, Stearns &
Co. Inc., no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Merger or the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its Subsidiaries and (ii) the fees and
commissions payable to the Company's financial advisors, as contemplated by this
Section, will not exceed the aggregate amount set forth in that certain letter,
dated July 1, 1997, from Bear, Stearns & Co. Inc. to the Company, a copy of
which is attached to Section 5.13 of the Company Disclosure Schedule.

Section 5.14 Compliance with Applicable Laws. The Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary in connection with the conduct
of their business (the "Company Permits"), except for such permits, licenses,
variances, exemptions, orders and approvals the failure of which to hold have
not had, or would not reasonably be expected to have, either singly or in the
aggregate, a Company Material Adverse Effect. The Company and its Subsidiaries
are in compliance with the terms of the Company Permits, except for such
failures to comply which, singly or in the aggregate, have not had, or would not
reasonably be expected to have, a Company Material Adverse Effect. The
businesses of the Company and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity, except
for violations which individually or in the aggregate have not had, or would not
reasonably be expected to have, a Company Material Adverse Effect. No
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending or, to the knowledge of the Company,
threatened, nor has any Governmental Entity indicated an intention to conduct
the same, other than those the outcome of which have not had, or would not
reasonably be expected to have, either singly or in the aggregate, a Company
Material Adverse Effect.

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Section 5.15 Liabilities. Since the date of the latest balance sheet of
the Company contained in the Company SEC Reports filed prior to the date hereof,
neither the Company nor any of its Subsidiaries has incurred any material
liabilities or obligations (absolute, accrued, contingent or otherwise) of the
type that is required to be reflected or reserved against in a balance sheet of
the Company and its Subsidiaries, or in the notes thereto, prepared in
accordance with generally accepted accounting principles, other than liabilities
incurred in the ordinary course of business and liabilities which are fully
disclosed or provided for in the most recent Company SEC Reports filed prior to
the date hereof. To the knowledge of the Company, there is no basis for any
contingent or unknown liability of any nature against the Company or its
Subsidiaries, which has had, or would reasonably be expected to have, either
singly or in the aggregate, a Company Material Adverse Effect, other than as
reflected in the Company SEC Reports.

Section 5.16 Taxes. For the purposes of this Agreement, the term "Tax"
shall include all Federal, state, local and foreign income, profits, franchise,
gross receipts, payroll, sales, employment, use, real and personal property,
withholding, excise and other taxes, duties and assessments of any nature
whatsoever together with all interest, penalties and additions imposed with
respect to such amounts. Except as set forth in Section 5.16 of the Company
Disclosure Schedule, (i) each of the Company and its Subsidiaries has filed all
material Tax returns required to be filed by any of them (taking into account
all valid extensions of filing dates) and has paid (or the Company has paid on
its behalf), or has set up an adequate reserve for the payment of, all material
Taxes required to be paid in respect of the periods covered by such returns;
(ii) the information contained in such Tax returns is true, complete and
accurate in all material respects; (iii) neither the Company nor any Subsidiary
of the Company is delinquent in the payment of any Tax, except where such
delinquency has not had, or would not reasonably be expected to have, a Company
Material Adverse Effect; (iv) no material deficiencies for any Taxes have been
proposed, asserted or assessed against the Company or any of its Subsidiaries
that have not been finally settled or paid in full, neither the Company nor any
of its Subsidiaries are under audit (or has received any notification of such an
audit) by any taxing authority, and no consents to extend the time to assess any
Tax have been granted or requested; and (v) none of the Company and its
Subsidiaries is obligated, or is reasonably expected to be obligated, to make
any payments, or is a party to any agreement that under certain circumstances
would obligate it, or reasonably be expected to obligate it, to make any
payments that will not be deductible under Section 280G of the Code.

Section 5.17 Certain Agreements. Except as set forth in Section 5.17 of
the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries
is a party to (i) any agreement (oral or written) with any executive officer or
other key employee of the Company or any of its Subsidiaries the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company of the nature contemplated by
this Agreement; (ii) any agreement (oral or written) with respect to any
executive officer or other key employee of the Company or any of its
Subsidiaries providing any term of employment or compensation guarantee
extending beyond the Effective Date; or (iii) any plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting of
the benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement, or the value of any of the benefits
of which will be calculated on the basis of the transactions contemplated by
this Agreement.

Section 5.18 Contracts. All material contracts and agreements are listed
in Section 5.18 of the Company Disclosure Schedule, and true, complete and
correct copies of all such contracts and agreements (together with all
amendments thereto) have been delivered to Parent prior to the date hereof. All
such contracts and agreements are valid and binding and are in full force and
effect and enforceable against the other parties thereto in accordance with
their respective terms (except with respect to the real estate purchase
contracts, which will be so valid and binding and in full force and effect and
enforceable upon the incorporation of an adequate legal description of the
property into such contracts), subject to applicable bankruptcy, insolvency,
reorganization and other similar laws of general applicability relating to or
affecting the enforcement of creditors' rights generally. Except as set forth in
Section 5.18 of the Company Disclosure Schedule, (i) no approval or consent of,
or notice to, any person is needed in order that such contract or agreement (and
the real estate purchase contracts to the extent set forth in the preceding
sentence) shall continue in full force and effect in accordance with its terms
without penalty, acceleration or rights of early

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termination following consummation of the transactions contemplated by this
Agreement, except for such penalties, accelerations or rights which have not
had, and would not reasonably be expected to have, either singly or in the
aggregate, a Company Material Adverse Effect and (ii) the Company is not in
violation or breach of or default under any such contract or agreement which
violation or breach or default has had, or would reasonably be expected to have,
either singly or in the aggregate, a Company Material Adverse Effect, nor, to
the Company's knowledge, is any other party to such contract or agreement. There
is no contract or agreement required to be described in or filed as an exhibit
to any Company SEC Report that is not described in or filed as required by the
Securities Act or the Exchange Act, as the case may be.

Section 5.19 Trademarks. The Company and its Subsidiaries own or have
valid rights to use all trademarks, trade names, service marks, trade secrets,
copyrights and licenses and other proprietary intellectual property rights and
licenses as are material to the businesses of the Company and its Subsidiaries
(the "Intellectual Property"), all of which are listed on Section 5.19 of the
Company Disclosure Schedule, and there is no conflict with the rights of the
Company and its Subsidiaries therein or any conflict with the rights of others
therein which have had, or would reasonably be expected to have, either singly
or in the aggregate, a Company Material Adverse Effect. Neither the Merger nor
the transactions contemplated hereby will adversely affect the rights of the
Company or any of its Subsidiaries in respect of any of the Intellectual
Property.

Section 5.20 No Material Adverse Effect. Except as disclosed in the
Company SEC Reports filed prior to the date hereof, the Company is not aware of
any fact or facts which has or have had, or would reasonably be expected to
have, either singly or in the aggregate, a Company Material Adverse Effect.

Section 5.21 Accounting Matters. Neither the Company nor, to its
knowledge, any of its affiliates, has through the date hereof, taken or agreed
to take any action that would prevent Parent from accounting for the business
combination to be effected by the Merger as a "pooling of interests" in
accordance with Accounting Principles Board Opinion No. 16, the interpretive
releases issued pursuant thereto and the pronouncements of the Commission. To
the knowledge of the Company, the Company has not taken any action which would
prevent the Merger from constituting a reorganization within the meaning of
Section 368(a) of the Code.

Section 5.22 Required Vote of Company Common Stock. The approval of the
holders of not less than two-thirds of the outstanding shares of Company Common
Stock is required to adopt this Agreement and approve the Merger and the other
transactions contemplated hereby. No other vote of the stockholders of the
Company is required by law, the Certificate of Incorporation or By-laws of the
Company or otherwise to adopt this Agreement and approve the Merger and the
other transactions contemplated hereby.

Section 5.23 Real Property. (a) The Company and its Subsidiaries have
good and indefeasible title to (i) the real property reflected on the
consolidated balance sheet of the Company and its Subsidiaries as at March 31,
1997 and own all of the improvements located thereon and the real property (and
the improvements thereon) thereafter acquired, all of which (as of the date
hereof) are listed in Section 5.23(a) of the Company Disclosure Schedule
(collectively, the "Operating Real Property") and (ii) the real property under
development (and the improvements thereon), all of which (as of the date hereof)
are listed in Section 5.23(a) of the Company Disclosure Schedule (collectively,
the "Development Properties"), in each case free and clear of any lien except
Permitted Exceptions. "Permitted Exceptions" shall mean, with respect to the
individual property comprising the Operating Real Property and the Development
Properties, (a) liens set forth in Section 5.23(a) of the Company Disclosure
Schedule; (b) any liens for real estate taxes and assessments not yet delinquent
or which are being contested by the Company in good faith and for which the
Company has taken appropriate reserves in accordance with generally accepted
accounting principles consistently applied; (c) any imperfection of title that,
individually or in the aggregate with other such liens, does not materially and
adversely interfere with the current or intended use of the property subject
thereto or detract from the indefeasibility and insurability (at standard rates
by a title company of nationally recognized standing) of the property subject
thereto or materially impair the operations of the Company; (d) mechanics' liens
with respect to the Development Properties; (e) the rights of hotel guests; and
(f) the encumbrances set forth on the owner's title insurance policy or
commitments therefor issued to the Company for such property, delivered to
Parent prior to the date hereof.

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(b) As of the date hereof, the Company has executed only the letters of
intent or contracts for the acquisition and development of additional hotel
sites (the sites which are the subject of such letters of intent or contracts
being referred to as "Contract Properties") which are listed in Section 5.23(b)
of the Company Disclosure Schedule.

(c) All utilities and services necessary for the use and operation of the
Operating Real Property (including road access, gas, water, electricity and
telephone) are available thereto, and are of sufficient capacity to meet
adequately all needs and requirements necessary for current use and operation of
such respective Operating Real Property and for their respective intended
purposes.

(d) The Development and Construction Agreements, Development Plans,
Completion Guaranties, Construction Contracts and Project Schedules entered into
pursuant to the Master Development Assistance Agreement, dated as of February 9,
1996 (the "Master Development Agreement"), and the Management Agreements entered
into pursuant to the Extended-Stay Management Assistance Agreement, dated as of
August 26, 1996 (the "Master Management Agreement"), in each case delivered by
the Company to Parent, are all agreements in existence as of the date hereof
(other than architect's agreements and sub-contracts) with respect to the
development, construction and management of the Development Properties as of the
date hereof and are true, correct and complete copies thereof and, to the
knowledge of the Company, are in full force and effect and enforceable in
accordance with their terms and no party to any such document has committed a
default thereunder or any act or thing which with the giving of notice or the
passage of time may constitute such a default. The Company reasonably
anticipates that substantial completion of the Development Properties will occur
on or before the dates specified in Section 5.23(d) to the Company Disclosure
Schedule, in accordance with the Development Budgets attached to the Company
Disclosure Schedule and in accordance with all requirements of the Development
Agreements and Development Plans. If constructed in accordance with the
Development Plans, the Development Properties shall comply in all material
respects with all applicable codes and zoning laws and resolutions.

(e) None of the Operating Real Property, the Development Properties or, to
the Company's knowledge, the Contract Properties is subject to any right or
option of any other person to purchase or lease or otherwise obtain title to or
an interest in such property.

(f) There is no outstanding violation by the Company or its Subsidiaries of
a condition or agreement contained in any easement, restrictive covenant or any
similar instrument or agreement affecting any Operating Real Property or
Development Properties, except to the extent the same would not individually or
in the aggregate have a Company Material Adverse Effect.

Section 5.24 Hotel Zoning; Improvements. Except as set forth in Section
5.24 of the Company Disclosure Schedule, each of the Operating Real Properties
complies in all material respects with all applicable codes and zoning laws and
resolutions, and there is no pending or, to the knowledge of the Company or its
Subsidiaries, threatened condemnation, zoning change or other proceeding or
action that will in any material respect affect the size of, use of,
improvements on, construction on or access to the Operating Real Properties. The
improvements comprising any portion of each Operating Real Property (the
"Improvements") are free of physical, mechanical, structural, design or
construction defects which would, singly or in the aggregate, have a Company
Material Adverse Effect and the mechanical, electrical and utility systems
servicing the Improvements (including, without limitation, all water, electric,
sewer, plumbing, heating, ventilation, gas and air conditioning) are in good
condition and proper working order and are free of defects (for which provision
to repair has not been made) which have had or would reasonably be expected to
have, either singly or in the aggregate, a Company Material Adverse Effect.

Section 5.25 Environmental Matters. The Company and its Subsidiaries have
obtained and maintained in effect all licenses, permits and other authorizations
required under all applicable laws, regulations and other requirements of
governmental or regulatory authorities relating to pollution, public health and
safety or the environment ("Environmental Laws") and are in compliance with all
Environmental Laws and with all such licenses, permits and authorizations,
except to the extent such failure to obtain, maintain or comply have not had, or
would not reasonably be expected to have, either singly or in the aggregate, a
Company Material Adverse Effect. Neither the Company nor any of its Subsidiaries
has performed or suffered any act which

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could give rise to, or has otherwise incurred, liability to any person
(governmental or not) under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or any other Environmental Laws, which
has had, or would reasonably be expected to have, either singly or in the
aggregate, a Company Material Adverse Effect; nor has the Company or any of its
Subsidiaries received notice of any such liability or any claim therefor or
submitted notice pursuant to CERCLA to any governmental agency with respect to
any of their respective assets. Except as set forth in Section 5.25 of the
Company Disclosure Schedule, no hazardous substance, hazardous waste,
contaminant, petroleum product, chemical, pollutant or toxic substance (as such
terms are defined in any applicable Environmental Law) has been released,
placed, dumped, emitted or otherwise come to be located on, at or beneath any of
the assets or properties of the Company or any of its Subsidiaries or any
surface waters or groundwaters thereon or thereunder which has had, or would
reasonably be expected to have, either singly or in the aggregate, a Company
Material Adverse Effect. Neither the Company nor any of its Subsidiaries owns or
operates, or has ever owned or operated, an underground storage tank containing
a regulated substance, as such term is defined in the Resource Conservation and
Recovery Act. There is no asbestos at or in any of the assets or properties of
the Company or any of its Subsidiaries.

Section 5.26 Development Agreement. The Master Development Agreement,
filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, is in full force and effect and, except as set forth in
Section 5.26 of the Company Disclosure Schedule, has not been amended or
modified, and neither the Company nor its Subsidiaries has received any notice
of default or termination, or have knowledge of any event that, with notice or
lapse of time, or both, would constitute a default or termination, under such
agreement.

Section 5.27 Insurance. The Company and each of its Subsidiaries maintain
insurance against losses and risks in accordance with customary industry
practice in amounts that are adequate to protect the Company and each of its
Subsidiaries and their respective businesses.

Section 5.28 Disclosure. No representation or warranty by the Company in
this Agreement and no schedule or certificate delivered by the Company and
furnished or to be furnished to Parent pursuant hereto, or in connection with
the transactions contemplated hereby, is false and misleading in any material
respect or contains any material misstatement of fact or omits to state any
material facts required to be stated to make such information not misleading.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES REGARDING SUB

Parent and Sub jointly and severally represent and warrant to the Company
as follows:

Section 6.1 Organization. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Sub has
not engaged in any business since it was incorporated other than in connection
with its organization and the transactions contemplated by this Agreement.

Section 6.2 Capitalization. The authorized capital stock of Sub consists
of 1,000 shares of Common Stock, par value $.01 per share, 1,000 shares of which
are validly issued and outstanding, fully paid and nonassessable and are owned
by Parent free and clear of all liens, claims and encumbrances.

Section 6.3 Authority Relative to this Agreement. Sub has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and sole stockholder, and no other corporate proceedings on the part
of Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. Except as referred to herein or in connection or in
compliance with the provisions of the Securities Act, the Exchange Act and the
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by Sub of the Merger
or the transactions contemplated by this Agreement.

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ARTICLE VII

CONDUCT OF BUSINESS PENDING THE MERGER

Section 7.1 Conduct of Business by the Company Pending the Merger. Prior
to the Effective Date, unless Parent shall otherwise consent in writing:

(i) the Company shall, and shall cause its Subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its Subsidiaries to, use their best efforts to preserve intact their
present business organizations and preserve their relationships with
customers, suppliers and others having business dealings with them with the
intent that their goodwill and on-going businesses are unimpaired at the
Effective Date, except as set forth in Section 7.1 of the Company
Disclosure Schedule;

(ii) except as required by this Agreement, the Company and its
Subsidiaries shall not and shall not propose to (a) sell or pledge or agree
to sell or pledge any capital stock owned by the Company in any of its
Subsidiaries; (b) amend its Certificate of Incorporation or By-laws; (c)
split, combine or reclassify its outstanding capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or declare, set
aside or pay any dividend or other distribution payable in cash, stock or
property; or (d) directly or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of its
capital stock;

(iii) the Company shall not, nor shall it permit any of its
Subsidiaries to, (a) issue, deliver, sell, transfer or otherwise dispose of
or agree to issue, deliver, sell, transfer or otherwise dispose of any
additional shares of, or rights of any kind to acquire any shares of, its
capital stock of any class, any indebtedness having the right to vote, or
which are convertible into or exercisable for securities having the right
to vote, with respect to matters on which the Company's shareholders may
vote, or any option, rights or warrants to acquire, or securities
convertible into, shares of capital stock other than pursuant to the
exercise of vested Options outstanding on the date hereof under the Option
Plans; (b) acquire (including by merger, consolidation or acquisition of
stock or assets), lease, pledge, encumber or dispose or agree to acquire
(including by merger, consolidation or acquisition of stock or assets),
lease, pledge, encumber or dispose of any capital assets or any other
assets other than in accordance with the Master Development Agreement (and
with Parent's prior written consent with respect to proposed development
sites); (c) incur additional indebtedness, assume, guarantee, endorse or
otherwise become responsible for the obligations of any person, make loans
or advances or encumber or grant a security interest in any asset or enter
into any other material transaction in excess of $250,000 in the aggregate;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing an equity interest in excess of $250,000 in the aggregate in, or
by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof; (e) enter
into any contract, agreement, commitment or arrangement with respect to any
of the foregoing; (f) with respect to the Contract Properties, enter into
any material amendment to the agreement to acquire any Contract Property or
modify in any material respect any letter of intent to acquire any Contract
Property or waive any material diligence contingencies; (g) amend, modify
or terminate any contracts or agreements with respect to the Operating Real
Property or the Development Property, except if such amendment,
modification or termination would not have a material adverse effect on the
respective Operating Real Property or Development Property; or (h) enter
into any new contracts or agreements, including any leases, with respect to
the Operating Real Property or the Development Property, except if such
contract or agreement would not have a material adverse effect on the
respective Operating Real Property or Development Property;

(iv) the Company shall not, nor shall it permit any of its
Subsidiaries to, except as required to comply with applicable law and
except as provided in Section 8.5 hereof, enter into any new (or amend any
existing) Company Employee Benefit Plan or any new (or amend any existing)
employment, severance, executive compensation (including without limitation
stock option and restricted stock agreements between the Company and any
employee or any other person or entity) or consulting agreement, grant any
general increase in the compensation of directors, officers or employees
(including any such increase pursuant to any bonus, pension, profit-sharing
or other plan or commitment), grant any

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stock options or other stock-based awards or take any action to accelerate
any stock options or other stock-based awards, or grant any increase in the
compensation payable or to become payable to any director, officer or
employee, except for annual increases in the base rates and bonuses of
officers or employees consistent with past practices;

(v) the Company shall not, nor shall it permit any of its Subsidiaries
to, make any investments in non-investment grade securities;

(vi) the Company shall not, nor shall it permit any of its
Subsidiaries to, take any action to change accounting principles, policies
or procedures (including, without limitation, procedures with respect to
revenue recognition, payment of accounts payable and collection of accounts
receivable);

(vii) the Company shall not, nor shall it permit any of its
Subsidiaries to, enter into any transaction or series of transactions with
any Affiliate (as defined in Section 11.16) except pursuant to the Master
Management Agreement and the Master Development Agreement and except for
reasonable and customary brokerage commissions payable to Trammell Crow
Company and its Affiliates on market terms for services rendered;

(viii) the Company shall, and shall cause its Subsidiaries to, (a)
maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (b) comply with all laws,
ordinances and regulations of Governmental Entities applicable to the
Company and its Subsidiaries; (c) maintain and keep its properties and
equipment in good repair, working order and condition; and (d) perform its
obligations under all material contracts and commitments to which it is a
party or by which it is bound;

(ix) the Company shall not, nor shall it permit any of its
Subsidiaries to, take, or agree in writing or otherwise to take, any action
which would cause a breach of any of the representations or warranties of
the Company contained in this Agreement or prevent the Company from
performing or cause the Company not to perform its covenants hereunder;

(x) except as set forth in this Agreement or with the prior written
consent of Parent, the Company shall not submit any matters to its
shareholders for approval; and

(xi) the Company shall not, nor shall it permit any of its
Subsidiaries to, take or cause to be taken any action which would
disqualify the Merger as a "pooling of interests" for accounting purposes
or as a "reorganization" within the meaning of Section 368(a) of the Code.

Notwithstanding anything set forth in this Section 7.1, the Company and its
Subsidiaries may enter into management agreements pursuant to the Master
Management Agreement and (i) the hotel development transactions and (ii) the
financing transactions with Parent (or its Affiliates) or Bank One, Texas, NA
(or its Affiliates), in each case as set forth in Section 7.1 of the Company
Disclosure Schedule and in accordance with the Master Development Agreement and
the terms and conditions set forth therein, without the prior written consent of
Parent.

Section 7.2 Conduct of Business by Parent Pending the Merger. Prior to
the Effective Date, unless the Company shall otherwise agree in writing or
except as otherwise required by this Agreement, Parent shall, and shall cause
its Subsidiaries to, carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted;
provided that Parent may engage in acquisitions and dispositions in the
hospitality business and related businesses and may engage in debt or equity
financing or enter into sale/leaseback agreements or other financing
arrangements with respect to properties.

Section 7.3 Conduct of Business of Sub. During the period from the date
of this Agreement to the Effective Date, Sub shall not engage in any activities
of any nature except as provided in or contemplated by this Agreement.

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ARTICLE VIII

ADDITIONAL AGREEMENTS

Section 8.1 Access and Information. Each of the Company and Parent and
their respective Subsidiaries shall afford to the other and to the other's
accountants, counsel and other representatives reasonable access during normal
business hours (and at such other times as the parties may mutually agree)
throughout the period prior to the Effective Date to all of its properties,
books, contracts, commitments, records and personnel and, during such period,
each shall furnish promptly to the other (i) a copy of each report, schedule and
other document filed or received by it pursuant to the requirements of federal
or state securities laws, and (ii) all other information concerning its
business, properties and personnel as the other may reasonably request. Each of
the Company and Parent shall hold, and shall cause their respective employees
and agents to hold, in confidence all such information in accordance with the
terms of the Confidentiality Agreement dated February 11, 1997 between Parent
and the Company.

Section 8.2 Registration Statement/Proxy Statement. Parent and the
Company shall cooperate and promptly prepare, and Parent shall file with the
Commission as soon as practicable, a Registration Statement on Form S-4 (the
"Form S-4") under the Securities Act, with respect to the Parent Common Stock
issuable in the Merger, portions of which Registration Statement shall also
serve as the proxy statement with respect to the Company Meeting (the "Proxy
Statement/Prospectus"). The respective parties will cause the Proxy
Statement/Prospectus and the Form S-4 to comply in all material respects with
the applicable provisions of the Securities Act, the Exchange Act and the rules
and regulations thereunder. Parent shall use all reasonable efforts, and the
Company will cooperate with Parent, to have the Form S-4 declared effective by
the Commission as promptly as practicable and to keep the Form S-4 effective as
long as is necessary to consummate the Merger. Parent shall, as promptly as
practicable, provide copies of any written comments received from the Commission
with respect to the Form S-4 to the Company and advise the Company of any oral
comments with respect to the Form S-4 received from the Commission. Parent shall
use its best efforts to obtain, prior to the effective date of the Form S-4, all
necessary state securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by the Merger Agreement and will pay all
expenses incident thereto. Parent agrees that none of the information supplied
or to be supplied by Parent for inclusion or incorporation by reference in the
Form S-4 or the Proxy Statement/Prospectus (i) in the case of the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Company Meeting, or (ii) in the case of
the Form S-4 and each amendment or supplement thereto, at the time it is filed
or becomes effective, will contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Company agrees that none of the information supplied
or to be supplied by the Company for inclusion or incorporation by reference in
the Form S-4 or the Proxy Statement/Prospectus (i) in the case of the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Company Meeting, or, (ii) in the case of
the Form S-4 or any amendment or supplement thereto, at the time it is filed or
becomes effective, will contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. For purposes of the foregoing, it is understood and agreed that
information concerning or related to Parent will be deemed to have been supplied
by Parent and information concerning or related to the Company and the Company
Meeting shall be deemed to have been supplied by the Company. No amendment or
supplement to the Proxy Statement/Prospectus will be made by Parent or the
Company without the approval of the other party. Parent will advise the Company,
promptly after it receives notice thereof, of the time when the Form S4 has
become effective or any supplement or amendment has been filed, the issuance of
any stop order, the suspension of the qualification of Parent Common Stock
issuable in connection with the Merger for offering or sale in any jurisdiction,
or any request by the Commission for amendment of the Proxy Statement/Prospectus
or the Form S-4 or comments thereon and responses thereto or requests by the
Commission for additional information.

Section 8.3 Affiliate and Pooling Agreements. As soon as practicable
after the date hereof, the Company shall deliver to Parent a list of names and
addresses of those persons who are "affiliates" (each such

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person, an "Affiliate") of the Company within the meaning of Rule 145 (or any
successor rule, for so long as such rule is in effect) of the rules and
regulations promulgated under the Securities Act (and shall keep such list
current through the record date for the Company Meeting). The Company shall use
all reasonable efforts to obtain and deliver or cause to be delivered to Parent,
prior to the Effective Date, from each of the Affiliates of the Company
identified in the foregoing list, an Affiliate Letter in form and substance
satisfactory to Parent to the effect that such Affiliate will not offer to sell,
sell or otherwise dispose of any shares of Parent Common Stock issued to such
Affiliate in connection with the Merger, except pursuant to an effective
registration statement or in compliance with Rule 145 or in a transaction that,
in the opinion of counsel satisfactory to Parent, is exempt from the
registration requirements of the Securities Act and otherwise in a manner
consistent with applicable accounting requirements so that the Merger qualifies
as a "pooling of interests" (an "Affiliate Letter"). Parent shall be entitled to
place legends as specified in such Affiliate Letters on the certificates
evidencing any Parent Common Stock to be received by such Affiliates pursuant to
the terms of the Merger, and to issue appropriate stop transfer instructions to
the transfer agent for the Parent Common Stock, consistent with the terms of
such Affiliate Letters.

Section 8.4 Stock Exchange Listing. Parent shall use its best efforts to
list on the NYSE, upon official notice of issuance, the Parent Common Stock to
be issued pursuant to the Merger.

Section 8.5 Employee Plans. (a) Parent agrees to honor all contracts and
agreements of the Company or any of its Subsidiaries authorized by the Company
or any of its Subsidiaries prior to the date hereof which apply to any current
or former employee or current or former director of the Company or any of its
Subsidiaries and which are set forth in Section 8.5 of the Company Disclosure
Schedule. Parent agrees to provide the employment or severance arrangements as
set forth on Schedule 8.5; and

(b) Parent agrees to provide to officers and employees of the Company and
its Subsidiaries who become or remain regular (full-time) employees of Parent or
any of its Subsidiaries, employee benefits, other than salary, bonus and stock
options, no less favorable than those provided by Parent and its Subsidiaries to
their similarly situated officers and employees. Any employee of the Company or
any of its Subsidiaries who becomes a participant in any employee benefit plan,
program, policy or arrangement of Parent or any of its Subsidiaries after the
Effective Date shall be given credit under such plan, program, policy or
arrangement for all service with the Company or any of its Subsidiaries, and, if
applicable, with Parent or any of its Subsidiaries, prior to becoming such a
participant for purposes of eligibility and vesting.

Section 8.6 Indemnification and Insurance. (a) From and after the
Effective Date, Parent shall indemnify, defend and hold harmless the officers,
directors and employees of the Company (the "Indemnified Parties") against all
losses, expenses, claims, damages or liabilities arising out of the transactions
contemplated by this Agreement to the fullest extent permitted or required under
applicable law; provided, however, that the requirement to advance expenses
shall be limited to those instances in which the Indemnified Party undertakes to
repay such amount if it shall ultimately be determined that he is not required
to be indemnified under Section 145(c) of the DGCL. Parent agrees that all
rights to indemnification existing in favor of the directors, officers or
employees of the Company as provided in the Company's Certificate of
Incorporation or Bylaws, as in effect as of the date hereof, with respect to
matters occurring through the Effective Date, shall survive the Merger and shall
continue in full force and effect, and the obligations of the Surviving
Corporation are hereby unconditionally guaranteed by Parent, for a period of not
less than six years from the Effective Date; provided, that in the event any
claim or claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until
final disposition of any and all such claims.

(b) Parent agrees to maintain or cause the Surviving Corporation to
maintain in effect for not less than three years after the Effective Date
policies of directors' and officers' liability insurance equivalent to those
maintained by the Company with respect to matters occurring prior to the
Effective Date; provided, however, that the Surviving Corporation shall not be
required to pay an annual premium for such insurance in excess of 200% of the
current annual premiums paid by the Company for such insurance, but in such case
shall purchase as much coverage as possible for such amount.

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(c) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Effective Date, the parties hereto agree
to cooperate and use their respective reasonable efforts to vigorously defend
against and respond thereto.

Section 8.7 Board Representation. (a) Parent acknowledges its intent to
discuss the potential nomination or appointment to its Board of Directors of a
nominee of the Company and to that end will consider the potential nomination or
appointment of such qualified persons as may be proposed by the Company;
provided, however, that such acknowledgment shall not obligate Parent to
nominate or appoint any such person to its Board of Directors.

(b) On or prior to the Effective Date, the Company shall use all reasonable
efforts to deliver to Parent evidence satisfactory to Parent of the resignations
of the directors of the Company, such resignations to be effective immediately
prior to the Closing.

Section 8.8 Additional Agreements. (a) Subject to the terms and
conditions herein provided (including without limitation Section 8.9), each of
the parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including using all
reasonable efforts to obtain all necessary waivers, consents and approvals, to
effect all necessary registrations and filings (including, but not limited to,
filings with all applicable Governmental Entities) and to lift any injunction to
the Merger (and, in such case, to proceed with the Merger as expeditiously as
possible).

(b) In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and/or directors of Parent, the Company and the Surviving Corporation
shall take all such necessary action.

(c) Following the Effective Date, Parent shall use its best efforts to
conduct the business, and shall cause the Surviving Corporation to use its best
efforts to conduct its business, except as otherwise contemplated by this
Agreement, in a manner which would not jeopardize the qualification of the
Merger as a reorganization within the meaning of Section 368(a) of the Code.

Section 8.9 Alternative Proposals. Prior to the Effective Date, the
Company agrees (a) that neither it nor any of its Subsidiaries shall, and it and
they shall direct and use its and their best efforts to cause its and their
respective officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its stockholders) with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities of, the Company or any of its
Subsidiaries (any such proposal or offer made prior to the termination of this
Agreement (and any subsequent amended proposal or offer made by the same or an
affiliated party) being hereinafter referred to as an "Alternative Proposal") or
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Alternative
Proposal, or release any third party from any obligations under any existing
standstill agreement or arrangement relating to any Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing, and it will take the necessary
steps to inform the individuals or entities referred to above of the obligations
undertaken in this Section 8.9; and (c) that it will notify Parent immediately
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it; provided, however, that nothing contained in
this Section 8.9 shall prohibit the Board of Directors of the Company from (i)
furnishing information to or entering into discussions or negotiations with, any
person or entity that makes or proposes to make an unsolicited bona fide
proposal to acquire the Company pursuant to a merger, consolidation, share
exchange, purchase of a substantial portion of assets, business combination or
other similar transaction, if, and only to the extent that, (A) the Board of
Directors of the Company determines in good faith that such action is required
for the Board

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of Directors to comply with its fiduciary duties to stockholders imposed by law,
(B) prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, the Company provides written notice to
Parent to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity and (C) the Company
keeps Parent promptly informed of the status and all material terms and
conditions of any such discussions or negotiations (including identities of
parties); and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Alternative Proposal.
Nothing in this Section 8.9 shall (x) permit the Company to terminate this
Agreement (except as specifically provided in Article X hereof), (y) permit the
Company to enter into any agreement with respect to an Alternative Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, the Company shall not enter into any agreement with any person that
provides for, or in any way facilitates, an Alternative Proposal), or (z) affect
any other obligation of the Company under this Agreement.

Section 8.10 Advice of Changes; SEC Filings. The Company shall confer on
a regular basis with Parent on operational matters. Parent and the Company shall
promptly advise each other orally and in writing of any change or event that has
had, or could reasonably be expected to have, a Company Material Adverse Effect
or a Parent Material Adverse Effect, as the case may be. The Company and Parent
shall promptly provide each other (or their respective counsel) copies of all
filings made by such party with the Commission or any other state or federal
Governmental Entity in connection with this Agreement and the transactions
contemplated hereby.

Section 8.11 Letter of the Company's Accountants. The Company shall use
its best efforts to cause to be delivered to Parent and Sub at the time of
mailing of the Proxy Statement/Prospectus a "comfort" letter from Ernst & Young
LLP of the kind contemplated by the Statement of Auditing Standards with respect
to Letters to Underwriters promulgated by the American Institute of Certified
Public Accountants (the "AICPA Statement"), dated the date of such mailing, in
form and substance reasonably satisfactory to Parent and Sub, in connection with
the procedures undertaken by them with respect to the financial statements of
the Company contained or incorporated by reference in the Form S-4 and the other
matters contemplated by the AICPA Statement and customarily included in comfort
letters relating to transactions similar to the Merger.

Section 8.12 Letter of Parent and Sub's Accountants. Parent and Sub shall
use their respective best efforts to cause to be delivered to the Company at the
time of mailing of the Proxy Statement/Prospectus a "comfort" letter from Arthur
Andersen LLP, of the kind contemplated by the AICPA Statement, dated the date of
such mailing, in form and substance reasonably satisfactory to the Company, in
connection with the procedures undertaken by them with respect to the financial
statements of Parent contained or incorporated by reference in the Form S-4 and
the other matters contemplated by the AICPA Statement and customarily included
in comfort letters relating to transactions similar to the Merger.

Section 8.13 Tax Certificate. The Company shall use all reasonable
efforts to provide Parent a certificate of non-foreign status in the manner
provided in Treasury Regulation Sec. 1.1445-2 from each Company stockholder
owning, actually or constructively, five percent (5%) or more of the Company
Common Stock.

ARTICLE IX

CONDITIONS PRECEDENT

Section 9.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions:

(a) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the holders of the
Company Common Stock.

(b) The Form S-4 shall have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the
effectiveness of the Form S-4 shall have been issued by the

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Commission and remain in effect and all necessary approvals under state
securities laws relating to the issuance or trading of the Parent Common
Stock to be issued to stockholders of the Company in connection with the
Merger shall have been obtained.

(c) No preliminary or permanent injunction or other order by any
federal or state court in the United States of competent jurisdiction which
prevents the consummation of the Merger shall have been issued and remain
in effect (each party agreeing to use its reasonable efforts to have any
such injunction lifted).

(d) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Date and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
properties, assets, prospects, condition (financial or otherwise),
liabilities or results of operations of Parent and the Company (and their
respective Subsidiaries), taken as a whole, following the Effective Date.

(e) The Parent Common Stock to be issued to Company stockholders in
connection with the Merger shall have been approved for listing on the
NYSE, subject only to official notice of issuance.

Section 9.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by the Company:

(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior
to the Effective Date, and the representations and warranties of Parent and
Sub contained in this Agreement that are qualified as to materiality shall
be true, and those that are not so qualified shall be true in all material
respects, when made and on and as of the Effective Date as if made on and
as of such date (except to the extent they relate to a particular date),
except as expressly contemplated or permitted by this Agreement, and the
Company shall have received a certificate of the President or Chief
Executive Officer or a Vice President of Parent and Sub to that effect.

(b) The Company shall have received an opinion from Vinson & Elkins
L.L.P., based upon certificates and letters from the Company, Parent and
Sub and certain stockholders of the Company (reasonably requested by such
counsel), to the effect that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such
opinion, such counsel may receive and rely upon representations of fact
contained in certificates and letters as specified in the preceding
sentence.

(c) The Company shall have received a "comfort" letter from Arthur
Andersen LLP, of the kind contemplated by the AICPA Statement, dated the
Effective Date, in form and substance reasonably satisfactory to the
Company, in connection with the procedures undertaken by them with respect
to the financial statements of Parent contained or incorporated by
reference in the Form S-4 and the other matters contemplated by the AICPA
Statement and customarily included in comfort letters relating to
transactions similar to the Merger.

(d) From the date of this Agreement through the Effective Date, there
shall not have occurred any change, individually or together with other
changes, that has had, or would reasonably be expected to have, a material
adverse change in the financial condition, business, results of operations
or prospects of Parent and its Subsidiaries, taken as a whole.

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Section 9.3 Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by Parent:

(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Effective Date, and the representations and warranties of the
Company contained in this Agreement that are qualified as to materiality
shall be true, and those that are not so qualified shall be true in all
material respects, when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), except as expressly contemplated or permitted by this Agreement, and
Parent and Sub shall have received a certificate of the President or Chief
Executive Officer or a Vice President of the Company to that effect.

(b) Parent and Sub shall have received an opinion from Willkie Farr &
Gallagher, based upon certificates and letters from the Company, Parent and
Sub and certain stockholders of the Company (reasonably requested by such
counsel), to the effect that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such
opinion, such counsel may receive and rely upon representations of fact
contained in certificates and letters as specified in the preceding
sentence.

(c) Parent and Sub shall have received a "comfort" letter from Ernst &
Young LLP, of the kind contemplated by the AICPA Statement, dated the
Effective Date, in form and substance reasonably satisfactory to Parent, in
connection with the procedures undertaken by them with respect to the
financial statements of the Company contained or incorporated by reference
in the Form S-4 and the other matters contemplated by the AICPA Statement
and customarily included in comfort letters relating to transactions
similar to the Merger.

(e) The Company shall have received estoppel certificates, in a form
satisfactory to Parent, executed by the third parties to the Master
Development Agreement.

(f) The Agreement Regarding Termination of Management Agreements,
dated the date hereof, between the Company and VPS I, L.P., Parent, Crow
Hotel Realty Investors, L.P., Wyndham Management Corporation, Wyndham Hotel
Corporation and Wyndham IP Corporation with respect to, among other things,
termination of the Management Agreements under the Master Management
Agreement shall be in full force and effect and shall not have been amended
or modified, and the parties thereto shall have performed their respective
obligations required to be performed thereunder at or prior to the
Effective Date.

(g) The Company shall have received the consent of each of Bank One,
Texas, NA (or its Affiliates or agents) and Nomura Asset Capital
Corporation, in a form satisfactory to Parent, with respect to this
Agreement and the transactions contemplated hereby.

ARTICLE X

TERMINATION, AMENDMENT AND WAIVER

Section 10.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Date, before or after the approval of this Agreement by the stockholders of the
Company, by the mutual consent of Parent and the Company.

Section 10.2 Termination by Either Parent or the Company. This Agreement
may be terminated and the Merger may be abandoned by action of the Board of
Directors of either Parent or the Company if (a) the

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Merger shall not have been consummated by December 31, 1997, or (b) the approval
of the Company's stockholders required by Section 3.6 shall not have been
obtained at a meeting duly convened therefor or at any adjournment or
postponement thereof, or (c) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable;
provided, that the party seeking to terminate this Agreement pursuant to this
clause (c) shall have used all reasonable efforts to remove such injunction,
order or decree; and provided, in the case of a termination pursuant to clause
(a) above, that the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that shall have
proximately contributed to the failure to consummate the Merger.

Section 10.3 Termination by the Company. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Date, before
or after the adoption and approval by the stockholders of the Company referred
to in Section 3.6, by action of the Board of Directors of the Company, if (a) in
the exercise of its good faith judgment as to fiduciary duties to its
stockholders imposed by law, the Board of Directors of the Company determines
that such termination is required by reason of an Alternative Proposal being
made, or (b) there has been a breach by Parent or Sub of any representation or
warranty contained in this Agreement which would have or would be reasonably
likely to have a Parent Material Adverse Effect, or (c) there has been a
material breach of any of the covenants or agreements set forth in this
Agreement on the part of Parent, which breach is not curable or, if curable, is
not cured within 30 days after written notice of such breach is given by the
Company to Parent or (d) a change or changes having the effect specified in
Section 9.2(d) shall have occurred.

Section 10.4 Termination by Parent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Date, by action
of the Board of Directors of Parent, if (a) the Board of Directors of the
Company shall have withdrawn or modified in a manner adverse to Parent its
approval or recommendation of this Agreement or the Merger or shall have
recommended an Alternative Proposal to the Company stockholders, (b) there has
been a breach by the Company of any representation or warranty contained in this
Agreement which has had, or would be reasonably expected to have, a Company
Material Adverse Effect, (c) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of the Company,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Parent to the Company or (d) a change
or changes having the effect specified in Section 9.3(d) shall have occurred.

Section 10.5 Effect of Termination and Abandonment. (a) In the event that
(x) any person shall have made an Alternative Proposal and thereafter this
Agreement is terminated by the Company pursuant to Section 10.3(a), (y) the
Board of Directors of the Company shall have withdrawn or modified in a manner
adverse to Parent its approval or recommendation of this Agreement or the Merger
or shall have recommended an Alternative Proposal to the Company stockholders
and Parent shall have terminated this Agreement pursuant to Section 10.4(a) or
(z) any person shall have made an Alternative Proposal and thereafter this
Agreement is terminated by either party pursuant to Section 10.2(b), or by
Parent pursuant to Section 9.3(a) as a result of the Company's intentional
failure to perform one of its agreements contained in this Agreement or
intentional breach of one of its representations and warranties contained in
this Agreement and within 12 months thereafter such Alternative Proposal shall
have been consummated, then in the case of either (x), (y) or (z) above, the
Company shall promptly, but in no event later than two days after such
termination (in the case of (x) or (y)) or consummation (in the case of (z)),
pay Parent a fee of $3,325,000, which amount shall be payable by wire transfer
of same day funds. The Company acknowledges that the agreements contained in
this Section 10.5(a) are an integral part of the transactions contemplated in
this Agreement, and that, without these agreements, Parent and Sub would not
enter into this Agreement; accordingly, if the Company fails to promptly pay the
amount due pursuant to this Section 10.5(a), and, in order to obtain such
payment, Parent or Sub commences a suit which results in a judgment against the
Company for the fee set forth in this Section 10.5(a), the Company shall pay to
Parent its costs and expenses

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(including attorneys' fees) in connection with such suit, together with interest
on the amount of the fee at the rate of 12% per annum.

(b) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article X, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
10.5 and Section 11.3 and except for the provisions of Sections 8.1, 11.6, 11.7,
11.9, 11.11, 11.12 and 11.15. Moreover, in the event of termination of this
Agreement pursuant to Section 10.2, 10.3 or 10.4, nothing herein shall prejudice
the ability of the non-breaching party from seeking damages from any other party
for any breach of this Agreement, including without limitation, attorneys' fees
and the right to pursue any remedy at law or in equity; provided, that following
termination of this Agreement upon the occurrence of any of the events described
in clauses (x), (y) or (z) of Section 10.5, and provided that the fee payable
pursuant to Section 10.5 shall after such termination (in the case of (x) or
(y)) or consummation (in the case of (z)) be paid, neither Parent nor Sub shall
(i) have any rights whatsoever in respect of or in connection with the
representation, and warranties, covenants and agreements of the Company, (ii)
assert or pursue in any manner, directly or indirectly, any claim or cause of
action based in whole or in part upon alleged tortious or other interference
with rights under this Agreement against any entity or person submitting an
Alternative Proposal or (iii) assert or pursue in any manner, directly or
indirectly, any claim or cause of action against the Company or any of its
officers or directors based in whole or in part upon its or their receipt,
consideration, recommendation, or approval of an Alternative Proposal, the
payment of the fee therein described being Parent's sole and exclusive remedy;
provided, further, that Parent may waive its right to receive the fee following
termination of this Agreement upon the occurrence of any of the events described
in clause (z) of Section 10.5 by written notice to the Company in which case the
foregoing proviso shall not be applicable.

ARTICLE XI

GENERAL PROVISIONS

Section 11.1 Non-Survival of Representations, Warranties and
Agreements. All representations and warranties set forth in this Agreement
shall terminate at the Effective Date. All covenants and agreements set forth in
this Agreement shall survive the Effective Date or the termination of this
Agreement, as applicable, in accordance with their terms or as set forth in
Section 10.5(b) hereof, respectively.

Section 11.2 Notices. All notices or other communications under this
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by cable, telegram, telex
or other standard form of telecommunications, or by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:

If to Parent or Sub:

Prime Hospitality Corp.
700 Route 46 East
P.O. Box 2700
Fairfield, New Jersey 07007
Attention: President and Chief Executive Officer
Telecopy No.: (201) 808-8577

With a copy to:

Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Jack H. Nusbaum, Esq.
Telecopy No.: (212) 821-8111

If to the Company:

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Homegate Hospitality, Inc.
111 Congress Avenue
Suite 2600
Austin, Texas 78701
Attention: Chief Operating Officer
Telecopy No.: (512) 477-6800

With a copy to:

Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: Derek R. McClain, Esq.
Telecopy No.: (214) 220-7716

or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.

Section 11.3 Fees and Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses, except as expressly provided herein and except that (a) the
filing fee in connection with the filing of the Form S-4 or Proxy
Statement/Prospectus with the Commission and (b) the expenses incurred in
connection with printing and mailing the Form S-4 and the Proxy
Statement/Prospectus, shall be shared equally by the Company and Parent.

Section 11.4 Publicity. So long as this Agreement is in effect, Parent,
Sub and the Company agree to consult with each other in issuing any press
release or otherwise making any public statement with respect to the
transactions contemplated by this Agreement, and none of them shall issue any
press release or make any public statement prior to such consultation, except as
may be required by law or by obligations pursuant to any listing agreement with
any national securities exchange. The commencement of litigation relating to
this Agreement or the transactions contemplated hereby or any proceedings in
connection therewith shall not be deemed a violation of this Section 11.4.

Section 11.5 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.

Section 11.6 Assignment; Binding Effect. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, with the
exception of Section 8.5 of the Parent Disclosure Schedule and Section 8.6
hereof, which are intended to have third party beneficiary effect with respect
to the individuals described or named therein.

Section 11.7 Entire Agreement. This Agreement, the Exhibits, the Company
Disclosure Schedule, the Parent Disclosure Schedule, the Confidentiality
Agreement dated February 11, 1997, between the Company and Parent, the letter
described in Section 8.5(a) and any documents delivered by the parties in
connection herewith and therewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No

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addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.

Section 11.8 Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors, at any time
before or after approval of matters presented in connection with the Mergers by
the stockholders of the Company, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.

Section 11.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to its rules of conflict of laws.

Section 11.10 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.

Section 11.11 Headings and Table of Contents. Headings of the Articles
and Sections of this Agreement and the Table of Contents are for the convenience
of the parties only, and shall be given no substantive or interpretive effect
whatsoever.

Section 11.12 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.

Section 11.13 Waivers. At any time prior to the Effective Date, the
parties hereto, by or pursuant to action taken by their respective Boards of
Directors, may (i) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.

Section 11.14 Incorporation of Exhibits. The Company Disclosure Schedule,
the Parent Disclosure Schedule and all Exhibits attached hereto and referred to
herein are hereby incorporated herein and made a part hereof for all purposes as
if fully set forth herein.

Section 11.15 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.

Section 11.16 Certain Definitions. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner. As used in this Agreement, an "Affiliate" of a person or
entity is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such person or entity.

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Section 11.17 Waiver of Jury Trial. PARENT, SUB AND THE COMPANY WAIVE ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
RIGHTS (A) UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH OR (B) ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS
AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A
COURT AND NOT BEFORE A JURY.

Section 11.18 Jurisdiction; Service of Process. EACH PARTY TO THIS
AGREEMENT HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE COURTS OF THE
STATE OF DELAWARE AND OF ANY FEDERAL COURT SITTING IN THE STATE OF DELAWARE, AND
AGREES THAT VENUE IN EACH OF SUCH COURTS IS PROPER IN CONNECTION WITH ANY ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED IN CONNECTION HEREWITH.

IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunder duly authorized all as of
the date first written above.

PRIME HOSPITALITY CORP.

By: /s/ JOHN M. ELWOOD
------------------------------------
Name: John M. Elwood
Title: Executive Vice President and
Chief Financial Officer

PH SUB CORPORATION

By: /s/ JOHN M. ELWOOD
------------------------------------
Name: John M. Elwood
Title: President

HOMEGATE HOSPITALITY, INC.

By: /s/ ROBERT A. FAITH
------------------------------------
Name: Robert A. Faith
Title: Chairman of the Board, Chief
Executive Officer and President

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ANNEX B

OPINION OF BEAR, STEARNS & CO. INC.

JULY 24, 1997

Board of Directors
Homegate Hospitality, Inc.
111 Congress Avenue
Suite 2600
Austin, Texas 78701

Attention: Robert A. Faith
Chairman and Chief Executive Officer

Gentlemen:

We understand that Homegate Hospitality, Inc. a Delaware corporation
("Homegate"), and Prime Hospitality,Inc., a Delaware corporation ("Prime"),
intend to affect a business combination by means of the merger of PH Sub
Corporation, a Delaware corporation ("Mergersub"), with and into Homegate
("Merger"). In the Merger, each outstanding share of Homegate common stock will
be converted into .6073 of a share of Prime common stock. You have provided us
with the Agreement and Plan of Merger among Homegate, Prime and Mergersub in
substantially final form (the "Merger Agreement").

You have asked us to render our opinion as to whether the consideration to
be received by the public stockholders of Homegate in the Merger is fair, from a
financial point of view, to the public stockholders of Homegate.

In the course of our analyses for rendering this opinion, we have:

1. reviewed the Merger Agreement;

2. reviewed Homegate's Annual Report to Stockholders and Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, and its
Quarterly Report on Form 10-Q for the period ended March 31, 1997;

3. reviewed certain operating and financial information, including
projections, provided to us by management relating to Homegate's business
and prospects;

4. met with certain members of Homegate's senior management to
discuss its operations, historical financial statements, current situation
and future prospects;

5. reviewed Prime's Annual Report to Stockholders and Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and its Quarterly
Report on Form 10-Q for the period ended March 31, 1997;

6. reviewed certain operating and financial information, including
projections, provided to us by management relating to Prime's business and
prospects;

7. met with certain members of Prime's senior management to discuss
its operations, historical financial statements, current situation and
future prospects;

8. reviewed the historical prices and trading volumes of the common
shares of Homegate and Prime;

9. reviewed publicly available financial data and stock market
performance data of companies that we deemed generally comparable to
Homegate and Prime;

10. reviewed the terms of recent acquisitions of companies that we
deemed generally comparable to Homegate; and

11. conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.

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In the course of our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information provided to us by
Homegate and Prime. With respect to Homegate's and Prime's projected financial
results and potential synergies that could be achieved upon consummation of the
Merger, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Homegate and Prime as to the expected future performance of
Homegate and Prime, respectively. We have not assumed any responsibility for the
information or projections provided to us and we have further relied upon the
assurances of the managements of Homegate and Prime that they are unaware of any
facts that would make the information or projections provided to us incomplete
or misleading, and we express no opinion with respect to such projections or to
the assumptions upon which they are based. In arriving at our opinion, we have
not performed or obtained any independent appraisal of the assets of Homegate
and Prime.

Our opinion is necessarily based on economic, market and other conditions,
and the information made available to us, as they exist and can be evaluated as
of the date hereof. We have not been asked and do not intend to update our
opinion. Our opinion as expressed below does not imply any conclusion as to the
likely trading range for Prime common stock either before or following the
consummation of the Merger, which may vary depending upon, among other factors,
changes in interest rates, dividend rates, market conditions, general economic
conditions and other factors that generally influence the price of securities.
Our opinion is directed solely to the fairness, from a financial point of view,
of the consideration to be received by the public stockholders of Homegate in
the Merger and does not address Homegate's underlying business decision to
effect the Merger and is not a recommendation to the Board of Directors or
stockholders of Homegate stockholders as to whether to approve or vote for the
Merger.

Based on the foregoing, it is our opinion that the consideration to be
received by the public stockholders of Homegate in the Merger is fair, from a
financial point of view, to the public stockholders of Homegate.

We have acted as financial advisor to Homegate in connection with the
Merger and will receive a fee for such services, payment of a significant
portion of which is contingent upon the consummation of the Merger. In the
ordinary course of business, we may actively trade the securities of Homegate
and Prime for our own account and for the account of customers and, accordingly,
may at any time hold a long or short position in such securities. We have
previously rendered certain investment banking and financial advisory services
to Homegate and Prime for which we received customary compensation.

Very truly yours,

BEAR, STEARNS & CO. INC.

By: /s/ DAVID GLASER
------------------------------------
Managing Director

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