-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BgI1Thbyt8HfKP+MQKNc8DFfy5ATJRE4aUk9Gq7wiFjhnukyr1H1e4WXRx3/DR/G fqjJUqDsyTYr/AGfZvX6Pw== 0000950123-96-001425.txt : 19960401 0000950123-96-001425.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950123-96-001425 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME HOSPITALITY CORP CENTRAL INDEX KEY: 0000080293 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 222640625 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06869 FILM NUMBER: 96540953 BUSINESS ADDRESS: STREET 1: 700 RTE 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 2018821010 MAIL ADDRESS: STREET 1: 700 RTE 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: PRIME MOTOR INNS INC DATE OF NAME CHANGE: 19920609 FORMER COMPANY: FORMER CONFORMED NAME: PRIME EQUITIES INC DATE OF NAME CHANGE: 19731120 10-K405 1 ANNUAL REPORT, PRIME HOSPITALITY CORP. 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-K (MARK ONE) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE - ----- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-6869 ----------------- PRIME HOSPITALITY CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2640625 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 700 ROUTE 46 EAST, FAIRFIELD, NEW JERSEY 07004 (address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(201)882-1010 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange Title of each class on which registered ------------------- --------------------- Par Value $.01 Per Share, Common Stock New York Stock Exchange 7% Convertible Subordinated Notes due 2002 New York Stock Exchange 9 1/4% First Mortgage Bond Notes due 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Warrants to Purchase Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x --- The aggregate market value of the registrant's common stock held by non-affiliates on March 20, 1996 based on the last sale price as reported by the National Quotation Bureau, Inc. on that date was approximately $380,450,000. The Registrant had 31,057,151 shares of Common Stock outstanding as of March 20, 1996. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No --- --- - -------------------------------------------------------------------------------- 2 PART I AND PART II Items 1 and 2. Business and Properties GENERAL BUSINESS THE COMPANY Prime Hospitality Corp. (The "Company or Prime") is a leading hotel owner/operator with a portfolio of 95 hotels totaling 13,622 rooms as of March 20, 1996. Located primarily in secondary markets in 21 states and the U.S. Virgin Islands, Prime's hotels operate either under franchise agreements with hotel brands such as Marriott, Radisson, Sheraton, Holiday Inn, Ramada and Howard Johnson, or under the Company's proprietary brand names, AmeriSuites and Wellesley Inns. The Company owns or leases 78 hotels (the "Owned Hotels") and manages 17 hotels for third parties (the "Managed Hotels"). Prime holds financial interests in the form of mortgages on or profit participations in 10 of the Managed Hotels. In total, the Company has equity or financial interests in 88 hotels containing 12,229 rooms. The Company operates in three major lodging industry segments: full-service, all-suites and limited-service. Approximately 50% of Prime's hotel rooms are in full-service hotels. The Company's 22 AmeriSuites hotels, which comprise approximately 19% of the Company's hotel rooms, are mid-priced, all-suites hotels, situated near office parks and travel destinations in the Southern and Central United States. The Company is expanding its operation of AmeriSuites hotels and expects to have 40 AmeriSuites hotels in operation by the end of 1996. Prime competes in the limited-service segment, which comprises approximately 31% of its hotel rooms, primarily through its economically priced Wellesley Inns, which are located in Florida, the Middle Atlantic and the Northeast. As a leading owner/operator of hotels, Prime believes that it is well positioned to benefit from the continuing strong performance of the lodging industry. Industry improvements in recent years have been driven by a favorable supply/demand imbalance resulting primarily from increased economic activity and the sharp decline in the growth of the supply of new hotel rooms since 1991. Demand growth exceeded new supply growth during each year in the period from 1991 to 1994, and in 1995 demand growth exceeded supply growth by 1.4%, as reported by Smith Travel Research. This trend has resulted in an increase in industry-wide occupancy levels from 60.9% in 1991 to 65.5% for 1995. Higher occupancy levels have allowed the industry to increase rates. The industry-wide average daily rate ("ADR") increased in 1995 by 4.8% over 1994 levels. Revenue per available room ("REVPAR"), which measures the combined impact of rate and occupancy, increased by 6.1% for 1995. Because of the operating leverage inherent in the lodging industry, increases in REVPAR have had a major impact on hotel operating performance, with industry pretax profits growing from breakeven levels in 1992 to approximately $7.5 billion in 1995, as estimated by Coopers & Lybrand. 1 3 Prime intends to continue to capitalize on its strengths and improve its position in the lodging industry through the implementation of the following strategies: Hotel Equity Ownership. Prime is fundamentally committed to hotel equity ownership, which it believes assures consistent high quality standards at its hotels. Significant elements of Prime's ownership strategy are strong in-house hotel management and control of its proprietary brands, both of which have contributed to improved hotel operating performance. Reflecting Prime's operating strengths, the Company's hotels generated average operating profit margins that exceeded comparable industry averages for 1994, as reported by industry sources, by approximately 19% for full-service hotels, 8% for all-suites hotels and 2% for limited-service hotels. Enhance Operating Performance at Existing Hotels. The Company's strategy for improving results at its existing hotels includes using sophisticated operating, marketing and financial systems and capitalizing on the operating leverage inherent in the lodging industry. Implementation of the Company's strategy, together with positive industry trends, has produced improved performance in recent years. Exemplifying the Company's operating leverage, for 1995, REVPAR increased 9.5% while net operating income (i.e. operating income plus depreciation and amortization, minus an imputed management fee and a reserve for capital replacements) increased 13.7%, as compared to 1994, for Company-owned comparable hotels, which are hotels that have been open for all of 1995 and 1994. The Company expects further improvement for the lodging sector and continued improvement in the performance of its existing hotels. Opportunistic Acquisition of Hotels. The Company seeks to capitalize on its strength as a hotel owner/operator by continuing to pursue the acquisition of hotels. In 1994 the Company acquired four hotels with approximately 1,000 rooms and in 1995 the Company acquired seven hotels, also containing approximately 1,000 rooms. In March 1996, the Company acquired 18 hotels with approximately 1,700 rooms, including 16 Wellesley Inns, a proprietary brand of the Company. The acquisition enables the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns now owned and operated by the Company. The acquisition should also provide the Company with significant new opportunities to maximize the value of its brand. With a continued industry outlook for limited new room supply, steady demand growth and acquisition prices generally at discounts to replacement cost, Prime believes that hotel acquisitions will continue to provide growth opportunities. Expand AmeriSuites All-Suites Hotel Brand. Prime is committed to expanding its proprietary AmeriSuites all-suites hotel brand. The Company believes that its AmeriSuites brand is well-positioned within the rapidly-growing all-suites segment, providing an excellent guest experience and offering desirable suite accommodations and other amenities at mid-scale prices. In the all-suites segment, demand growth exceeded new supply growth in 1995 by 2.6%, which is approximately twice the rate by which demand growth exceeded supply for the lodging industry as a whole. The operating performance of the 2 4 AmeriSuites hotels is benefiting from this favorable trend. For the eight owned AmeriSuites hotels which were open for all of 1995 and 1994, REVPAR increased by 11.9% during 1995. In addition to the 22 existing AmeriSuites hotels located in 13 states, the Company has an additional 12 AmeriSuites hotels under construction and 19 AmeriSuites sites under contract. The Company plans to open 20 AmeriSuites hotels in 1996, including three hotels which have opened in the first quarter of 1996. The Company believes that AmeriSuites provide attractive economic returns due to their reasonable cost and rapid stabilization rate. The Company's AmeriSuites have generally achieved positive net operating income within 12 months after opening. Management believes that economic returns from AmeriSuites development have generally equalled or exceeded those prevalent in the hotel acquisition markets. The Company believes it has the financial ability to execute its growth strategy. In January, the Company received net proceeds of $63.9 million, after repayment of debt and other expenses, from the issuance of 9 1/4% First Mortgage Notes due 2006. In addition, the Company had cash and cash equivalents and marketable securities totaling approximately $61.5 million as of December 31, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company is the successor in interest to Prime Motor Inns, Inc. ("PMI"). PMI restructured its operations and capital structure pursuant to a bankruptcy reorganization completed on July 31, 1992. Under its restructuring, PMI recruited new management and directors, reduced its liabilities by $448.8 million, revalued its assets to reflect fair market value and eliminated unprofitable contract commitments. During the period from July 31, 1992 through December 31, 1995, the Company further reduced its reorganization debt by $130.9 million and reduced its portfolio of notes receivable through cash collections and collateral recoveries by $160.1 million. In the process, the Company increased its investment in hotel fixed assets by $237.8 million and increased stockholders' equity by $97.3 million. With a strengthened balance sheet, a diminished note receivable portfolio and a significantly increased base of Owned Hotels, the Company believes that it is well positioned to implement its growth strategy. LODGING INDUSTRY Lodging industry analysts expect further improvement for the lodging sector. The primary reasons contributing to continued growth include: - Overall hotel supply growth is expected to remain modest in 1996 as replacement costs continue to exceed acquisition prices and the availability of construction financing remains limited. - Hotel room demand growth is expected to continue due to continued economic growth, expected increases in leisure and international travel and favorable demographics. 3 5 - Higher occupancy rates have provided the industry with pricing power as evidenced by the 4.8% increase in ADR in 1995, which has outpaced the growth in the consumer price index. The following table was compiled from industry operating data as reported by Smith Travel Research and highlights industry data for the United States and the regions in which most of the Company's hotels are located: the Middle Atlantic region, which is comprised of New Jersey, New York and Pennsylvania; and the South Atlantic region, which is comprised of Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware. The table also includes operating data concerning the three price levels (of the five price levels classified by Smith Travel Research) in which the Company competes: upscale, mid-price and economy. REVPAR data was calculated by the Company based on occupancy and ADR data supplied by Smith Travel Research.
%CHANGE IN: ROOM SUPPLY ROOM DEMAND REVPAR ----------- ----------- ------ 1993VS. 1994 VS. 1995 VS . 1993 VS. 1994 VS.1995 VS. 1993 VS. 1994 VS. 1995 VS. 1992 1993 1994 1992 1993 1994 1992 1993 1994 ------ ------ ------ ------ ------ ------ ------ ------ ----- United States..... 1.0% 1.4% 1.6% 4.0% 4.7% 3.0% 4.8% 7.3% 6.1% BY REGION: Middle Atlantic... 0.6 0.4 1.1 4.8 4.0 1.2 6.3 10.5 5.8 South Atlantic.... 0.7 1.1 1.3 4.1 3.2 3.6 4.1 4.9 6.9 BY SERVICE (PRICE LEVEL): Upscale........... 0.9 2.0 1.9 2.9 3.8 2.6 1.7 5.0 4.7 Mid-Price......... 1.4 2.0 2.4 2.9 4.2 3.8 3.5 5.5 5.9 Economy........... 0.8 1.1 2.0 1.6 2.6 3.0 (2.7) 5.0 6.2
PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Owned and Managed Hotels as of March 20, 1996:
MANAGED WITH FINANCIAL OWNED(1) INTEREST(2) OTHER MANAGED TOTAL HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- Full Service: Marriott.................. 1 517 -- -- 1 525 2 1,042 Radisson.................. 1 272 1 204 1 192 3 668 Sheraton.................. 4 944 0 0 0 0 4 944 Holiday Inn............... 3 602 4 810 0 0 7 1,412 Ramada.................... 8 1,214 3 672 2 276 13 2,162 Howard Johnson............ 1 210 1 116 1 115 3 441 Independent............... 1 149 0 0 0 0 1 149 ---- ------- ---- --------- --- -------- ---- ------- Total Full-Service...... 19 3,908 9 1,802 5 1,108 33 6,818 All Suites: AmeriSuites............... 22 2,640 0 0 0 0 22 2,640 Limited Service: Wellesley Inn............. 30 3,013 0 0 0 0 30 3,013 Howard Johnson............ 4 372 1 149 2 285 7 806 Other..................... 3 345 0 0 0 -- 3 345 --- ------- --- -------- -- -------- ---- ------- Total Limited Service... 37 3,730 1 149 2 285 40 4,164 Total................... 78 10,278 10 1,951 7 1,393 95 13,622 == ====== == ===== = ===== == ======
4 6 - ---------- (1) Of the 78 Owned Hotels, ten are leased. The leases covering the Company's leased hotels provide for fixed lease rents and, in most instances, additional percentage rents based on a percentage of room revenues. The leases also generally require the Company to pay the cost of repairs, insurance and real estate taxes. In addition, some of the Company's Owned Hotels are located on land subject to long-term leases, generally for terms in excess of the depreciable lives of the improvements. (2) Ten Managed Hotels in which the Company holds a mortgage or profit participation on the property. The following table sets forth the location of the Company's hotels as of March 20, 1996:
MANAGED WITH FINANCIAL OWNED INTEREST OTHER MANAGED TOTAL HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- Arizona.......... 1 118 -- -- -- -- 1 118 Arkansas......... 1 130 -- -- -- -- 1 130 California....... -- -- -- -- 1 96 1 96 Connecticut...... 4 589 -- -- -- -- 4 589 Florida.......... 23 2,529 -- -- 1 115 24 2,644 Georgia.......... 3 351 -- -- 1 189 4 540 Illinois......... 1 113 -- -- -- -- 1 113 Indiana.......... 1 126 -- -- -- -- 1 126 Kansas........... 1 126 -- -- -- -- 1 126 Kentucky......... 1 123 -- -- -- -- 1 123 Maryland......... 1 84 -- -- 1 525 2 609 Nevada........... 2 350 -- -- -- -- 2 350 New Jersey....... 14 2,127 8 1,693 3 468 25 4,288 New York......... 8 941 -- -- -- -- 8 941 North Carolina... 1 126 -- -- -- -- 1 126 Ohio............. 4 508 -- -- -- -- 4 508 Oregon........... 1 161 -- -- -- -- 1 161 Pennsylvania..... 3 467 2 258 -- -- 5 725 South Carolina... 1 111 -- -- -- -- 1 111 Tennessee........ 2 251 -- -- -- -- 2 251 U.S. Virgin Islands 1 517 -- -- -- -- 1 517 Virginia......... 4 430 -- -- -- -- 4 430 ---- -------- ---- --------- ------ -------- ---- -------- Total....... 78 10,278 10 1,951 7 1,393 95 13,622 == ====== == ===== ====== ===== == ======
5 7 The following table sets forth for the five years ended December 31, 1995, operating data for the 92 hotels in the Company's portfolio as of December 31, 1995. 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 26 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
MANAGED WITH OWNED FINANCIAL INTEREST OTHER MANAGED TOTAL HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- 1991 53 7,080 10 1,951 4 993 67 10,024 1992 56 7,428 10 1,951 4 993 70 10,372 1993 60 7,917 10 1,951 5 1,108 75 10,976 1994 67 8,983 10 1,951 7 1,393 84 12,327 1995 75 9,957 10 1,951 7 1,393 92 13,301
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ --------- --- ------ --------- --- ------ 1991 66.4% $59.27 $39.34 62.3% $60.86 $37.89 61.6% $82.44 $50.74 65.1% $61.74 $40.20 1992 67.9 59.83 40.62 70.3 61.88 43.47 66.2 82.83 54.81 68.2 62.39 42.54 1993 71.3 61.77 44.07 72.3 63.92 46.22 67.2 84.09 56.47 71.1 64.16 45.63 1994 69.7 64.54 44.96 71.7 69.26 49.63 69.5 77.58 53.94 70.0 66.92 46.84 1995 69.8 68.97 48.13 73.1 72.09 52.67 71.9 80.95 58.18 70.5 70.80 49.93
Full-Service Hotels The Company operates 33 full-service hotels under franchise agreements with Marriott, Radisson, Sheraton, Holiday Inn (including Crowne Plaza), Ramada and Howard Johnson. The full-service hotels are concentrated in the Northeast. The hotels are generally positioned along major highways within close proximity to corporate headquarters, office parks, airports, convention or trade centers and other major facilities. The customer base for full-service hotels consists primarily of business travelers. Consequently, the Company's sales force markets to companies which have a significant number of employees traveling in the Company's operating regions who consistently produce a high volume demand for hotel room nights. In addition, the Company's sales force actively markets meeting and banquet services to groups and individuals for seminars, business meetings, holiday parties and weddings. The Company owns and operates one resort hotel, the Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef) in St. Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 517-room resort hotel which includes a 421-room eight-story building and 96 rooms in the adjacent Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive convention facilities, complete sports and beach facilities and a self-contained total energy system. Certain of these facilities were damaged in the September 1995 hurricane described in the following paragraph. The Frenchman's Reef is marketed directly through its own sales force in New York City and at the hotel, and through the Marriott reservation system. The Frenchman's Reef market includes tour groups, corporate meetings, conventions and individual vacationers. 6 8 In September 1995, the Frenchman's Reef suffered damage when Hurricane Marilyn struck the U.S. Virgin Islands. Due to extensive property and business interruption insurance, the Company believes that its capital resources will be impacted only to the extent of its insurance deductibles, which the Company estimates at $2.2 million. The majority of damaged rooms at the Frenchman's Reef have been repaired on an interim basis and approximately 95% of the rooms are currently available for occupancy. The Company anticipates that extensive renovation at the Frenchman's Reef in 1996 will reduce the number of rooms available for occupancy. Such reduction in rooms available and related revenue will be a component of the Company's claim under its business interruption insurance. The Company is engaged in discussions with its insurance carrier regarding the amount of insurance proceeds to be paid and is assessing the extent of further refurbishments required at the Frenchman's Reef. The Company's full-service hotels generally have between 150 and 300 rooms and pool, restaurant, lounge, banquet and meeting facilities. Other amenities include fitness rooms, room service, remote-control cable television and facsimile services. In order to enhance guest satisfaction, the Company also has theme concept lounges such as sports bars, fifties clubs and country and western bars in a number of its hotels. In recent years, the Company has received recognition from various franchisors and associations for its hotel quality and service. The following table sets forth for the five years ended December 31, 1995, operating data for the 33 full-service hotels in the Company's portfolio as of December 31, 1995. Operating data for the hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of eight Owned Hotels that were managed by the Company prior to their acquisition by the Company during the five-year period are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1991 17 3,404 30 6,199 1992 17 3,404 30 6,199 1993 17 3,404 31 6,314 1994 18 3,759 32 6,669 1995 19 3,908 33 6,818
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ 1991 63.6% $79.27 $50.38 65.1% $75.55 $49.16 1992 62.6 75.22 47.11 62.5 72.55 45.37 1993 63.6 77.27 49.12 66.2 73.63 48.72 1994 67.9 80.93 54.96 69.4 76.51 53.06 1995 66.5 85.78 57.07 68.8 81.28 55.90
The Company has taken advantage of opportunities for acquisitions of full-service hotels at attractive multiples of cash flow or at significant discounts to replacement values. During 1994, the Company acquired the 183-room Ramada Inn in Clifton, New Jersey, the 272-room Ramada Inn in Trevose, Pennsylvania, which the Company has since converted to a Radisson, 7 9 the 355-room Sheraton in Hasbrouck Heights, New Jersey and the 225-room Sheraton hotel in Mahwah, New Jersey. In addition, the Company obtained ownership of the 517-room Frenchman's Reef hotel through a note receivable settlement in 1994. The Company does not anticipate the acquisition of other resort hotels. The Company continued its acquisition program in 1995 with the acquisition of the 240-room Princeton Ramada Inn in New Jersey, which the Company has since converted to a Holiday Inn, and the 149-room St. Tropez Hotel and Shopping Center in Las Vegas, Nevada. With a continued outlook for limited new room supply, steady demand growth and acquisition prices at discounts to replacement cost in the full-service segment, Prime believes its full-service hotels will continue to provide significant growth opportunities. The majority of the Company's repositioning efforts have been performed at the full-service hotels. Since 1993, the Company successfully completed the repositioning of ten of its full-service hotels which included changing the franchise affiliations of five such hotels. The Company is in the process of repositioning the Hasbrouck Heights Sheraton Hotel to a Crowne Plaza. All-Suites Hotels The Company currently owns 22 AmeriSuites hotels. AmeriSuites are all-suite, mid-priced 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 contain approximately 128 suites and two to four meeting rooms. AmeriSuites are primarily located near corporate office parks and travel destinations in the Southern and Central parts of the United States. The target customer is primarily the business traveler with an average length of stay of two to three nights. AmeriSuites are marketed primarily through direct sales, national marketing programs and a central reservation system. The following table sets forth for the five years ended December 31, 1995, certain data with respect to AmeriSuites hotels, all of which are owned by the Company. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations.
HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- --- ------ 1991 4 497 48.5% $55.33 $26.83 1992 6 749 59.9 54.99 32.97 1993 8 993 64.1 56.21 36.01 1994 12 1,494 65.9 56.21 39.50 1995 19 2,319 67.2 65.45 43.98
8 10 The Company believes that the all-suites segment will continue to be a high growth segment of the industry. In the all-suites segment, demand growth exceeded new supply growth in 1995 by 2.6%, which is approximately twice the rate by which demand growth exceeded supply for the lodging industry as a whole. The operating performance of the AmeriSuites hotels is benefiting from this favorable trend. For the eight owned AmeriSuites hotels which were open for all of 1995 and 1994, REVPAR increased by 11.9% during 1995. The Company plans to develop the AmeriSuites brand primarily through new construction to assure product consistency and quality. The average age of the AmeriSuites hotels is 4.5 years. The Company believes that AmeriSuites provide attractive economic returns due to their reasonable cost and rapid stabilization rate. The Company's AmeriSuites have generally achieved positive net operating income within 12 months after opening. The Company believes that economic returns from AmeriSuites development have generally equalled or exceeded those prevalent in the hotel acquisition markets. The Company plans to open 20 AmeriSuites hotels in 1996. In 1995, AmeriSuites hotels were opened in Atlanta, Greensboro, Jacksonville, Chicago, Columbia and Augusta. In addition, in 1996, the Company opened two new AmeriSuites hotels in Miami and one new AmeriSuites hotel in Cleveland, bringing the number of AmeriSuites owned and operated by the Company to 22. The Company currently has 12 AmeriSuites hotels under construction and 19 additional AmeriSuites sites under contract and scheduled for the commencement of development in 1996. In March 1995 the Company purchased an AmeriSuites hotel in Richmond, Virginia and the option of ShoLodge, Inc. to acquire a 50% interest in 11 of the Company's AmeriSuites hotels. As a result of the transaction, the Company assumed management of all AmeriSuites hotels, including these twelve which had previously been managed by ShoLodge, Inc. Limited-Service Hotels The Company's limited-service hotels consist of 30 Wellesley Inns and 10 other hotels operated under franchise agreements, primarily with Howard Johnson. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The acquisition enables the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The acquisition should also provide the Company with significant new opportunities to maximize the value of its brand. Of the Company's 30 Wellesley Inns, 16 are located in Florida and the remainder in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has 105 rooms and is distinguished by its classic stucco exterior, spacious lobby and amenities such as pool facilities, continental breakfast, remote control cable television and facsimile services. In connection with the acquisition of the 16 Wellesley Inns, the Company intends to refurbish 9 11 these hotels to ensure consistent product quality throughout the chain. Marketing efforts for the Wellesley Inn chain will continue to rely heavily on direct marketing and billboard advertising. In Florida, where the population has grown rapidly and development opportunities continue to exist, the Company has built a geographically concentrated group of Wellesley Inns, thereby developing regional brand name recognition in Florida. The majority of the Florida Wellesley Inns were constructed within the past five years. The Company historically has constructed these properties at a cost of approximately $40,000 per room and a construction period of approximately seven to nine months. Florida Wellesley Inns have a low cost structure and have had rapid stabilization periods generally within six to twelve months of opening. The Company's other limited-service hotels have an average of between 100 and 120 rooms and offer complimentary continental breakfast, remote control cable television, pool facilities and facsimile services, generally with restaurant facilities within a short distance of the hotel. They are designed to appeal primarily to business travelers. The following table sets forth for the five years ended December 31, 1995 operating data for the 40 limited-service hotels as of December 31, 1995. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of 18 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1991 32 3,179 33 3,328 1992 33 3,275 34 3,424 1993 35 3,520 36 3,669 1994 37 3,730 40 4,164 1995 37 3,730 40 4,164
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ 1991 72.6% $44.57 $32.37 71.8% $44.78 $32.16 1992 74.3 44.41 32.97 73.6 44.46 32.74 1993 76.8 45.43 34.89 76.1 45.46 34.61 1994 73.9 47.57 35.15 73.1 47.31 34.60 1995 74.7 50.77 37.93 74.1 50.53 37.46
REFURBISHMENT PROGRAM The Company continuously refurbishes its Owned Hotels in order to maintain consistent quality standards. The Company generally spends approximately 4% to 6% of hotel revenue on capital improvements at its Owned Hotels and typically refurbishes each hotel approximately every five years. The Company believes that its Owned Hotels are in generally good physical condition, with over half of the Owned Hotels being five years old or less. The 10 12 Company recommends the refurbishment and repair projects on its Managed Hotels although spending amounts vary based on the plans of such hotels' owners and the significance of the Company's interest as a mortgagee. In addition to making normal capital improvements, the Company reviews on an on-going basis each hotel's competitive position in the local market in order to decide the types of product that will best meet the market's demand characteristics. During the past three years, the Company has implemented a program of repositioning its Owned Hotels. Repositioning a hotel generally requires renovation and refurbishment of the exterior and interior of the building and may result in a change of brand name. In 1993, 1994 and 1995, the Company spent $2.8 million, $8.9 million and $13.7 million, respectively, on the repositioning of 16 of its Owned Hotels, which included changing the franchise affiliation of ten of such hotels. Major refurbishment efforts in 1996 will focus on the Hasbrouck Heights Crowne Plaza conversion and the 18 hotels acquired on March 6, 1996, 16 of which are Wellesley Inns. The Company expects to spend approximately $13.5 million in connection with these repositionings. MORTGAGES AND NOTES RECEIVABLE As of December 31, 1995, mortgages and notes receivable totaled $66.5 million (including current portion) and consisted of an aggregate principal amount of $43.3 million of mortgages and notes secured by Managed Hotels, $13.9 million of mortgages secured by hotels that are leased by the Company from third parties and $9.3 million of other mortgages and notes secured primarily by other hotels. The Company has pursued a strategy of converting its mortgage and notes receivable into cash or operating hotel assets. Since July 31, 1992, the Company has received $100.7 million in cash and added eight operating hotel assets through note settlements. The Company will continue to pursue settlements with mortgage and note obligors and will utilize the cash for debt repayments or for general corporate purposes. During 1995, the Company received $13.1 million in cash in settlements of notes receivable resulting in gains of $822,000. In May 1995, the Company obtained control of the 240-room Princeton Holiday Inn by converting its $2.7 million mortgage note receivable into a long-term leasehold position and assuming $1.5 million of debt. The hotel was recently repositioned to a Holiday Inn from a Ramada Inn. In January 1996, the Company obtained control of the 210-room Cocoa Beach Howard Johnson Plaza by converting its $9.7 million mortgage note receivable into a long-term leasehold position. The Company's mortgage notes secured by Managed Hotels bear interest at rates ranging from 8.0% to 13.5% per annum and have various maturities through 2015. The mortgages were derived from the sales of hotel properties. The loans secured by Managed Hotels pay interest and principal based upon available cash and include a participation in the future excess cash flow of such hotel properties. Two of these mortgages have been structured to include a "senior portion" featuring defined payment terms, and a "junior portion" payable annually based on cash flow. 11 13 In addition to the mortgage positions referred to above, the Company holds junior or cash flow mortgages and subordinated interests on six other hotel properties operated by the Company under management agreements. Pursuant to these mortgage agreements, the Company is entitled to receive the majority of excess cash flow generated by these hotel properties and to participate in any future sales proceeds. With regard to these properties, third parties hold significant senior mortgages. The junior mortgages mature on various dates from 1999 through 2002. In accordance with the adoption of fresh start reporting under SOP 90-7, no value was assigned to the junior portions of the notes or the junior mortgages and subordinated interests on the other hotels as there was substantial doubt at the time of valuation that the Company would recover any of their value. As a result, interest income on these junior or cash flow mortgages is recognized when cash is received. During 1993, 1994 and 1995, the Company recognized $976,000, $2,000,000 and $1,950,000, respectively, of interest income related to these mortgages. Future recognition of interest income on these mortgages is dependent primarily upon the net cash flow of the underlying hotels after debt service, which is senior to the Company's junior positions. In June 1995, the Company purchased $17.4 million in face amount of first mortgage notes for $12.7 million in cash. These first mortgage notes were secured by two hotels. The purchase of such notes was intended to provide the Company with the opportunity to acquire the underlying properties. On December 21, 1995, the Company received $12.7 million plus all accrued interest as payment in full on the first mortgage notes. In addition to mortgages and notes receivable, as of December 31, 1995, the Company had other assets that totaled $13.6 million, which consisted primarily of real property not related to Owned Hotels. MANAGEMENT AGREEMENTS As of March 20, 1996, the Company provides hotel management services to third party hotel owners of 17 Managed Hotels. Management fees are based on fixed percentages of the property's total revenues and incentive payments based on certain measures of hotel income. Additional fees are also generated from the rendering of specific services such as accounting services, construction services, design services and sales commissions. The Company's fixed management fee percentages range from 1.0% to 5.0% and average 3.5% total revenues before giving consideration to performance related incentive payments. The base and incentive fees comprised 56.2%, or $4.6 million, of the total management and other fees for 1995. Terms of the management agreements vary but the majority are short-term and, therefore, there are risks associated with termination of these agreements. Although management agreements may be terminated in connection with a change in ownership of the underlying hotels, such risks may be limited due to the Company's other financial interests in these hotels. 12 14 The Company holds financial interests in the form of mortgages or profit participations in 10 of the 17 Managed Hotels. OPERATIONS As a leading domestic hotel operating company, the Company enjoys a number of operating advantages over other lodging companies. With 95 hotels covering a number of price points and broad geographic regions, the Company possesses the critical mass to support sophisticated operating, marketing and financial systems. The Company believes that its broad array of central services permits on-site hotel general managers to effectively focus on providing guest services, results in economies of scale and leads to above-market hotel profit margins. As a result of these operating strategies, the Company's hotels generated average operating profit margins that exceeded comparable industry averages for 1994, as reported by industry sources, by approximately 19% for full-service hotels, 8% for all-suites hotels and 2% for limited-service hotels. The Company's operating strategy combines operating service and guidance from its central management team with decentralized decision-making authority delegated to each hotel's on-site management. The on-site hotel management teams consist of a general manager and, depending on the hotel's size and market positioning, managers of sales and marketing, food and beverage, front desk services, housekeeping and engineering. The Company's operating objective is to exceed guest expectations by providing quality services and comfortable accommodations at a fair value. On-site hotel management is responsible for efficient expense controls and uses operating standards provided by the Company. Within parameters established in the operating and capital planning process, on-site management possesses broad decision-making authority on operating issues such as guest services, marketing strategies, hiring practices and incentive programs. Each hotel's management team is empowered to take all necessary steps to ensure guest satisfaction within established guidelines. Key on-site personnel participate in an incentive program based on hotel revenues and profits. The central management team, located in Fairfield, New Jersey, provides four major categories of services: (i) operations management, (ii) sales and marketing management, (iii) financial reporting and control and (iv) hotel support services. Operations Management. Operations management consists of the development, implementation and monitoring of hotel operating standards and is provided by a network of regional operating officers who are each responsible for the operations of 10 to 30 hotels. They are supported by training, food and beverage and human resources departments, each staffed full-time by specialized professionals. The cornerstone of operations management is employee training, with a staff of professionals dedicated to training in sales, housekeeping, food service, front desk services and leadership. The Company believes these efforts increase employee effectiveness, reduce turnover and improve the level of guest services. 13 15 The Company's cost-effective centralized management services benefit not only its existing operations but also provide additional opportunities for growth and development from acquisitions. In all of the recently acquired hotels, the Company's central management has assumed certain of the operational responsibilities which previously had been performed by the on-site hotel management. In addition, the Company believes it has improved operating efficiencies for each of the hotels that it has acquired. Sales and Marketing Management. Aggressive sales and marketing is a top operating priority. Sales and marketing management is directed by a corporate staff of 20 professionals, including regional marketing directors who are responsible for each hotel's sales and marketing strategies, and the Company's national sales group, Market Segments, Inc. ("MSI"). In cooperation with the regional marketing staff, on-site sales management develops and implements short- and intermediate-term marketing plans. The Company focuses on yield management techniques, which optimize the relationship between hotel rates and occupancies and seek to maximize profitability. In addition, the Company assumes prominent roles in franchise marketing associations to obtain maximum benefit from franchise affiliations. The Company's in-house creative department develops hotel advertising materials and programs at cost-effective rates. Complementing regional and on-site marketing efforts, MSI's marketing team targets specific hotel room demand generators including tour operators, major national corporate accounts, athletic teams, religious groups and others with segment-specialized sales initiatives. MSI's primary objective is to book hotel rooms at the Company's hotels and its secondary objective is to market its services on a commission basis to hotels throughout the industry. Sales activities on behalf of non-affiliated hotels increase the number of hotels where bookings can be made to support marketing efforts and defray the costs of the marketing organization. Financial Reporting and Control. The Company's system of centralized financial reporting and control permits management to closely monitor decentralized hotel operations without the cost of financial personnel on site. Centralized accounting personnel produce detailed financial and operating reports for each hotel. Additionally, central management directs budgeting and analysis, processes payroll, handles accounts payable, manages each hotel's cash, oversees credit and collection activities and conducts on-site hotel audits. Hotel Support Services. The Company's hotel support services combine a number of technical functions in central, specialized management teams to attain economies of scale and minimize costs. Central management handles purchasing, directs construction and maintenance and provides design services. Technical staff teams support each hotel's information and communication systems needs. Additionally, the Company directs safety/risk management activities and provides central legal services. 14 16 FRANCHISE AGREEMENTS The Company enters into non-exclusive franchise licensing agreements with franchisors, which agreements typically have a ten year term and allow the Company to benefit from franchise brand recognition and loyalty. The non-exclusive nature of the franchise agreement allows the Company the flexibility to continue to develop properties with the brands that have shown success in the past or to develop in conjunction with other brand names. This flexibility also plays an important role in the Company's repositioning strategy which emphasizes proper positioning of its properties within their respective markets to maximize their return on investment. Over the past three years, the Company has repositioned several hotels. These repositionings include the Portland, Oregon Crowne Plaza (formerly Howard Johnson), the Las Vegas, Nevada Crowne Plaza (formerly Howard Johnson), the Saratoga Springs, New York Sheraton (formerly Ramada Renaissance), the Fairfield, New Jersey Radisson (formerly Sheraton), the Orlando, Florida Shoney's Inn (formerly Howard Johnson), the Trevose, Pennsylvania Radisson (formerly Ramada) and the Princeton, New Jersey Holiday Inn (formerly Ramada). The Company believes its relationships with numerous nationally recognized franchisors provides significant benefits for both its existing hotel portfolio and prospective hotel acquisitions. While the Company currently enjoys good relationships with its franchisors, there can be no assurance that a desirable replacement would be available if any of the franchise agreements were to be terminated. The franchise agreements require the Company to pay annual fees, to maintain certain standards and to implement certain programs which require additional expenditures by the Company such as remodeling or redecorating. The payment of annual fees, which typically total 7% to 8% of room revenues, cover royalties and the costs of marketing and reservation services provided by the franchisors. Franchise agreements, when initiated, generally provide for an initial fee in addition to annual fees payable to the franchisor. WORKING CAPITAL The Company has financed its operations and capital needs principally through a combination of cash flow from operations, proceeds from the public offerings of convertible notes and first mortgage notes and other mortgage financings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition." SEASONALITY The impact of seasonality on the Company as a whole is insignificant due to the seasonal balance achieved from the geographical location of the Company's hotel properties in the Northeast and Southeast. 15 17 COMPETITION The Company operates and manages hotel properties in areas that contain numerous other hotels, some of which are affiliated with national or regional brands. The Company competes with other hotels primarily on the basis of price, physical facilities and customer service. EMPLOYEES As of December 31, 1995, the Company employed approximately 5,500 employees. Certain of the Company's employees are covered by collective bargaining agreements. The Company believes that relations with its employees are good. ENVIRONMENTAL MATTERS The Hotels are subject to environmental regulations under Federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. The Company does not believe that it is subject to any material environmental liability. Item 3. Legal Proceedings In April 1995, the Company received a favorable ruling in its litigation with Financial Security Assurance, Inc. ("FSA") in which FSA sought approximately $31.2 million previously received by the Company in settlement of a note and guaranty from Allan V. Rose and Arthur G. Cohen ("Rose and Cohen"). In an order dated April 25, 1995, the U.S. District Court for the Southern District of Florida affirmed a lower court ruling approving the Company's settlement with Rose and Cohen and finding that the Company alone was entitled to the settlement proceeds. The Company reached a settlement in 1993 with Rose and Cohen which provided for Rose or his affiliate to pay the Company $25.0 million plus proceeds from the sale of approximately 1.1 million shares of the Company's common stock held by Rose, bringing the total settlement proceeds to approximately $31.2 million. FSA asserted that, under the terms of an intercreditor agreement, it was entitled to receive the settlement proceeds otherwise payable to the Company. The U.S. Bankruptcy Court for the Southern District of Florida ruled in favor of the Company in April 1994 and the Company used $25.0 million of the settlement proceeds to retire certain senior secured notes. FSA appealed to the U.S. District Court, which affirmed the Bankruptcy Court's ruling. On May 12, 1995, the Company used the remaining proceeds plus accrued interest to prepay senior secured notes. On May 23, 1995, FSA filed a notice of appeal with the U.S. Court of Appeals for the 11th Circuit. The Company believes that the U.S. Court of Appeals will affirm the U.S. District Court ruling and that there will be no effect on the Company's financial position, results of operations or liquidity. 16 18 In addition to the foregoing legal proceedings, the Company is involved in various other proceedings incidental to the normal course of its business. Management does not expect that any of such other proceedings will have a material adverse effect on the Company's financial position. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted during the fiscal quarter ended December 31, 1995 to a vote of the security holders of the Company. 17 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock, par value $.01 per share, commenced trading on the New York Stock Exchange (the "NYSE") on August 3, 1992 under the symbol "PDQ." As of March 20, 1996 there were 31,057,151 shares of common stock outstanding. In addition, warrants to purchase an aggregate of 1,392,193 shares of common stock are outstanding as of March 20, 1996. The warrants are not listed on any exchange. The following table sets forth the reported high and low closing sales prices of the common stock on the NYSE.
High Low Dividend/Share ---- --- -------------- Year Ended December 31, 1994 First Quarter ................................. 8 1/8 5 3/8 -0- Second Quarter ................................ 7 5/8 5 3/8 -0- Third Quarter ................................. 8 3/4 6 3/4 -0- Fourth Quarter ................................ 9 6 7/8 -0- Year Ended December 31, 1995 First Quarter.................................. 10 3/8 7 3/8 -0- Second Quarter................................. 10 5/8 9 1/4 -0- Third Quarter.................................. 11 9 1/2 -0- Fourth Quarter................................. 10 1/4 9 3/8 -0-
As of March 20, 1996, the closing sales price of the common stock on the NYSE was $12 1/4, and there were approximately 2,532 holders of record of common stock. The Company has not declared any cash dividends on its common stock since the Effective Date and does not currently anticipate paying any dividends on the common stock in the foreseeable future. The Company currently anticipates that it will retain any future earnings for use in its business. The Company is prohibited by the terms of certain debt agreements from paying cash dividends. 18 20 Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY AND ITS PREDECESSOR The Company is the successor in interest to PMI, which emerged from chapter 11 reorganization on July 31, 1992 (the "Effective Date"). PMI had filed for protection under chapter 11 of the United States Bankruptcy Code in September 1990. The Company implemented "fresh start" reporting pursuant to the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" of the American Institute of Certified Public Accountants, as of the Effective Date. Accordingly, the consolidated financial statements of the Company are not comparable in all material respects to any such financial statement as of any date or any period prior to the Effective Date. Subsequent to the Effective Date, the Company changed its fiscal year end from June 30 to December 31. The table below presents selected consolidated financial data derived from: (i) the Company's historical financial statements for the years ended December 31, 1993, 1994 and 1995, (ii) the Company's historical financial statements as of and for the five-month period ended December 31, 1992, (iii) the Company's "fresh start" balance sheet as of the Effective Date, and (iv) the historical consolidated financial statements of PMI for the one month ended July 31, 1992 and for the years ended June 30, 1991 and 1992. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
PRE-REORGANIZATION POST-REORGANIZATION ------------------------------ ---------------------------------------------- AS OF AND AS OF AND FOR THE FOR THE AS OF AND FOR THE YEAR ONE MONTH FIVE MONTHS FOR THE YEAR ENDED ENDED JUNE 30, ENDED AS OF ENDED DECEMBER 31, -------------- JULY 31, JULY 31, DEC. 31, ------------ 1991(1) 1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 ------- ------- ------- ------- ---- ---- ---- ---- (IN THOUSANDS) (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Total revenues $205,699 $134,190 $ 8,793 $ 41,334 $108,860 $134,303 $205,628 Valuation writedowns and reserves (59,149) (62,123) (13,000) -- -- -- -- -- Reorganization items (181,655) (23,194) 1,796 -- -- -- -- -- Income (loss) from continuing operations before extraordinary items(2) .......... (246,110) (71,965) (10,274) -- 1,393 8,175 18,258 17,465 Extraordinary items-gains on discharge of indebtedness (net of income taxes) ..... -- -- 249,600 -- -- 3,989 172 104 Net income (loss) ... (227,188) (71,965) 239,326 -- 1,393 12,164 18,430 17,569 BALANCE SHEET DATA: Total assets ........ $679,916 $554,118 -- $468,650 $403,314 $410,685 $434,932 $573,241 Long-term debt, net of current portion ... 2,851 8,921 -- 204,438 192,913 168,618 178,545 276,920 Stockholders' equity (deficiency) ...... (157,327) (229,292) -- 135,600 137,782 171,364 204,065 232,916
19 21 Item 6. (Continued) Selected Quarterly Financial Data (Unaudited) (1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at which time it owned or managed 141 hotels. During its approximately two-year reorganization, PMI restructured its assets, operations and capital structure. On the Effective Date, the Company emerged from chapter 11 reorganization with 75 Owned or Managed Hotels, $135.6 million of stockholders' equity and $266.4 million of total debt. (2) Approximately $2.3 million, $28.0 million and $25.3 million of contractual interest expense during the one month ended July 31, 1992 and for the fiscal years ended June 30, 1992 and 1991, respectively, was not accrued and was not paid due to the chapter 11 proceeding. Quarterly financial data for the years ending December 31, 1994 and 1995 is presented as follows (in thousands, except per share amounts).
Three Months Ended ----------------------------------------------------------- March 31, June 30, September 30, December 31, 1994 (a) 1994 (a) 1994 1994 --------- -------- ---- ---- Net revenue ................. $28,079 $33,194 $36,063 $36,967 Operating income ............ 6,850 8,632 9,394 8,492 Net income before extraordinary items ........ 2,840 6,869 4,117 4,432 Extraordinary items (net of tax) ............... 111 58 3 -- Net income .................. 2,951 6,927 4,120 4,432 Income per common share: Income before extraordinary items ........ 0.08 0.22 0.13 0.14 Extraordinary items ......... 0.01 -- -- -- ----- -------- -------- -------- Net income .................. $0.09 $0.22 $0.13 $0.14 ===== ===== ===== ===== Three Months Ended ------------------------------------------------------------ March 31, June 30, September 30, December 31, 1995 1995 1995 1995 ---- ---- ---- ---- Net revenue ................ $48,238 $51,703 $52,703 $52,985 Operating income ........... 10,600 12,058 12,141 11,012 Net income before extraordinary items ....... 4,208 4,915 4,060 4,282 Extraordinary items (net of tax) .............. 7 54 12 32 Net income ................. 4,215 4,969 4,072 4,314 Income per common share: Income before extraordinary items....... 0.13 0.15 0.13 0.13 Extraordinary items ........ -- -- -- -- -------- ----- ------- -------- Net income ................. $0.13 $0.15 $0.13 $0.13 ===== ===== ===== =====
(a) Income per share has been restated to reflect a 9.4% retroactive reduction in the number of shares distributed under PMI's plan of reorganization. 20 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading hotel owner/operator which, as of March 20, 1996, owns or leases 78 hotels and manages 17 hotels for third parties. The Company has a financial interest in the form of mortgages or profit participations (primarily incentive management fees) in 10 of the Managed Hotels. The Company consolidates the results of operations of its Owned Hotels and records management fees (including incentive management fees) and interest income, where applicable, on the Managed Hotels. The Company has implemented a growth strategy which focuses on improving results at existing hotels, maximizing the value of its proprietary AmeriSuites and Wellesley Inn hotels and acquiring hotels with potential for operating and marketing improvements. For 1995, earnings from recurring operations have increased by 36.2% reflecting a 9.5% REVPAR increase at comparable hotels, the addition of 20 hotels primarily through acquisition or construction in the past two years and the impact of increased operating leverage. Although future results of operations may be adversely affected in the short term by the costs associated with the acquisition and construction of new hotels, it is expected that this impact will be offset, after an initial period, by revenues generated by such new hotels. The Company believes that it is well positioned to benefit from the expected continued improvements in the lodging industry due to its hotel equity ownership position and its growth strategy. In 1994 and 1995, the Company acquired ownership of three hotels, including the Frenchman's Reef, as a result of restructuring mortgage notes receivable secured by these hotels. The transactions have not had a material impact on operating income but have affected operating margins significantly. Prior to these settlements, the Company recorded revenues related to these hotels in the form of interest income and management fees, with no corresponding operating expenses. For the year ended December 31, 1995, the Company recorded the operating revenues and operating expenses related to these hotels. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for the years ended December 31, 1994 and 1995. The results of the four hotels divested during 1994 21 23 and 1995 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE TOTAL HOTELS(1) 1994 1995 1994 1995 ------ ------ ------ ----- (DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR) Revenues: Lodging....................................... $ 88,753 $146,184 $76,604 $83,190 Food and Beverage............................. 18,090 37,955 13,601 13,299 Management and Other Fees..................... 10,021 8,115 Interest on Mortgages and Notes Receivable.... 15,867 11,895 Rental and Other.............................. 1,572 1,479 -------- -------- Total Revenues ............. 134,303 205,628 Direct Hotel Operating Expenses: Lodging....................................... 25,490 38,383 20,722 21,908 Food and Beverage............................. 13,886 28,429 10,634 10,467 Selling and General........................... 27,244 49,753 23,009 24,338 Occupancy and Other Operating................... 9,799 11,763 General and Administrative...................... 15,089 15,515 Depreciation and Amortization................... 9,427 15,974 Operating Income................................ 33,368 45,811 Operating Expense Margins: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue... 28.7% 26.3% 27.1% 26.3% Food and Beverage, as a percentage of food and beverage revenue................... 76.8% 74.9% 78.2% 78.7% Selling and General, as a percentage of lodging and food and beverage revenue....... 25.5% 27.0% 25.5% 25.2% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue............................ 9.2% 6.4% General and Administrative, as a percentage of total revenue............................ 11.2% 7.5% Other Data: Occupancy..................................... 68.0% 69.2% 70.4% 72.3% Average Daily Rate ("ADR").................... $60.36 $73.28 $59.92 $63.97 Revenue Per Available Room ("REVPAR")......... $41.04 $50.71 $42.21 $46.22 Gross Operating Profit........................ $40,223 $67,605 $35,824 $39,926
(1) For purposes of this discussion of results of operations, comparable Owned Hotels refers to the 37 Owned Hotels that were owned or leased by the Company during all of 1994 and 1995. Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $57.4 million, or 64.7%, from $88.8 million in 1994 to $146.2 million in 1995. The increase was due to $52.1 million of lodging revenues from the 22 24 addition of the Frenchman's Reef and the 19 new hotels added during 1994 and 1995 with the balance coming from growth in revenues at comparable Owned Hotels. Lodging revenues for comparable Owned Hotels increased by $6.6 million, or 8.6%, in 1995 as compared to 1994. The Company operates in three major segments of the industry: full-service, all-suites and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for 1995, as compared to 1994, by industry segment:
YEAR ENDED DECEMBER 31, 1995 ----------------- Full-service....................... 8.7% All-suites......................... 11.9% Limited-service.................... 9.2% Total..................... 9.5%
The REVPAR growth at comparable Owned Hotels reflects strong results in each of the Company's industry segments. Repositioning efforts at both full-service and limited-service hotels also contributed to the REVPAR increases. The improvements in REVPAR were generated by increases in ADR, which rose by 6.8% and gains in occupancy of 2.7%. Food and beverage revenues increased by $19.9 million, or 109.8%, from $18.1 million in 1994 to $38.0 million in 1995. The increase was primarily due to the additional food and beverage operations related to the Frenchman's Reef and six other full-service hotels acquired since January 1, 1994. Food and beverage revenues for comparable Owned Hotels decreased by $302,000 in 1995 compared to 1994. The decrease was primarily due to decreased banquet business and lower beverage revenues at the Company's sports lounges. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group, Market Segments, Inc. ("MSI"). Management and other fees decreased by $1.9 million, or 19.0%, from $10.0 million in 1994 to $8.1 million in 1995. The decrease was primarily due to the loss of management fees on five Managed Hotels acquired by the Company during 1994 and 1995 and six additional hotels which were sold by a third party hotel owner in 1994. Partially offsetting these decreased management fees were increased base and incentive management fees associated with the remaining Managed Hotels and increased revenues generated by MSI. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $4.0 million, or 25.0%, from $15.9 million in 1994 to $11.9 million in 1995, primarily due to the Company's conversion of a $50.0 million note receivable secured by the Frenchman's Reef into an operating hotel asset in December 1994. Partially offsetting the decrease was interest income related to the purchase of $17.4 million of first mortgages secured by two hotels for $12.7 million in June 1995. 23 25 Direct lodging expenses increased by $12.9 million, or 50.6%, from $25.5 million in 1994 to $38.4 million in 1995, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 28.7% in 1994 to 26.3% in 1995. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.1% in 1994 to 26.3% in 1995. Direct food and beverage expenses increased by $14.5 million, or 104.7%, from $13.9 million in 1994 to $28.4 million in 1995, primarily due to the addition of seven new full-service hotels. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 76.8% in 1994 to 74.9% in 1995. The decrease was primarily due to increased revenues in higher margin areas such as banquet departments at the new hotels. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue increased slightly from 78.2% in 1994 to 78.7% in 1995. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $22.6 million, or 82.6%, from $27.2 million in 1994 to $49.8 million in 1995, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses increased from 25.5% in 1994 to 27.0% in 1995 due to the addition of new full-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 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. 24 26 Depreciation and amortization expense increased by $6.6 million, or 69.4%, from $9.4 million in 1994 to $16.0 million in 1995, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels. Interest expense increased by $7.6 million, or 54.4%, from $14.0 million in 1994 to $21.6 million in 1995, primarily due to new mortgage borrowings of $39.0 million incurred in February 1995 and $86.3 million of 7% Convertible Subordinated Notes due 2002 (the "Convertible Notes") issued in April 1995. Investment income increased by $2.9 million from $2.0 million in 1994 to $4.9 million in 1995 primarily due to higher average cash balances generated by the new borrowings. Other income consists of items which are not part of the Company's recurring operations. For the year ended December 31, 1995, other income consisted of a gain on the settlement of a note receivable of $822,000 and gains on the sale of land parcels of $1.4 million. Other income for the year ended December 31, 1994 consisted primarily of a gain on the settlement of the Rose and Cohen note receivable of $6.2 million, gains on property sales of $1.0 million and rebates of prior years' insurance premiums of $1.2 million. Other expense of $2.2 million for the year ended December 31, 1995 consists of a reserve for insurance deductibles related to hurricane damage at the Frenchman's Reef hotel in St. Thomas, U.S. Virgin Islands. Pretax extraordinary gains of approximately $174,000 for the year ended December 31, 1995 relate to the retirement of secured notes with a face value of $22.2 million. Pretax extraordinary gains of approximately $292,000 for the year ended December 31, 1994 relate to the retirement of debt with a face value of $8.3 million. 25 27 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for 1993 and 1994. The results of the four hotels divested during 1993 and 1994 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) 1993 1994 1993 1994 ------ ------ ------ ----- (DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR) Revenues: Lodging....................................... $ 69,487 $88,753 $62,305 $66,821 Food and Beverage............................. 12,270 18,090 10,875 11,410 Management and Other Fees..................... 10,831 10,021 Interest on Mortgages and Notes Receivable.... 14,765 15,867 Rental and Other.............................. 1,507 1,572 -------- ------- Total Revenues ............. 108,860 134,303 Direct Hotel Operating Expenses: Lodging....................................... 19,925 25,490 16,870 17,281 Food and Beverage............................. 10,230 13,886 9,029 9,143 Selling and General........................... 21,180 27,244 17,779 18,889 Occupancy and Other Operating................... 9,827 9,799 General and Administrative...................... 15,685 15,089 Depreciation and Amortization................... 7,117 9,427 -------- -------- Operating Income................................ 24,896 33,368 Operating Expense Margins: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue... 28.7% 28.7% 27.1% 25.9% Food and Beverage, as a percentage of food and beverage revenue................... 83.4% 76.8% 83.0% 80.1% Selling and General, as a percentage of lodging and food and beverage revenue....... 25.9% 25.5% 24.3% 24.1% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue............................ 12.0% 9.2% General and Administrative, as a percentage of total revenue............................ 14.4% 11.2% Other Data: Occupancy..................................... 70.4% 68.0% 73.2% 73.1% Average Daily Rate ("ADR").................... $56.14 $60.36 $56.84 $61.16 Revenue Per Available Room ("REVPAR")......... $39.52 $41.04 $41.61 $44.71 Gross Operating Profit........................ $30,422 $40,223 $29,500 $32,917
26 28 (1) For purposes of this discussion of results of operations for 1994 compared to 1993, comparable Owned Hotels refers to the 31 Owned Hotels that were owned or leased by the Company during all of 1994 and 1993. Lodging revenues increased by $19.3 million, or 27.7%, from $69.5 million in 1993 to $88.8 million in 1994. This increase was primarily due to incremental lodging revenues of $17.6 million from hotels acquired or built in 1993 and 1994 and an increase in lodging revenues at comparable Owned Hotels. Lodging revenues for comparable Owned Hotels increased by $4.5 million, or 7.2%, in 1994 compared to 1993 due to improvements in ADR. ADR increased by $4.22 or 7.5% for all hotels and $4.32 or 7.6% for comparable Owned Hotels due to repositioning and refurbishment efforts at several full-service hotels and the continued improvements in the lodging industry. In 1994, the industry continued its recovery, as demand growth continued to outpace new hotel supply growth, resulting in higher occupancy levels which have allowed the industry to increase room rates. The Company has pursued a strategy of increasing ADR, which has a greater impact on net operating income than changes in occupancy. Occupancy rates for all hotels decreased from 70.4% in 1993 to 68.0% in 1994 due to the lower occupancy rates normally associated with new hotels, including both newly constructed hotels and repositioned hotels during the refurbishment period. Occupancy rates for comparable Owned Hotels remained constant in 1994 compared to 1993. The Company operates in three major segments of the industry: full-service, all-suites and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for the year ended December 31, 1994 as compared to the prior year, by industry segment:
YEAR ENDED DECEMBER 31, 1994 ----------------- Full-service...................... 7.7% All-suites........................ 13.1% Limited-service................... 4.1% Total.................... 7.5%
Food and beverage revenues increased by $5.8 million, or 47.4%, from $12.3 million in 1993 to $18.1 million in 1994. This increase was primarily due to the impact of incremental revenues of $5.7 million from additional food and beverage operations of four full-service hotels acquired in 1994. Food and beverage revenues for comparable Owned Hotels increased by $535,000, or 4.9%, in 1994 compared to 1993 primarily as a result of increased banquet sales and the repositioning of three lounges to a sports bar theme. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group, Market Segments, Inc. Management and other fees decreased by $810,000, or 7.5%, from $10.8 million in 1993 to $10.0 million in 1994 primarily due to the loss of management fees on four Managed Hotels acquired by the Company during 27 29 1994. In addition, the Company's management contracts covering six additional hotels were terminated during 1994 upon divestiture of those hotels by the third party hotel owners. Partially offsetting these decreased management fees were the addition of two new management contracts and increased revenues associated with the remaining Managed Hotels. Interest on mortgages and notes receivable in 1993 and 1994 primarily related to mortgages secured by certain Managed Hotels including the Frenchman's Reef. Interest income on mortgages and notes receivable increased by $1.1 million, or 7.5%, from $14.8 million in 1993 to $15.9 million in 1994 primarily due to interest recognized on the Company's cash flow notes, which are subordinated or junior mortgages which remit payment based on hotel cash flow. In accordance with fresh start reporting adopted on the Effective Date, assets and liabilities were recorded at their then-current fair market values. As these cash flow notes bear many of the characteristics and risks of operating hotel equity investments, no value was assigned to these notes on the Company's balance sheet due to substantial doubt as to their recoverability. The Company's policy is to recognize interest on cash flow notes when cash is received. In 1994, the portion of interest on mortgages and other notes receivable attributable to cash flow notes increased to $2.0 million from $1.0 million in 1993 primarily due to the execution of revised cash flow note agreements on three hotels and the improved operating performance of the underlying hotels. See "Business -Mortgages and Notes Receivable." Approximately $4.3 million and $4.6 million of interest on mortgages and notes receivable in 1993 and 1994, respectively, was derived from the Company's $50.0 million note receivable secured by the Frenchman's Reef. This note was restructured in December 1994 and pursuant to such restructuring, the Company obtained ownership and control of the Frenchman's Reef (see "-Liquidity and Capital Resources"). Direct lodging expenses increased by $5.6 million, or 27.9%, from $19.9 million in 1993 to $25.5 million in 1994 due primarily to the addition of new hotels. As a percentage of lodging revenue, direct lodging expenses remained constant at 28.7% in 1993 and 1994. For comparable Owned Hotels, direct lodging expenses increased $411,000, or 2.4%, but decreased as a percentage of comparable lodging revenue from 27.1% in 1993 to 25.9% in 1994 primarily due to increases in ADR which had minimal corresponding increases in expenses. Direct food and beverage expenses increased by $3.7 million, or 35.7%, from $10.2 million in 1993 to $13.9 million in 1994 due primarily to the addition of new full-service hotels. As a percentage of food and beverage revenue, direct food and beverage expenses decreased from 83.4% in 1993 to 76.8% in 1994 primarily due to increased revenues in higher margin areas such as banquet departments and sports lounges. For comparable Owned Hotels, direct food and beverage expenses increased $114,000, or 1.3%, but decreased as a percentage of food and beverage revenue from 83.0% in 1993 to 80.1% in 1994. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as 28 30 administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $6.1 million, or 28.6%, from $21.2 million in 1993 to $27.2 million in 1994 due primarily to the addition of 11 new hotels. Of these 11 hotels, four were managed by the Company in 1993 or during a portion of 1994, while the other seven had no previous relationship to the Company. As a percentage of hotel revenues (defined as rooms and food and beverage revenues), direct hotel selling and general expenses decreased slightly from 25.9% in 1993 to 25.5% in 1994. For comparable Owned Hotels, direct selling and general expenses increased $1.1 million, or 6.2%, but decreased slightly as a percentage of comparable Owned Hotel revenues from 24.3% in 1993 to 24.1% in 1994. Occupancy and other operating expenses, which consist primarily of insurance, real estate and other taxes, and rent expense, decreased by $28,000 in 1994. As a percentage of hotel revenues, occupancy and other operating expenses decreased from 12.0% in 1993 to 9.2% in 1994 primarily due to operating leverage, lower property and liability insurance charges based on favorable claims experiences and reductions in real estate taxes as a result of successful tax appeals on certain properties. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned and Managed Hotels and general corporate expenses. General and administrative expenses decreased by $596,000, or 3.8%, from $15.7 million in 1993 to $15.1 million in 1994 primarily due to savings realized from the restructuring of the Company's centralized management operations in 1993. As a percentage of total revenues, general and administrative expenses decreased from 14.4% in 1993 to 11.2% in 1994. Depreciation and amortization expense increased by $2.3 million, or 32.5%, from $7.1 million in 1993 to $9.4 million in 1994, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels. Interest expense decreased by $2.1 million, or 13.2%, from $16.1 million in 1993 to $14.0 million in 1994, primarily due to the net reduction of approximately $27.4 million of debt over the past two years. Interest income on cash investments increased by approximately $700,000, or 55.2%, from $1.3 million in 1993 to $2.0 million in 1994 due to higher average cash balances in 1994. Other income for 1994 consisted primarily of a gain of approximately $6.2 million related to the settlement of the Rose and Cohen note receivable (see "-- Liquidity and Capital Resources"), gains on sales of other hotel assets of approximately $1.0 million and rebates of prior years' insurance premiums of $1.2 million. Pretax extraordinary gains of approximately $292,000 for 1994 relate to the retirement of secured notes with a face value of $8.3 million. Pretax extraordinary gains of approximately $6.8 million in 1993 relate to the retirement of debt with a face value of $25.8 million. 29 31 LIQUIDITY AND CAPITAL RESOURCES The Company's growth strategy focuses on increasing its equity ownership in strategically positioned hotels. The Company is expanding its AmeriSuites hotel brand and expects to open 20 AmeriSuites hotels in 1996. Additionally, the Company has acquired and is repositioning 18 hotels acquired in March 1996, 16 of which are Wellesley Inns. The Company's development and acquisition program was funded in 1995 primarily with the proceeds from the issuance of $86.3 million of Convertible Notes and mortgage financings of $39.0 million incurred in 1995. The Company intends to finance future acquisitions and development with the net proceeds from the issuance of $120.0 million of 9 1/4% First Mortgage Notes due 2006 (the "First Mortgage Notes") in January 1996, cash flow from operations, and other secured financings. The Company believes that these sources will be adequate to fund the implementation of its growth strategy through 1996. Additionally, the Company believes that its cash flow from operations is sufficient to fund its anticipated working capital needs, routine capital expenditures and debt service obligations through 1996. The Company believes it has the financial resources available to execute its growth and hotel acquisition strategy. At December 31, 1995, the Company had cash and cash equivalents of $49.5 million, current marketable securities of $11.9 million and restricted cash, which is primarily collateral for various debt obligations, of $9.0 million. In addition, the First Mortgage Notes offering generated $63.9 of net cash proceeds, after debt repayments and underwriting expenses, in January 1996. Cash and cash equivalents and current marketable securities increased by $47.8 million during 1995 primarily due to new borrowings and cash flow from operations offset by development and acquisition spending. Cash flow from operations was approximately $40.9 million in 1995 as compared to $28.7 million in 1994. Cash flow from operations was positively impacted by the utilization of net operating loss carryforwards ("NOLs") and other tax basis differences of $9.5 million and $12.8 million in 1995 and 1994, respectively. At December 31, 1995, the Company had federal NOLs relating to its predecessor, PMI, of approximately $114.3 million which are subject to annual utilization limitations and expire beginning in 2005 and continuing through 2007. The Company's other major sources of cash were net proceeds of approximately $83.2 million from the issuance of the Convertible Notes, mortgage financings of $39.0 million and collections of mortgages and notes receivable of $27.6 million. The Company's major uses of cash in 1995 were capital expenditures of $113.5 million, debt payments of $34.0 million, the purchase of first mortgage notes for $12.7 million and purchases of marketable securities of $11.5 million. Debt. In April 1995, the Company issued $86.3 million of 7% Convertible Subordinated Notes due 2002. The Convertible Notes bear interest at 7%, are convertible into common stock of the Company at a price of $12 per share at the option of the holder and mature April 15, 2002. The Convertible Notes are redeemable, in whole or in part, at the option of the Company after three 30 32 years at premiums to principal which decline on each anniversary date. The Company utilized the proceeds primarily to finance the development and acquisition of hotels. In February 1995, the Company obtained $39.0 million of mortgage financing on 11 of its hotels under two separate loan agreements. Both loans bear interest at variable rates (approximately 10.5% at December 31, 1995) and have five-year maturities. The funds were used to finance the Company's acquisition and development program. The Company also incurred an additional $3.6 million of debt in connection with the ShoLodge transaction. See "-- Capital Investments." During 1995, the Company prepaid and retired $22.3 million of its senior secured notes resulting in pre-tax extraordinary gains of $174,000. As of December 31, 1995, the Company has $32.1 million of debt related to the Frenchman's Reef which was scheduled to mature in December 1996. In March 1996, the Company and the lender entered into an agreement to extend the maturity of the loan to July 1997. The loan will bear interest at the same rate currently in effect and principal payments will be waived until July 1997. All other terms and conditions of the loan shall remain in effect. See "--Capital Investments." At December 31, 1995, the Company had $282.7 million in debt outstanding. Of this debt, approximately $78.5 million bears interest at floating rates. 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 will pay a fixed rate of interest of 6.18% per annum and will receive 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 January 1996, the Company issued $120.0 million of 9 1/4% First Mortgage Notes due 2006. Interest on the First Mortgage Notes is payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, divided payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The Notes are redeemable, in whole or in part, at the option of the Company on or after January 15, 2001 at premiums to principal which decline on each anniversary date thereafter. The Company utilized a portion of the proceeds to pay down approximately $51.6 million of indebtedness, with the remainder of the proceeds to be used to finance the development or acquisition of hotels or hotel portfolios. 31 33 Capital Investments. The Company has implemented a hotel development and acquisition program which focuses on the development of its AmeriSuites hotel chain and the consolidation of its Wellesley Inns chain. In connection with this program, the Company spent approximately $91.2 million in cash on the acquisition and construction of hotels, purchased first mortgage notes for $12.7 million and assumed $5.1 million of debt in 1995. The cash portion was funded by a combination of cash flow from operations, mortgage financings and the Convertible Notes offering. The Company plans to double the size of its AmeriSuites chain in 1996. In 1995, new AmeriSuites hotels were opened in Atlanta and Greensboro. The Company also converted four Bradbury Suites hotels to AmeriSuites in the fourth quarter of 1995 bringing the year end total to 19 hotels. In addition in the first quarter of 1996, the Company opened two new AmeriSuites hotels in Miami and an AmeriSuites hotel in Cleveland, bringing the number of AmeriSuites to 22 as of March 20, 1996. The Company has 12 AmeriSuites hotels under construction in the Dallas, Detroit, Baltimore, Richmond, Atlanta and Memphis areas. The Company also has 19 additional AmeriSuites sites under contract as of March 20, 1996 which are scheduled for the commencement of construction in 1996. In March 1995, the Company purchased an AmeriSuites hotel in Richmond, Virginia and ShoLodge Inc.'s option to acquire a 50% interest in 11 of the Company's 12 AmeriSuites hotels. The total consideration payable by the Company in the transaction was $19.7 million, comprised of (i) $16.1 million which was paid during 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 $3.6 million of long-term debt. As a result of the transaction, the Company assumed management of these 12 AmeriSuites hotels. In August 1995, the Company purchased four Bradbury Suites hotels for $18.7 million. The hotels, comprising 447 rooms, are located in Augusta, Georgia; Columbia, South Carolina; Arlington Heights, Illinois and Jacksonville, Florida. The Company converted these hotels to the AmeriSuites brand in the fourth quarter of 1995. In August 1995, the Company also purchased the 149 room full service, all-suite St. Tropez Hotel and Shopping Center in Las Vegas for $15.2 million. In June 1995, the Company purchased $17.4 million in face amount of first mortgage notes for $12.7 million in cash. These first mortgage notes were secured by two hotels. The purchase of such notes was intended to provide the Company with the opportunity to acquire the underlying properties. On December 21, 1995, the Company received $12.7 million plus all accrued interest as payment in full on the first mortgage notes. In September 1995, the Frenchman's Reef hotel suffered significant hurricane damage. Due to extensive property and business interruption insurance, the Company believes that its liquidity will be affected only to the extent of its insurance deductibles which the Company estimates at $2.2 million. The majority of damaged rooms at the Frenchman's Reef have been repaired on an interim 32 34 basis and approximately 95% of the rooms are currently available for occupancy. The Company anticipates that extensive renovation at the Frenchman's Reef in 1996 will reduce the number of rooms available for occupancy. Such reduction in rooms available and related revenue will be a component of the Company's claim under its business interruption insurance. The Company is engaged in discussions with its insurance carrier regarding the amount of insurance proceeds to be paid and is assessing the extent of further refurbishments required at the Frenchman's Reef. Additionally, the Company's debt in the amount of $32.1 million related to the Frenchman's Reef is further secured by an assignment of property issuance proceeds. The lender has sole discretion concerning the utilization of such proceeds for refurbishment. The Company is discussing with the lender the terms under which the lender will make such funds available for refurbishment. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited service hotels for approximately $65.1 million in cash. The acquisition enables the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The Company intends to refurbish these hotels to ensure consistent quality and enhance the value of its brand. During 1995, the Company spent approximately $22.0 million on capital improvements at its Owned Hotels, of which approximately $13.7 million related to refurbishments and repositionings of recently acquired hotels. The Company intends to spend a total of approximately $13.5 million in 1996 relating to the refurbishing and repositioning of the Hasbrouck Heights Crowne Plaza and the 16 recently acquired Wellesley Inns. Asset Realizations. The Company has pursued a strategy of converting mortgage notes receivable and other assets into cash or operating hotel assets. Since July 31, 1992, the Company has received $100.7 million in cash and added seven operating hotel assets through note settlements, lease terminations and property sales. The Company will continue to pursue settlements with mortgage and note obligors to further reduce its portfolio. During 1995, the Company received $13.1 million in cash in settlement of notes receivable and $8.2 million in cash on sales of properties resulting in gains of $2.2 million. In May 1995, the Company obtained control of the 240-room Princeton Holiday Inn by converting its $2.7 million mortgage note receivable into a long-term lease and assuming $1.5 million of debt. The hotel was recently repositioned to a Holiday Inn from a Ramada Inn. In January 1996, the Company obtained control of the 210-room Cocoa Beach Howard Johnson Hotel by converting its $9.7 million mortgage note receivable into a long-term lease. In April 1995, the Company received a favorable ruling in its litigation with Financial Security Assurance, Inc. ("FSA") in which FSA sought approximately $31.2 million previously received by the Company in settlement of a note and guaranty from Allan V. Rose and Arthur G. Cohen ("Rose and Cohen"). In an order dated April 25, 1995, the U.S. District Court for the Southern District of Florida affirmed a lower court ruling approving the Company's settlement with Rose and Cohen and finding that the Company alone was entitled to the settlement proceeds. The Company reached a settlement in 1993 with Rose and Cohen which provided for Rose or his affiliate to pay the Company $25.0 million plus proceeds from the sale of approximately 1.1 million shares of the Company's common stock held by Rose, bringing the total settlement proceeds to approximately $31.2 million. FSA asserted that, under the terms of an intercreditor agreement, it was entitled to receive the settlement proceeds otherwise payable to the Company. 33 35 The U.S. Bankruptcy Court for the Southern District of Florida ruled in favor of the Company in April 1994 and the Company used $25.0 million of the settlement proceeds to retire certain senior secured notes. FSA appealed to the District Court, which affirmed the Bankruptcy Court's ruling. On May 12, 1995, the Company used the remaining proceeds plus accrued interest to prepay senior secured notes. On May 23, 1995, FSA filed a notice of appeal with the U.S. Court of Appeals for the 11th Circuit. The Company believes that the U.S. Court of Appeals will affirm the U.S. District Court ruling and that there will be no effect on the Company's financial position or results of operations. Item 8. Financial Statements and Supplementary Data. See Index to Financial Statements included in Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 34 36 PART III Item 10. Directors and Executive Officers of the Registrant. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of the Company:
NAME AGE POSITION ---- --- -------- David A. Simon 43 President, Chief Executive Officer and Chairman of the Board of Directors John M. Elwood 41 Executive Vice President, Chief Financial Officer and Director Howard M. Lorber(1) 47 Director Herbert Lust, II(1) 69 Director Jack H. Nusbaum 55 Director Allen J. Ostroff(1) 59 Director A.F. Petrocelli(1) 52 Director Paul H. Hower 61 Executive Vice President Timothy E. Aho 52 Senior Vice President/Development Denis W. Driscoll 51 Senior Vice President/Human Resources John H. Leavitt 43 Senior Vice President/Sales and Marketing Joseph Bernadino 49 Senior Vice President, Secretary and General Counsel Richard T. Szymanski 38 Vice President and Corporate Controller Douglas W. Vicari 36 Vice President and Treasurer ----------
(1) Member of the Compensation and Audit Committee. The following is a biographical summary of the experience of the directors and executive officers of the Company: David A. Simon has been President, Chief Executive Officer and a Director since 1992 and Chairman of the Board of Directors of the Company since 1993. Mr. Simon was a director of PMI from 1991 to 1992. Mr. Simon was the Chief Executive Officer of PMI from 1991 to 1992. John M. Elwood has been a Director and Executive Vice President of the Company since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the Director of Reorganization of PMI from 1991 through the Effective Date of the PMI reorganization. 35 37 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. Several of these partnerships filed for protection under the federal bankruptcy laws in 1991. Herbert Lust, II has been a Director since 1992 and Chairman of the Compensation and Audit Committee of the Company since 1993. Mr. Lust was a member of the Committee of Unsecured Creditors of PMI from 1991 to 1992. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust. Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman of the New York 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 and The Topps Company, Inc. 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 subsidiary of The Prudential Insurance Company of America, since June 1994 and was a Senior Vice President of the Prudential Realty Group from 1991 to June 1994. A.F. Petrocelli has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Petrocelli has been the Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years. He is also a director of Nathan's Famous, Inc. Paul H. Hower has been an Executive Vice President of the Company since 1993. Mr. Hower was President of Integrity Hospitality Services from 1991 to 1993 and Vice President and Hotel Division Manager of B.F. Saul Co. in 1991. Timothy E. Aho has been a Senior Vice President of the Company since 1994. Mr. Aho was a Senior Vice President of Development for Boykin Management Company from 1993 to 1994 and Vice President of Development for Interstate Hotels Corporation from 1991 to 1993. Denis W. Driscoll has been a Senior Vice President of the Company since 1993. Mr. Driscoll was President of Driscoll Associates, a human resources consulting organization, from 1991 to 1993. 36 38 John H. Leavitt has been a Senior Vice President of the Company since 1992. Mr. Leavitt was a Senior Vice President of PMI from 1991 to 1992 and a Senior Vice President of Medallion Hotel corporation in 1991. Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of the Company since 1992. Mr. Bernadino was an Assistant Secretary and Assistant General Counsel of PMI from 1991 to 1992. Richard T. Szymanski has been a Vice President and Corporate Controller of the Company since 1992. Mr. Szymanski was Corporate Controller of PMI from 1991 to 1992. Douglas W. Vicari has been a Vice President and Treasurer of the Company since 1992 and was Vice President and Treasurer of PMI during 1992. Mr. Vicari was the Director of Budget and Financial Analysis of PMI from 1991 to 1992. Item 11. Executive Compensation The following summary compensation table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to the persons who were, at December 31, 1995, the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company (the "named executive officers"). The information shown reflects compensation for services in all capacities awarded to, earned by or paid to these persons for the years ending December 31, 1993, 1994 and 1995.
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation --------------------------------- ------------ Securities Other Annual Underlying All Other Name and Principal Position Year Salary Bonus Compensation Options Compensation --------------------------- ---- -------- ------- ------------ --------- ------------ David A. Simon.................... 1995 $336,808 $218,297 $-0- 100,000 $8,774(1) President and Chief.............. 1994 312,552 161,538 -0- 0 5,507 Executive Officer................ 1993 303,853 -0- -0- 45,000 6,211 John M. Elwood.................... 1995 272,982 184,305 -0- 80,000 5,642(2) Executive Vice President......... 1994 249,423 129,231 -0- 50,000 3,147 and Chief Financial Officer...... 1993 240,000 -0- -0- 45,000 21,981 Paul H. Hower..................... 1995 205,675 50,000 -0- 36,000 7,174(3) Executive Vice President......... 1994 190,000 20,000 -0- 15,000 5,410 1993 94,320 -0- -0- 20,000 113 Denis W. Driscoll................. 1995 168,974 20,000 -0- 18,000 1,873(4) Senior Vice President - Human.... 1994 159,961 10,000 -0- 8,000 959 Resources........................ 1993 68,565 -0- -0- 8,000 73 Joseph Bernadino.................. 1995 132,667 30,000 -0- 23,000 1,697(5) Senior Vice President,.......... 1994 126,184 24,150 -0- 8,000 614 Secretary and General Counsel... 1993 120,750 -0- -0- 8,000 87
37 39 1. Represents $102 for premiums of Company-provided life insurance, $2,731 related to 401K matching contributions and $5,941 in value of use of Company-provided car. 2. Represents $102 for premiums for Company-provided life insurance, $2,276 related to 401K matching contributions and $3,264 in value of use of Company-provided car. 3. Represents $702 for premiums for Company-provided life insurance, $1,500 related to 401K matching contributions and $4,972 in value of use of Company-provided car. 4. Represents $288 for premiums for Company-provided life insurance and $1,585 related to 401K matching contributions. 5. Represents $174 for premiums for Company-provided life insurance and $1,523 related to 401K matching contributions. STOCK OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995 The following table sets forth information concerning individual grants of stock options made during the year ending December 31, 1995 to each of the officers listed below. The Company did not grant any stock appreciation rights during such period.
Individual Grants ------------------------ % of Total Number of Options Potential Realized Value at Securities Granted to Assumed Annual Rates of Underlying Employees Exercise Stock Price Appreciation For Options in Fiscal Price Per Expiration Option Terms Name Granted Year Share Date 5% 10% ---- ------- ------ ------- ------ ---- ---- David A. Simon ....... 100,000(1) 15.1% $9.75 8/01/2005 613,172 1,553,899 John M. Elwood........ 80,000(2) 12.1% $9.25 5/15/2005 465,382 1,179,369 Paul H. Hower......... 36,000(3) 5.4% $9.63 7/28/2005 217,912 552,232 Denis W. Driscoll .... 18,000(3) 2.7% $9.63 7/28/2005 108,956 276,116 Joseph Bernadino...... 18,000(3) 2.7% $9.63 7/28/2005 108,956 276,116 5,000(4) 0.8% $9.88 5/01/2001 16,792 38,096
(1) These stock options vest with respect to one third of the grant on each of August 1, 1996, 1997 and 1998 and will continue to be exercisable through August 1, 2005. These options become immediately exercisable upon a change in control of the Company. (2) These stock options vest with respect to one third of the grant on each of May 15, 1996, 1997 and 1998 and will continue to be exercisable through May 15, 2005. These options become immediately exercisable upon a change in control of the Company. (3) These stock options vest with respect to one third of the grant on each of July 28, 1996, 1997 and 1998 and will continue to be exercisable through July 28, 2005. These options become immediately exercisable upon a change in control of the Company. (4) These stock options vest with respect to one third of the grant on each of May 1, 1996, 1997 and 1998 and will continue to be exercisable through May 1, 2001. These options become immediately exercisable upon a change in control of the Company. 38 40 AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1995 AND YEAR-END OPTION VALUES
Number of Securities Shares Underlying Unexercised Value of Unexercised In- Acquired on Value Options at Year End The-Money Options Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- David A. Simon .......... -0- -0- 375,000 100,000 $2,711,700 $25,000 John M. Elwood .......... -0- -0- 77,500 117,500 $462,613 $158,438 Paul H. Hower ........... -0- -0- 25,000 46,000 $131,875 $37,250 Denis W. Driscoll ....... -0- -0- 7,999 26,001 $40,330 $36,420 Joseph Bernadino ........ -0- -0- 7,999 31,001 $40,330 $37,045
EMPLOYMENT AGREEMENTS Mr. Simon and the Company executed an employment agreement dated August 1, 1995 which provides for a term of three years, with automatic successive one-year extensions unless a prior election is made by either party not to extend the agreement. The employment agreement provides for an annual base salary of $350,000 (which will increase annually based upon increases in the consumer price index), a discretionary annual bonus based on attainment of performance objectives set by the Board of Directors, a life insurance policy in an amount not less than $1,000,000, an automobile and other customary welfare benefits, including medical and disability insurance. The agreement also provides that, to the extent payments made by the Company for disability insurance, life insurance and the use of the automobile are subject to federal, state or local income taxes, the Company will pay Mr. Simon the amount of such additional taxes plus such additional amount as will be reasonable to hold him harmless from the obligation to pay such taxes. Pursuant to this employment agreement, Mr. Simon was granted stock options on August 1, 1995 to purchase 100,000 shares of Common Stock. The agreement also provides that the Company will grant options to purchase 100,000 shares of Common Stock on each of the first and second anniversary dates of the agreement. Such stock options are exercisable as to one-third of the grant on each of the first, second and third anniversaries of the option grant date, provided his employment has not been terminated by such date. This employment agreement may be terminated by the Company at any time, with or without cause. If the agreement is terminated by the Company prior to the expiration of the three-year term without cause, or if Mr. Simon resigns because of circumstances amounting to constructive termination of employment, severance would be paid in a single lump sum equal to one-year's base salary or, if greater, the base salary that would have been payable over the remainder of the initial term. All stock options would become fully vested. Any bonus awarded for the year of termination would not be prorated. If the agreement is terminated by the Company for cause (as such term is defined in the employment agreement), or if Mr. Simon resigns voluntarily under circumstances not amounting to a constructive termination of employment, no benefits are payable other than accrued but unpaid salary and any unpaid bonus earned prior to such termination or resignation. 39 41 As of May 15, 1995, Mr. Elwood and the Company executed an employment agreement which had a term of one year. This employment agreement provided for an annual base salary of $280,000 (which will increase annually based upon increases in the consumer price index), a discretionary annual bonus based on attainment of performance objectives set by the Board of Directors, a life insurance policy in the amount of $1,000,000, an automobile, and other customary welfare benefits, including medical and disability insurance. Pursuant to this employment agreement, Mr. Elwood was granted stock options on May 15, 1995 to purchase 80,000 shares of Common Stock. The agreement also provides that the Company will grant options to purchase 80,000 shares of Common Stock on each of the first and second anniversary dates of the agreement. Such options are exercisable as to one-third of the grant on each of the first, second and third anniversaries of the option grant date, provided his employment has not been terminated by such date. This employment agreement may be terminated by the Company at anytime, with or without cause. If the agreement is terminated by the Company prior to the expiration of the three-year term without cause, or if Mr. Elwood resigns because of circumstances amounting to constructive termination of employment, severance would be paid in a single lump sum equal to one-year's base salary or, if greater, the base salary that would have been payable over the remainder of the term. All stock options would become fully vested. Any bonus awarded for the year of termination would not be prorated. If the agreement is terminated by the Company for cause (as such term is defined in the employment agreement), or if Mr. Elwood resigns voluntarily under circumstances not amounting to a constructive termination of employment, no benefits are payable other than accrued but unpaid salary and any unpaid bonus earned prior to such termination or resignation. CHANGE IN CONTROL AGREEMENTS As of February 15, 1995, the Company executed change in control agreements with ten officers of the Company, including each named executive officer. These agreements provide that, if within two years of a change in control of the Company, the officer's employment with the Company is terminated by the Company without cause or if the officer resigns for good reason (as defined in the agreements), the Company will pay the beneficiary two and one-half times the aggregate cash compensation earned by the beneficiary during the fiscal year immediately preceding the termination of employment. Such payments are to be reduced, however, to the extent necessary to avoid characterization as "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code. In addition, any outstanding options to purchase shares of the Company held by the officer will vest and become exercisable as of the date of the change in control. BOARD OF DIRECTORS COMPENSATION AND BENEFITS Directors who are employees of the Company do not receive additional compensation for serving on the Board of Directors. Non-employee Directors receive $30,000 annually. In addition, 40 42 each non-employee Director receives $1,500 for each Board of Directors meeting attended, $1,500 for each committee meeting attended and $500 for each telephonic meeting if such meeting extends beyond a period of 15 minutes. The Chairman of the Compensation and Audit Committee receives an additional $15,000 annually. The Directors' remuneration is paid quarterly. All Directors are reimbursed for their expenses. In addition, on the date of the Company's Annual Meeting of Stockholders, each non-employee Director receives an automatic grant of options to purchase 10,000 shares of the Company's Common Stock in accordance with the Company's 1995 Non-Employee Director Stock Option Plan. The options vest one year from the date of grant at an option price equal to the mean price of a share of the Company's Common Stock on the New York Stock Exchange for the trading day immediately prior to the date of grant. The Board of Directors held twelve meetings during 1995. All members of the Board of Directors attended at least 75% of the aggregate number of meetings of the Board of Directors. COMPENSATION AND AUDIT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation and Audit Committee are Herbert Lust, II (Chairman), A. F. Petrocelli, Allen J. Ostroff and Howard M. Lorber. Mr. Petrocelli has certain business relationships with the Company, which are described under the heading "Certain Relationships and Related Transactions." 41 43 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth as of March 15, 1996, information with respect to the beneficial ownership of the Company's common stock by (i) each person known by the Company to own beneficially 5% or more of the Company's common stock, (ii) each director of the Company, (iii) the Company's Chief Executive Officer and each of the four remaining most highly compensated executive officers, and (iv) all executive officers and directors of the Company as a group.
Amount and Percent Nature of of Name of Beneficial Owner Ownership Class(p) ------------------------ --------- -------- FMR Corp.(a) .................................. 3,930,931 12.66 82 Devonshire Street Boston, MA 02109 Denver Investment Advisors LLC(b).............. 3,849,760 12.40 1225 17th Street, 26th Floor Denver, CO 80208 Neuberger & Berman L.P. (c).................... 2,151,034 6.93 605 Third Avenue New York, NY 10158-3698 David A. Simon (d) ............................ 533,895 1.72 John M. Elwood (e) ............................ 176,288 * Herbert Lust, II (f) .......................... 78,151 * Allen J. Ostroff (g) .......................... 60,000 * A.F. Petrocelli (h) ........................... 63,276 * Jack H. Nusbaum (i) ........................... 40,000 * Howard M. Lorber (j) .......................... 30,000 * Paul H. Hower (k) ............................. 27,300 * Denis W. Driscoll (l) ......................... 13,883 * Joseph Bernadino (m) .......................... 10,665 * John H. Leavitt (n) ........................... 8,110 * Richard T. Szymanski (o) ...................... 7,332 * Douglas W. Vicari (p) ......................... 7,332 * Timothy E. Aho (q)............................. 3,666 * All directors and executive officers as a group (14 persons) (r) ................. 1,059,898 3.41
(a) FMR Corp. filed a Schedule 13G, dated February 14, 1996 with the Securities and Exchange Commission (the "SEC") reporting ownership of 3,930,931 shares of Common Stock, with sole voting power with respect to 44,999 shares and sole dispositive power with respect to 3,930,931 shares. 42 44 (b) Denver Investment Advisors LLC filed a Schedule 13G, dated March 4, 1996 with the SEC reporting ownership of 3,849,760 shares of Common Stock, with sole voting power with respect to 2,382,160 and sold dispositive power with respect to 3,849,760 shares. (c) Neuberger & Berman L.P. filed a Schedule 13G, dated February 12, 1996 with the SEC reporting ownership of 2,151,034 shares of Common Stock, with sole voting power with respect to 461,450 shares, with shared voting power with respect to 253,600 and shared dispositive power with respect to 2,151,034 shares. (d) Includes 151,726 shares owned by David A. Simon, 146 shares owned by his wife and 249 shares held by Mr. Simon as custodian for his children. Mr. Simon disclaims beneficial ownership of the shares owned by his wife and held as custodian for his children. Also includes warrants to purchase 5,510 shares with an exercise price of $2.71 per share owned by Mr. Simon, 467 warrants owned by his wife, and 797 warrants held as custodian for his children. Mr. Simon disclaims beneficial ownership of the warrants owned by his wife and held as custodian for his children. Also includes options to purchase 375,000 shares with an exercise price of $3.20 per share as to 45,000 shares and $2.71 as to 300,000 shares. (e) Includes 47,500 shares, warrants to purchase 12,122 shares with an exercise price of $2.71 per share and options to purchase 20,000 shares at an exercise price of $3.81 per share, options to purchase 45,000 shares at an exercise price of $3.20 per share and options to purchase 25,000 at an exercise price of $7.38 per share and 26,666 shares with an exercise price of $9.25 per share. (f) Includes 10,000 shares owned by Herbert Lust, 23,151 shares held by a trust under which Mr. Lust and his wife are co-trustees and beneficiaries and options held by Mr. Lust to purchase 45,000 shares with an exercise price of $3.20 per share as to 35,000 and 10,000 shares with an exercise price of $9.31 per share. (g) Includes 5,000 shares and options to purchase 45,000 shares with an exercise price of $3.20 per share and 10,000 shares with an exercise price of $9.31 per share. (h) Includes 8,276 shares held by United Capital Corp. of which Mr. Petrocelli is Chairman of the Board of Directors and Chief Executive Officer and options held by Mr. Petrocelli to purchase 45,000 shares with an exercise price of $3.20 per share and 10,000 shares with an exercise price of $9.31 per share. (i) Includes 10,000 shares and options to purchase 10,000 shares with an exercise price of $7.25 per share, 10,000 shares with an exercise price of $9.50 per share, and 10,000 shares with an exercise price of $9.31 per share. 43 45 (j) Includes options to purchase 30,000 shares with an exercise price of $7.25 per share as to 10,000 shares, 10,000 shares with an exercise price of $9.50 per share and 10,000 shares with an exercise price of $9.31 per share. (k) Includes 2,000 shares owned by Paul H. Hower, 300 shares owned by his wife and options to purchase 25,000 shares with an exercise price of $4.00 per share as to 20,000 shares and 5,000 shares with an exercise price of $7.63 per share. (l) Includes 5,520 shares owned by Mr. Driscoll, 200 shares held by Mr. Driscoll as custodian for his children and 100 shares held as custodian for his grandchild, warrants to purchase 64 shares with an exercise price of $2.71 per share, and options to purchase 7,999 shares with an exercise price of $3.63 per share as to 5,333 shares and 2,666 shares with an exercise price of $7.63 per share. (m) Includes 1,000 shares and options to purchase 9,665 shares with an exercise price of $3.63 per share as to 5,333 shares, 2,666 shares with an exercise price of $7.63, and 1,666 shares with an exercise price of $9.88 per share. (n) Includes 26 shares, warrants to purchase 85 shares with an exercise price of $2.71 per share and options to purchase 7,999 shares with an exercise price of $3.63 per share as to 5,333 shares and 2,666 shares with an exercise price of $7.63. (o) Includes options to purchase 7,332 shares with an exercise price of $3.63 per share as to 3,333 shares, 2,333 shares with an exercise price of $7.63 per share, and 1,666 shares with an exercise price of $9.88 per share. (p) Includes options to purchase 7,332 shares with an exercise price of $3.63 per share as to 3,333 shares, 2,333 shares with an exercise price of $7.63 per share, and 1,666 shares with an exercise price of $9.88 per share. (q) Includes 1,000 shares and options to purchase 2,666 shares with an exercise price of $7.625 per share. (r) With the exception of David Simon, the Directors and executive officers each owns less than one percent of the outstanding Common Stock and own approximately two percent of the outstanding Common Stock as a group. Percentages were based on 31,057,151 shares outstanding as of March 20, 1996. The asterisk indicates ownership of less than 1% of the shares outstanding. 44 46 Item 13. Certain Relationships and Related Transactions. A.F. Petrocelli, a Director of the Company, is the Chairman of the Board and Chief Executive Officer of United Capital Corp. and Howard Lorber, a Director of the Company, is also a director of United Capital Corp. In March 1994, the Company entered into management agreements with the corporate owners of two hotels who are affiliates of United Capital Corp. The Company received $120,000 in management fees for 1995. In March 1996, United Capital Corp. agreed to loan $4,000,000 to an entity in which the Company expects to have a 50% interest to finance the construction of a new hotel. United Capital Corp. has received $20,000 in commitment fees through March 1996 relating to this proposed loan. During 1989, a partnership in which Peter E. Simon, father of David A. Simon, is a partner acquired an interest in three hotels from PMI. In partial payment PMI received non-recourse junior loans aggregating $21,590,000. As of December 31, 1995, the aggregate balance owed on these loans was $21,472,766. The interest rates on these loans ranged from 9 1/2% to 11% per annum. The Company has restructured these loans in order to obtain payment based upon the available cash flow of the hotels. During 1995, the Company recognized $630,000 of interest income related to these loans. The Company managed these three hotels for the partnership and received $510,000 in management fees for 1995. During 1989, this same partnership acquired PMI's interest in eight hotel properties. In partial payment PMI received a junior non-recourse mortgage note in the principal amount of $9,647,450. The Company restructured this transaction as of December 1, 1992 by (i) conveying to the partnership its interest in one hotel property, and (ii) amending the principal amount and interest rate of the note to $8,103,362 and 8.2% per annum, respectively. No debt payments were made on these loans during 1995. The Company managed these nine hotels for the partnership and received $562,000 in accounting and management fees for 1995. In March 1996, the Company purchased these nine hotels from the partnership together with an additional nine hotels from two unrelated entities for an aggregate purchase price of $4,700,000. In a simultaneous transaction, the Company purchased from unrelated holders the first mortgage notes secured by the eighteen properties for $60,400,000. The partnership received $1,900,000 out of the purchase proceeds and the junior non-recourse note held by the Company was canceled. During February 1990, this same partnership purchased from PMI a note owed by a third party in the original principal amount of $3,255,380. This partnership paid PMI $488,318 in cash and granted PMI an 85% note participation. In partial settlement of its claim on the note, the Company acquired a hotel located in Miami, Florida in which the partnership has a 15% interest. In December 1993, the Company entered into a management agreement with the corporate owner of a hotel in which Peter E. Simon is a stockholder. The Company received $50,000 in management fees for 1995. 45 47 The Company has a note receivable from John H. Leavitt, Senior Vice President- Sales and Marketing, with a balance of $38,065 at December 31, 1995. The note bears interest at 8.5% and is due in 2011. The Company has retained Willkie Farr & Gallagher as its legal counsel involving certain matters during its last fiscal year and anticipates it will continue such relationship with the firm in this fiscal year. Mr. Nusbaum, a Director of the Company, is the Chairman of the firm. 46 48 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statement The Financial Statements listed in the accompanying index to financial statements are filed as part of this Annual Report. 2. Exhibits (2) (a) Reference is made to the Disclosure Statement for Debtors' Second Amended Joint Plan of Reorganization dated January 16, 1992, which includes the Debtors' Second Amended Plan of Reorganization as an exhibit thereto filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Contract of Purchase and Sale between Hillsborough Associates, Meriden Hotel Associates, L.P., Wellesley I, L.P., Multi-Wellesley Limited Partnership and the Company dated March 6, 1996 filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference. (c) Reference is made to Consent of the Holders Thereof to the Purchase by the Company of the Outstanding First Mortgage Notes filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference. (3) (a) Reference is made to the Restated Certificate of Incorporation of the Company dated June 5, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. 47 49 (4) (a) Reference is made to the Form of 8.20% Fixed Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Form of Adjustable Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (c) Reference is made to the Form of 9.20% Junior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (d) Reference is made to the Form of 8.20% Tax Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (e) Reference is made to the Form of 10.20% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the Form of 8% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (g) Reference is made to the Form of 9.20% OVR Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (h) Reference is made to the Collateral Agency Agreement among the Company, U.S. Trust and the Secured Parties, dated as of July 31, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (i) Reference is made to the Security Agreement between the Company and U.S. Trust, dated as of July 31, 1992, filed as 48 50 an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (j) Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (k) Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (l) Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (m) Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (n) Reference is made to a Form 8-A of the Company as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference. (o) Indenture, dated April 26, 1995, between the Company and the Trustee related to the issuance of 7% Convertible Subordinated Notes due 2002. (p) Indenture, dated January 23, 1996, between the Company and the Trustee related to 9 1/4% First Mortgage Notes due 2006. 49 51 (10) (a) Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc. dated June 3, 1985, and its related agreements, each of which was included as Exhibits to the Form 8-K dated August 14, 1985 of PMI, which are incorporated herein by reference. (b) Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q dated February 12, 1988 of PMI, which is incorporated herein by reference. (c) Reference is made to the Employment Agreement dated as of July 31, 1992, between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (d) Reference is made to the 1992 Performance Incentive Stock Option Plan of the Company dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (e) Reference is made to the 1992 Stock Option Plan of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David A. Simon filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (g) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David L. Barsky filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (i) Reference is made to the Employment Agreement dated as of December 31, 1992 between John Elwood and the Company filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference. 50 52 (j) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and John Elwood filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference. (k) Reference is made to the Employment Agreement dated as of May 18, 1993 between Paul Hower filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference. (l) Reference is made to the Consolidated and Amended Settlement Agreement dated as of October 12, 1993 between Allan V. Rose and the Company filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference. (m) Reference is made to the Consent and Amendment to Prime Hospitality Corp. 9.20% Junior Secured Notes filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (n) Reference is made to the Agreement dated February 6, 1995 among Suites of America, Inc., ShoLodge, Inc. and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (o) Reference is made to the Change of Control Agreement dated February 15, 1995 between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (p) Reference is made to the Change of Control Agreement dated February 15, 1995 between John M. Elwood and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (q) Reference is made to the Change of Control Agreement dated February 15, 1995 between Paul H. Hower and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (r) Reference is made to the Change of Control Agreement dated February 15, 1995 between John H. Leavitt and the 51 53 Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (s) Reference is made to the Change of Control Agreement dated February 15, 1995 between Denis W. Driscoll and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (t) Reference is made to the Change of Control Agreement dated February 15, 1995 between Timothy E. Aho and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (u) Reference is made to the Change of Control Agreement dated February 15, 1995 between Joseph Bernadino and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (v) Reference is made to the Change of Control Agreement dated February 15, 1995 between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10- K dated March 10, 1995. (w) Reference is made to the Change of Control Agreement dated February 15, 1995 between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10- K dated March 10, 1995. (x) Reference is made to the Change of Control Agreement dated February 15, 1995 between Richard Moskal and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (y) Employment Agreement dated May 15, 1995 between John Elwood and the Company. (z) Employment Agreement dated August 1, 1995 between David Simon and the Company. 52 54 (21) Subsidiaries of the Company are as follows: Jurisdiction of Name Incorporation ---- ------------- Dynamic Marketing Group, Inc. Delaware Fairfield Holding Corp. Delaware Fairfield-Meridian Claims Service, Inc. Delaware FR Delaware, Inc. (Subsidiary of FR Management Corporation) Delaware FR Management Corporation Virginia KSA Management, Inc. Kansas Mahwah Holding Corp. Delaware Market Segments, Incorporated Delaware PHC Construction Corp. Delaware PHC Disaster Relief Fund, Inc. New Jersey PHC Hotels, Inc. Delaware Prime-American Realty Corp. Delaware Prime Note Collections Company, Inc. Delaware Prime-O-Lene, Inc. New Jersey Republic Motor Inns, Inc Virginia (23) (a) Consent of Arthur Andersen LLP (b) Reports on Form 8-K: An 8-K was filed on March 21, 1996 announcing the Company's acquisition of 18 hotels, including 16 Wellesley Inns, for $65.1 million. 53 55 PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS (ITEM 14(A))
PAGE ---- FINANCIAL STATEMENTS: Report of Arthur Andersen LLP........................... F-2 Consolidated: Balance Sheets at December 31, 1994 and 1995........ F-3 Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 ......... F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 ......... F-5 Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 ......... F-6 Notes to Consolidated Financial Statements ............. F-7
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. Separate financial statements of 50% or less owned entities accounted for by the equity method have been omitted because such entities considered in the aggregate as a single subsidiary would not constitute a significant subsidiary. F-1 56 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Prime Hospitality Corp.: We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries ("the Company") as of December 31, 1994 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Arthur Andersen LLP Roseland, New Jersey January 31, 1996, except with respect to the matter discussed in Note 16 as to which the date is March 6, 1996 F-2 57 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
1994 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 12,524 $ 49,533 Marketable securities available for sale ........................... 1,117 11,929 Restricted cash .................................................... 9,725 8,973 Accounts receivable, net of reserves of $125 and $213 in 1994 and 1995, respectively ................................... 7,819 13,139 Current portion of mortgages and notes receivable .................. 1,925 1,533 Other current assets ............................................... 7,196 8,070 -------- -------- Total current assets ....................................... 40,306 93,177 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization ...................................... 299,291 398,201 Mortgages and notes receivable, net of current portion ............... 81,260 64,962 Other assets ......................................................... 14,075 16,901 -------- -------- TOTAL ASSETS ............................................... $434,932 $573,241 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt ............................................ $ 5,284 $ 5,731 Other current liabilities .......................................... 23,904 38,961 -------- -------- Total current liabilities .................................. 29,188 44,692 Long-term debt, net of current portion ............................... 178,545 276,920 Other liabilities .................................................... 23,134 18,713 -------- -------- Total liabilities .......................................... 230,867 340,325 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued ..................................................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized 30,409,371 and 31,004,499 shares issued and outstanding in 1994 and 1995, respectively .......................................... 304 310 Capital in excess of par value ..................................... 171,774 183,050 Retained earnings .................................................. 31,987 49,556 -------- -------- Total stockholders' equity ................................. 204,065 232,916 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $434,932 $573,241 ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-3 58 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1993 1994 1995 --------- --------- --------- Revenues: Lodging .......................................... $ 69,487 $ 88,753 $ 146,184 Food and beverage ................................ 12,270 18,090 37,955 Management and other fees ........................ 10,831 10,021 8,115 Interest on mortgages and notes receivable ....... 14,765 15,867 11,895 Rental and other ................................. 1,507 1,572 1,479 --------- --------- --------- Total revenues ........................... 108,860 134,303 205,628 --------- --------- --------- Costs and expenses: Direct hotel operating expenses: Lodging ....................................... 19,925 25,490 38,383 Food and beverage ............................. 10,230 13,886 28,429 Selling and general ........................... 21,180 27,244 49,753 Occupancy and other operating .................... 9,827 9,799 11,763 General and administrative ....................... 15,685 15,089 15,515 Depreciation and amortization .................... 7,117 9,427 15,974 --------- --------- --------- Total costs and expenses ................. 83,964 100,935 159,817 --------- --------- --------- Operating income ................................... 24,896 33,368 45,811 Investment income .................................. 1,267 1,966 4,861 Interest expense ................................... (16,116) (13,993) (21,603) Other income ....................................... 3,809 9,089 2,239 Other expense ...................................... -- -- (2,200) --------- --------- --------- Income before income taxes and extraordinary items . 13,856 30,430 29,108 Provision for income taxes ......................... 5,681 12,172 11,643 --------- --------- --------- Income before extraordinary items .................. 8,175 18,258 17,465 Extraordinary items -- gains on discharges of indebtedness (net of income taxes of $2,772, $120 and $70 in 1993, 1994 and 1995, respectively) 3,989 172 104 --------- --------- --------- Net income ......................................... $ 12,164 $ 18,430 $ 17,569 ========= ========= ========= Net income per common share: Income before extraordinary items ................ $ .27 $ .57 $ .54 Extraordinary items .............................. .13 .01 -- --------- --------- --------- Net income per common share ........................ $ .40 $ .58 $ .54 ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements. F-4 59 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK CAPITAL IN ---------------- EXCESS OF RETAINED SHARES AMOUNT PAR VALUE EARNINGS TOTAL ------ ------ --------- -------- ----- Balance December 31, 1992 .................. 29,912,794 $299 $136,090 $ 1,393 $137,782 Net income ................................. -- -- -- 12,164 12,164 Utilization of net operating loss carryforwards ............................ -- -- 4,525 -- 4,525 Federal income tax refund .................. -- -- 16,462 -- 16,462 Compensation expense related to stock option plan ..................................... -- -- 225 -- 225 Proceeds from exercise of stock options .... 30,000 -- 81 -- 81 Proceeds from exercise of stock warrants ... 45,880 1 124 -- 125 ---------- ---- -------- ------- -------- Balance December 31, 1993 .................. 29,988,674 300 157,507 13,557 171,364 Net income ................................. -- -- -- 18,430 18,430 Utilization of net operating loss carryforwards ............................ -- -- 5,861 -- 5,861 Amortization of pre-fresh start tax basis differences ........................ -- -- 6,954 -- 6,954 Federal income tax refund .................. -- -- 200 -- 200 Compensation expense related to stock option plan ..................................... -- -- 60 -- 60 Proceeds from exercise of stock options .... 216,080 2 640 -- 642 Proceeds from exercise of stock warrants ... 204,617 2 552 -- 554 ---------- ---- -------- ------- -------- Balance December 31, 1994 .................. 30,409,371 304 171,774 31,987 204,065 Net income ................................. -- -- -- 17,569 17,569 Utilization of net operating loss carryforwards ............................ -- -- 3,370 -- 3,370 Amortization of pre-fresh start tax basis differences ........................ -- -- 6,167 -- 6,167 Compensation expense related to stock option plan ..................................... -- -- 16 -- 16 Proceeds from exercise of stock options .... 220,159 2 705 -- 707 Proceeds from exercise of stock warrants ... 374,969 4 1,018 -- 1,022 ---------- ---- -------- ------- -------- Balance December 31, 1995 .................. 31,004,499 $310 $183,050 $49,556 $232,916 ========== ==== ======== ======= ========
See Accompanying Notes to Consolidated Financial Statements. F-5 60 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993 1994 1995 -------- -------- --------- Cash flows from operating activities: Net income ............................................. $ 12,164 $ 18,430 $ 17,569 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... 7,117 9,427 15,974 Utilization of net operating loss carryforwards ..... 4,525 5,861 3,370 Gains on settlements of notes receivable ............ -- (6,224) (822) Gains on discharges of indebtedness ................. (6,761) (292) (174) Gains on sales of assets ............................ (1,769) (1,099) (1,957) Amortization of pre-fresh start tax basis differences ....................................... -- 6,954 6,167 Deferred income taxes ............................... 1,541 (205) 1,556 Compensation expense related to stock options ....... 225 60 16 Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable ................................. 269 (1,945) (5,320) Other current assets ................................ (1,791) 127 (887) Other liabilities ................................... 4,208 (2,422) 5,359 -------- -------- --------- Net cash provided by operating activities ........... 19,728 28,672 40,851 -------- -------- --------- Cash flows from investing activities: Net proceeds from mortgages and other notes receivable . 10,861 36,198 27,603 Disbursements for mortgages and notes receivable ....... (515) (1,100) (12,704) Proceeds from sales of property, equipment and leasehold improvements ........................................ 3,715 1,480 8,167 Purchases of property, equipment and leasehold improvements ........................................ (14,346) (63,360) (113,517) Decrease in restricted cash ............................ 1,903 1,268 752 Proceeds from sales of marketable securities ........... -- 1,116 2,928 Purchase of marketable securities ...................... -- (5,885) (11,520) Insurance advances in excess of renovation payments .... -- -- 6,518 Other .................................................. 663 (3,965) 846 -------- -------- --------- Net cash provided by (used in) investing activities ........................................ 2,281 (34,248) (90,927) -------- -------- --------- Cash flows from financing activities: Net proceeds from issuance of debt ..................... 2,771 19,026 119,360 Payments of debt ....................................... (30,890) (43,771) (33,961) Proceeds from the exercise of stock options and warrants ........................................... 206 1,196 1,729 Principal proceeds from federal income tax refund ...... 16,462 200 -- Reorganization items after emergence from bankruptcy ... (5,605) (120) (43) -------- -------- --------- Net cash provided by (used in) financing activities . (17,056) (23,469) 87,085 -------- -------- --------- Net increase (decrease) in cash and cash equivalents ..... 4,953 (29,045) 37,009 Cash and cash equivalents at beginning of period ......... 36,616 41,569 12,524 -------- -------- --------- Cash and cash equivalents at end of period ............... $ 41,569 $ 12,524 $ 49,533 ======== ======== =========
See Accompanying Notes to Consolidated Financial Statements. F-6 61 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994 AND 1995 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES: Prime Hospitality Corp. (the "Company") is a hotel owner/operator with ownership or management of hotels in the United States and the U.S. Virgin Islands. The Company's hotels primarily provide moderately priced, quality accommodations in secondary markets, and operate under franchise agreements with national hotel chains or under the Company's proprietary Wellesley Inns or AmeriSuites brand names. BASIS OF PRESENTATION: The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992. Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximate the present values of amounts to be paid determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. F-7 62 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-8 63 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan (SFAS 114)" and SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures (SFAS 118)." As defined in SFAS 114 and SFAS 118, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS 114 and SFAS 118 require that the measurement of impairment of a loan be based on the present value of expected future cash flows (net of estimated costs to sell) discounted at the loan's effective interest rate. Impairment can also be measured based on a loan's observable market price or the fair value of collateral, if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company will establish a valuation allowance, or adjust existing valuation allowances, with a corresponding charge or credit to operations. The effect of adopting these new accounting standards was immaterial in 1995. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Properties identified for disposal are stated at their estimated net realizable value. During 1995, the Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121)". Following this standard, the Company evaluates whether impairment has occurred at each of its properties based upon the future cash flows (undiscounted and before interest charges) as compared to the carrying value of the property. Based upon its evaluation as of December 31, 1995, the Company has determined that no impairment has occurred. OTHER ASSETS: Other assets consist primarily of deferred issuance costs related to the Company's 7% Convertible Subordinated Notes due 2002 and other debt obligations. F-9 64 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company. Provisions have been made in the combined financial statements which represent the expected future payments based on the estimated ultimate cost for incidents incurred through the balance sheet date. INCOME TAXES: The Company and its subsidiaries file a consolidated Federal income tax return. For financial reporting purposes, the Company follows SFAS No. 109 "Accounting for Income Taxes". In accordance with SFAS 109, as well as SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized. NET INCOME PER COMMON SHARE: Primary net income per common share is computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each year. The weighted average number of common shares used in computing primary net income per share was F-10 65 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 30,721,000, 32,022,000 and 32,461,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Fully diluted net income per share, in addition to the adjustments for primary net income per share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes from their issuance in April 1995. The weighted average number of common share used in computing fully diluted net income per share was 37,423,000 for the year ended December 31, 1995. Fully diluted net income per share has not been presented in the consolidated financial statements because the dilutive effect is not material. PRE-OPENING COSTS: Non-capital expenditures incurred prior to opening new or renovated hotels such as payroll and other operating supplies are deferred and expensed within one year after opening. Preopening costs charged to expense were $-0-, $86,000 and $364,000 for the years ended December 31, 1993, 1994 and 1995. As of December 31, 1995, $261,000 of pre-opening costs are included in other current assets. INTEREST RATE SWAPS: The Company has entered into an interest rate swap agreement which reduces the Company's exposure to interest rate fluctuations. The accounting treatment for the Company's off balance sheet interest rate swap agreement is to accrue net interest to be received or to be paid as an adjustment to interest expense. RECLASSIFICATIONS: Certain reclassifications have been made to the December 31, 1993 and 1994 consolidated financial statements to conform them to the December 31, 1995 presentation. NOTE 2 -- HOTEL PROPERTY ACQUISITIONS In March 1995, the Company acquired the option of ShoLodge, Inc. ("ShoLodge") to purchase a 50% interest in eleven of the Company's AmeriSuites hotels F-11 66 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $19,700,000 and was comprised of (i) $16,100,000 in cash, which was paid in 1995, plus (ii) $18,500,000 in notes maturing in 1997, less (iii) $14,900,000 of existing debt on five hotels, which was forgiven at face value. The transaction resulted in a net increase of approximately $3,600,000 of long-term debt. No gain or loss was recorded on the forgiveness of debt. As a result of this transaction, the Company assumed management of these hotels. In August 1995, the Company entered into an agreement to purchase four Bradbury Suites hotels for $18,700,000. The hotels, comprising 447 rooms, were subsequently converted to the Company's proprietary AmeriSuites brand. In August 1995, the Company also purchased the 149 room all-suite St. Tropez Hotel and Shopping Center in Las Vegas for $15,200,000. Revenues and expenses from these transactions have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements for the full year, reported results would not have been materially different. NOTE 3 -- CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of the following (in thousands):
DECEMBER 31, --------------------------- 1994 1995 ---- ---- Cash.............................................. $ 5,953 $ 4,312 Commercial paper and other cash equivalents....... 6,571 45,221 ------- ------ Totals.......................... $12,524 $49,533 ======= =======
F-12 67 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- MARKETABLE SECURITIES Marketable securities are comprised of the following:
DECEMBER 31, ----------------------------- 1994 1995 ---- ---- Equity securities.................. $ 1,117 $ 3,796 Corporate debt securities.......... -- 8,133 ------- ------- Totals........... $ 1,117 $11,929 ======= =======
NOTE 5 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
DECEMBER 31, --------------------------- 1994 1995 ---- ---- Properties operated by the Company(a) .... $60,609 $57,171 Other(b) ................................. 22,576 9,324 ------ ------ Total .......................... 83,185 66,495 Less current portion ..................... (1,925) (1,533) ------- ------- Long-term portion ........................ $81,260 $64,962 ======= =======
- ------------ (a) At December 31, 1995, the Company is the holder of mortgage notes receivable with a book value of $43,293,000 secured primarily by four hotel properties operated by the Company under management agreements and $13,878,000 in mortgages secured primarily by four properties operated under lease agreements. These notes bear interest at rates ranging from 8.0% to 13.5% and mature through 2015. The mortgages were derived from the sales of hotel properties. The loans secured by hotel properties operated under management agreements pay interest and principal based upon available cash and include a participation in the future excess cash flow of such hotel properties. Two of these mortgages have been structured to include a "senior portion" featuring defined payment terms, and a "junior portion" payable annually based on cash flow. In addition to the mortgage positions referred to above, the Company holds junior or cash flow mortgages and subordinated interests on six other hotel properties F-13 68 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operated by the Company under management agreements. Pursuant to these mortgage agreements, the Company is entitled to receive the majority of excess cash flow generated by these hotel properties and to participate in any future sales proceeds. With regard to these properties, third parties hold significant senior mortgages. The junior mortgages mature on various dates from 1999 through 2002. In accordance with the adoption of fresh start reporting under SOP 90-7, no value was assigned to the junior portions of the notes or the junior mortgages and subordinated interests on the other hotels as there was substantial doubt at the time of valuation that the Company would recover any of their value. As a result, interest income on these junior or cash flow mortgages is recognized when cash is received. During 1993, 1994 and 1995, the Company recognized $976,000, $2,000,000 and $1,950,000, respectively, of interest income related to these mortgages. Future recognition of interest income on these mortgages is dependent primarily upon the net cash flow of the underlying hotels after debt service, which is senior to the Company's junior positions. (b) Other notes receivable currently bear interest at effective rates ranging from 4.0% to 10.0%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company. NOTE 6 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, YEARS OF ---------------------- 1994 1995 USEFUL LIFE ------ ------ ----------- Land and land leased to others ........................... $ 49,438 $ 69,765 Hotels ................................................... 200,706 246,278 20 to 40 Furniture, fixtures and autos ............................ 46,021 67,001 3 to 10 Leasehold improvements ................................... 11,336 26,038 3 to 40 Construction in progress ................................. 1,457 22,667 Properties held for sale ................................. 8,898 -- ------- ------- Sub-total .............................................. 317,856 431,749 Less accumulated depreciation and amortization ..................................... (18,565) (33,548) -------- -------- Totals ......................................... $299,291 $398,201 ======== ========
F-14 69 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1995, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $7,493,000 pursuant to noncancelable operating leases expiring on various dates through 2013. Minimum future rentals under such leases are $9,599,000, of which $4,079,000 is scheduled to be received in the aggregate during the five-year period ending December 31, 2000. Depreciation and amortization expense on property, equipment and leasehold improvements was $7,015,000, $9,300,000 and $14,800,000 for the years ended December 31, 1993, 1994 and 1995, respectively. During the years ended December 31, 1993, 1994 and 1995, the Company capitalized $0, $836,000 and $2,596,000, respectively, of interest related to borrowings used to finance hotel construction. NOTE 7 -- OTHER CURRENT LIABILITIES Other current liabilities consist of the following (in thousands):
DECEMBER 31, ---------------------------- 1994 1995 ---- ---- Accounts payable ............................ $ 4,436 $6,940 Interest .................................... 3,115 3,616 Accrued payroll and related benefits ........ 2,490 3,151 Accrued expenses ............................ 4,182 4,303 Insurance reserves .......................... 5,123 6,007 Hurricane damage reserve..................... -- 8,718 Other ....................................... 4,558 6,226 ------- ------ Totals ............................ $23,904 $38,961 ======= =======
In September 1995, the Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef") in St. Thomas, United States Virgin Islands suffered damages when Hurricane Marilyn struck the U.S. Virgin Islands. At December 31, 1995, the Company has a reserve of $8,718,000 which consists of a $2,200,000 reserve (See Notes 8 and 11) established to cover the cost of the insurance deductible and $6,518,000 of insurance advances, net of funds that have been used to begin the restoration process. F-15 70 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- DEBT Debt consists of the following (in thousands):
DECEMBER 31, ----------------------------- 1994 1995 ---- ---- 10% Senior Secured Notes(a) .................. $ 52,580 $ 30,374 7% Convertible Subordinated Notes(b).......... -- 86,250 Mortgages and other notes payable(c) ......... 131,249 158,904 Capitalized lease obligations(d).............. -- 7,123 -------- -------- Total debt ................................... 183,829 282,651 Less current maturities ...................... (5,284) (5,731) -------- -------- Long-Term debt, net of current portion .... $178,545 $276,920 ======== ========
(a) The 10% Senior Secured Notes were issued pursuant to the Plan, and mature on July 31, 1999. The collateral for the 10% Senior Secured Notes consists primarily of mortgages and notes receivable and real property, net of related liabilities (the "10% Senior Secured Note Collateral"), with a book value of $68,812,000 as of December 31, 1995. Interest on the 10% Senior Secured Notes is payable semi-annually. The 10% Senior Secured Notes require that 85% of the cash proceeds from the 10% Senior Secured Note Collateral be applied first to interest then to prepayment of principal. Aggregate principal payments on the 10% Senior Secured Notes are required in order that one-third of the principal balance outstanding on December 31, 1996 is paid by July 31, 1998 and all of the balance is paid by July 31, 1999. To the extent the cash proceeds from the 10% Senior Secured Note Collateral are insufficient to pay interest or required principal payments on the 10% Senior Secured Notes, the Company will be obligated to pay any deficiency out of its general corporate funds. The 10% Senior Secured Notes contain covenants which, among other things, require the Company to maintain a net worth of at least $100,000,000, and preclude cash distributions to stockholders, including dividends and redemptions, until the 10% Senior Secured Notes have been paid in full. As of December 31, 1995, the Company was in compliance with all covenants applicable to the 10% Senior Secured Notes. During 1994 the Company purchased through a third party agent approximately $5,200,000 of its 10% Senior Secured Notes for aggregate consideration of F-16 71 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $4,800,000. These notes are currently held by the third party agent and have not been retired due to certain restrictions under the note agreements. The purchases were recorded as investments on the Company's balance sheet and no gains are recorded until the notes mature or are redeemed. During 1994, approximately $1,137,000 of the notes were retired resulting in a pretax extraordinary gain of approximately $105,000. During 1995, approximately $1,738,000 of the notes were retired resulting in a pretax extraordinary gain of $174,000. As of December 31, 1995, the Company had unrecognized holding gains of approximately $177,000 related to these securities. (b) In 1995, the Company sold $86,250,000 of 7% Convertible Subordinated Notes due 2002. The notes are convertible into common stock at a price of $12 per share at the option of the holder and mature on April 15, 2002. The notes are redeemable, in whole or in part, at the option of the Company after April 17, 1998 at premiums to principal which decline on each anniversary date. (c) The Company has mortgage and other notes payable of approximately $158,904,000 that are secured by mortgage notes receivable and hotel properties with a book value of $260,116,000. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1995 these notes bear interest at rates ranging from 6.6% to 10.5%, with a weighted average interest rate of 9.3%, and mature from 1996 through 2007. Subsequent to December 31, 1995, the Company entered into an agreement to extend the maturity of a loan in the amount of $32,097,000 secured by the Frenchman's Reef from December 1996 to July 1997. The loan will bear interest at the same rate currently in effect and principal payments will be waived until July 1997. All other terms and conditions of the loan shall remain in effect. The December 31, 1995 consolidated financial statements reflect the impact of this amendment. Additionally, the Company's debt related to the Frenchman's Reef is further secured by an assignment of property insurance proceeds related to the hurricane damage (See Notes 7 and 11). The lender has sole discretion concerning the utilization of such proceeds for refurbishment. The Company is discussing with the lender the terms under which the lender will make such funds available for refurbishment. (d) The Company has $7,123,000 of capital lease obligations. Principal and interest on these capital lease obligations are generally paid monthly. At December 31, F-17 72 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1995, these leases bear interest at rates ranging from 6.7% to 12.45%, with a weighted average interest rate of 10.8%, and mature through 2001. In August 1995, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40 million of variable interest rate debt. Under the agreement, on a monthly basis the Company will pay a fixed rate of interest of 6.18% and will receive a floating interest rate payment equal to the 30 day LIBOR rate on a $40 million notional principal amount. The agreement commenced in October 1995 and expires in 1999. Maturities of long-term debt for the next five years ending December 31 are as follows (in thousands): 1996 .......................................... $ 5,731 1997 .......................................... 83,127 1998 .......................................... 4,877 1999 .......................................... 33,714 2000........................................... 28,277 Thereafter .................................... 126,925 -------- Total ......................................... $282,651 ========
On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First Mortgage Notes due 2006 (See Note 16). The Company utilized a portion of the proceeds to pay down $51,601,000 of debt outstanding at December 31, 1995. Included in this amount was $45,798,000 due in 1997. NOTE 9 -- LEASE COMMITMENTS AND CONTINGENCIES Leases The Company leases various hotels under lease agreements with initial terms expiring at various dates from 1998 through 2022. The Company has options to renew certain of the leases for periods ranging from 1 to 99 years. Rental payments are based on minimum rentals plus a percentage of the hotel properties' revenues in excess of stipulated amounts. F-18 73 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule, by year, of future minimum lease payments required under the remaining operating leases that have terms in excess of one year as of December 31, 1995 (in thousands): 1996 ..................................... $ 4,854 1997 ..................................... 4,808 1998 ..................................... 4,762 1999 ..................................... 4,976 2000...................................... 4,681 Thereafter ............................... 42,829 ------ Total .................................... $66,910 =======
Rental expense for all operating leases, including those with terms of less than one year, consist of the following for the years ended December 31, 1993, 1994 and 1995 (in thousands):
DECEMBER 31, ------------------------------------ 1993 1994 1995 ---- ---- ---- Rentals .............................. $5,009 $4,654 $4,630 Contingent rentals ................... 764 823 745 ----- ------ ----- Rental expense ............. $5,773 $5,477 $5,375 ====== ====== ======
Employee Benefits The Company does not provide any material post employment benefits to its current or former employees. Contingent Claims In April 1995, the Company received a second favorable ruling in its litigation with Financial Security Assurance, Inc. ("FSA") in which FSA sought approximately $31,200,000 previously received by the Company in settlement of a note and guaranty from Allen V. Rose and Arthur Cohen ("Rose and Cohen"). In an order dated April 25, 1995, the U.S. District Court for the Southern District of Florida (the "U.S. District Court") affirmed a lower court ruling approving the Company's settlement with Rose and Cohen and finding that the Company alone was entitled to the settlement proceeds. The Company had previously reached a settlement in 1993 with Rose and Cohen which provided for Rose or his affiliate to pay the Company $25,000,000 plus proceeds from the sale of approximately 1,100,000 shares of the Company's common stock held by Rose, bringing the total settlement proceeds to approximately $31,200,000. F-19 74 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FSA asserted that, under the terms of an intercreditor agreement, it was entitled to receive the settlement proceeds otherwise payable to the Company. The U.S. Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") ruled in favor of the Company in April 1994 and the Company used $25,000,000 of the settlement proceeds to retire certain senior secured notes. FSA appealed to the U.S. District Court, which affirmed the Bankruptcy Court's ruling. On May 12, 1995, the Company used the remaining proceeds plus accrued interest to prepay the 10% Senior Secured Notes. On May 23, 1995, FSA filed a notice of appeal with the U.S. Court of Appeals for the 11th Circuit. The Company believes that the U.S. Court of Appeals will affirm the U.S. District Court ruling and that there will be no effect on the Company's financial position or results of operations. The Company is involved in various other proceedings incidental to the normal course of its business. The Company believes that the resolution of these contingencies will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. NOTE 10 -- INCOME TAXES The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 1993, 1994 and 1995 (in thousands):
DECEMBER 31, ------------ 1993 1994 1995 ---- ---- ---- Current: Federal ................................ $ 2,167 $ 970 $ 320 State .................................. 220 28 299 ------- ------- ------- 2,387 998 619 Deferred: Federal ................................ 5,049 9,780 9,929 State .................................. 1,017 1,514 1,165 ------- ------- ------- 6,066 11,294 11,094 ------- ------- ------- Total .......................... $ 8,453 $12,292 $11,713 ======= ======= =======
Income taxes are provided at the applicable federal and state statutory rates. F-20 75 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, 1993, 1994 and 1995 (in thousands):
DECEMBER 31, ------------ 1993 1994 1995 ---- ---- ---- Utilization of net operating loss ................ $ 4,525 $ 5,861 $ 3,370 Amortization of pre-fresh start basis differences -- properties and notes ............ 1,322 5,632 6,167 Depreciation ..................................... 144 200 1,400 Leasehold reserves ............................... -- 450 158 Property transactions ............................ -- 320 -- Compensation expense.............................. -- -- 604 Other ............................................ 75 (1,169) (605) ------ ------- ------ Total .................................. $ 6,066 $11,294 $11,094 ======= ======= =======
At December 31, 1995, the Company had available federal net operating loss carryforwards of approximately $114,271,000 which will expire beginning in 2005 and continuing through 2007. Of this amount, $96,080,000 is subject to an annual limitation of $8,735,000 under the internal revenue code due to a change in ownership of the company upon consummation of the Plan. The Company also has potential state income tax benefits relating to net operating loss carryforwards of approximately $8,673,000 which will expire during various periods from 1996 to 2006. Certain of these potential benefits are subject to annual limitations similar to federal requirements due to factors such as the level of business conducted in each state and the amount of income subject to tax within each state's carryforward period. In accordance with SFAS 109, the Company has not recognized the future tax benefits associated with the net operating loss carryforwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $39,995,000 against the deferred tax asset as of December 31, 1995. To the extent any available carryforwards or other tax benefits are utilized, the amount of tax benefit realized will be treated as a contribution to stockholders' equity and will have no effect on the income tax provision for financial reporting purposes. For the years ended December 31, 1993, 1994 and 1995, the Company recognized $4,525,000, $5,861,000 and $3,370,000, respectively of such benefits as a contribution to stockholders' equity. Additionally, the Company recognized $6,954,000 and $6,167,000 as a contribution to stockholders' equity for the years ended December 31, 1994 and 1995, F-21 76 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable. As a result of reflecting substantially all of the deferred tax provisions as a contribution to stockholders' equity, the Company had no material deferred tax assets or liabilities as of December 31, 1994 and 1995. NOTE 11 -- OTHER INCOME/EXPENSE Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following as of December 31, 1993, 1994 and 1995 (in thousands):
DECEMBER 31, ------------ 1993 1994 1995 ---- ---- ---- Gains on settlements of notes receivable $ -- $6,355 $ 822 Gain on sale of property 2,109 1,099 1,417 Rebates of prior year's insurance premiums -- 1,579 -- Interest on federal income tax refund 1,200 56 -- Other 500 -- -- ----- ------ ------ Total $3,809 $9,089 $2,239 ====== ====== ======
Other expense of $2,200,000 for the year ended December 31, 1995, consists of a reserve for insurance deductibles related to hurricane damage at the Frenchman's Reef (See Note 7). NOTE 12 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The fair values of non-current financial assets and liabilities and other financial instruments are shown below. The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts.
December 31, 1994 December 31, 1995 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Mortgage and notes receivable $ 81,260 $ 91,604 $ 64,962 $ 76,058 Long-term debt 178,545 178,250 276,920 278,899 Other financial instruments (Interest rate swap agreement) -- -- -- (15)
F-22 77 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value for mortgages and notes receivable is based on the valuation of the underlying collateral utilizing discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or at current rates available to the Company for debt of the same maturities. The fair value of the interest rate swap agreement is based on the estimated amount the Company would pay to terminate the agreement. The Company's mortgages and other notes receivable (See Note 5) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many of the same risks as the Company's operating hotel assets. A significant portion of the collateral is located in the Northeastern and Southeastern United States. NOTE 13 -- RELATED PARTY TRANSACTIONS The following summarizes significant financial information with respect to transactions with present and former officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 1993, 1994 and 1995 (in thousands):
DECEMBER 31, ------------ 1993 1994 1995 ---- ---- ---- Management and other fee income(a) ........................... $ 810 $ 1,165 $1,427 Interest income(a) ........................................... 14 1,283 518 Management fee expense(b) .................................... 222 679 -- Interest expense(b) .......................................... 475 461 -- Reservation fee expense(b) ................................... 468 317 --
(a) During 1995, the Company managed 15 hotels for partnerships in which related parties own various interests. The income amounts shown above primarily include transactions related to these hotel properties. On March 6, 1996, the Company acquired nine of these hotels (See Note 16). (b) In 1991, the Company entered into an agreement with ShoLodge, a company controlled by a former director, whereby ShoLodge was appointed the exclusive agent to develop and manage certain hotel properties. In March 1995, the Company acquired ShoLodge's option to purchase the remaining 50% interest in all eleven hotels developed by ShoLodge and also F-23 78 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) acquired the ownership interest of the remaining AmeriSuites hotel not already owned by the Company (See Note 2). NOTE 14 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS STOCK OPTIONS The Company has adopted various stock option and performance incentive plans under which options to purchase shares of common stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. Total options reserved under these plans (net of amounts granted to date) as of December 31, 1995 are as follows: 1995 Employee Stock Option Plan 574,000 1995 Non-Employee Director Stock Option Plan 250,000 ------- Total 824,000 =======
Under the 1995 Employee Stock Option Plan, options to purchase shares of common stock may be granted at the fair market value of the common stock at the date of grant. Options can generally be exercised during a participant's employment with the Company in equal annual installments over a three-year period and expire ten years from the date of grant. During 1995, options to purchase 648,000 shares of common stock were granted under this plan. Under the 1995 Non-Employee Director Stock Option Plan, options to purchase 10,000 shares of common stock are automatically granted to each non-employee director at the fair market value of the common stock at the date of grant. All options will be fully vested and exercisable one year after the date of grant and will expire ten years after the date of grant, or earlier if the non-employee director ceases to be a director. During 1995, options to purchase 50,000 shares of common stock were granted under this plan. Under the Company's 1992 Stock Option and Performance Incentive Plans, options to purchase 413,000, 367,000 and 15,000 shares of common stock were issued to employees in 1993, 1994 and 1995, respectively. The options were granted at prices which approximate fair market value at the date of grant. Generally, these 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. F-24 79 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options to purchase 315,000, 30,000 and 60,000 shares of common stock were issued to non-employee directors of the Company in 1993, 1994 and 1995, respectively, under the Company's 1992 Stock Option Plan. The options were granted at prices which approximate fair market value at the date of grant. Generally, one-third of these options were exercisable at the date of grant and the remaining options vest in equal annual installments over a two-year period. The options expire six years after the date of grant. During 1992, options to purchase 350,000 shares were granted to employee officers and directors under the Company's 1992 Stock Option Plan. All 350,000 shares are currently exercisable at December 31, 1995. In addition, options to purchase 330,000 shares were granted to a former officer in 1992. At December 31, 1995, all of these options were exercised. The exercise prices of the above options are based on the average market price one year from the date of grant which was determined to be $2.71 per share. Based on this exercise price, the amount of compensation expense attributable to these options was $225,000, $60,000 and $16,000 for the years ended December 31, 1993, 1994 and 1995, respectively. During 1995, the Financial Accounting Standards Board issued "Accounting for Stock Based Compensation (SFAS 123)." The new standard specifies permissible methods for valuing compensation attributable to stock options, as well as certain required disclosures. The Company is required to adopt the new standard beginning in 1996. The Company intends to continue to follow the compensation measurement method currently used, which is one of the permissible methods under SFAS 123. As a result, compensation expense attributable to stock option plans will continue to be measured by the excess, if any, of the market price of the Company's common stock on the date of grant over the exercise price of the option. Additional disclosures showing the pro forma effect of an alternative method will be included in the notes to financial statements. F-25 80 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the various stock option plans:
NUMBER OPTION PRICE OF SHARES PER SHARES --------- ---------- Outstanding at December 31, 1993 ............ 1,301,000 Granted ..................................... 397,000 $7.38-$7.63 Exercised ................................... (216,000) $2.71-$3.63 Canceled .................................... (40,000) $3.63-$7.63 --------- Outstanding at December 31, 1994 ............ 1,442,000 --------- Granted ..................................... 773,000 $9.25-$10.88 Exercised ................................... (222,000) $2.71-$7.63 Canceled .................................... (165,000) $3.63-$9.63 --------- Outstanding at December 31, 1995............. 1,828,000 ========= Exercisable at December 31, 1995 ............ 798,000 $2.71-$9.31 =========
WARRANTS Pursuant to the Plan, warrants to purchase 2,106,000 shares of the Company's common stock were issued to former shareholders of the Company's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share and expire five years after the date of grant. The exercise price was determined from the average per share daily closing price of the Company's common stock during the year following its reorganization on July 31, 1992. As of December 31, 1995 warrants to purchase 625,466 shares have been exercised. NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 1993, 1994 and 1995 (in thousands):
DECEMBER 31, ------------ 1993 1994 1995 ---- ---- Hotels acquired in exchange for the assumption of mortgage notes payable .......... $ 9,161 $18,718 $5,120 Hotels received in settlement of mortgage notes receivable .............................. 3,500 54,521 2,702 Sale of hotel in exchange for a mortgage note receivable ............................... $ 6,500 $ 1,497 $ --
F-26 81 Cash paid for interest was $16,347,000, $15,504,000 and $22,444,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Cash paid for income taxes was $2,697,000, $1,900,000 and $1,237,000 for the years ended December 31, 1993, 1994 and 1995, respectively. NOTE 16 -- SUBSEQUENT EVENTS On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First Mortgage Notes due 2006. Interest on the notes will be payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after five years at premiums to principal which decline on each anniversary date. The Company utilized a portion of the proceeds to pay down $51,601,000 of debt outstanding as of December 31, 1995. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65,100,000 in cash. The acquisition enables the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The acquisition price was comprised of approximately $60,400,000 million to purchase the first mortgage on the 18 hotels with a face value of approximately $70,500,000 million and $4,700,000 to purchase the interests of the three partnerships which owned the hotels. Approximately $1,900,000 of the total purchase price was paid to a partnership in which a general partner is the father of David A. Simon, the Company's President and Chief Executive Officer. In connection with the transaction, the Company also terminated its management agreements and junior subordinated mortgages related to the 18 hotels. F-27 82 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRIME HOSPITALITY CORP. DATE: March 27, 1996 By: /s/ DAVID A. SIMON --------------------------------- David A. Simon, Chairman of the Board of Directors, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1996. SIGNATURE TITLE - --------- ----- /s/ DAVID A. SIMON - ------------------------ David A. Simon Chairman of Board of Directors, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ JOHN M. ELWOOD - ------------------------ John M. Elwood Chief Financial Officer, Executive Vice President and Director (Principal, Financial and Accounting Officer) /s/ ALLEN J. OSTROFF - ------------------------ Allen J. Ostroff Director /s/ HERBERT LUST, II - ------------------------ Herbert Lust, II Director /s/ A.F. PETROCELLI - ------------------------ A.F. Petrocelli Director /s/ JACK H. NUSBAUM - ------------------------ Jack H. Nusbaum Director /s/ HOWARD M. LORBER - ------------------------ Howard M. Lorber Director 83 Exhibit Index (2) (a) Reference is made to the Disclosure Statement for Debtors' Second Amended Joint Plan of Reorganization dated January 16, 1992, which includes the Debtors' Second Amended Plan of Reorganization as an exhibit thereto filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Contract of Purchase and Sale between Hillsborough Associates, Meriden Hotel Associates, L.P., Wellesley I, L.P., Multi-Wellesley Limited Partnership and the Company dated March 6, 1996 filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference. (c) Reference is made to Consent of the Holders Thereof to the Purchase by the Company of the Outstanding First Mortgage Notes filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference. (3) (a) Reference is made to the Restated Certificate of Incorporation of the Company dated June 5, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. 84 Exhibit Index (continued) (4) (a) Reference is made to the Form of 8.20% Fixed Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Form of Adjustable Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (c) Reference is made to the Form of 9.20% Junior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (d) Reference is made to the Form of 8.20% Tax Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (e) Reference is made to the Form of 10.20% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the Form of 8% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (g) Reference is made to the Form of 9.20% OVR Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (h) Reference is made to the Collateral Agency Agreement among the Company, U.S. Trust and the Secured Parties, dated as of July 31, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (i) Reference is made to the Security Agreement between the Company and U.S. Trust, dated as of July 31, 1992, filed as 85 Exhibit Index (continued) an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (j) Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (k) Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (l) Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (m) Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (n) Reference is made to a Form 8-A of the Company as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference. (o) Indenture, dated April 26, 1995, between the Company and the Trustee related to the issuance of 7% Convertible Subordinated Notes due 2002. (p) Indenture, dated January 23, 1996, between the Company and the Trustee related to 9 1/4% First Mortgage Notes due 2006. 86 Exhibit Index (continued) (10) (a) Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc. dated June 3, 1985, and its related agreements, each of which was included as Exhibits to the Form 8-K dated August 14, 1985 of PMI, which are incorporated herein by reference. (b) Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q dated February 12, 1988 of PMI, which is incorporated herein by reference. (c) Reference is made to the Employment Agreement dated as of July 31, 1992, between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (d) Reference is made to the 1992 Performance Incentive Stock Option Plan of the Company dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (e) Reference is made to the 1992 Stock Option Plan of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David A. Simon filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (g) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David L. Barsky filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (i) Reference is made to the Employment Agreement dated as of December 31, 1992 between John Elwood and the Company filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference. 87 Exhibit Index (continued) (j) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and John Elwood filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference. (k) Reference is made to the Employment Agreement dated as of May 18, 1993 between Paul Hower filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference. (l) Reference is made to the Consolidated and Amended Settlement Agreement dated as of October 12, 1993 between Allan V. Rose and the Company filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference. (m) Reference is made to the Consent and Amendment to Prime Hospitality Corp. 9.20% Junior Secured Notes filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (n) Reference is made to the Agreement dated February 6, 1995 among Suites of America, Inc., ShoLodge, Inc. and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (o) Reference is made to the Change of Control Agreement dated February 15, 1995 between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (p) Reference is made to the Change of Control Agreement dated February 15, 1995 between John M. Elwood and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (q) Reference is made to the Change of Control Agreement dated February 15, 1995 between Paul H. Hower and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (r) Reference is made to the Change of Control Agreement dated February 15, 1995 between John H. Leavitt and the 88 Exhibit Index (continued) Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (s) Reference is made to the Change of Control Agreement dated February 15, 1995 between Denis W. Driscoll and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (t) Reference is made to the Change of Control Agreement dated February 15, 1995 between Timothy E. Aho and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (u) Reference is made to the Change of Control Agreement dated February 15, 1995 between Joseph Bernadino and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (v) Reference is made to the Change of Control Agreement dated February 15, 1995 between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10- K dated March 10, 1995. (w) Reference is made to the Change of Control Agreement dated February 15, 1995 between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10- K dated March 10, 1995. (x) Reference is made to the Change of Control Agreement dated February 15, 1995 between Richard Moskal and the Company filed as an Exhibit to the Company's Form 10-K dated March 10, 1995. (y) Employment Agreement dated May 15, 1995 between John Elwood and the Company. (z) Employment Agreement dated August 1, 1995 between David Simon and the Company. 89 Exhibit Index (continued) (21) Subsidiaries of the Company are as follows: Jurisdiction of Name Incorporation ---- ------------- Dynamic Marketing Group, Inc. Delaware Fairfield Holding Corp. Delaware Fairfield-Meridian Claims Service, Inc. Delaware FR Delaware, Inc. (Subsidiary of FR Management Corporation) Delaware FR Management Corporation Virginia KSA Management, Inc. Kansas Mahwah Holding Corp. Delaware Market Segments, Incorporated Delaware PHC Construction Corp. Delaware PHC Disaster Relief Fund, Inc. New Jersey PHC Hotels, Inc. Delaware Prime-American Realty Corp. Delaware Prime Note Collections Company, Inc. Delaware Prime-O-Lene, Inc. New Jersey Republic Motor Inns, Inc Virginia (23) (a) Consent of Arthur Andersen LLP EX-4.O 2 INDENTURE, DATED APRIL 26, 1995 1 ================================================================================ PRIME HOSPITALITY CORP. --------------------------------------------- $75,000,000 (With an Over-Allotment Option for an Additional $11,250,000) 7% CONVERTIBLE SUBORDINATED NOTES DUE 2002 --------------------------------------------- ----------------- INDENTURE Dated as of April 26, 1995 ----------------- --------------------------------------------- BANK ONE, COLUMBUS, N.A. --------------------------------------------- as Trustee ================================================================================ 2 CROSS-REFERENCE TABLE*
TRUST INDENTURE ACT SECTION INDENTURE SECTION 310 (a)(1).................................................. 6.9 (a)(2)................................................. 6.9 (a)(3) ................................................ N.A. (a)(4)................................................. N.A. (a)(5)................................................. 6.9 (b) ................................................... 6.8; 6.10 311 (a) .................................................... 6.13 (b) ................................................... 6.13 312 (a)..................................................... 7.1; 7.2(a) (b).................................................... 7.2(b) (c) ................................................... 7.2(c) 313 (a)..................................................... 7.3(a) (a)(4).................................................. 1.1 (b).................................................... 7.3(a) (c).................................................... 7.3(a) (d).................................................... 7.3(b) 314 (a) .................................................... 7.4 (b) ................................................... N.A. (c)(1) ................................................ 1.2 (c)(2) ................................................ 1.2 (c)(3) ................................................ N.A. (d).................................................... N.A. (e) .................................................. 1.2 315 (a)..................................................... 6.1 (b).................................................... 6.2 (c) .................................................. 6.1 (d).................................................... 6.1 (e).................................................... 5.14 316 (a)..................................................... 1.1 (a)(1)(A).............................................. 5.2; 5.12 (a)(1)(B) ............................................. 5.13 (a)(2) ................................................ N.A. (b) ................................................... 5.8 (c) ................................................... 1.4(c) 317 (a)(1) ................................................. 5.3 (a)(2)................................................. 5.4 (b) ................................................... 10.3 318 (a)..................................................... 1.7
N.A. means not applicable. - ---------------------------- *THIS CROSS-REFERENCE TABLE IS NOT PART OF THE INDENTURE. 3 TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION......................... 1 1.1 Definitions........................................................... 1 ----------- "Act"................................................................. 2 "Affiliate"........................................................... 2 "Authenticating Agent"................................................ 2 "Beneficial owner..................................................... 2 "Board of Directors".................................................. 2 "Board Resolution".................................................... 2 "Business Day"........................................................ 2 "Closing Price"....................................................... 2 "Commission".......................................................... 2 "Common Stock"........................................................ 2 "Company"............................................................. 2 "Company Request" or "Company Order".................................. 3 "Corporate Trust Office".............................................. 3 "Corporation"......................................................... 3 "Defaulted Interest".................................................. 3 "Event of Default".................................................... 3 "Exchange Act"........................................................ 3 "Holder".............................................................. 3 "Indenture"........................................................... 3 "Interest Payment Date"............................................... 3 "Maturity............................................................. 3 "Note"................................................................ 3 "Note Register"....................................................... 3 "Officers' Certificate"............................................... 3 "Opinion of Counsel".................................................. 3 "Outstanding,"........................................................ 3 "Paying Agent"........................................................ 4 "Person".............................................................. 4 "Predecessor Note".................................................... 4 "Redemption Date,".................................................... 4 "Redemption Price,"................................................... 4 "Regular Record Date"................................................. 4 "Repurchase Date"..................................................... 4 "Repurchase Price".................................................... 4 "Risk Event".......................................................... 5 "Senior Indebtedness"................................................. 5 "Significant Subsidiary".............................................. 5 "Special Record Date"................................................. 5 "Stated Maturity,".................................................... 5 "Subsidiary".......................................................... 5 "Trading Day"......................................................... 5 "Trustee"............................................................. 6 "Trust Indenture Act"................................................. 6 "Vice President,"..................................................... 6
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Page 1.2 Compliance Certificates and Opinions.................................. 6 ------------------------------------ 1.3 Form of Documents Delivered to Trustee................................ 6 -------------------------------------- 1.4 Acts of Holders; Record Dates......................................... 7 ----------------------------- 1.5 Notices to Trustee and Company........................................ 8 ------------------------------ 1.6 Notice to Holders; Waiver............................................. 8 ------------------------- 1.7 Conflict with Trust Indenture Act..................................... 8 --------------------------------- 1.8 Effect of Headings and Table of Contents.............................. 8 ---------------------------------------- 1.9 Successors and Assigns................................................ 8 ---------------------- 1.10 Separability Clause................................................... 9 ------------------- 1.11 Benefits of Indenture................................................. 9 --------------------- 1.12 Governing Law......................................................... 9 ------------- 1.13 Legal Holidays........................................................ 9 -------------- 1.14 No Security Interest Created.......................................... 9 ---------------------------- 1.15 Immunity of Incorporators, Stockholders, Officers and Directors....... 9 --------------------------------------------------------------- 1.16 Acceptance by Trustee................................................. 9 --------------------- ARTICLE 2 NOTE FORMS............................... 10 2.1 Forms Generally....................................................... 10 2.2 Form of Face of Note.................................................. 10 2.3 Form of Reverse Side of Note.......................................... 11 2.4 Form of Trustee's Certificate of Authentication....................... 20 ARTICLE 3 THE NOTES............................... 20 3.1 Title and Terms....................................................... 20 3.2 Denominations......................................................... 20 3.3 Execution, Authentication, Delivery and Dating........................ 21 3.4 Temporary Notes....................................................... 21 3.5 Registration, Registration of Transfer and Exchange................... 21 3.6 Mutilated, Destroyed, Lost and Stolen Notes........................... 22 3.7 Payment of Interest; Interest Rights Preserved........................ 23 3.8 Persons Deemed Owners................................................. 24 3.9 Cancellation.......................................................... 24 3.10 Computation of Interest............................................... 24 ARTICLE 4 SATISFACTION AND DISCHARGE....................... 24 4.1 Satisfaction and Discharge of Indenture............................... 24 4.2 Application of Trust Money............................................ 25 4.3 Reinstatement......................................................... 25 ARTICLE 5 REMEDIES................................ 26 5.1 Events of Default..................................................... 26 5.2 Acceleration of Maturity; Rescission and Annulment.................... 27 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee....... 28 5.4 Trustee May File Proofs of Claim...................................... 28
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Page 5.5 Trustee May Enforce Claims Without Possession of Notes................ 29 5.6 Application of Money Collected........................................ 29 5.7 Limitation on Suits................................................... 29 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert............................................... 30 5.9 Restoration of Rights and Remedies.................................... 30 5.10 Rights and Remedies Cumulative........................................ 30 5.11 Delay or Omission Not Waiver.......................................... 30 5.12 Control by Holders.................................................... 30 5.13 Waiver of Past Defaults............................................... 31 5.14 Undertaking for Costs................................................. 31 5.15 Waiver of Stay or Extension Laws...................................... 31 ARTICLE 6 THE TRUSTEE.............................. 31 6.1 Certain Duties and Responsibilities................................... 31 6.2 Notice of Defaults.................................................... 32 6.3 Certain Rights of Trustee............................................. 32 6.4 Not Responsible for Recitals or Issuance of Notes..................... 33 6.5 May Hold Notes........................................................ 33 6.6 Money Held in Trust................................................... 34 6.7 Compensation and Reimbursement........................................ 34 6.8 Disqualification; Conflicting Interests............................... 34 6.9 Corporate Trustee Required; Eligibility............................... 34 6.10 Resignation and Removal; Appointment of Successor..................... 34 6.11 Acceptance of Appointment by Successor................................ 35 6.12 Merger, Conversion, Consolidation or Succession to Business........... 36 6.13 Preferential Collection of Claims Against Company..................... 36 6.14 Appointment of Authenticating Agent................................... 36 ARTICLE 7 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY........... 37 7.1 Company to Furnish Trustee Names and Addresses of Holders............. 37 7.2 Preservation of Information Communications to Holders................. 38 7.3 Reports by Trustee.................................................... 38 7.4 Reports by Company.................................................... 38 ARTICLE 8 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE.......... 38 8.1 Company May Consolidate, Etc., Only on Certain Terms.................. 38 8.2 Successor Substitute.................................................. 39 ARTICLE 9 SUPPLEMENTAL INDENTURES........................ 39 9.1 Supplemental Indentures Without Consent of Holders.................... 39 9.2 Supplemental Indentures with Consent of Holders....................... 40 9.3 Execution of Supplemental Indentures.................................. 40 9.4 Effect of Supplemental Indentures..................................... 41
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Page 9.5 Conformity with Trust Indenture Act................................... 41 9.6 Reference in Notes to Supplemental Indentures......................... 41 9.7 Notice of Supplemental Indenture...................................... 41 ARTICLE 10 COVENANTS............................... 41 10.1 Payment of Principal, Premium and Interest............................ 41 10.2 Maintenance of Office or Agency....................................... 41 10.3 Money for Note Payments to Be Held in Trust........................... 42 10.4 Statement by Officers as to Default................................... 42 10.5 Existence............................................................. 43 10.6 Maintenance of Properties............................................. 43 10.7 Payment of Taxes and Other Claims..................................... 43 10.8 Waiver of Certain Covenants........................................... 43 ARTICLE 11 REDEMPTION OF NOTES.......................... 43 11.1 Right of Redemption................................................... 43 11.2 Applicability Of Article.............................................. 44 11.3 Election to Redeem; Notice to Trustee................................. 44 11.4 Selection by Trustee of Notes to Be Redeemed.......................... 44 11.5 Notice of Redemption.................................................. 44 11.6 Deposit of Redemption Price........................................... 45 11.7 Notes Payable on Redemption Date...................................... 45 11.8 Notes Redeemed in Part................................................ 45 ARTICLE 12 SUBORDINATION OF NOTES......................... 46 12.1 Notes Subordinate to Senior Indebtedness.............................. 46 12.2 Payment Over of Proceeds Upon Dissolution, Etc........................ 46 12.3 No Payment on Notes in Certain Circumstances.......................... 47 12.4 Payment Permitted if No Default....................................... 47 12.5 Subrogation to Rights of Holders of Senior Indebtedness............... 48 12.6 Provisions Solely to Define Relative Rights........................... 48 12.7 Trustee to Effectuate Subordination................................... 48 12.8 No Waiver of Subordination Provisions................................. 48 12.9 Notice to Trustee..................................................... 49 12.10 Reliance on Judicial Order or Certificate of Liquidating Agent...... 49 12.11 Trustee Not Fiduciary for Holders of Senior Indebtedness...... 50 12.12 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights...................................................... 50 12.13 Article Applicable to Paying Agents...... 50 12.14 Certain Conversions Deemed Payment...... 50 ARTICLE 13 CONVERSION OF NOTES.......................... 50 13.1 Conversion Privilege and Conversion Price............................. 50 13.2 Exercise of Conversion Privilege...................................... 51
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Page 13.3 Fraction of Shares.................................................... 51 13.4 Adjustment of Conversion Price........................................ 52 13.5 Notice of Adjustments of Conversion Price............................. 57 13.6 Notice of Certain Corporate Action.................................... 57 13.7 Company to Reserve Common Stock....................................... 58 13.8 Taxes on Conversions.................................................. 58 13.9 Covenant as to Shares of Common Stock................................. 58 13.10 Cancellation of Converted Notes...... 58 13.11 Provisions in Case of Consolidation, Merger or Sale of Assets...... 58 13.12 Disclaimer of Responsibility for Certain Matters...... 59 ARTICLE 14 REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A RISK EVENT.................... 59 14.1 Right to Require Repurchase........................................... 59 14.2 Notices; Method of Exercising Repurchase Right, Etc................... 59 14.3 Certain Definitions................................................... 61
v 8 INDENTURE, dated as of April 26, 1995, between Prime Hospitality Corp., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 700 Route 46 East, Fairfield, New Jersey 07004, and Bank One, Columbus, N.A., a national banking association, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture). RECITALS The Company has duly authorized the creation of an issue of its 7% Convertible Subordinated Notes Due 2002 (herein called the "Notes") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the promises and the purchase of the Notes by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to then in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; (4) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (5) "or" is not exclusive. 9 "Act" when used with respect to any Holder, has the meaning specified in Section 1.4. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate Notes. "Beneficial owner" shall have the meaning specified in Section 14.3(a). "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York or the city in which the Corporate Trust Office is located are authorized or obligated by law or executive order to close or to be closed. "Closing Price" has the meaning specified in Section 13.4(h). "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 13.11, shares issuable on conversion of Notes shall include only shares of the class designated as Common Stock of the Company at the date of this instrument or shares of any class or classes resulting from any reclassification or reclassification thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassification bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. 2 10 "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered. As of the date hereof, the Corporate Trust Office of the Trustee is located at 100 East Broad Street, 8th Floor, Columbus, Ohio 43271-0181. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Defaulted Interest" has the meaning specified in Section 3.7. "Event of Default" has the meaning specified in Section 5.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Holder" means a Person in whose name a Note is registered in the Note Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and to govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Maturity," when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Note" has the meaning specified in the Recitals of the Company to this Indenture. "Note Register" and "Note Registrar" have the respective meanings specified in Section 3.5. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 10.4 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee. "Outstanding," when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (i) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; 3 11 (ii) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Notes which have been paid pursuant to Section 3.6 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands such Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Notes on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 3.6 in exchange for or in lieu of a mutilated, destroyed, lost, or stolen Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Note. "Redemption Date," when used with respect to any Note to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price," when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Repurchase Date" has the meaning specified in Section 14.1. "Repurchase Price" has the meaning specified in Section 14.1. 4 12 "Risk Event" has the meaning specified in Section 14.3(c). "Senior Indebtedness" means the principal of (and premium, if any) and interest on (a) all indebtedness of the Company for money borrowed, other than the Notes, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, except any such indebtedness that, by the terns of the instrument or instruments by which such indebtedness was created or incurred, expressly provides that it (i) is junior in right of payment to the Notes or (ii) ranks pari passu in right of payment with the Notes, and (b) any amendments, renewals, extensions, deferrals, modifications, refinancings and refundings of any such indebtedness. For the purposes of this definition, "indebtedness for money borrowed," when used with respect to the Company, means (u) any obligation of the Company for the repayment of borrowed money (including, without limitation, fees, penalties, expenses, collection expenses, interest yield amounts and other obligations in respect thereof, and, to the extent permitted by applicable law, interest accruing after the filing of a petition initiating any proceeding under the Bankruptcy Code, whether or not allowed as a claim in such proceeding), whether or not evidenced by bonds, debentures, notes or other written instruments, and any other obligations evidenced by notes, bonds, debentures or similar instruments, (v) any deferred payment obligation of the Company for the payment of the purchase price of property or assets evidenced by a note or similar instrument (excluding any obligations for trade payables or constituting the deferred purchase price of assets incurred in ordinary course of business), (w) any obligation of the Company for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of the Company under generally accepted accounting principles, (x) any obligation of the Company due and payable under interest rate and currency swaps, floors, caps or similar arrangements intended to fix interest rate obligations or currency fluctuation risks, (y) any obligation of the Company evidenced by a letter of credit or any reimbursement obligation of the Company in respect of a letter of credit, and (z) any obligations of others of the kinds described in the preceding clauses (u), (v), (w), (x) or (y) assumed by or guaranteed by the Company and the obligations of the Company under guarantees of such obligations. "Significant Subsidiary" means, with respect to any person, a Subsidiary of such Person that would constitute a "significant subsidiary" as such term in defined under Rule 1.02(v) of Regulation S-X of the Securities and Exchange Commission. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.7. "Stated Maturity," when used with respect to any Note or any installment of interest thereon, means the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest, as applicable, is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange or in the applicable securities market. 5 13 "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". 1.2 Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate (other than certificates provided pursuant to Section 10.4) or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with; provided, however, that, with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. 1.3 Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care, as to factual matters, should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual 6 14 matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. 1.4 Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.1) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 7.1) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. (d) The ownership of Notes shall be proved by the Note Register. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Note. 7 15 1.5 Notices to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or other Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this Indenture, or at any other address previously furnished in writing to the Trustee by the Company, Attention: Chief Financial Officer, or (3) the Company by the Trustee or the Trustee by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if transmitted by facsimile transmission to the Company at (201) 882-8577 or to the Trustee at (614) 248-5195 (or to such other facsimile transmission number previously furnished in writing to the Company by the Trustee or to the Trustee by the Company) and in each case confirmed by a copy sent to the Company or to the Trustee, as the case may be, by guaranteed overnight courier. 1.6 Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Note Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification to every purpose hereunder. 1.7 Conflict with Trust Indenture Act. If, and to the extent, any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. 1.8 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 1.9 Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. 8 16 1.10 Separability Clause. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 1.11 Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Notes, any benefit or any legal or equitable right, remedy or claim under this Indenture. 1.12 Governing Law. This Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York. 1.13 Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Note or the last date on which a Holder has the right to convert his Notes shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of interest or principal (and premium, if any), Repurchase Price or conversion of the Notes need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date or Repurchase Date, or at the Stated Maturity, or on such last day for conversion, provided that no additional interest shall accrue as a result of such delayed payment for the period from and after such Interest Payment Date, Redemption Date, Repurchase Date or Stated Maturity, as the case may be. 1.14 No Security Interest Created. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its Subsidiaries is located. 1.15 Immunity of Incorporators, Stockholders, Officers and Directors. No recourse shall be had for the payment of the principal of (and premium, if any), or the interest, if any, on any Note, or for any claim based thereon, or upon any obligation, covenant or agreement of this Indenture, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or indirectly through the Company or of any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment of penalty or otherwise; it being expressly agreed and understood that this Indenture and all of the Notes are solely corporate obligations, and that no personal liability whatever shall attach to, or is incurred by, any incorporator, stockholder, officer or director, past, present or future, of the Company or of any successor corporation, either directly or indirectly through the Company or any successor corporation, because of the incurring of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants or agreements contained in this Indenture or in the Notes, or to be implied herefrom or therefrom; and that all such personal liability is hereby expressly released and waived as a condition of, and as part of the consideration for, the execution of this Indenture and the issuance of the Notes. 1.16 Acceptance by Trustee. The Trustee hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions set forth herein. 9 17 ARTICLE 2 NOTE FORMS 2.1 Forms Generally. The Notes and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange on which the Notes may be listed or as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution of the Notes. The definitive Notes shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the officers executing such Notes, as evidenced by their execution of such Notes. 2.2 Form of Face of Note. No. _______ $_______ Prime Hospitality Corp. 7% Convertible Subordinated Note Due 2002 CUSIP 741917 AB 4 Prime Hospitality Corp., a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars on April 15, 2002, and to pay interest thereon from April 26, 1995 or from and including the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on April 15 and October 15 in each year, commencing October 15, 1995, at the rate of 7% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is, registered at the close of business on the Regular Record Date for such interest, which shall be April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York or at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made 10 18 by check mailed to the address of the Person entitled thereto as such address shall appear in the Note Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trust referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: PRIME HOSPITALITY CORP. TRUSTEE'S CERTIFICATE OF BY: ____________________ AUTHENTICATION President This is one of the Notes referred to in the within- ATTEST: ________________ mentioned Indenture. Secretary BANK ONE, COLUMBUS, N.A., as Trustee BY: ______________________________ Authorized Signatory 2.3 Form of Reverse Side of Note. PRIME HOSPITALITY CORP. 7% CONVERTIBLE SUBORDINATED NOTE DUE 2002 This Note is one of a duly authorized issue of Notes of the Company designated as its 7% Convertible Subordinated Notes Due 2002 (herein called the "Notes"), limited in aggregate principal amount to $75,000,000 (subject to increase as provided in the Indenture up to $86,250,000 aggregate principal amount), issued and to be issued under an Indenture, dated as of April 26, 1995 (herein called the "Indenture"), between the Company and Bank One, Columbus, N.A. as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Notes and of the terms upon which the Notes are, and are to be, authenticated and delivered. 11 19 Subject to and upon compliance with the provisions of the Indenture, the Holder of this Note is entitled, at his option, at any time on or before the close of business on April 15, 2002, or in case this Note or a portion hereof is called for redemption or submitted for repurchase upon the occurrence of a Risk Event, then in respect of this Note or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption or repurchase, as the case may be) not after, the close of business on the last Trading Day prior to the Redemption Date or Repurchase Date, respectively, to convert this Note (or any portion of the principal amount hereof which is $1,000 or an integral multiple thereof), at the principal amount hereof, or of such portion, into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at a conversion price equal to $12.00 aggregate principal amount of Notes for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in the Indenture) by surrender of this Note, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency maintained for that purpose in the Borough of Manhattan, The City of New York or the Corporate Trust Office, accompanied by written notice to the Company in the form provided in this Note (or such other notice as is acceptable to the Company) that the Holder hereof elects to convert this Note, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (unless this Note or the portion thereof being converted has been called for redemption on a Redemption Date within such period), also accompanied by payment in New York Clearing House or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Note then being converted. Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Note (or any Predecessor Note) of record at such Regular Record Date to receive an installment of interest (with certain exceptions provided in the Indenture), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractional shares or scrip representing fractional shares will be issued on conversion, but instead of any fractional share the Company shall pay a cash adjustment as provided in the Indenture. The conversion price is subject to adjustment as provided in the Indenture. In addition, the Indenture provides that in case of certain reclassifications, consolidations or mergers to which the Company is a party or the sale or transfer of substantially all of the assets of the Company, the Indenture shall be amended, without the consent of any Holders of Notes, so that this Note, if then outstanding, will be convertible thereafter, during the period this Note shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the reclassification, consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock into which this Note might have been converted immediately prior to such consolidation, merger or transfer (assuming such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares). The Notes are subject to redemption upon not less than thirty (30) nor more than sixty (60) days' notice by mail, at any time on or after April 17, 1998 and prior to maturity, as a whole or in part, at the election of the Company, at the following Redemption Prices' (expressed as percentages of the principal amount): 12 20 If redeemed during the twelve (12) month period beginning April 15 (or April 17, in the case of 1998) of the years indicated,
Year Redemption Price 1998 .............................................. 104.0% 1999 .............................................. 103.0% 2000 .............................................. 102.0% 2001 .............................................. 101.0%
and at maturity at 100% of principal, together in the case of any such redemption with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Notes, or one or more Predecessor Notes, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. The Indenture provides that if a Risk Event (as defined therein) occurs, each Holder of Notes shall have the right, in accordance with the provisions of the Indenture, to require the Company to repurchase all of such Holder's Notes, or any portion thereof that is an integral multiple of $1,000, for cash at a price equal to 100% of the principal amount of such Notes to be repurchased together with accrued interest to the Repurchase Date. In the event of redemption, conversion or repurchase of this Note in part only, a new Note or Notes for the portion hereof not redeemed, converted or repurchased will be issued in the name of the Holder hereof upon the cancellation hereof. The indebtedness evidenced by this Note is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Note is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Notes under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued 13 21 upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Note at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Note as provided in the Indenture. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable in the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan, The City of New York or the Corporate Trust Office, duly endorsed by or accompanied by a written instrument of transfer in form satisfactory to the Company and the Note Registrar duly executed by the Holder hereof or his attorney duly authorized in writing, in each case, with an appropriate signature guarantee, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (except as provided in the Indenture). Prior to due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal, premium, if any, or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 14 22 ABBREVIATIONS The following abbreviations, when used in the inscription the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - TEN ENT - as tenants by the ________ Custodian _______ entireties (Cust) (Minor) JT TEN - as joint tenants with Under Uniform Gifts to right of survivorship Minors Act ___________ and not as tenants in (State) common Additional abbreviations may also be used though not in above list. 15 23 [FORM OF CONVERSION NOTICE] CONVERSION NOTICE TO PRIME HOSPITALITY CORP. The undersigned registered owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of the Company in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Note. Dated: ------------------- Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if shares of Common Stock are to be delivered, or Notes to be issued, other than to and in the name of the registered owner. - -------------------------- Signature Guarantee Fill in for registration of shares of Common Stock if they are to be delivered, or Notes if they are to be issued, other than to and in the name of the registered owner: Register: Common Stock -- - -------------------------- (Name) Notes -- - -------------------------- (Street Address) (Check appropriate line(s)) 16 24 Principal amount to be converted (City, State and Zip Code) (if less than all): (Please print name and address) $____________,000 Social Security or Other Taxpayer Identification Number 17 25 [FORM OF OPTION TO ELECT REPAYMENT UPON A RISK EVENT] OPTION TO ELECT REPAYMENT UPON A RISK EVENT TO PRIME HOSPITALITY CORP. The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from the Company as to the occurrence of a Risk Event with respect to the Company and requests and instructs the Company to repay the entire principal amount of this Note, or the portion thereof (which is $1,000 or an integral multiple thereof) below designated, in accordance with the terms of the Indenture, together with accrued interest to such date, to the registered holder hereof. ---------------------------- Date: --------- ---------------------------- Signature(s) ---------------------------- Social Security or Other Taxpayer Identification Number Principal amount to be repaid (if less than all): $ ,000 ----------- NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. 18 26 [FORM OF ASSIGNMENT] ASSIGNMENT ---------------------------- Date: --------- ---------------------------- Signature(s) ---------------------------- Social Security or Other Taxpayer Identification Number Principal amount to be repaid (if less than all): $ ,000 ----------- NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. 19 27 2.4 Form of Trustee's Certificate of Authentication. This is one of the Notes referred to in the within-mentioned Indenture. BANK ONE, COLUMBUS, N.A., as Trustee By ------------------------------ Authorized Signatory ARTICLE 3 THE NOTES 3.1 Title and Terms. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to (a) $75,000,000 plus (b) such additional aggregate principal amount (which may not exceed $11,250,000 principal amount) of Notes as may be purchased by the Underwriters pursuant to the Underwriting Agreement, dated April 19, 1995, among the Company, Montgomery Securities and Smith Barney Inc., as Underwriters, solely to cover over-allotments, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Sections 3.4, 3.5, 3.6, 9.6, 11.8 or 13.2. The Notes shall be known and designated as the "7% Convertible Subordinated Notes Due 2002" of the Company. Their Stated Maturity shall be April 15, 2002, and they shall bear interest at the rate of 7% per annum, from the date of initial issuance or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1995, until the principal thereof is paid or made available for payment. The principal of (and premium, if any) and interest on the Notes shall be payable and the transfer of Notes will be registrable at the office or agency of the Company in the Borough of Manhattan, The City of New York or the Corporate Trust Office, maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Note Register. The Notes shall be redeemable as provided in Article 11. The Notes shall be subordinated in right of payment to Senior Indebtedness as provided in Article 12. The Notes shall be convertible as provided in Article 13. The Notes shall be subject to repurchase by the Company, at the election of Holders, as provided in Article 14. 3.2 Denominations. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. 20 28 3.3 Execution, Authentication, Delivery and Dating. The Notes shall be executed on behalf of the Company by its Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Notes; and the Trustee in accordance with such Company Order shall authenticate and deliver such Notes as in this Indenture provided and not otherwise. Each Note shall be dated the date of its authentication. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. 3.4 Temporary Notes. Pending the preparation of definitive Notes, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as evidenced by their execution of such Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at any office or agency of the Company designated pursuant to Section 10.2, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. 3.5 Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.2 being herein sometimes collectively referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Trustee is hereby appointed "Note Registrar" for the purpose of registering Notes and transfers of Notes as herein provided. Upon surrender for registration of transfer of any Note at an office or agency of the Company designated pursuant to Section 10.2 for such purpose, the Company shall execute, and the Trustee shall 21 29 authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Note Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to a Holder for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Sections 3.4, 9.6, 11.8, 13.2 or 14.2 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business fifteen (15) days before day of the mailing of a notice of redemption of Notes selected for redemption under Section 11.4 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. 3.6 Mutilated, Destroyed, Lost and Stolen Notes. If any mutilated Note is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, or theft of any Note and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute, and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost 22 30 or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. 3.7 Payment of Interest; Interest Rights Preserved. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Note Register, not less than ten (10) days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. 23 31 In the case of any Note which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Note whose Maturity is prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Note which is converted, interest whose Stated Maturity is after the date of conversion of such Note shall not be payable. 3.8 Persons Deemed Owners. Prior to due presentment of a Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 3.7) interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. 3.9 Cancellation. All Notes surrendered for payment, redemption, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly canceled by the Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee shall be disposed of as directed by a Company Order. 3.10 Computation of Interest. Interest on the Notes shall be computed on the basis of a 360- day year of twelve 30-day months. ARTICLE 4 SATISFACTION AND DISCHARGE 4.1 Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Notes herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Notes theretofore authenticated and delivered (other than (i) Notes which have been destroyed, lost or stolen and which have been replaced or paid an provided in Section 3.6 and (ii) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.3) have been delivered to the Trustee for cancellation; or (B) all such Notes not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or 24 32 (ii) will become due and payable at their Stated Maturity within one (1) year, or (iii) are to be called for redemption within one (1) year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for that purpose an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.7 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 4.2 and the last paragraph of Section 10.3 shall survive. 4.2 Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.3, all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 4.1 (and held by it or any Paying Agent) for the payment of Notes subsequently converted shall be returned to the Company upon Company Request. 4.3 Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article 4 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article 4 until such time as the Trustee or Paying Agent is permitted to apply all money held in trust with respect to the Notes; provided, however, that if the Company makes any payment of principal of or any premium or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders to receive such payment from the money so held in trust. 25 33 ARTICLE 5 REMEDIES 5.1 Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of the principal of (or premium, if any, on) any Note at its Maturity, whether or not such payment is prohibited by the provisions of Article 12; or (2) default in the payment of any interest upon any Note when it becomes due and payable, and continuance of such default for a period of thirty (30) days, whether or not such payment is prohibited by the provisions of Article 12; or (3) a default in the payment of the Repurchase Price in respect of any Note on the Repurchase Date therefor in accordance with the provisions of Article 14, whether or not such payment is prohibited by the provisions of Article 12; or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of sixty (60) days after there has been given, by registered or certified mail, to the Company by the Trustee, or to the Company and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Notes, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or any of its Significant Subsidiaries or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any Significant Subsidiary in an amount, together with all other such indebtedness, exceeding $5,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay any portion of principal or interest on such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such indebtedness in an amount exceeding $5,000,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of ten (10) days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Notes a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (6) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any Significant Subsidiary which remains undischarged for a period (during which execution shall not be effectively stayed) of sixty (60) days, provided that the aggregate of all such outstanding judgments exceeds $5,000,000 26 34 (excluding any amounts covered by insurance as to which the insurer has not denied liability); or (7) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company or a Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company or a Significant Subsidiary bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Subsidiary under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of sixty (60) consecutive days; or (8) the commencement by the Company or any Significant Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company or any Significant Subsidiary in furtherance of any such action. 5.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of all the Notes to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal shall become immediately due and payable. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the outstanding Notes, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes, (B) the principal of (and premium, if any, on) any Notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, 27 35 (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Notes, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the nonpayment of the principal of Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (1) default is made in the payment of any interest on any Note when such interest becomes due and payable and such default continues for a period of thirty (30) days, or (2) default is made in the payment of the Repurchase Price in respect of any Note on the Repurchase Date therefor in accordance with the provisions of Article 14, or (3) default is made in the payment of the principal of (or premium, if any, on) any Note at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal (and premium, if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate borne by the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 5.4 Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Notes), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any 28 36 amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.7. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. 5.5 Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. 5.6 Application of Money Collected. Subject to Article 12, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.7; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and THIRD: To the payment of the remainder, if any, to the Company, its successors or assigns, or to whomsoever may be lawfully entitled to the same, or as a court of competent jurisdiction may determine. 5.7 Limitation on Suits. No Holder of any Note shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and 29 37 (5) no direction inconsistent with such written request has been given to the Trustee during such sixty (60) day period by the Holders of a majority in principal amount of the Outstanding Notes. It being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 3.7) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date), to have such Note repurchased in accordance with Article 14 and to convert such Note in accordance with Article 13 and to institute suit for the enforcement of any such payment, right to require repurchase and right to convert, and such rights shall not be impaired without the consent of such Holder. 5.9 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. 5.10 Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 3.6, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 5.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. 5.12 Control by Holders. The Holders of a majority in principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and 30 38 (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. 5.13 Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any past default hereunder and its consequences, except (1) a default in the payment of the principal of (or premium, if any) or interest on any Note, or (2) a default with respect to the right of a Holder to require repurchase of or convert a Note, or (3) a default with respect to any covenant or provision hereof which under Article 9 cannot be modified or amended without the consent of the Holder of each Outstanding Note affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 5.14 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or in any suit for the enforcement of the right to convert any Note in accordance with Article 13 or the right to require the Company to repurchase any Note in accordance with Article 14. 5.15 Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 6 THE TRUSTEE 6.1 Certain Duties and Responsibilities. Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and 31 39 (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that (1) this paragraph shall not be construed to limit the effect of paragraph (a) of this Section 6.1; (2) the Trustee shall not be liable for any error of judgment made in good faith by a responsible officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of a majority in principal amount of the Outstanding Notes relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, under this Indenture, and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. 6.2 Notice of Defaults. The Trustee shall give the Holders notice of any default hereunder known to the Trustee as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 5.1(4), no such notice to Holders shall be given until at least thirty (30) days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. 6.3 Certain Rights of Trustee. Subject to the provisions of Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, 32 40 bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be held responsible for having knowledge of any defaults, of which it does not have actual knowledge, except money defaults unless specifically notified in writing by the Company and/or the Holders of the Notes. 6.4 Not Responsible for Recitals or Issuance of Notes. The recitals contained herein and in the Notes, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of Notes or the proceeds thereof. 6.5 May Hold Notes. The Trustee, any Paying Agent, any Note Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to Sections 6.8 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Note Registrar or such other agent. 33 41 6.6 Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. 6.7 Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. 6.8 Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. 6.9 Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. 6.10 Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within thirty (30) days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. 34 42 (d) If at any time: (1) the Trustee shall fail to comply with Section 6.8 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six (6) months, or (2) the Trustee shall cease to be eligible under Section 6.9 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (I) the Company by a Board Resolution may remove the Trustee, or (II) subject to Section 5.14, any Holder who has been a bona fide Holder of a Note for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within ninety (90) days after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Note for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 1.6. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. 6.11 Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its fees and expenses (including counsel fees, if any) execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. 35 43 6.12 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. 6.13 Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). 6.14 Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon original issue and upon exchange, registration of transfer, partial conversion or partial redemption or pursuant to Section 3.6, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Whenever reference is made in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustees certificate of authentication, such references shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such 36 44 appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Note Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 6.7. If an appointment is made pursuant to this Section, the Notes may have endorsed thereon, in addition to the Trustees certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Notes described in the within mentioned Indenture. BANK ONE, COLUMBUS, N.A., as Trustee By _____________________ as authorized agent By:_____________________ as Authenticating Agent By:_____________________ Authorized Signatory ARTICLE 7 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY 7.1 Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than fifteen (15) days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within thirty (30) days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen (15) days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Note Registrar. 37 45 7.2 Preservation of Information Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Note Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.1 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Notes, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. 7.3 Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Notes are listed, with the Commission and with the Company. The Company will notify the Trustee when the Notes are listed on any stock exchange. 7.4 Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within fifteen (15) days after the same is so required to be filed with the Commission. ARTICLE 8 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE 8.1 Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company in merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United 38 46 States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Notes and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 13.11; (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. 8.2 Successor Substitute. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.1, the successor person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Notes. ARTICLE 9 SUPPLEMENTAL INDENTURES 9.1 Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Notes; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; provided, however, that in respect of any such additional covenant such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; or (3) to secure the Notes; or 39 47 (4) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Section 13.11; or (5) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Notes and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or (6) to add any additional Events of Default; or (7) to cure any ambiguity, to correct or supplement any provision herein or any supplemental indenture which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided that such action pursuant to this Clause (7) shall not adversely affect the interests of the Holders in any material respect. 9.2 Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Notes, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby, (1) change the Stated Maturity of, the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Note or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or adversely affect the right to convert any Note as provided in Article 13 (except as permitted by Section 9.1(4)), or adversely affect the right to cause the Company to repurchase any Note pursuant to Article 14, or modify the provisions of this Indenture with respect to the subordination of the Notes in a manner adverse to the Holders, or (2) reduce the percentage in principal amount of the outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section or Section 5.13 or Section 10.8, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. 9.3 Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts 40 48 created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 9.4 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such-supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. 9.5 Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. 9.6 Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, Notes so modified as to conform, in the opinion of Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for outstanding Notes. 9.7 Notice of Supplemental Indenture. Promptly after execution by the Company and the Trustee of any supplemental indenture pursuant to Section 9.2, the Company shall transmit to the Holders a notice setting forth the substance of such supplemental indenture. ARTICLE 10 COVENANTS 10.1 Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Notes (including the Repurchase Price) in accordance with the terms of the Notes and this Indenture. 10.2 Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange, where Notes may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. 41 49 The Company will give prompt written notice to the Trustee of any such designation or rescission of any change in the location of any such other office or agency. 10.3 Money for Note Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Notes, aggregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Notes) in the making of any payment in respect of the Notes, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent as such. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Note and remaining unclaimed for two (2) years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of the Company cause to be published once, in a paper published in the English language, customarily published on each Business Day and of general circulation in City of New York, notice that such money remains unclaimed that, after a date specified therein, which shall not be less than thirty (30) days from the date of such publication, any unclaimed balance of such money then remaining will be paid to the Company. 10.4 Statement by Officers as to Default. The Company will deliver to the Trustee, within sixty (60) days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating as to each signer thereof that he or she is familiar with the affairs of the Company and whether or not to his or her knowledge the Company is in default in the performance and observance of the terms, provisions or conditions of this Indenture (without regard to any period of grace or requirement 42 50 of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which he or she may have knowledge. 10.5 Existence. Subject to Article 8, the Company will cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises and the existence, rights (charter and statutory) and franchises of each Significant Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries and that the loss thereof is not disadvantageous in any material respect to the Holders. 10.6 Maintenance of Properties. The Company will cause properties used or useful in the conduct of its business or the business of any Significant Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business and the business of its Subsidiaries and not disadvantageous in any material respect to the Holders. 10.7 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Significant Subsidiary or upon the income, profits or property he Company or any Significant Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Significant Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. 10.8 Waiver of Certain Covenants. The Company need not in any particular instance comply with any covenant or condition set forth in Section 10.5, 10.6 or 10.7, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Notes shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. ARTICLE 11 REDEMPTION OF NOTES 11.1 Right of Redemption. The Notes may be redeemed at the election of the Company, as a whole or from time to in part, at any time on or after April 17, 1998, at the Redemption Prices specified in the form of Note hereinbefore set forth, together with accrued interest to the Redemption Date. 43 51 11.2 Applicability Of Article. Redemption of Notes at the election of the Company, as permitted by any provision of this Indenture, shall be made in accordance with such provision and this Article. 11.3 Election to Redeem; Notice to Trustee. The election of the Company to redeem any Notes pursuant to Section 11.1 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Notes, the Company shall, at least sixty (60) days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed. 11.4 Selection by Trustee of Notes to Be Redeemed. If less than all the Notes are to be redeemed, the particular Notes to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, by lot or such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or any integral multiple thereof) of the principal amount of Notes of a denomination larger than $1,000. If any Note selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Note so selected, the converted portion of such Note shall be deemed (so far as may be) to be the portion selected for redemption. Notes which have been converted during a selection of Notes to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and each Note Registrar in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Notes shall relate, in the case of any Notes redeemed or to be redeemed only in part, to the portion of the principal amount of such Notes which has been or is to be redeemed. 11.5 Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date, to each Holder of Notes to be redeemed, at his address appearing in the Note Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Notes are to be redeemed, the identification (and, in the case of partial redemption of any Notes, the principal amounts) of the particular Notes to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Note to be redeemed and that interest thereon will cease to accrue on and after said date, 44 52 (5) the conversion price, the date on which the right to convert the Notes to be redeemed will terminate and the place or places where such Notes may be surrendered for conversion, and (6) the place or places where such Notes are to be surrendered for payment of the Redemption Price. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at Company's request, by the Trustee in the name and at the expense of the Company. 11.6 Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.3) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Notes which are to be redeemed on that date other than Notes called for redemption on that date which have been converted prior to the date of such deposit. If any Note called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or segregated and held in trust for the redemption of such Note shall (subject to any right of the Holder of such Note or any Predecessor Note to receive interest as provided in the last paragraph of Section 3.7) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. 11.7 Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Notes so redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Notes shall cease to bear interest. Upon surrender of such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such at the close of business on the relevant record dates according to their terms and the provisions of Section 3.7. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Note. 11.8 Notes Redeemed in Part. Any Note which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant Section 10.2 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company or the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. 45 53 ARTICLE 12 SUBORDINATION OF NOTES 12.1 Notes Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Note, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article (subject to the provisions of Article 4), the payment of the principal of (and premium, if any) and interest on each and all of the Notes (including any repurchases or payments pursuant to Article 14) are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. 12.2 Payment Over of Proceeds Upon Dissolution, Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary whether or not involving insolvency or bankruptcy, or any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event specified in (a) or (b) above (each such event, if any, herein sometimes referred to as a "Proceeding") the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, before the Holders of the Notes are entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, on account of principal of (or premium, if any) or interest on the Notes or on account of any purchase (including any repurchase pursuant to Article 14) or other acquisition of Notes by the Company or any Subsidiary of the Company (all such payments, distributions, purchases and acquisitions herein referred to, individually and collectively, as a "Notes Payment"), and to that end the holders of all Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any Notes Payment which may be payable or deliverable in respect of the Notes in any such Proceeding. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Note shall have received any Notes Payment before all Senior Indebtedness is paid in full or payment thereof provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, and if such fact shall, at or prior to the time of such Notes Payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such Notes Payment shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article only, the words "any payment or distribution of any kind or character, whether in cash, property or securities" shall not be deemed to include a payment or distribution of stock or securities of the Company provided for by a plan of reorganization or readjustment authorized by an order or decree of a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law or of any other corporation provided for by such plan of reorganization or readjustment which stock or securities are subordinated in right of payment to all then outstanding Senior Indebtedness to substantially the same extent as the Notes are so subordinated as provided in this Article. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution or the Company following the conveyance or transfer of all or substantially all of its properties and assets as an entirety to another Person upon the terms and 46 54 conditions set forth in Article 8 shall not be deemed a Proceeding for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer such properties and assets as an entirety, as the case may be, all, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article 8. 12.3 No Payment on Notes in Certain Circumstances. In the event that any Notes are declared due and payable before their Stated Maturity, then and in such event the holders of the Senior Indebtedness outstanding at the time such Notes so become due and payable shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of such Senior Indebtedness, before the Holders of the Notes are entitled to receive any Notes Payment (including any payment which may be payable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Notes). In the event and during the continuation of (i) any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto, or (ii) any other event of default with respect to any Senior Indebtedness shall have occurred and be continuing permitting the holders of such Senior Indebtedness (or a trustee or other representative on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, upon written notice thereof to the Company and the Trustee by any holders of Senior Indebtedness (or a trustee or other representative on behalf of the holders thereof) (the "Default Notice"), unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or (iii) any judicial proceeding shall be pending with respect to any such default payment or event of default, then no Notes Payment shall be made; provided, however, that clause (ii) of this paragraph shall not prevent the making of any Notes Payment for more than 179 days after a Default Notice shall have been received by the Trustee unless the Senior Indebtedness in respect of which such event of default exists has been declared due and payable in its entirety in which case no such payment may be made until such acceleration has been rescinded or annulled or such Senior Indebtedness has been paid in full; provided, however, no event of default which existed or was continuing on the date of any Default Notice shall be made the basis for the giving of a second Default Notice; and provided, further, however, that only one such Default Notice may be given in any 365 day period. In the event that, notwithstanding the foregoing, the Company shall make any Notes Payment to the Trustee or any Holder prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such Notes Payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such Notes Payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any Notes Payment with respect to which Section 12.2 would be applicable. 12.4 Payment Permitted if No Default. Nothing contained in this Article or elsewhere in this Indenture or in any of the Notes shall prevent (a) the Company, at any time except during the pendency of any Proceeding referred to in Section 12.2 or under the conditions described in Section 12.3, from making Notes Payments, or (b) the application by the Trustee of any money deposited with it hereunder to Notes Payments or the retention of such Notes Payment by the Holders, if, at the time of such application by the Trustee, it did not have knowledge that such Notes Payment would have been prohibited by the provisions of this Article. 47 55 12.5 Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all amounts due or to become due on or in respect of Senior Indebtedness, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, the Holders of the Notes shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to indebtedness of the Company to substantially the same extent as the Notes are subordinated and is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Notes shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Notes or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Notes or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Notes, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. 12.6 Provisions Solely to Define Relative Rights. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Notes, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article of the holders of Senior Indebtedness, is intended to rank equally with all other general obligations of the Company), to pay to the Holders of the Notes the principal of (and premium, if any) and interest on, and to make any repurchases required by Article 14 of, the Notes as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Notes and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Note from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. 12.7 Trustee to Effectuate Subordination. Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. 12.8 No Waiver of Subordination Provisions. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the 48 56 Holders of the Notes to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness, any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. 12.9 Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Notes. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Notes, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 6.1, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least three (3) Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on, or amounts payable upon repurchase of, any Note), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may received by it within three (3) Business Days prior to such date. Subject to the provisions of Section 6.1, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. 12.10 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 6.1, and the Holders of the Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Notes, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. 49 57 12.11 Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Notes or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. 12.12 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.7. 12.13 Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 12.12 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. 12.14 Certain Conversions Deemed Payment. For the purposes of this Article only, (1) the issuance and delivery of junior securities upon conversion of Notes in accordance with Article 13 shall not be deemed to constitute a payment or distribution on account of the principal of (or premium, if any) or interest on Notes or on account of the purchase or other acquisition of Notes, and (2) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon conversion of a Note shall be deemed to constitute payment on account of the principal of such Note. For the purposes of this Section, the term "junior securities" means (a) shares of any stock of any class of the Company, (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Notes are so subordinated as provided in this Article and (c) securities into which the Notes become convertible pursuant to Section 13.11. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Notes, the right, which is absolute and unconditional, of the Holder of any Note to convert such Note in accordance with Article 13. ARTICLE 13 CONVERSION OF NOTES 13.1 Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Note or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at the conversion price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire 50 58 at the close of business on April 15, 2002. In case a Note or portion thereof is called for redemption at the election of the Company or delivered for repurchase pursuant Article 14, such conversion right in respect of the Note or portion so called shall expire at the close of business on the last Trading Day prior to the Redemption Date or the Repurchase Date, as the case may be, unless the Company defaults in making the payment due upon redemption or repurchase. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $12.00 per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in this Article 13. 13.2 Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Note to be converted shall surrender such Note, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose pursuant to Section 10.2, accompanied by written notice to the Company (in form and substance satisfactory to the Company) at such office agency that the Holder elects to convert such Note or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Notes surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of Notes or portions thereof which have been called for redemption on a Redemption Date within such period) be accompanied by payment in New York Clearing House funds or other funds acceptable to Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Notes being surrendered for conversion. Subject to the provisions Section 3.7 relating to the payment of Defaulted Interest by the Company, the interest payment with respect to a Note called for redemption on a Redemption Date during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall be payable on such Interest Payment Date to the Holder of such Note at the close of business on such Regular Record Date notwithstanding the conversion of such Note after such Regular Record Date and prior to such Interest Payment Date, and the Holder converting such Note need not include a payment of such interest payment amount upon surrender of such Note for conversion. Except as provided in the preceding sentence and subject to the final paragraph of Section 3.7, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Notes surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Notes shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Notes for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Notes as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the Conversion Date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 13.3. In the case of any Note which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Note or Notes of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Note. 13.3 Fraction of Shares. No fractional shares of Common Stock shall be issued upon conversion of Notes. If more than one Note shall be surrendered for conversion at one time by the same 51 59 Holder, the number of full shares which shall issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Note or Notes (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the fraction of the daily Closing Price per share of Common Stock (consistent with Section 13.4(h) below) at the close of business on the day of conversion. 13.4 Adjustment of Conversion Price. (a) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company in Common Stock, the conversion price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (a), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (b) Subject to the provisions of paragraph (g) of this Section, in case the Company shall issue rights, options or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (determined as provided in paragraph (h) of this Section) on the date fixed for the determination of stockholders entitled to receive such rights, options or warrants (other than pursuant to a dividend reinvestment plan), the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock offered for subscription or purchase would purchase at such Current Market Price and the denominator shall be the number shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or repurchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights, options or warrants in respect of shares of Common Stock held in the treasury of the Company. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. 52 60 (d) Subject to the last sentence of this paragraph (d) and the provisions of paragraph (g) of this Section, in case the Company shall, by dividend or otherwise, distribute to all holders of the Common Stock evidences of its indebtedness, shares of any class of its capital stock, cash or other assets (including securities, but excluding any rights, options or warrants referred to in paragraph (b) of this Section, excluding any dividend or distribution paid exclusively in cash and excluding any dividend or distribution referred to in paragraph (a) of this Section), the conversion price shall be reduced by multiplying the conversion price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in paragraph (h) of this Section) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such date of the portion of the evidences of indebtedness, shares of capital stock, cash and other assets to be distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following such date. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (d) by reference to the actual or when- issued trading market for any securities comprising part or all of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to paragraph (h) of this Section, to the extent possible. For purposes of this paragraph (d), any dividend or distribution that includes shares of Common Stock, rights, options or warrants to subscribe for or purchase shares of Common stock or securities convertible into or exchangeable for shares of Common Stock shall be deemed to be (x) a dividend or distribution of the evidences of indebtedness, cash, assets or shares of capital stock other than such shares of Common Stock, such rights, options or warrants or such convertible or exchangeable securities (making any conversion price reduction required by this paragraph (d)) immediately followed by (y) in the case of such shares of Common Stock or such rights, options or warrants, dividend or distribution thereof (making any further conversion price reduction required by (a) and (b) of this Section, except any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at close of business on the date fixed for such determination" within the meaning of paragraph (a) of this Section), or (z) in the case of such convertible or exchangeable securities, a dividend or distribution of the number of shares of Common Stock as would then be issuable upon the conversion or exchange thereof, whether or not the conversion or exchange of such securities is subject to any conditions (making any further conversion price reduction required by paragraph (a) of this Section, except the shares deemed to constitute such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of paragraph (a) of this Section). (e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed upon a merger or consolidation to which Section 13.11 applies or as part of a distribution referred to in paragraph (d) of this Section) in an aggregate amount that, combined together with (1) the aggregate amount of any other distributions to all holders of its Common Stock exclusively in cash within the twelve (12) months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this paragraph (e) has been made, and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration paid or payable in respect of any tender offer by the Company or any Subsidiary for all or any portion the Common Stock concluded within the twelve (12) months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to paragraph (f) of this Section has been made, exceeds 12.5% of the product of the Current Market Price (determined as provided in paragraph (h) of this Section) on the date for the determination of holders of shares of Common Stock entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, then, 53 61 and in each such case, immediately after the close of business on such date for determination, the conversion price shall be reduced so that same shall equal the price determined by multiplying the conversion price in effect immediately prior to the close of business on the date fixed for determination of the stockholders entitled to receive such distribution by a fraction (i) the numerator of which shall be equal to the Current Market Price (determined as provided in paragraph (h) of this Section) on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount over such 12.5% and (y) the number of shares of Common Stock outstanding on such date for determination and (ii) the denominator of which shall be equal to the Current Market Price (determined as provided in paragraph (h) of this Section) on such date for determination. (f) In case a tender offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) that combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of such tender offer, of consideration paid or payable in respect of any other tender offer, by the Company or any Subsidiary for all or any portion of the Common Stock expiring within the twelve (12) months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this paragraph (f) has been made and (2) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash within twelve (12) months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to paragraph (e) of this Section has been made, exceeds 12.5% of the product of the Current Market Price (determined as provided in paragraph (h) of this Section) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to close of business on the date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (I) the Current Market Price (determined as provided in paragraph (h) of this Section) on the date of the Expiration Time and (II) the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time less (B) the amount of cash plus the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares, and (ii) the denominator of which shall be equal to the product of (A) the Current Market Price (determined as provided in paragraph (h) of this Section) as of the Expiration Time and (B) the number of shares of Common Stock outstanding (including any tendered shares) as of the Expiration Time less the number of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed to be accepted up to any such maximum, being referred to as the "Purchased Shares"). (g) The reclassification of Common Stock into securities, including securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 13.11 applies), shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to receive such distribution" and the "date fixed for such determination" within the meaning of paragraph (d) of this Section), and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately 54 62 prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (c) of this Section). Rights, options or warrants issued by the Company to all holders of the Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock (either initially or under certain circumstances), which rights, options or warrants (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of paragraphs (b) and (d) above not be deemed issued until the occurrence of the earliest Trigger Event. Notwithstanding any provision of paragraphs (b) and (d) above to the contrary, no adjustment shall be made pursuant to paragraphs (b) or (d) above for any dividend, distribution or issuance of rights, options or warrants to all holders of Common Stock if the Company makes proper provision so that each Holder of a Note who converts such Note (or any portion thereof) after the date fixed for the determination of stockholders entitled to such issuance, dividend or distribution, shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion, that number of rights, options or warrants as would have been issuable to a holder of a number of shares of Common Stock equal to the number of shares to which the Notes were convertible as of the date fixed for such issuance, dividend or distribution (with adjustments to the rights and privileges under such rights, options or warrants given effect as if such rights, options or warrants had been issued as of such date), provided that the foregoing provisions set forth in this sentence shall only apply to the extent (and so long as) such rights, options or warrants receivable upon conversion of the Notes would be exercisable without any loss of rights or privileges for a period of at least 90 days following conversion of the Notes. In addition, in the event of any issuance or distribution of rights, options or warrants, or any Trigger Event with respect thereto, which shall have resulted in an adjustment to the conversion price with respect to the Notes under paragraphs (b) or (d) above, (a) in the case of any such rights, options or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the conversion price shall be readjusted upon such final redemption or repurchase to give effect to such issuance or distribution (or Trigger Event, as the case may be) as though a cash distribution had been made to all of the holders of Common Stock equal to the per share redemption or repurchase price received by a holder of Common Stock with respect to the rights, options or warrants received by such holder (assuming such holder had retained such rights, options or warrants), and (b) in the case of any such rights, options or warrants all of which shall have expired without exercise by any holder thereof, the conversion price with respect to the Notes shall be readjusted as if such issuance had not occurred. (h) For the purpose of any computation under this paragraph and paragraphs (b), (d), (e) and (f) of this Section, the current market price per share of Common Stock (the "Current Market Price") on any date shall be deemed to be the average of the daily Closing Prices (as hereinafter defined) for the five consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than the date in question; provided, however, that (i) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the 20th Trading Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event, (ii) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or 55 63 after the "ex" date for the issuance or distribution requiring such computation and on or prior to the date in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the conversion price is so required to be adjusted as a result of such other event, and (iii) if the "ex" date for the issuance or distribution requiring such computation is on or prior to the date in question, after taking into account any adjustment required pursuant to this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of paragraph (d) or (e) of this Section, whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For the purpose of any computation under paragraph (f) of this Section, the Current Market Price on any date shall be deemed to be the average of the daily Closing Prices for the 5 consecutive Trading Days selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Trading Days before the date in question, (ii) the date of commencement of the tender offer requiring such computation, and (iii) the date of the last amendment, if any, of such tender offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the Expiration Time of such tender offer; provided, however, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the Commencement Date and prior to the Expiration Time for the tender offer requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event. The closing price for any Trading Day (the "Closing Price") shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading or, if not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotations National Market System or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. The term "ex date," (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Prices were obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the last time that tenders may be made pursuant to such tender offer (as it shall have been amended). (i) No adjustment in the conversion price shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (i) would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this paragraph (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph (i) shall be made to the nearest percent. 56 64 (j) No upward adjustment in the conversion price will be made other than in the event of a reverse stock split. (k) The Company may make such reductions in the conversion price, in addition to those required by paragraphs (a), (b), (c), (d), (e) and (f) of this Section, as it considers to be advisable in order to avoid or diminish any income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights, options or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes or for any other reasons. The Company shall have the power to resolve any ambiguity or correct any error in this paragraph (k) and its actions in so doing shall be final and conclusive. (l) Notwithstanding any other provision of this Section 13.4, no adjustment to the conversion price shall reduce the conversion price below the then par value per share the Common Stock, and any such purported adjustment shall instead reduce the conversion price to such par value. The Company hereby covenants not to take any action to increase par value per share of the Common Stock. 13.5 Notice of Adjustments of Conversion Price. Whenever conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 13.4 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Notes pursuant to Section 10.2; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Company to all Holders at their last addresses as they shall appear in the Note Register. 13.6 Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) payable (i) otherwise than exclusively in cash and (ii) exclusively in cash in an amount that would require a conversion price adjustment pursuant to paragraph (e) of Section 13.4; or (b) the Company shall authorize the granting to the holders of its Common Stock of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation, or share exchange to which the Company is a party and which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 57 65 (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of the outstanding shares of Common Stock (or shall amend any such tender offer to change the maximum number of shares being sought or the amount or type of consideration being offered therefor); then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Notes pursuant to Section 10.2, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Note Register, at least twenty-one (21) days (or eleven days in any case specified in clause (a), (b) or (c) above) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, share exchange, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (a) through (e) of this Section 13.6. 13.7 Company to Reserve Common Stock. The Company shall at all times reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Notes, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Notes. 13.8 Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Notes pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Note or Notes to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or established to the satisfaction of the Company that such tax has been paid. 13.9 Covenant as to Shares of Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Notes will upon issue be fully paid and nonassessable and, except as provided in Section 13.8, the Company will pay all taxes, liens and charges with respect to the issue thereof. 13.10 Cancellation of Converted Notes. All Notes delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.9. 13.11 Provisions in Case of Consolidation, Merger or Sale of Assets. In case of any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, change or cancellation of outstanding shares of Common Stock of the Company) or any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Note then outstanding shall have the right thereafter, during the period such Note shall be convertible as specified 58 66 in Section 13.1, to convert such Note only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company into which such Note might have been converted immediately prior to such consolidation, merger, sale or transfer, assuming such holder of Common Stock of the Company is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be ("constituent Person"), or an Affiliate of a constituent Person, and failed to exercise his rights of election, if any, to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, sale or transfer by others than a constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section shall similarly apply to successive consolidations, mergers, sales or transfers. 13.12 Disclaimer of Responsibility for Certain Matters. The Trustee shall not be accountable with respect to the listing or registration or the validity or value (or the kind or amount) or any shares of Common Stock, or of any securities, cash or other property, which may at any time be issued or delivered upon the conversion of any Note; and the Trustee makes no representation with respect thereto. The Trustee shall not be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or to make any cash payment upon the surrender of any Note for the purpose of conversion or, subject to the provisions of Section 6.01, to comply with any of the covenants contained in this Article Thirteen. ARTICLE 14 REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A RISK EVENT 14.1 Right to Require Repurchase. In the event that a Risk Event (as hereinafter defined) shall occur, then each Holder shall have the right, at the Holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, all of such Holder's Notes, or any portion of the principal amount thereof that is an integral multiple of $1,000, on the date (the "Repurchase Date") that is forty-five (45) calendar days after the date of the Company Notice (as defined in Section 14.2) for cash at a purchase price equal to 100% of the principal amount the Notes to be repurchased (the "Repurchase Price"), together in each case with accrued interest to the Repurchase Date. Such right to require the repurchase of the Notes shall not continue after a discharge of the Company from its obligations with respect to the Notes in accordance with Article 4, unless a Risk Event shall have occurred prior to such discharge. 14.2 Notices; Method of Exercising Repurchase Right, Etc. (a) Unless the Company shall have theretofore called for redemption all of the Outstanding Notes, on or before the fifteenth (15th) calendar day after the occurrence of a Risk Event, the Company 59 67 or, at the request of the Company, the Trustee, shall mail to all Holders a notice (the "Company Notice") of the occurrence of the Risk Event and of the repurchase right set forth herein arising as a result thereof. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee and cause a copy of such Notice of a repurchase right, or a summary of the information contained therein, to be published in a newspaper of general circulation in The City of New York. Each notice of a repurchase right shall state: (1) the Repurchase Date, (2) the date by which the repurchase right must be exercised, (3) the Repurchase Price, (4) a description of the procedure which a Holder must follow to exercise a repurchase right, and (5) the conversion price then in effect, the date which the right to convert the principal amount of the Notes to be repurchased will terminate and the place or places where Notes may be surrendered for conversion. No failure of the Company to give the foregoing notices or defect therein shall limit any Holder's right to exercise a purchase right or affect the validity of the proceedings for the repurchase of Notes. If any of the foregoing provisions are inconsistent with applicable law, such law shall govern. (b) To exercise a repurchase right, a Holder shall deliver to the Trustee on or before the close of business on the fifth day preceding the Repurchase Date (i) written notice of the Holder's exercise of such right, which notice shall set forth the name the Holder, the principal amount of the Notes to be repurchased, a statement that an election to exercise the repurchase right is being made thereby, and (ii) the Notes with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company. Such written notice shall be irrevocable, except that the right of the Holder to convert the Notes with respect to which the repurchase right is being exercised shall continue until the close of business on the last Trading Day preceding the Repurchase Date. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the Repurchase Price in cash to the Holder on the Repurchase Date, together with accrued and unpaid interest to the Repurchase Date payable with respect to the Notes to which the purchase right has been exercised; provided, however, that installments of interest that mature on or prior the Repurchase Date shall be payable in cash to the Holders of such Notes, or one or more predecessor Notes, registered as such at the close of business on the relevant Regular Record Date according to the terms and provisions of Article 3. (d) If any Note surrendered for repurchase shall be so paid on the Repurchase Date, the principal shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at the rate borne by the Note and each Note shall remain convertible into Common Stock until the principal of such Note shall have been paid or duly provided for. 60 68 (e) Any Note which is to be repurchased only in part shall be surrendered to the Trustee (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes, containing identical terms and conditions, of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Note so surrendered. (f) Prior to the Repurchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.3) an amount of money sufficient to pay the Repurchase Price of the Notes that are to be repaid on the Repurchase Date. 14.3 Certain Definitions. For purposes of this Article 14, (a) the term "beneficial owner" shall be determined in accordance with Rule 13d-3, as in effect on the date of the final execution of this Indenture, promulgated by the Securities and Exchange Commission pursuant to the Exchange Act; (b) the term "Person" shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act, as in effect on the date of the original execution of this Indenture; and (c) a "Risk Event" shall be deemed to have occurred at such time as: (i) any Person (other than the Company, any Subsidiary of the Company or any current or future employee or director benefit plan of the Company or any subsidiary of the Company or any entity holding capital stock of the Company for or pursuant to the terms of such plan or any underwriter engaged in a firm commitment underwriting in connection with a public offering of capital stock of the Company) is or becomes the beneficial owner, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the elections of directors (any shares of voting stock of which such person or group is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage); or (ii) the Company adopts a plan relating to the liquidation or dissolution of the Company; (iii) any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sale or transfer of all or substantially all of the assets of the Company to another Person (other than a merger (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock or (y) which is affected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock); or 61 69 (iv) a change in the Board of Directors of the Company in which the individuals who constituted the Board of Directors of the Company at the beginning of the twelve-month period immediately preceding such change (together with any other director whose election by the Board of Directors of the Company or whose nomination for election by the shareholders of the Company was approved by a vote of at least a majority of the directors then in office either who were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office. provided, however, that a Risk Event shall not be deemed to have occurred if the closing price per share of Common Stock for any five (5) Trading Days within the period of ten (10) consecutive Trading Days ending immediately before the Risk Event shall equal or exceed 105% of the conversion price of such Notes in effect on each such Trading Day. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. [signature page follows] 62 70 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. PRIME HOSPITALITY CORP. By________________________________ Title: Attest:___________________________ BANK ONE, COLUMBUS, N.A., as Trustee By________________________________ Authorized Signatory Attest:___________________________ 63 EX-4.P 3 INDENTURE, DATED JANUARY 23, 1996 1 EXECUTION COPY ================================================================================ PRIME HOSPITALITY CORP. $120,000,000 (subject to increase to up to $200,000,000) 9 1/4% First Mortgage Notes due 2006 -------------------------------------- INDENTURE Dated as of January 23, 1996 -------------------------------------- -------------------------------------------- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION -------------------------------------------- Trustee ================================================================================ 2 CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310(a)(1).................................................... 7.10 (a)(2).................................................... 7.10 (a)(3).................................................... N.A. (a)(4).................................................... N.A. (a)(5).................................................... 7.10 (b)....................................................... 7.08;7.10 (c)....................................................... N.A. 311(a)....................................................... 7.11 (b)....................................................... 7.11 (c)....................................................... N.A. 312(a)....................................................... 2.06 (b)....................................................... 12.03 (c)....................................................... 12.03 313(a)....................................................... 7.06 (b)....................................................... 7.06 (c)....................................................... 7.06;12.02 (d)....................................................... 7.06 314(a)....................................................... 4.03;12.02 (a)(4).................................................... 4.03;12.05 (b)....................................................... 10.02 (c)(1).................................................... 12.04 (c)(2).................................................... 12.04 (c)(3).................................................... N.A. (d)....................................................... 10.04 (e)....................................................... 12.05 (f)....................................................... N.A. 315(a)....................................................... 7.01(2) (b)....................................................... 7.05;12.02 (c)....................................................... 7.01 (d)....................................................... 7.01(3) (e)....................................................... 6.11;7.08 316(a)(last sentence)........................................ 2.09;2.10 (a)(1)(A)................................................. 6.05 (a)(1)(B)................................................. 6.04 (a)(2).................................................... N.A. (b)....................................................... 6.07 (c)....................................................... 9.04;2.14 317(a)(1).................................................... 6.08 (a)(2).................................................... 6.09 (b)....................................................... 2.04 318(a)....................................................... 12.01 (b)....................................................... N.A. (c)....................................................... 12.01
- ---------- N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. 3 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions......................................................................... 1 Section 1.02. Other Definitions................................................................... 14 Section 1.03. Incorporation by Reference of Trust Indenture Act................................... 15 Section 1.04. Rules of Construction............................................................... 15 ARTICLE 2 THE NOTES Section 2.01. Form and Dating..................................................................... 16 Section 2.02. Additional Notes.................................................................... 16 Section 2.03. Execution and Authentication........................................................ 16 Section 2.04. Registrar and Paying Agent.......................................................... 17 Section 2.05. Paying Agent to Hold Money in Trust................................................. 17 Section 2.06. Holders Lists....................................................................... 18 Section 2.07. Transfer and Exchange............................................................... 18 Section 2.08. Replacement Notes................................................................... 18 Section 2.09. Outstanding Notes................................................................... 19 Section 2.10. Treasury Notes...................................................................... 19 Section 2.11. Temporary Notes..................................................................... 19 Section 2.12. Cancellation........................................................................ 19 Section 2.13. Defaulted Interest.................................................................. 20 Section 2.14. Record Date......................................................................... 20 Section 2.15. CUSIP Number........................................................................ 20 ARTICLE 3 REDEMPTIONS AND OFFERS TO PURCHASE Section 3.01. Notices to Trustee.................................................................. 20 Section 3.02. Selection of Notes to Be Redeemed or Purchased...................................... 21 Section 3.03. Notice of Redemption................................................................ 21 Section 3.04. Effect of Notice of Redemption...................................................... 22 Section 3.05. Deposit of Redemption Price......................................................... 22 Section 3.06. Notes Redeemed in Part.............................................................. 23 Section 3.07. Optional Redemption................................................................. 23 Section 3.08. Mandatory Redemption................................................................ 23 Section 3.09. Offer to Purchase by Application of Excess Collateral Proceeds or Excess Proceeds... 23
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Page ---- ARTICLE 4 COVENANTS Section 4.01. Payment of Notes.................................................................... 25 Section 4.02. Maintenance of Office or Agency..................................................... 25 Section 4.03. SEC Reports......................................................................... 26 Section 4.04. Compliance Certificate.............................................................. 26 Section 4.05. Taxes............................................................................... 27 Section 4.06. Stay, Extension and Usury Laws...................................................... 27 Section 4.07. Limitation on Restricted Payments................................................... 27 Section 4.08. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries........ 30 Section 4.09. Limitation on Additional Indebtedness and Issuance of Disqualified Stock............ 30 Section 4.10. Limitation on Sale of Assets........................................................ 32 Section 4.11. Limitation on Transactions With Affiliates.......................................... 34 Section 4.12. Limitation on Liens................................................................. 35 Section 4.13. Corporate Existence................................................................. 35 Section 4.14. Change of Control................................................................... 36 Section 4.15. Subsidiary Guarantees............................................................... 37 Section 4.16. Line of Business.................................................................... 37 Section 4.17. Payments for Consent................................................................ 37 Section 4.18. Maintenance of Insurance............................................................ 37 Section 4.19. Collateral Documents................................................................ 38 Section 4.20. Further Assurances.................................................................. 38 Section 4.21. Liquidation......................................................................... 39 Section 4.22. Maintenance of Collateral........................................................... 39 Section 4.23. Convertible Note Indenture.......................................................... 39 ARTICLE 5 SUCCESSORS Section 5.01. When the Company May Merge, etc..................................................... 40 Section 5.02. Successor Substituted............................................................... 40 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default................................................................... 41 Section 6.02. Acceleration........................................................................ 43 Section 6.03. Other Remedies...................................................................... 43 Section 6.04. Waiver of Past Defaults............................................................. 44 Section 6.05. Control by Majority................................................................. 44 Section 6.06. Limitation on Suits................................................................. 44 Section 6.07. Rights of Holders to Receive Payment................................................ 44 Section 6.08. Collection Suit by Trustee.......................................................... 45 Section 6.09. Trustee May File Proofs of Claim.................................................... 45 Section 6.10. Priorities.......................................................................... 45 Section 6.11. Undertaking for Costs............................................................... 46
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Page ---- ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee................................................................... 46 Section 7.02. Rights of Trustee................................................................... 47 Section 7.03. Individual Rights of Trustee........................................................ 47 Section 7.04. Trustee's Disclaimer................................................................ 48 Section 7.05. Notice of Defaults.................................................................. 48 Section 7.06. Reports by Trustee to Holders....................................................... 48 Section 7.07. Compensation and Indemnity.......................................................... 48 Section 7.08. Replacement of Trustee.............................................................. 49 Section 7.09. Successor Trustee by Merger, etc.................................................... 50 Section 7.10. Eligibility; Disqualification....................................................... 50 Section 7.11. Preferential Collection of Claims Against Company................................... 50 ARTICLE 8 DISCHARGE OF INDENTURE Section 8.01. Defeasance and Discharge of this Indenture and the Notes............................ 50 Section 8.02. Legal Defeasance and Discharge...................................................... 51 Section 8.03. Covenant Defeasance................................................................. 51 Section 8.04. Conditions to Legal or Covenant Defeasance.......................................... 52 Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions............................................................ 53 Section 8.06. Repayment to the Company............................................................ 54 Section 8.07. Reinstatement....................................................................... 54 ARTICLE 9 AMENDMENTS Section 9.01. Without Consent of Holders.......................................................... 54 Section 9.02. With Consent of Holders............................................................. 55 Section 9.03. Compliance with Trust Indenture Act................................................. 56 Section 9.04. Revocation and Effect of Consents................................................... 56 Section 9.05. Notation on or Exchange of Notes.................................................... 56 Section 9.06. Trustee to Sign Amendments, etc..................................................... 56 ARTICLE 10 COLLATERAL AND SECURITY Section 10.01. Collateral and Security............................................................. 58 Section 10.02. Recording, Title Insurance, Etc. ................................................... 58 Section 10.03. Protection of the Trust Estate...................................................... 59 Section 10.04. Release of Lien..................................................................... 59 Section 10.05. Collateral Agent.................................................................... 60 Section 10.06. Authorization of Actions to Be Taken by the Trustee Under the Collateral Documents. ......................................................................... 60 Section 10.07. Authorization of Receipt of Funds by the Trustee Under the Collateral Documents..... 60
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Page ---- ARTICLE 11 SUBSIDIARY GUARANTEES Section 11.01. Subsidiary Guarantees............................................................... 61 Section 11.02. When a Guarantor May Merge, Etc..................................................... 62 Section 11.03. Limitation of Guarantor's Liability................................................. 62 Section 11.04. Release of a Guarantor.............................................................. 63 ARTICLE 12 MISCELLANEOUS Section 12.01. Trust Indenture Act Controls........................................................ 63 Section 12.02. Notices............................................................................. 63 Section 12.03. Communication by Holders with Other Holders......................................... 65 Section 12.04. Certificate and Opinion as to Conditions Precedent.................................. 65 Section 12.05. Statements Required in Certificate or Opinion....................................... 65 Section 12.06. Rules by Trustee and Agents......................................................... 65 Section 12.07. Legal Holidays...................................................................... 65 Section 12.08. Recourse Against Others............................................................. 66 Section 12.09. Duplicate Originals................................................................. 66 Section 12.10. Governing Law....................................................................... 66 Section 12.11. No Adverse Interpretation of Other Agreements....................................... 66 Section 12.12. Successors.......................................................................... 66 Section 12.13. Severability........................................................................ 66 Section 12.14. Counterpart Originals............................................................... 66 Section 12.15. Table of Contents, Headings, etc.................................................... 67 SIGNATURES.......................................................................................... 68 EXHIBITS Exhibit A Form of First Mortgage Note Exhibit B Form of Supplemental Indenture Exhibit C Form of Deed of Trust
iv 7 n INDENTURE dated as of January 23, 1996 between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Norwest Bank Minnesota, National Association, a national banking association, as trustee (the "Trustee"). Each of the Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 9 1/4% First Mortgage Notes due 2006 of the Company (the "Notes"). ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 DEFINITIONS. "Acquired Debt" means, with respect to any specified Person: (i) Indebtedness of any other Person existing at the time such other Person merged with or into or became a Subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Agent" means any Registrar, Paying Agent or co-Registrar. "Asset Sale" means (i) the sale, lease (other than operating leases in respect of facilities which are ancillary to the operation of the Company's or a Restricted Subsidiary's hotel properties), conveyance or other disposition of any property or assets of the Company or any Restricted Subsidiary (including by way of a sale and leaseback transaction and including a disposition by the Company or a Restricted Subsidiary of Equity Interests in an Unrestricted Subsidiary), (ii) the issuance or sale of Equity Interests of any of the Company's Restricted Subsidiaries or (iii) any Event of Loss, other than, with respect to clauses (i), (ii) and (iii) above, the following: (1) the sale or disposition of personal property held for sale in the ordinary course of business, (2) the sale or disposal of damaged, worn out or other obsolete 8 property in the ordinary course of business so long as such property is no longer necessary for the proper conduct of the business of the Company or such Restricted Subsidiary, as applicable, (3) the transfer of assets by the Company to a Restricted Subsidiary of the Company or by a Restricted Subsidiary of the Company to the Company or to another Restricted Subsidiary of the Company, (4) the exchange of assets (other than assets which constitute Collateral) held by the Company or a Restricted Subsidiary of the Company for one or more hotels and/or one or more Hospitality-Related Businesses of any Person or entity owning one or more hotels and/or one or more Hospitality-Related Businesses; provided, that the Board of Directors of the Company has determined that the terms of any exchange are fair and reasonable and that the fair market value of the assets received by the Company, as set forth in an opinion of a Qualified Appraiser, are equal to or greater than the fair market value of the assets exchanged by the Company or a Restricted Subsidiary of the Company, (5) any Restricted Payment, dividend or purchase or retirement of Equity Interests permitted under Section 4.07 hereof, (6) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company in compliance with Section 4.14 and Article V hereof, (7) the conversion of or foreclosure on any mortgage or note, provided that the Company or a Restricted Subsidiary receives the real property underlying any such mortgage or note, or (8) any transaction or series of related transactions that would otherwise be an Asset Sale where the fair market value of the assets sold, leased, conveyed or otherwise disposed of was less than $5.0 million or, in the case of Collateral, less than $1.5 million, or an Event of Loss or related series of Events of Loss pursuant to which the aggregate value of property or assets involved in such Event of Loss or Events of Loss is less than $5.0 million or, in the case of Collateral, less than $1.5 million. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day that is not a Saturday, Sunday or a day on which banking institutions in New York, New York or the city in which the Corporate Trust Office is located are authorized or obliged by law or executive order to close. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be so required to be capitalized on the balance sheet in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, including, without limitation, with respect to partnerships, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership. "Cash Equivalents" means (i) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than six months from the date of acquisition, (ii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months from the date of acquisition and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500 million, (iii) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i) and (ii) entered into with any financial institution meeting the qualifications specified in clause (ii) above, (iv) commercial paper or commercial paper Master Notes having a rating of P-2 or the equivalent thereof by Moody's Investors Service, Inc. or A-2 or the equivalent thereof by Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition, (v) money market mutual funds that provide daily purchase and redemption features and (vi) corporate debt with 9 maturities of not greater than six months and with a rating of A or the equivalent thereof by Standard & Poor's Corporation and a rating of A2 or the equivalent thereof by Moody's Investors Service, Inc. "Change of Control" means the occurrence of any of the following: (i) the sale, lease or transfer, in one or a series of related transactions, of all or substantially all of the Company's assets to any person or group (as such term is used in Section 13 (d) (3) of the Exchange Act) other than to a Wholly Owned Restricted Subsidiary that is a Guarantor, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the acquisition by any person or group (as such term is used in Section 13 (d) (3) of the Exchange Act) of a direct or indirect interest in more than 50% of the ownership of the Company or the voting power of the voting stock of the Company by way of purchase, merger or consolidation or otherwise (other than a creation of a holding company that does not involve a change in the beneficial ownership of the Company as a result of such transaction), (iv) the merger or consolidation of the Company with or into another corporation or the merger of another corporation into the Company with the effect that immediately after such transaction the stockholders of the Company immediately prior to such transaction hold less than 50% of the total voting power of all securities generally entitled to vote in the election of directors, managers, or trustees of the Person surviving such merger or consolidation or (v) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Collateral" means (i) first mortgage Liens on the following 15 hotel properties owned by the Company: AmeriSuites, Atlanta Duluth, Georgia; AmeriSuites, Brentwood, Tennessee; AmeriSuites, Cincinnati Blue Ash, Ohio; AmeriSuites, Cincinnati Forest Park, Ohio; AmeriSuites, Columbus, Ohio; Ramada, Danbury, Connecticut; AmeriSuites, Flagstaff, Arizona; Crowne Plaza, Las Vegas, Nevada; AmeriSuites, Little Rock, Arkansas; Ramada, Meriden, Connecticut; AmeriSuites, Nashville Opryland, Tennessee; AmeriSuites, Overland Park, Kansas; AmeriSuites, Richmond, Virginia; St. Tropez Hotel, Las Vegas, Nevada; and AmeriSuites, Tampa, Florida and any and all related real property thereto; (ii) property consisting of furniture, furnishings, fixtures and equipment and machinery forming a part thereof or used in connection therewith; (iii) trademarks, to the extent assignable (other than the Company's proprietary tradenames including, without limitation, "AmeriSuites" and "Wellesley Inns") as provided in the Collateral Documents; (iv) assignments of rents, contracts and franchise rights, to the extent assignable, all as provided in the Collateral Documents; (v) after-acquired personal property and improvements relating to the properties listed in clause (i); (vi) Substitute Collateral, if any; (vii) Qualified Collateral, if any; and (viii) proceeds of the foregoing. "Collateral Agent" means Norwest Bank Minnesota, National Association, a national banking association, as collateral agent under any of the Collateral Documents and any successor thereto, or any other person appointed by the Trustee as a collateral agent hereunder. "Collateral Documents" means, collectively, the Deed of Trust agreements, and any other instruments, financing statements and other documents that evidence, set forth or limit the Lien in favor of the Trustee or a collateral agent, appointed by the Trustee, in the Collateral, including any environmental indemnity agreement entered into with respect to the Collateral. "Company" means Prime Hospitality Corp., a Delaware corporation, until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter, means such successor. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus: (a) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale, to the extent such losses were deducted in computing 3 10 Consolidated Net Income, plus (b) provision for taxes based on income or profits of such Person for such period, to the extent such provision for taxes was included in computing Consolidated Net Income, plus (c) Consolidated Interest Expense of such Person for such period to the extent such expense was deducted in computing Consolidated Net Income, plus (d) Consolidated Depreciation and Amortization Expense of such Person for such period, to the extent deducted in computing Consolidated Net Income in each case, on a consolidated basis for such Person and its Restricted Subsidiaries and determined in accordance with GAAP, less (e) other income as reflected on such Person's consolidated financial statements, as prepared in accordance with GAAP, to the extent such other income was included in computing Consolidated Net Income. Notwithstanding the foregoing, the provision for taxes on the income or profits of, the depreciation and amortization of and the interest expense of, a Restricted Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person and only if a corresponding amount would be permitted at the date of determination to be dividended to such Person by such Restricted Subsidiary without prior governmental approval (that has not been obtained), and without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Restricted Subsidiary or its stockholders. Any calculation of the Consolidated Cash Flow of an individual hotel property shall be calculated in a manner consistent with the foregoing. "Consolidated Depreciation and Amortization Expense" means, with respect to any Person for any period, the total amount of depreciation and amortization expense (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and the total amount of non-cash charges (other than non-cash charges that represent an accrual or reserve for cash charges in future periods or which involved a cash expenditure in a prior period) of such Person and its Restricted Subsidiaries for such period on a consolidated basis as determined in accordance with GAAP. "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication, the sum of (a) interest expense, whether paid or accrued, to the extent such expense was deducted in computing Consolidated Net Income (including amortization of original issue discount, non-cash interest payments, the interest component of Capital Lease Obligations, and net payments (if any) pursuant to Hedging Obligations, but excluding amortization of deferred financing fees), (b) commissions, discounts and other fees and charges paid or accrued with respect to letters of credit and bankers' acceptance financing and (c) interest for which such Person or its Restricted Subsidiaries is liable, whether or not actually paid, pursuant to Indebtedness or under a Guarantee of Indebtedness of any other Person; in each case, calculated for such Person and its Restricted Subsidiaries for such period on a consolidated basis as determined in accordance with GAAP. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, that the following shall be excluded: (i) the Net Income of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries, (ii) the Net Income of any Person that is a Restricted Subsidiary and that is restricted from declaring or paying dividends or other distributions, directly or indirectly, by operation of the terms of its charter, any applicable agreement, instrument, judgment, decree, order, statute, rule or governmental regulation or otherwise shall be included only to the extent of the amount of dividends or distributions paid to the referent Person or a Wholly Owned Restricted Subsidiary, (iii) the Net Income of any Person 4 11 acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (iv) the cumulative effect of change in accounting principles shall be excluded. "Consolidated Net Worth" means, with respect to any Person, as of any date of determination, the sum of (i) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date plus (ii) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of Preferred Stock (other than Disqualified Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such Preferred Stock, less (x) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made within 12 months after the acquisition of such business) subsequent to the Issuance Date in the book value of any asset owned by such Person or a consolidated Subsidiary of such Person, (y) all investments as of such date in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in each case, Permitted Investments) and (z) all unamortized debt discount and expense and unamortized deferred charges as of such date, all of the foregoing determined in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the Issuance Date or (ii) was nominated for election or elected to such Board of Directors with the affirmative vote of at least a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office" shall be at the address of the Trustee specified in Section 12.02 or such other address as the Trustee may give notice to the Company. "Credit Facility" means one or more borrowing arrangements, to be entered into, by and between the Company and/or one or more Restricted Subsidiaries and a commercial bank or other institutional lender, including any related notes, security documentation, guarantees, collateral documents, instruments and agreements executed in connection therewith, in each case as amended, modified, supplemented, restructured, renewed, restated, refunded, replaced or refinanced or extended from time to time on one or more occasions. "Deed of Trust" means, collectively, mortgages, deeds to secure debt, deeds of trust, security agreements, assignment of rents and leases and fixture filings encumbering the hotel properties, substantially in the form of Exhibit C, hereto each as may be reasonably modified to conform to the rules and requirements of the respective jurisdictions in which they are to be filed. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to January 15, 2007. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for Capital Stock). 5 12 "Event of Loss" means, with respect to any property or asset (tangible or intangible, real or personal) any of the following: (A) any loss, destruction or damage of such property or asset; (B) any institution of any proceedings for the condemnation or seizure of such property or asset or for the exercise of any right of eminent domain; or (C) any actual condemnation, seizure or taking by the power of eminent domain or otherwise of such property or asset, or confiscation of such property or asset or the requisition of the use of such property or asset. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Indebtedness" means Indebtedness of the Company and its Restricted Subsidiaries (other than under any Indebtedness permitted under clause (ii) of the second paragraph of Section 4.09 hereof) in existence on the Issuance Date (after giving effect to the use of the proceeds of the sale of the Notes as contemplated by the Prospectus). "Existing Real Estate" means any real estate owned, leased or optioned by the Company or any of its Subsidiaries on the Issuance Date, or any real estate on which the Company or any of its Subsidiaries holds a mortgage on the Issuance Date. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness (other than revolving credit borrowings that provide working capital in the ordinary course of business) or issues or redeems Preferred Stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee or redemption of Indebtedness, or such issuance or redemption of Preferred Stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. For purposes of making the computation referred to above, acquisitions, dispositions and discontinued operations (as determined in accordance with GAAP) that have been made by the Company or any of its Restricted Subsidiaries, including all mergers, consolidations and dispositions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be calculated on a pro forma basis assuming that all such acquisitions, dispositions, discontinued operations, mergers, consolidations (and the reduction of any associated fixed charge obligations resulting therefrom) had occurred on the first day of the four-quarter reference period. "Fixed Charges" means, with respect to any Person for any period, the sum of (a) Consolidated Interest Expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, to the extent such expense was deducted in computing Consolidated Net Income and (b) the product of (i) all cash dividend payments (and non-cash dividend payments in the case of a Person that is a Restricted Subsidiary) on any series of Preferred Stock of such Person or its Restricted Subsidiaries (other than Preferred Stock owned by such Person or its Restricted Subsidiaries), times (ii) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such 6 13 other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issuance Date. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States of America is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business) or otherwise incurring, assuming or becoming liable for the payment of any principal, premium or interest, direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantor" means such Persons that become a guarantor of the Notes pursuant to the terms of the Indenture, and each of their respective successors. "Hedging Obligations" means, with respect to any person, the obligations of such person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such person against fluctuations in interest rates. "Holder" means the Person in whose name a Note is registered on the Registrar's books. "Hospitality-Related Business" means the hotel business and other businesses necessary for, incident to, in support of, connected with or arising out of the hotel business, including, without limitation (i) developing, constructing, managing, operating, improving or acquiring lodging facilities, restaurants and other food-service facilities, sports or entertainment facilities, and convention or meeting facilities, and marketing services related thereto, (ii) acquiring, developing, operating, managing or improving the Existing Real Estate, any real estate taken in foreclosure (or similar settlement) by the Company or any of its Subsidiaries, or any real estate ancillary or connected to any hotel owned, managed or operated by the Company or any of its Restricted Subsidiaries, (iii) owning and managing mortgages in, or other Indebtedness secured by Liens on hotels and real estate related or ancillary to hotels or (iv) other related activities thereto. "Indebtedness" means, with respect to any person, any indebtedness of such person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, and also includes, to the extent not otherwise included, the Guarantee of any Indebtedness of such Person or any other Person. "Indenture" means this Indenture, as amended or supplemented from time to time. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of loans (including Guarantees), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity 7 14 Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, greater than 50% of the outstanding Common Stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "Issuance Date" means the closing date for the sale and original issuance of the Notes. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Make-Whole Amount" with respect to a Note means an amount equal to the excess, if any, of (A) the present value of the remaining interest, premium and principal payments due on such Note as if such Note were redeemed on the First Redemption Date, computed using a discount rate equal to the Treasury Rate plus 50 basis points, less (B) the outstanding principal amount of such Note. "Treasury Rate" means the yield to maturity at the time of the computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15(519), which has become publicly available at least two Business Days prior to the date fixed for prepayment or, if such Statistical Release is no longer published, any publicly available source of similar market data) most nearly equal to the then remaining Average Life of the Notes assuming redemption of the Notes on the First Redemption Date, provided, however, that if the Average Life of such Note is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Average Life of such Notes is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "Average Life" means, when applied to Notes subject to purchase pursuant to a Collateral Asset Sale Offer at any date, the number of years (calculated to the nearest one-twelfth) between the date of such purchase and the First Redemption Date. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends, excluding, however, any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with any Asset Sale, and excluding any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale, net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions), and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets the 8 15 subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets. "Non-Recourse Indebtedness" means Indebtedness or that portion of Indebtedness (a) as to which neither the Company nor any of its Restricted Subsidiaries (i) provides credit support (other than in the form of a Lien on an asset serving as security for Non-Recourse Indebtedness) pursuant to any undertaking, agreement or instrument that would constitute Indebtedness, (ii) is directly or indirectly liable (other than in the form of a Lien on an asset serving as security for Non-Recourse Indebtedness) or (iii) constitutes the lender, and (b) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Notes" means the Notes issued under this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officers" means the Chairman of the Board, the President, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary, any Assistant Secretary or any Vice President of the Company. "Officers' Certificate" means a certificate signed by the Chairman of the Board of Directors, the President or a Vice President and by the Chief Financial officer, the Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary of the Company, as applicable, except with respect to certificates required to be furnished by the Company to the Trustee pursuant to Section 4.04 hereof, in which event "Officers' Certificate" means a certificate signed by the principal executive officer or principal financial officer. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Investments" means (a) any Investments in the Company or any Guarantor; (b) Investments in any Restricted Subsidiary that is not a Guarantor not to exceed an aggregate of $2.0 million per Restricted Subsidiary; (c) any Investments in Cash Equivalents; (d) Investments by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or any Guarantor or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Wholly Owned Restricted Subsidiary of the Company or any Guarantor; (e) Investments, in an amount not to exceed $20.0 million at any one time outstanding in joint ventures for the development of (i) an "all-suites" hotel in Kansas City, Missouri and (ii) a "full-service" hotel in Jersey City, New Jersey; and (f) net cash advances to Restricted Subsidiaries in the ordinary course of business and consistent with the Company's past cash management practices in an amount not to exceed $ 10.0 million at any one time outstanding. "Permitted Liens" means: (i) Liens in favor of the Company or a Restricted Subsidiary; 9 16 (ii) Liens securing the Notes sold in the offering as contemplated by the Prospectus, Liens securing Indebtedness incurred pursuant to one or more Credit Facilities, and Liens securing any Additional Notes (and the Notes) issued by the Company in accordance with the provisions described in Section 2.02 hereof, in an aggregate principal amount at any one time outstanding (taking into account only the principal amount of one or more Credit Facilities and the Additional Notes, if any), not to exceed $80.0 million; (iii) Liens for taxes, assessments and governmental charges not yet delinquent or that are being contested in good faith and that are appropriately reserved for in accordance with GAAP; (iv) Liens incurred in the ordinary course of business that are not incurred in connection with the borrowing of money; (v) Liens existing as of the Issuance Date provided the same were agreed to by the Trustee; (vi) Liens on property of a Person at the time such Person was merged with the Company or a Restricted Subsidiary, Liens on acquired property existing at the time of acquisition thereof, and Liens upon any property of a Person existing at the time such Person becomes a Restricted Subsidiary; provided in each case that such Liens were not created in contemplation of such merger or acquisition, as the case may be, and such Liens only extend to such merged or acquired property; (vii) Liens arising after the date hereof (1) securing purchase money, construction, permanent financing, refurbishment or lease obligations (a "Designated Financing") otherwise permitted by this Indenture incurred or assumed in connection with the acquisition, purchase, construction, development, refurbishment or lease of real or personal property (the "Financed Assets") used or to be used in a Hospitality-Related Business, which Designated Financing (other than a Designated Financing constituting a financing of furniture, fixtures or equipment), in the aggregate, does not exceed 75% of the fair market value of such Financed Assets as set forth in an opinion of a Qualified Appraiser or, in the case of a Designated Financing constituting a financing of furniture, fixtures or equipment, shall not, in the aggregate, exceed 90% of the fair market value of such Financed Assets, at the time of such financing, as set forth in an Officers' Certificate, (2) securing any refinancing of any Designated Financing which has an aggregate principal amount which is equal to or less than the aggregate outstanding amount of the Designated Financing being refinanced, (3) securing any refinancing of any Designated Financing which has an aggregate principal amount which is greater than the aggregate outstanding amount of the Designated Financing being refinanced, which refinancing, in the aggregate, does not exceed 75% of the fair market value of the Financed Assets, at the time of such refinancing, as set forth in an opinion of a Qualified Appraiser, (4) encumbering any real or personal property acquired with the proceeds of a sale of such Financed Assets or (5) encumbering after-acquired personal property and improvements relating to such Financed Assets or relating to any real property or personal property acquired with the proceeds of a sale of such assets; provided, however, that such Lien does not extend to any property or assets of the Company or any Restricted Subsidiary other than the property or assets so acquired, purchased, constructed, developed, refurbished or leased; (viii) mechanics', workmen's, materialmen's, operator's or similar Liens arising in the ordinary course of business for sums that are not yet delinquent or are being contested in good faith and by appropriate action; 10 17 (ix) Liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate action; (x) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases, public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (xi) survey exceptions, encumbrances, easements or reservations, or restrictions as to the use of real properties, and other minor defects in title which, in the case of any of the foregoing, were not incurred or created to secure the payment of borrowed money or the deferred purchase price of property or services. (xii) judgment and attachment Liens not giving rise to an Event of Default or Liens created by or existing from any litigation or legal proceedings that are currently being contested in good faith and that are appropriately reserved for in accordance with GAAP; (xiii) Liens in favor of collecting or payor banks having a right to setoff, revocation, refund or chargeback with respect to money or instruments of the Company or any Restricted Subsidiary on deposit with or in possession of such bank; (xiv) Liens now or hereafter securing any Hedging Obligations to the extent such Hedging Obligations are permitted to be incurred herein; (xv) Liens securing Indebtedness incurred after the Issuance Date permitted to be incurred under the Indenture, provided that the Holders of Notes are secured on an equal and ratable basis with the Indebtedness secured by such Liens (or on a senior basis with respect to any subordinated Indebtedness secured by such Liens), until such time as such Indebtedness is no longer secured by such Liens; and (xvi) Liens securing Permitted Refinancing Indebtedness (and any Permitted Refinancing Indebtedness with respect thereto) which constitutes a refinancing of Existing Indebtedness, which is secured on the date of this Indenture, permitted by Section 4.09 hereof. "Permitted Refinancing" means Refinancing Indebtedness or Refinancing Disqualified Stock, as the case may be, to the extent (a) the principal amount of Refinancing Indebtedness or the liquidation preference amount of Refinancing Disqualified Stock, as the case may be, does not exceed the principal amount of Indebtedness or the liquidation preference amount of Disqualified Stock, as the case may be, so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of premiums and reasonable expenses incurred in connection therewith); (b) such Refinancing Indebtedness or Refinancing Disqualified Stock, as the case may be, is scheduled to mature or is redeemable at the option of the holder, as the case may be, no earlier than the Indebtedness or Disqualified Stock, as the case may be, being refinanced; (c) in the case of Refinancing Indebtedness, the Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (d) in the case of Refinancing Disqualified Stock, the Disqualified Stock has a Weighted Average Life to Mandatory Redemption equal to or greater than the Weighted Average Life to Mandatory Redemption of the Disqualified Stock being extended, refinanced, renewed, replaced, defeased or refunded; (e) if the 11 18 Indebtedness or the Disqualified Stock, as the case may be, being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, the Refinancing Indebtedness or Refinancing Disqualified Stock, as the case may be, is subordinated in right of payment to the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness or the Disqualified Stock, as the case may be, being extended, refinanced, renewed, replaced, defeased or refunded or is payable solely in Equity Interests of the Person whose Indebtedness is being purchased, redeemed or otherwise acquired or retired for value. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Equity Interest with preferential right in the payment of dividends or liquidation or any Disqualified Stock. "Prospectus" means the Company's Prospectus dated January 18, 1996 pertaining to the offer and sale of $120,000,000 in aggregate principal amount of Notes, as filed with the SEC pursuant to Rule 424(b) of the Securities Act. "Qualified Collateral" means (i) any property subject to a Lien consistent with the requirements of this Indenture which is a "full-service" or "all-suites" property as determined in good faith by the Company and consistent with industry standards; (ii) any and all related real property thereto; (iii) property consisting of furniture, furnishings, fixtures and equipment and machinery forming a part thereof or used in connection therewith; (iv) trademarks, to the extent assignable (other than the Company's proprietary tradenames including, without limitation, "AmeriSuites" and "Wellesley Inns"), as provided in the Collateral Documents; (v) assignments of rents, contracts and franchise rights, to the extent assignable, all as provided in the Collateral Documents; and (vi) proceeds of the foregoing. "Refinancing Disqualified Stock" means Disqualified Stock issued in exchange for, or the proceeds of which are used, to extend, refinance, renew, replace, defease or refund Disqualified Stock or Indebtedness permitted to be issued pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof or Indebtedness referred to in clauses (iii), (v), (vii) and (ix) of the second paragraph of Section 4.09 hereof. "Refinancing Indebtedness" means Indebtedness issued in exchange for, or the proceeds of which are used to extend, refinance, renew, replace, defease or refund Indebtedness permitted to be incurred pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof or Indebtedness referred to in clauses (iii), (v), (vii) and (ix) of the second paragraph of Section 4.09 hereof. "Registration Statement" means the Registration Statement (No. 33-64685) on Form S-3 relating to the Notes filed with the SEC on December 1, 1995 and all exhibits, schedules and amendments thereto. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "SEC" means the Securities and Exchange Commission. 12 19 "Securities Act" means the Securities Act of 1933, as amended. "Significant Subsidiary" means any Subsidiary which would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof "Substitute Collateral" means any Qualified Collateral. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Trust Officer" means any officer in the Corporate Trust Office of the Trustee. "Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Indebtedness; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the board resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.07 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.09, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary, provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under Section 4.09 of this Indenture and (ii) no Default or Event of Default would be in existence following such designation. 13 20 "Weighted Average Life to Mandatory Redemption" means, when applied to any Disqualified Stock at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding liquidation preference amount of such Disqualified Stock. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person. SECTION 1.02. OTHER DEFINITIONS.
Defined in Term Section ---- ------- "Additional Notes"..................................... 2.02 "Additional Properties"................................ 2.02 "Affiliate Transaction"................................ 4.11 "Asset Sale Offer"..................................... 3.09 "Asset Sale Offer Price"............................... 4.10 "Bankruptcy Law"....................................... 6.01 "Change of Control Date"............................... 4.14 "Change of Control Offer".............................. 4.14 "Change of Control Payment Date"....................... 4.14 "Collateral Asset Sale Offer".......................... 3.09 "Collateral Asset Sale Offer Price".................... 4.10 "Collateral Proceeds".................................. 4.10 "Computation Period"................................... 4.07 "Convertible Note Indenture"........................... 4.23 "Convertible Notes".................................... 4.23 "Covenant Defeasance".................................. 8.03 "Custodian"............................................ 6.01 "defeasance trust"..................................... 8.02 "Designated Financing"................................. 1.01 "Event of Default"..................................... 6.01 "Excess Collateral Proceeds"........................... 4.10 "Excess Proceeds"...................................... 4.10 "Financed Assets"...................................... 1.01 "First Redemption Date"................................ 3.07
14 21
Defined in Term Section ---- ------- "Legal Defeasance"..................................... 8.02 "Legal Holiday"........................................ 12.07 "Paying Agent"......................................... 2.04 "Payment Default"...................................... 6.01(5) "Property"............................................. 4.21 "Qualified Appraiser".................................. 2.02 "Redemption Percentages"............................... 3.07 "Registrar"............................................ 2.04 "Restricted Payments".................................. 4.07 "Subsidiary Guarantee"................................. 4.15 "Substitute Collateral"................................ 4.10
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Notes means the Company, any Guarantor and any successor obligor. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions. 15 22 ARTICLE 2 THE NOTES SECTION 2.01. FORM AND DATING. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. Subject to Section 2.02 and 2.08 hereof, the Notes shall be in an aggregate principal amount of $120,000,000. The Notes may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company or any Guarantor is subject or usage. Each Note shall be dated the date of its authentication. The Securities shall be issued initially in denominations of $1,000 and integral multiples thereof. SECTION 2.02. ADDITIONAL NOTES. The Company may issue additional Notes under this Indenture in an aggregate principal amount not to exceed $80,000,000 (the "Additional Notes"); provided that (a) the Company would be permitted, after giving pro forma effect to any issuance of the Additional Notes and the application of the proceeds therefrom, to incur at least $1.00 of Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof, (b) the Additional Notes are secured by first mortgage liens on otherwise unencumbered hotel properties owned by the Company which constitute Qualified Collateral (the "Additional Properties") pursuant to Deeds of Trust substantially in the form of Exhibit C hereto and other instruments, financing statements and other documents, substantially similar to the Collateral Documents, (c) the aggregate principal amount of Additional Notes does not exceed 75% of the fair market value of such Additional Properties as set forth in an opinion of an independent, qualified appraiser that is a member of the American Institute of Real Estate Appraisers (a "Qualified Appraiser") and (d) the aggregate principal amount of the Additional Notes issued does not exceed 75% of the product of (A) ten times (B) the combined Consolidated Cash Flow of the Additional Properties for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which the Additional Notes are issued. If issued, the Additional Notes will be equally and ratably secured by the Collateral securing the Notes offered pursuant to the Prospectus, and the Notes offered pursuant to the Prospectus will be equally and ratably secured by first mortgage liens on the Additional Properties. Additional Notes, if any, will be treated for all purposes as "Notes" under this Indenture, unless the context requires otherwise. SECTION 2.03. EXECUTION AND AUTHENTICATION. An Officer of the Company shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in Exhibit A hereto. 16 23 The Trustee shall, upon a written order of the Company signed by two Officers of the Company, authenticate Notes for original issue up to an aggregate principal amount stated in Section 2.01 hereof. The aggregate principal amount of Notes outstanding at any time may not exceed the amount set forth herein, except as provided in Sections 2.02 and 2.08. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.04. REGISTRAR AND PAYING AGENT. The Company shall maintain (i) an office or agency where Notes may be presented for registration of transfer or for exchange (including any co-registrar, the "Registrar") and (ii) an office or agency where Notes may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07 hereof. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Notes. SECTION 2.05. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on the Notes, and will notify the Trustee of any default by the Company or Guarantor, if any, in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. If the Company or any of its Subsidiaries acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 2.06. HOLDERS LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA Section 312(a). If 17 24 the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven (7) Business Days before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, including the aggregate principal amount thereof, and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.07. TRANSFER AND EXCHANGE. When Notes are presented to the Registrar with a request to register, transfer or exchange them for an equal principal amount of Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; provided, however, that any Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Company shall issue and the Trustee shall authenticate Notes at the Registrar's request, subject to such rules as the Trustee may reasonably require. Neither the Company nor the Registrar shall be required (i) to issue, register the transfer of or exchange Notes during a period beginning at the opening of business on a Business Day fifteen (15) days before the day of any selection of Notes for redemption or purchase under Section 3.02 and ending at the close of business on the day of selection, (ii) to register the transfer of or exchange any Note selected for redemption or purchase in whole or in part, except the unredeemed or unpurchased portion of any Note being redeemed in part or (iii) to register the transfer or exchange of a Note between a record date and the next succeeding Interest Payment Date. No service charge shall be made to any Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.11, 3.06 or 9.05 hereof, which shall be paid by the Company). Prior to due presentment for registration of transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of, premium, if any, and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and neither the Trustee, any Agent, nor the Company shall be affected by notice to the contrary. SECTION 2.08. REPLACEMENT NOTES. If any mutilated Note is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Note if an indemnity bond is supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, each Agent and each authenticating agent from any loss which any of them may suffer if a Note is replaced. The Company and the Trustee may charge for its expenses in replacing a Note. Every replacement Note is an additional Obligation of the Company. 18 25 SECTION 2.09. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. If a Note is replaced pursuant to Section 2.08 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.10 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. SECTION 2.10. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, a Guarantor, if any, or any Affiliate of the Company or a Guarantor, if any, shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which a Trust Officer knows to be so owned shall be so considered. SECTION 2.11. TEMPORARY NOTES. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Company and the Trustee consider appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of the written order of the Company signed by two Officers of the Company, shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes. SECTION 2.12. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Notes (subject to the record retention requirement of the Exchange Act) unless the Company directs them to be returned to them. The Company may not issue new Notes to replace Notes that have been redeemed or paid or that have been delivered to the Trustee for cancellation. All cancelled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company unless by a written order, signed by an Officer of the Company, the Company shall direct that cancelled Notes be returned to them. SECTION 2.13. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons 19 26 who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five (5) Business Days prior to the payment date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall, with the consent of the Trustee, fix or cause to be fixed each such special record date and payment date. At least fifteen (15) days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.14. RECORD DATE. The record date for purposes of determining the identity of Holders entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA Section 316(c). SECTION 2.15. CUSIP NUMBER. The Company in issuing the Notes may use a "CUSIP" number, and if it does so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes. The Company will promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 REDEMPTIONS AND OFFERS TO PURCHASE SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45 days but not more than 90 days before a redemption date (unless a shorter notice period shall be satisfactory to the Trustee), an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the redemption price. If the Company is required to make an offer to purchase Notes pursuant to the provisions of Sections 4.10 or 4.14, it shall furnish to the Trustee, an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the offer to purchase shall occur, (ii) the offer's terms, (iii) the purchase price, (iv) the principal amount of the Notes to be purchased and (v) a statement to the effect that (a) the Company or one of its Restricted Subsidiaries has made an Asset Sale and that the conditions set forth in Sections 3.09 and 4.10 have been satisfied or (b) a Change of Control has occurred and the conditions set forth in Section 4.14 have been satisfied, as applicable. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED OR PURCHASED. If less than all of the Notes are to be redeemed or are to be purchased in an Asset Sale Offer or a Collateral Asset Sale Offer, the Trustee shall select the Notes to be redeemed or purchased among the Holders of the Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a pro rata basis, by 20 27 lot or by such method as the Trustee shall deem fair and appropriate (and in such manner as complies with applicable legal requirements). The Company shall give notice to the Trustee of such requirements of any securities exchange not less than forty-five (45) nor more than ninety (90) days prior to the date on which notice of such redemption or purchase is to be given. In the event of partial redemption, other than pro rata, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. In the event that less than all of the Notes properly tendered in an Asset Sale Offer or Collateral Asset Sale Offer are to be purchased, the particular Notes to be purchased shall be selected promptly upon the expiration of such Asset Sale Offer or Collateral Asset Sale Offer, as the case may be. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption or purchase and, in the case of any Note selected for partial redemption or purchase, the principal amount thereof to be redeemed or purchased. Notes and portions of them selected shall be in principal amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed or purchased, the entire outstanding principal amount of Notes held by such Holder shall be redeemed or purchased. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. In the event the Company is required to make an Asset Sale Offer or Collateral Asset Sale Offer pursuant to Sections 3.09 and 4.10 hereof and the amount of Excess Proceeds or Excess Collateral Proceeds, as applicable, to be applied to such purchase would result in the purchase of a principal amount of Notes which is not evenly divisible by $1,000, the Trustee shall promptly refund to the Company the portion of such Excess Proceeds or Excess Collateral Proceeds, as applicable, that is not necessary to purchase the immediately lesser principal amount of Notes that is so divisible. SECTION 3.03. NOTICE OF REDEMPTION. At least thirty (30) days but not more than sixty (60) days before a redemption date, the Company shall mail, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. The notice shall identify the CUSIP number of the Notes, if any, and the Notes to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note of the same series in principal amount equal to the unredeemed portion will be issued; (4) the name and address of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; 21 28 (6) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least five Business Days prior to the date such notice is to be given, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become due and payable on the redemption date at the redemption price. On and after the redemption date, unless the Company defaults in the payment of the redemption price, interest will cease to accrue on the Notes or portions of them called for redemption and all rights of Holders of such Notes will terminate except for the right to receive the redemption price. Upon surrender to the Paying Agent, the Holders of such Notes shall be paid the redemption price plus accrued interest, if any, to the redemption date, but interest installments whose maturity is on or prior to the redemption date will be payable to the Holder of record at the close of business on the relevant record dates referred to in the Notes. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. At least two Business Days before the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money in immediately available funds sufficient to pay the redemption price of and, if applicable, accrued interest on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly, and in any event within two Business Days after the redemption date, return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Notes to be redeemed. If the Company complies with the provisions of the preceding paragraph, interest on the Notes or the portions of Notes to be redeemed will cease to accrue on the applicable redemption date, whether or not such Notes are presented for payment. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest will be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, from the redemption date until such unpaid interest is paid, in each case at the rate provided in the Notes and in Section 4.01 hereof. SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount 22 29 to the unredeemed portion of the Note surrendered; provided, however, that no Note of $1,000 or less in principal amount shall be purchased or redeemed in part. SECTION 3.07. OPTIONAL REDEMPTION. The Notes are not redeemable at the Company's option prior to January 15, 2001 (the "First Redemption Date"). Thereafter, the Notes will be subject to redemption at the option of the Company, in whole or in part, at any time upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below (the "Redemption Percentages") plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
Year Percentage ---- ---------- 2001 ......................................................... 104.625% 2002 ......................................................... 103.083% 2003 ......................................................... 101.542% 2004 and thereafter........................................... 100.000%
Notwithstanding the foregoing, prior to January 15, 1999, the Company may redeem, on any one or more occasions, with the net cash proceeds of any public offering of its common equity (within 60 days of the consummation of any such public offering), up to $30.0 million in aggregate principal amount of the Notes at a redemption price equal to 109.25% of the principal amount of such Notes plus accrued and unpaid interest thereon, if any, to the redemption date; provided, however, that at least $100.0 million in aggregate principal amount of Notes (including Additional Notes, if any) must remain outstanding immediately following any such redemption. SECTION 3.08. MANDATORY REDEMPTION. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS COLLATERAL PROCEEDS OR EXCESS PROCEEDS. Within 30 days after the date that (i) Excess Collateral Proceeds exceed $1.0 million and a Collateral Asset Sale Offer is required under Section 4.10 hereof or (ii) Excess Proceeds exceed $10.0 million and an Asset Sale Offer is required under Section 4.10 hereof, the Company shall mail or cause the Trustee to mail (in the Company's name and at its expense and pursuant to an Officers' Certificate) an offer to purchase (in the case of Excess Collateral Proceeds, a "Collateral Asset Sale Offer" and in the case of Excess Proceeds, an "Asset Sale Offer") to each Holder of Notes pursuant to the terms of this Section 3.09. The Collateral Asset Sale Offer or Asset Sale Offer shall be mailed by the Company (or the Trustee) to Holders of Notes at their last registered address with a copy to the Trustee and the Paying Agent and shall set forth (a) notice that an Asset Sale has occurred, that the Company is making a Collateral Asset Sale Offer or an Asset Sale Offer, as applicable, pursuant to this Section 3.09, and that each Holder of Notes then outstanding has the right to require the Company to repurchase, for cash, such 23 30 Holder's Notes at the Collateral Asset Sale Offer Price or Asset Sale Offer Price, as applicable, plus accrued and unpaid interest thereon to the payment date; (b) the purchase price per $1,000 of principal amount and the payment date of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable; (c) the maximum amount of Collateral Excess Proceeds or Excess Proceeds, as applicable, required to be applied to such Collateral Asset Sale Offer or Asset Sale Offer; (d) that any Notes properly tendered pursuant to the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, will be accepted for payment (subject to reduction as provided in this Section 3.09) on the payment date of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, and any Notes not properly tendered will remain outstanding and continue to accrue interest; (e) that unless the Company defaults in the payment of the Collateral Asset Sale Offer Price or the Asset Sale Offer Price, as applicable, all Notes accepted for payment pursuant to the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, shall cease to accrue interest after the payment date of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable; (f) that Holders electing to have any Notes purchased pursuant to a Collateral Asset Sale Offer or Asset Sale Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, or transfer by book-entry transfer, to the Company, the Depository or the Paying Agent specified in the notice at the address specified in the notice prior to the close of business on the third Business Day preceding the payment date of the Collateral Asset Sale Offer or the Asset Sale Offer, as applicable; (g) that Holders will be entitled to withdraw their tendered Notes and their election to require the Company to purchase the Notes provided that the Paying Agent receives, not later than the close of business on the second Business Day preceding the payment date of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes tendered for purchase, and a statement that such Holder is withdrawing such Holder's tendered Notes and such Holder's election to have such Notes purchased; (h) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the amount of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, the Company shall select the Notes to be purchased by lot on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased or otherwise in accordance with the Indenture); and (i) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). If the payment date of the Collateral Asset Sale Offer or Asset Sale Offer is on or after an interest payment record date and on or before the related interest payment date, any accrued interest will be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender a Note pursuant to the Collateral Asset Sale Offer or Asset Sale Offer, as applicable. The Company shall fix the payment date of the Collateral Asset Sale Offer or Asset Sale Offer for such purchase no earlier than 30 but no more than 60 days after the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, is mailed as set forth above, except as may otherwise be required by applicable law. The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Notes pursuant to this Section 3.09. On the payment date of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, the Company shall, to the extent permitted by law, (x) accept for payment Notes or portions thereof properly tendered pursuant to the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, (y) deposit with the Paying Agent the amount of money, in immediately available funds, equal to the maximum Collateral 24 31 Excess Proceeds or Excess Proceeds, as applicable, required under Section 4.10 to be applied to such Collateral Asset Sale Offer or Asset Sale Offer and (z) deliver or cause to be delivered to the Trustee Notes so accepted together with an Officers' Certificate stating the Notes or portions thereof tendered to the Company. If the aggregate purchase price of all Notes properly tendered exceeds the maximum amount of Collateral Excess Proceeds or Excess Proceeds, as applicable, required to be applied to such Collateral Asset Sale Offer or Asset Sale Offer, as applicable, the Notes or portions thereof to be purchased shall be selected pursuant to Section 3.02 hereof. The Paying Agent shall promptly mail to each Holder of Notes so accepted for payment a check in an amount equal to the aggregate purchase price of the Notes purchased by the Company from such Holder and the Trustee shall promptly authenticate and mail to each Holder a new Note of the same series equal in principal amount to any unpurchased portion of any Note surrendered, if any, or return any unpurchased Note to such Holder; provided, however, that each such new Note shall be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce in a newspaper of national circulation or in a press release provided to a nationally recognized financial wire service the results of the Collateral Asset Sale Offer or Asset Sale Offer, as applicable, on the payment date. Other than as specifically provided in this Section 3.09, each purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01, 3.02, 3.05 and 3.06 hereof. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in this Indenture and the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary of the Company, holds as of 9:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. Such Paying Agent shall return to the Company promptly, and in any event, no later than five days following the date of payment, any money (including accrued interest) that exceeds such amount of principal, premium, if any, and interest paid on the Notes. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the interest rate then applicable to the Notes to the extent lawful. In addition, it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee or Registrar) where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to 25 32 furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.04. SECTION 4.03. SEC REPORTS. (i) The Company shall, whether or not required by the rules and regulations of the SEC, submit to the SEC for public availability and provide to the Trustee and the Holders copies of all quarterly and annual reports and other information, documents and reports specified in Sections 13 and 15(d) of the Exchange Act for so long as the Notes are outstanding. If, at any time during the period presented in such quarterly or annual report, the Company has one or more Unrestricted Subsidiaries that singly or together constitute a Significant Subsidiary, each such quarterly and annual report shall contain "summarized financial information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under the Exchange Act) for the Company and its Restricted Subsidiaries, on a consolidated basis, in addition to the financial information required by the Act. The summarized financial information required pursuant to the preceding sentence may, at the election of the Company, be included in the footnotes to audited consolidated financial statements of the Company and shall be as of the same dates and for the same periods as the consolidated financial statements of the Company and its Subsidiaries required pursuant to the Exchange Act. (ii) If the Company or a Guarantor, if any, is required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause such annual report or quarterly or other financial report furnished to be filed with the Trustee and mailed to the Holders at their addresses appearing in the register of Notes maintained by the Registrar. (iii) The Company and the Guarantors, if any, shall deliver all reports and other documents and information to the Holders under this Section 4.03. The Trustee shall, if requested to by the Company, deliver such reports, other documents and information to the Holders, but at the sole expense of the Company. SECTION 4.04. COMPLIANCE CERTIFICATE. (a) The Company shall deliver to the Trustee, within sixty (60) days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each of the Company and its Subsidiaries has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge each of the Company and its Subsidiaries has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a 26 33 Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action each of the Company and its Subsidiaries is taking or propose to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes are prohibited (or if such event has occurred, a description of the event and what action each is taking or proposes to take with respect thereto). (b) The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of (i) any Default or Event of Default or (ii) any event of default under any other mortgage, indenture or instrument which with the passage of time or giving of notice would be a Default or an Event of Default under Section 6.01 hereof, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. The Company shall, and shall cause each of its Subsidiaries to pay prior to delinquency, all material taxes, assessments, and governmental levies except as contested in good faith and by appropriate proceedings. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company covenants, and the Company shall cause any Guarantor to covenant (to the extent they may lawfully do so), that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture. The Company (to the extent it may lawfully do so) hereby expressly waives, and the Company will cause any Guarantor (to the extent it may lawfully do so) expressly to waive all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. LIMITATION ON RESTRICTED PAYMENTS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (other than (1) dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or (2) dividends or distributions by a Restricted Subsidiary of the Company, provided that to the extent that a portion of such dividend or distribution is paid to a holder of Equity Interests of a Restricted Subsidiary other than the Company or a Restricted Subsidiary, such portion of such dividend or distribution is not greater than such holder's pro rata aggregate common equity interest in such Restricted Subsidiary)); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any Restricted Subsidiary or other Affiliate of the Company (other than any such Equity Interests owned by the Company or any Wholly Owned Restricted Subsidiary of the Company); (iii) purchase, redeem or otherwise acquire or retire for value any Indebtedness of the Company or any Restricted Subsidiary that is subordinated in right of payment, by its terms, to the Notes or any Subsidiary Guarantee thereof prior to the scheduled final maturity or sinking fund payment dates for payment of principal and interest in accordance with the original documentation for such subordinated Indebtedness; or (iv) make any Restricted Investment (all 27 34 such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of this Indenture (excluding Restricted Payments permitted by clauses (ii), (iii), (iv) and (v) of the next succeeding paragraph), is less than the sum of (v) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from January 1, 1996 to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (w) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since the Issuance Date of Equity Interests of the Company or of debt securities of the Company that have been converted or exchanged into such Equity Interests (other than Equity Interests (or convertible or exchangeable debt securities) sold to a Restricted Subsidiary of the Company and other than Disqualified Stock or debt securities that have been converted or exchanged into Disqualified Stock), plus (x) in case any Unrestricted Subsidiary has been redesignated a Restricted Subsidiary and becomes a Guarantor pursuant to the terms of the Indenture or has been merged, consolidated or amalgamated with or into, or transfers or conveys assets to, or is liquidated into, the Company or a Restricted Subsidiary that is a Guarantor, and provided that no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof, the lesser of (i) the book value (determined in accordance with GAAP) at the date of such redesignation, combination or transfer of the aggregate Investments made by the Company and its Restricted Subsidiaries in such Unrestricted Subsidiary (or of the assets transferred or conveyed, as applicable) and (ii) the fair market value of such Investments in such Unrestricted Subsidiary at the time of such redesignation, combination or transfer (or of the assets transferred or conveyed, as applicable), in each case as determined in good faith by the Board of Directors of the Company, whose determination shall be conclusive and evidenced by a resolution of such Board and, in each case, after deducting any Indebtedness associated with the Unrestricted Subsidiary so designated or combined or with the assets so transferred or conveyed, plus (y) 100% of any dividends or interest actually received in cash by the Company or a Restricted Subsidiary that is a Guarantor after the Issuance Date from (1) a Restricted Subsidiary the Net Income of which has been excluded from the computation of Consolidated Net Income, (2) an Unrestricted Subsidiary, (3) a Person that is not a Subsidiary or (4) a Person that is accounted for on the equity method plus (z) $25.0 million. Notwithstanding the foregoing, the provisions of this Section 4.07 will not prohibit: 28 35 (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, purchase, retirement or other acquisition of any Equity Interests of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any proceeds that is utilized for such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c) (w) of the preceding paragraph; (iii) the defeasance, redemption, repayment or purchase of Indebtedness of the Company or any Restricted Subsidiary that is subordinated in right of payment, by its terms, to the Notes or any Subsidiary Guarantee thereof in a Permitted Refinancing; (iv) the defeasance, redemption, repayment or purchase of Indebtedness of the Company or any Restricted Subsidiary that is subordinated in right of payment, by its terms, to the Notes or any Subsidiary Guarantee thereof with the proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests (other than Disqualified Stock) of the Company; provided that the amount of any proceeds that is utilized for such defeasance, redemption, repayment or purchase shall be excluded from clause (c) (w) of the preceding paragraph; and (v) the purchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company pursuant to any management equity subscription agreement or stock option agreement in effect as of the Issuance Date; provided, however that the aggregate price paid for all such purchased, redeemed, acquired or retired Equity Interests shall not exceed $250,000 per year on a cumulative basis since the Issuance Date; provided that, in the case of clauses (ii) through (v) above, no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof. In determining whether any Restricted Payment is permitted by this Section 4.07, the Company may allocate or reallocate all or any portion of such Restricted Payment among the clauses (i) through (v) of the preceding paragraph or among such clauses and the first paragraph of this Section 4.07 including clauses (a), (b) and (c), provided that at the time of such allocation or reallocation, all such Restricted Payments, or allocated portions thereof, would be permitted under the various provisions of this Section 4.07. The amount of all Restricted Payments (other than cash) shall be the fair market value (evidenced by a resolution of the Board of Directors of the Company set forth in an Officers' Certificate delivered to the Trustee) on the date of the Restricted Payment of the asset(s) proposed to be transferred by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.07 were computed, which calculations may be based upon the Company's latest available financial statements. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or Event of Default. For purposes of making the determination as to whether such designation would cause a Default or Event of Default, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this Section 4.07. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greatest of (x) the net book value of such Investments at the time of such designation, (y) the fair market value of such Investments at the time of such designation and (z) the original fair market value of such Investments at the time they were made. Such designation will only be permitted if such Restricted 29 36 Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. SECTION 4.08. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (a) (i) pay dividends or make any other consensual distributions to the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits, or (ii) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (b) make loans or advances or capital contributions to the Company or any of its Restricted Subsidiaries or (c) sell, lease or transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reasons of (i) Existing Indebtedness as in effect on the Issuance Date, (ii) this Indenture and the Notes, (iii) applicable law, (iv) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries or of any Person that becomes a Restricted Subsidiary as in effect at the time of such acquisition or such Person becoming a Restricted Subsidiary (except to the extent such Indebtedness was incurred in connection with or, if incurred within one year prior to such acquisition or such Person becoming a Restricted Subsidiary, in contemplation of such acquisition or such Person becoming a Restricted Subsidiary), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that the Consolidated Cash Flow of such Person is not taken into account (to the extent of such restriction) in determining whether such acquisition was permitted by the terms of this Indenture, (v) any instrument governing Indebtedness or Capital Stock of a Person who becomes a Guarantor as in effect at the time of becoming a Guarantor (except to the extent such Indebtedness was incurred in connection with or, if incurred within one year prior to the time of becoming a Guarantor, in contemplation of such Subsidiary Guarantee), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person who became a Guarantor, (vi) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (vii) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in this clause (c) on the property so acquired, (viii) permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, or (ix) customary restrictions in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements and mortgages. SECTION 4.09. LIMITATION ON ADDITIONAL INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to 30 37 (collectively, "incur" and correlatively, an "incurrence" of) any Indebtedness (including Acquired Debt) and that the Company will not issue any, and will not permit any of its Restricted Subsidiaries to issue any, shares of Disqualified Stock; provided, however, that the Company or any of its Restricted Subsidiaries may incur Indebtedness or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. Notwithstanding the foregoing, if no Default or Event of Default shall occur as a consequence thereof, the foregoing provisions shall not apply to: (i) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Indebtedness; provided, however, that if any such Indebtedness ceases to be Non-Recourse Indebtedness of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (ii) the incurrence by the Company or its Restricted Subsidiaries of Indebtedness pursuant to one of more Credit Facilities in an aggregate principal amount not to exceed $50.0 million at any one time outstanding, less the aggregate amount of all proceeds of all sales or other dispositions of assets that have been applied to permanently reduce the outstanding amount of such Indebtedness pursuant to Section 4.10 hereof; (iii) the incurrence by the Company and its Restricted Subsidiaries of Existing Indebtedness; (iv) Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the Indenture to be outstanding; (v) the incurrence or the issuance by the Company of Refinancing Indebtedness or Refinancing Disqualified Stock of the Company or any Restricted Subsidiary or the incurrence or issuance by a Restricted Subsidiary of Refinancing Indebtedness or Refinancing Disqualified Stock of such Restricted Subsidiary, as the case may be; provided, however, that such Refinancing Indebtedness or Refinancing Disqualified Stock, as the case may be, is a Permitted Refinancing; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Restricted Subsidiaries; provided, however, that (a) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than a Wholly Owned Restricted Subsidiary and (b) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (vii) the incurrence of Indebtedness represented by the Notes and any Subsidiary Guarantee thereof; provided, however, that the Company may only issue Additional Notes if the conditions set forth in Section 2.02 hereof are satisfied; 31 38 (viii) the incurrence by the Company or any of its Restricted Subsidiaries, in the ordinary course of business and consistent with past practice, of Indebtedness to secure performance bonds not to exceed $7.5 million at any one time outstanding; or (ix) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed $5,000,000; provided that the net proceeds of such Indebtedness are used to finance the renovation or refurbishment of properties owned by the Company or a Restricted Subsidiary which are employed in a Hospitality-Related Business. SECTION 4.10. LIMITATION ON SALE OF ASSETS. (i) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, conduct or suffer to exist an Asset Sale, unless (x) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) and (y) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided, however, that if the assets which were the subject of the Asset Sale constitute Collateral, then (i) 100% of the consideration received in connection with the Asset Sale must be in the form of cash or Cash Equivalents and (ii) the Company must deliver to the Trustee the opinion of a Qualified Appraiser that the consideration received in connection with the Asset Sale is equal to or greater than the fair market value of the assets which were the subject of the Asset Sale; provided, further, that except for Asset Sales in which the assets that are the subject of the Asset Sale constitute Collateral, the principal amount of the following shall be deemed to be cash for purposes of this provision: (A) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto) of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes or any Subsidiary Guarantee thereof) that are assumed or forgiven by the transferee of any such assets and (B) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 90 days of the closing of such Asset Sale (to the extent of the cash received). Notwithstanding the foregoing, (a) the restriction in clause (y) above will not apply, as to Asset Sales of assets not constituting Collateral, with respect to mortgages or other notes receivable received by the Company or any such Restricted Subsidiary from such transferee to the extent such mortgages or other notes receivable are Restricted Investments permitted to be made by the Company or such Restricted Subsidiary under Section 4.07 hereof and (b) any Asset Sale of real property constituting Collateral which is released from the Lien of the Collateral Documents pursuant to the provisions of the applicable Deed of Trust relating to the sub-division of real property shall constitute an Asset Sale of an asset not constituting Collateral. (ii) Notwithstanding any provision of this Section 4.10 to the contrary, the Company may (a) invest all or a portion of the Net Proceeds of any Asset Sale of assets which constitute Collateral (such proceeds, "Collateral Proceeds") in Substitute Collateral or (b) elect to redesignate, at the time of such Asset Sale, an existing hotel property of the Company as Substitute Collateral and to treat the Collateral Proceeds as Net Proceeds of an Asset Sale of an asset not constituting Collateral as set forth in the next paragraph and the transaction as not constituting an Asset Sale of Collateral; provided, however, that, in either case, (i) the Substitute Collateral is subject to a perfected Lien in favor of the Trustee pursuant to deeds of trust, substantially in the form of Exhibit C hereto, and other instruments, financing statements and other documents, substantially similar to the Collateral Documents, which Lien has at least the same priority as the assets which were the subject of the Asset Sale (and the Company delivers to the Trustee 32 39 an Opinion of Counsel reasonably satisfactory to the Trustee regarding the perfection and priority of the Lien on the Substitute Collateral in favor of the Trustee, which Opinion of Counsel may be based on a binder or policy of a real estate title insurance company of national standing), (ii) the fair market value of the Substitute Collateral (plus any portion of the Collateral Proceeds not invested in the Substitute Collateral) is equal to or greater than the fair market value of the assets which were the subject of the Asset Sale (and the Company delivers to the Trustee an Officers' Certificate and an opinion of a Qualified Appraiser stating that the fair market value of the Substitute Collateral (plus any portion of the Collateral Proceeds not invested in the Substitute Collateral) is equal to or greater than the fair market value of the assets which were the subject of the Asset Sale), (iii) the combined Consolidated Cash Flow of the hotel properties constituting Substitute Collateral for the most recently ended four fiscal quarters for which internal financial statements are available immediately preceding the date on which the Asset Sale occurs (the "Calculation Period") is greater than the combined Consolidated Cash Flow of the hotel properties constituting assets which were the subject of the Asset Sale for the Calculation Period (and the Company delivers to the Trustee an Officers' Certificate to such effect) and (iv) the Substitute Collateral is acquired or designated, as the case may be, and the Opinion of Counsel, Officers' Certificate and appraisal referenced in clauses (i), (ii) and (iii) above are delivered, substantially concurrently with the consummation of the Asset Sale; provided, however, that in the case of an Asset Sale of any asset constituting Collateral that results from an Event of Loss, the opinion of counsel, officers' certificate and appraisal referenced in clauses (i), (ii) and (iii) above shall be delivered on or prior to the earlier of (A) 180 days after such Event of Loss, (B) 90 days after the receipt of any proceeds payable in respect of such Event of Loss and (C) the date of investment or redesignation pursuant to clause (a) or (b) above, respectively. Any Collateral Proceeds that are (A) not so invested so as to constitute Substitute Collateral or (B) not treated as Net Proceeds of an Asset Sale of an asset not constituting Collateral in accordance with the next succeeding paragraph in connection with the Company's election to redesignate an existing hotel property as Substitute Collateral, each as provided above, will be deemed to constitute "Excess Collateral Proceeds." When the amount of Excess Collateral Proceeds exceeds $1.0 million, the Company shall make an offer to all Holders of Notes (a "Collateral Asset Sale Offer") to purchase the maximum amount of Notes that is an integral multiple of $1,000, that may be purchased out of the Excess Collateral Proceeds at the following offer price (the "Collateral Asset Sale Offer Price") in cash: (i) if the purchase is required to be consummated between the Issuance Date and the First Redemption Date, the greater of (a) 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase plus the Make-Whole Amount or (b) the principal amount thereof multiplied by the Redemption Percentage on the First Redemption Date, plus accrued and unpaid interest thereon to the date of purchase and (ii) if the purchase is consummated after the First Redemption Date, the principal amount thereof multiplied by the Redemption Percentage corresponding to the applicable redemption period in which the date of purchase is required to occur, as set forth in Section 3.07 hereof, plus accrued and unpaid interest thereon to the date of purchase in accordance with the procedures set forth in Section 3.09 hereof. As provided in Section 3.09 hereof, the Collateral Asset Sale Offer shall be commenced as soon as practicable following the date that the Excess Collateral Proceeds exceeds $1.0 million, but in any event within 30 days following such date. Pending final application of any Collateral Proceeds, the Company shall deposit any such Collateral Proceeds with the Trustee for the benefit of the Holders of the Notes and such Collateral Proceeds shall be subject to a perfected Lien in favor of the Trustee, which Lien shall have at least the same priority as the Lien on the assets which were the subject of the Asset Sale. To the extent that the aggregate amount of Notes tendered pursuant to a Collateral Asset Sale Offer is less than the Excess Collateral Proceeds, any remaining Excess Collateral Proceeds shall be permitted to be used to permanently reduce Indebtedness of the Company that ranks pari passu in right of payment of the Notes or invested in a Hospitality-Related Business as provided in the following paragraph (without regard to the time period set forth therein); provided, however, that until so applied, the remaining Excess Collateral Proceeds shall remain pledged as security for the Notes and any newly acquired assets, when 33 40 acquired, shall be subject to a perfected Lien in favor of the Trustee, which Lien has at least the same priority as the assets which were the subject of the Asset Sale. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Collateral Proceeds, the Trustee shall select the Notes to be purchased in the manner described under Section 3.02 hereof. Upon completion of any Collateral Asset Sale Offer, the amount of Excess Collateral Proceeds shall be reset at zero. If any of the Collateral is sold and the Collateral Proceeds are applied in accordance with this paragraph, the Trustee shall release the Lien in favor of the Trustee in the assets so sold in accordance with the provisions of Section 10.04 hereof. Within 365 days of any Asset Sale (other than an Asset Sale of assets which constitute Collateral), the Company or such Restricted Subsidiary may (a) apply the Net Proceeds from such Asset Sale to permanently reduce (x) Indebtedness of the Company or a Restricted Subsidiary of the Company that is a Guarantor that ranks by its terms pari passu in right of payment with the Notes or (y) pari passu Indebtedness of a Restricted Subsidiary to the extent of the proceeds of the Asset Sale by such Restricted Subsidiary or (b) invest the Net Proceeds from such Asset Sale in property or assets used in a Hospitality-Related business; provided that the Company or such Restricted Subsidiary will have complied with this clause (b) if, within 365 days of such Asset Sale, the Company or such Restricted Subsidiary shall have commenced and not completed or abandoned an investment in compliance with this clause (b) and shall have segregated such Net Proceeds from the general funds of the Company and its Subsidiaries for that purpose and such investment is substantially completed within 180 days after the first anniversary of such Asset Sale. Any Net Proceeds from an Asset Sale (other than an Asset Sales of assets which constitute Collateral) that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes, that is an integral multiple of $1,000, that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Asset Sale Offer Price"), in accordance with the procedures set forth in Section 3.09 hereof. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased in the manner described in Section 3.02 hereof. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Pending the final application of any Net Proceeds from an Asset Sale pursuant to this paragraph, the Company or any Restricted Subsidiary may temporarily reduce Indebtedness of the Company or a Restricted Subsidiary that is a Guarantor that ranks by its terms pari passu with the Notes or otherwise invest such Net Proceeds in Cash Equivalents. (iii) Any offer to purchase the Notes pursuant to this Section 4.10 shall be made pursuant to the provisions of Section 3.09 hereof. Simultaneously with the notification of such offer to the Trustee, the Company shall provide the Trustee with an Officers' Certificate setting forth the calculations used in determining the amount of Collateral Excess Proceeds or Excess Proceeds, as applicable, to be applied to the purchase of the Notes. SECTION 4.11. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or Guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate 34 41 Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary on an arm's length basis with an unrelated Person, (b) the Company delivers to the Trustee (i) with respect to any Affiliate Transaction involving aggregate payments in excess of $5.0 million, an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and such Affiliate Transaction is approved by a majority of the disinterested nonemployee members of the Board of Directors and (ii) with respect to any Affiliate Transaction involving aggregate payments in excess of $10.0 million (other than an Affiliate Transaction involving the acquisition or disposition of a hotel by the Company or a Restricted Subsidiary of the Company), an opinion as to the fairness to the Company or such Restricted Subsidiary from a financial point of view issued, at the option of the Company, by an investment banking firm of national standing or a Qualified Appraiser and (c) the Company delivers to the Trustee in the case of an Affiliate Transaction involving the acquisition or disposition of a hotel by the Company or a Restricted Subsidiary of the Company and (x) involving aggregate payments of less than $25.0 million, an appraisal by a Qualified Appraiser to the effect that the transaction is being undertaken at fair market vale or (y) involving aggregate payments of $25.0 million or more, an opinion as to the fairness of the transaction to the Company or such Restricted Subsidiary from a financial point of view issued by an investment banking firm of national standing; provided, however, that the following shall not be deemed Affiliate Transactions: (A) any employment, deferred compensation, stock option, noncompetition, consulting or similar agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (B) transactions between or among the Company and/or its Wholly Owned Restricted Subsidiaries or any Guarantor, (C) the incurrence of fees in connection with the provision of hotel management services, provided that such fees are paid in the ordinary course of business and are consistent with past practice and (D) Restricted Payments permitted by Section 4.07 hereof. SECTION 4.12. LIMITATION ON LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by the Company or any Restricted Subsidiary, or any income or profits therefrom or assign or convey any right to receive income therefrom, except Permitted Liens. SECTION 4.13. CORPORATE EXISTENCE. Subject to Section 4.14 and Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence and the corporate existence of each of its Subsidiaries, in accordance with its respective organizational documents (as the same may be amended from time to time) and (ii) its (and its Subsidiaries') rights (charter and statutory), licenses and franchises; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate existence of any of its Subsidiaries, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. SECTION 4.14. CHANGE OF CONTROL. Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at a purchase offer 35 42 price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Payment"). Within 10 Business Days following any Change of Control, the Company will mail a notice of each Holder stating: (1) that the Change of Control Offer is being made pursuant to this Section 4.14, the period in which such offer will remain open and the expiration date of such offer; (2) that all Notes tendered will be accepted for payment, the purchase price and the purchase date (the "Change of Control Payment Date"); (3) that any Note not tendered will continue to accrue interest; (4) that, unless the Company defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at the address specified in the notice prior to the expiration of such offer; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the expiration of such offer, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Notes purchased; (7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof; and (8) the circumstances and material facts regarding such Change of Control (including, but not limited to, information with respect to pro forma and historical financial information after giving effect to such Change of Control and information regarding the Person or Persons acquiring control). The Company shall comply, to the extent applicable, with the requirements of Rule 14e-1 under the Exchange Act and other applicable securities laws and regulations thereunder in the event that a Change of Control occurs and the Company is required to repurchase the Notes pursuant to this Section 4.14. On the Change of Control Payment Date, the Company will, to the extent permitted by law, (x) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (y) deposit with the Paying Agent an amount equal to the aggregate Change of Control Payment in respect of all Notes or portions thereof so tendered and (z) deliver, or cause to be delivered, to the Trustee for cancellation the Notes so accepted together with an Officers' Certificate stating that the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Notes so accepted the Change of Control Payment for such Notes, and the Trustee shall promptly authenticate and mail to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided, however, that each such new Note shall be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce in a newspaper of national circulation or in a press release provided to a nationally recognized financial wire service the results of the Change of Control Offer on the Change of Control Payment Date. SECTION 4.15. SUBSIDIARY GUARANTEES. If (i) the Company or any Restricted Subsidiary shall transfer or cause to be transferred, in one or a series of related transactions, any assets (including cash or Cash Equivalents other than pursuant to clause (f) of the definition of Permitted Investments), business, divisions, real property or equipment having a book value or fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be conclusive and evidenced by a resolution of such Board) in excess of $2.0 million to any Restricted Subsidiary that is not a Guarantor or (ii) if the Company or any 36 43 of its Restricted Subsidiaries shall acquire or create after the Issuance Date another Restricted Subsidiary having total assets with a fair market value in excess of $2.0 million at the time of such acquisition or creation, the Company shall cause such Restricted Subsidiary to execute and deliver to the Trustee a supplemental indenture in the form of Exhibit B hereto pursuant to which such Restricted Subsidiary shall guarantee all of the obligations of the Company with respect to the Notes on a senior basis together with an Opinion of Counsel (which counsel may be an employee of the Company) to the effect that the supplemental indenture has been duly executed, delivered by, and is valid and binding on, such Restricted Subsidiary and is in compliance in all material respects with the terms of this Indenture. SECTION 4.16. LINE OF BUSINESS. For so long as any Notes are outstanding, the Company shall not, and shall not permit any of its Subsidiaries to, engage in any business or activity other than a Hospitality-Related Business. SECTION 4.17. PAYMENTS FOR CONSENT. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid or agreed to be paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. SECTION 4.18. MAINTENANCE OF INSURANCE. Until the Notes have been paid in full, the Company shall, and shall cause its Subsidiaries to, maintain insurance with responsible carriers against such risks and in such amounts as is customarily carried by similar businesses with deductibles, retentions, self-insured amounts and coinsurance customarily carried by similar businesses of similar size, including, without limitation, property and casualty loss, and interruption of business insurance, and shall provide satisfactory evidence of such insurance to the Trustee prior to the anniversary or renewal date of each such policy, which certificate shall expressly state such expiration date for each policy listed. Notwithstanding the foregoing, customary insurance coverage for the purposes of this Section 4.18 shall include the following: (i) workers' compensation insurance to the extent required to comply with all applicable state or United States laws and regulations or the laws and regulations of any other applicable jurisdiction, (ii) property insurance protecting property against loss or damage by fire, lightning, windstorm, tornado, water, flood, vandalism, riot, earthquake, civil commotion, malicious mischief, hurricane and such other risks and hazards as are from time to time covered by an "all risk" policy or property policy covering "special" causes of loss, such property insurance providing coverage of not less than 100% of actual replacement value (as determined at each policy renewal based on the EW Dodge Building Index or some other recognized means) of any improvements with a deductible no greater than $2.0 million (other than earthquake insurance, for which the deductible may be up to 5% of the replacement value, and which may be limited to an aggregate of $15.0 million per occurrence in California and $50.0 million per occurrence in other states, unless the Board of Directors of the Company determines in good faith that such insurance, with such deductibles, is not available at commercially reasonable rates and on commercially reasonable terms in which case the Company may procure earthquake insurance with appropriate deductibles which can be obtained at commercially reasonable rates and on commercially reasonable terms) and (iii) business interruption insurance for a period of not less than one year, and in an amount based upon 100% of estimated continuing expenses and lost cash flow for the fiscal year with 37 44 respect to which the insurance coverage is in effect less non-continuing expenses. All insurance under this Section 4.18 shall name the Trustee as an additional insured or loss payee, as applicable, to the extent of the interest of the Trustee in any assets covered by such insurance. All such insurance shall be issued by carriers having an A.M. Best & Company, Inc. rating of A or higher and a financial size category of not less than X, or if such carrier is not rated by A.M. Best & Company, Inc., having the financial stability and size deemed appropriate by the Company after consultation with a reputable insurance broker. The Company will furnish to the Trustee within 30 days of each anniversary of the Issuance Date evidence to the Trustee from an insurance broker or consultant that the provisions of this Section 4.18 have been complied with. SECTION 4.19. COLLATERAL DOCUMENTS. Neither the Company nor any Restricted Subsidiary will amend, waive or modify, or take or refrain from taking any action which has the effect of amending, waiving or modifying, any provision of the Collateral Documents to the extent that such amendment, waiver, modification or action would have an adverse effect on the rights of the Trustee or the Holders of Notes (as provided in the Collateral Documents); provided, however, that: (1) Collateral may be released or modified as expressly provided herein and in the Collateral Documents; (2) Guarantees, Liens, and pledges may be released as expressly provided herein and in the Collateral Documents; or (3) this Indenture and any of the Collateral Documents may be otherwise amended, waived or modified pursuant to Article 9 hereof. SECTION 4.20. FURTHER ASSURANCES. The Company and the Restricted Subsidiaries shall do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments, as may be required from time to time in order (i) to carry out more effectively the purposes of the Collateral Documents, (ii) to subject the Collateral to the Liens created by any of the Collateral Documents or any of the properties, rights or interests covered by any of the Collateral Documents, (iii) to perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the Liens intended to be created thereby and (iv) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Trustee any of the rights granted or now or hereafter intended to be granted to the Trustee hereunder or under any other instrument executed in connection therewith or granted to the Company under the Collateral Documents or under any other instrument executed in connection therewith. 38 45 SECTION 4.21. LIQUIDATION. A plan of liquidation or dissolution may not be adopted for the Company which provides for, contemplates or the effectuation of which is preceded by (a) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company otherwise than substantially as an entirety (Article 5 of this Indenture being the Article hereof which governs any such sale, lease, conveyance or other disposition substantially as an entirety) and (b) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and of the remaining assets of the Company to the holders of Equity Interests in the Company, unless the Company, prior to making any liquidating distribution pursuant to such plan, makes provision for the satisfaction of the Company's Obligations hereunder and under the Notes as to the payment of principal and interest. The Company shall be deemed to make provision for such payments only if (i) the Company delivers in trust to the Trustee or Paying Agent (other than the Company or its Restricted Subsidiaries) cash or Government Securities maturing as to principal and interest in such amounts and at such times as are sufficient without consideration of any reinvestment of such interest to pay, when due, the principal of and interest on the Notes or (ii) there is an express assumption and observance of all covenants and conditions to be performed by the Company hereunder by the execution and delivery of a supplemental indenture in the form of Exhibit B hereto by a Person that acquires or will acquire (otherwise than pursuant to a lease) a portion of the assets of the Company which person will have Consolidated Net Worth (immediately after the acquisition) and Consolidated Net Income (for such Person's four full fiscal quarters immediately preceding the acquisition) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the acquisition and the Consolidated Net Income of the Company (for its four full fiscal quarters immediately preceding such acquisition), respectively, and which is organized and existing under the laws of the United States, any state thereof or the District of Columbia; provided, however, that the Company shall not make any liquidating distribution until after the Company shall have certified to the Trustee with an Officers' Certificate at least five days prior to the making of any liquidating distribution that it has complied with the provisions of this Section 4.21 and that no Default or Event of Default then exists or would occur as a result of any such liquidating distribution. SECTION 4.22. MAINTENANCE OF COLLATERAL The Company shall maintain the Collateral in a manner consistent with its maintenance policies with respect to all of the hotels owned by it (including its policies with respect to making requisite capital expenditures for the maintenance of such hotels). SECTION 4.23. CONVERTIBLE NOTE INDENTURE Without the consent of at least 75% in principal amount of the Notes outstanding, the Company shall not amend, modify or alter the indenture (the "Convertible Note Indenture") governing its 7% Convertible Subordinated Notes due 2002 (the "Convertible Notes") in any way that will (i) increase the rate of or change the time for payment of interest on any Convertible Notes, (ii) increase the principal of, advance the final maturity date of or shorten the Weighted Average Life to Maturity of any Convertible Notes, (iii) alter the redemption provisions or the price or terms at which the Company is required to offer to purchase such Convertible Notes or (iv) amend the provisions of Article Twelve of the Convertible Note Indenture (which relate to subordination). 39 46 ARTICLE 5 SUCCESSORS SECTION 5.01. WHEN THE COMPANY MAY MERGE, ETC. The Company shall not consolidate or merge with or into or wind up into (whether or not the Company as the case may be, is the surviving entity), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to, another corporation, Person or entity unless: (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made assumes all the obligations of the Company under the Notes, this Indenture and the Collateral Documents pursuant to a supplemental indenture in the form of Exhibit B hereto; (iii) at the time of such transaction and immediately after such transaction after giving pro forma effect thereto, no Default or Event of Default exists or would exist; (iv) the Company or any Person formed by or surviving such consolidation or merger, or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (A) shall have Consolidated Net Worth (immediately after the transaction) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (B) shall, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (v) the Company shall have delivered to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate and an Opinion of Counsel to the combined effect that such sale, assignment, transfer, lease, conveyance or other disposition, and, if applicable, any supplemental indenture executed in connection therewith, comply with this Indenture. The Trustee shall be entitled to conclusively rely upon such Officers' Certificate and Opinion of Counsel. SECTION 5.02. SUCCESSOR SUBSTITUTED. Upon any consolidation, merger, lease, conveyance or transfer of all or substantially all of the assets of the Company, as the case may be, in accordance with Section 5.01 hereof, the successor formed by such consolidation or into which the Company is merged or to which such sale, lease, conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture, the Notes and the Collateral Documents with the same effect as if such successor had been named as the Company herein or therein and thereafter the predecessor corporation shall be relieved of all further obligations and covenants under this Indenture, the Notes and the Collateral Documents. 40 47 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Indenture: (1) default for 30 days in the payment when due of interest on the Notes; (2) default in payment when due of principal of or premium, if any, on the Notes; (3) failure by the Company or any Restricted Subsidiaries of the Company to comply with Sections 3.09, 4.07, 4.09, 4.10, 4.14 or 5.01 hereof; (4) failure by the Company or any Guarantor for 60 days in the performance of any other covenant, warranty or agreement in this Indenture or the Notes after written notice shall have been given to the Company by the Trustee or to the Company and the Trustee from Holders of at least 25% in principal amount of the Notes then outstanding; (5) default under (a) Non-Recourse Indebtedness of the Company or any of its Restricted Subsidiaries with an aggregate principal amount in excess of 10% of the aggregate assets of the Company and its Restricted Subsidiaries measured as of the end of the Company's most recent fiscal quarter for which internal financial statements are available immediately preceding the date on which such default occurred, determined on a pro forma basis, or (b) any other mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the Issuance Date and, in each case, the principal amount of which, together with the principal amount of any other such Indebtedness under which there has been a Payment Default (as defined below) or the maturity of which has been so accelerated, aggregates $10.0 million or more, which default, in either case, (x) is caused by a failure to pay when due principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (y) results in the acceleration of such Indebtedness prior to its express maturity or shall constitute a default in the payment of such issue of Indebtedness at final maturity of such issue; (6) failure by the Company or any of its Restricted Subsidiaries to pay final judgments rendered against them (other than judgment liens without recourse to any assets or property of the Company or any of its Restricted Subsidiaries other than assets or property securing Non-Recourse Indebtedness) aggregating in excess of $10.0 million, which judgments are not paid, discharged or stayed for a period of 90 days (other than any judgments as to which a reputable insurance company has accepted full liability); (7) breach by the Company of any material representation or warranty set forth in any of the Collateral Documents, or default by the Company for 30 days in the performance of any covenant set forth in the Collateral Documents after written notice shall have been given to the Company by the Trustee or to the Company and the Trustee from Holders of at least 25% in principal amount of the Notes then outstanding, or the repudiation by the Company of its obligations under, or the 41 48 unenforceability of any of the Collateral Documents for any reason that would materially impair the benefits to the Trustee or the Holders of the Notes thereunder; (8) except as permitted by this Indenture, any Subsidiary Guarantee with respect to the Notes shall be held in a judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor (or its successors or assigns), or any Person acting on behalf of such Guarantor (or its successors or assigns), shall deny or disaffirm its obligations or shall fail to comply with any obligations under its Subsidiary Guarantee; (9) the Company, any Guarantor or any of the Company's Subsidiaries that would constitute a Significant Subsidiary or any group of the Company's Subsidiaries that, taken together, would constitute a Significant Subsidiary pursuant to or within the meaning of the Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, (d) makes a general assignment for the benefit of its creditors, or (e) admits in writing its inability to pay its debts as they become due; and (10) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief in an involuntary case against the Company, any Guarantor or any Subsidiary that is a Significant Subsidiary of the Company or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary of the Company, (b) appoints a Custodian of the Company, any Guarantor or any Subsidiary that is a Significant Subsidiary of the Company or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary of the Company, or for all or substantially all of the property of the Company, any Guarantor or any Subsidiary that is a Significant Subsidiary of the Company, or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary of the Company, or (c) orders the liquidation of the Company, any Guarantor or any Subsidiary that is a Significant Subsidiary of the Company or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary of the Company, and the order or decree remains unstayed and in effect for 60 consecutive days. The term "Bankruptcy Law" means, title 11, U.S. Code or any similar federal or state law for the relief of debtors, each as amended from time to time. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium 42 49 that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to Section 3.07 hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to January 15, 2001, by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to January 15, 2001, then the premium specified below (expressed as a percentage of the principal amount that would otherwise be due) shall also become immediately due and payable to the extent permitted by law upon acceleration of the Notes:
Year Percentage 1996.............................................. 112.335% 1997.............................................. 110.793% 1998.............................................. 109.251% 1999.............................................. 107.709% 2000.............................................. 106.167%
SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clauses (9) and (10) of Section 6.01 hereof) occurs and is continuing, the Trustee by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the then outstanding Notes by written notice to the Company and the Trustee, may declare all Notes to be due and payable immediately. Upon the effectiveness of such declaration, all amounts due and payable on the Notes, as determined in the succeeding paragraphs, shall be due and payable effective immediately. If an Event of Default specified in clause (9) or (10) of Section 6.01 hereof occurs, all outstanding Notes shall ipso facto become and be immediately due and payable immediately without further action or notice within part of or by the Trustee or any Holder. In the event that the maturity of the Notes is accelerated pursuant to this Section 6.02, 100% of the principal amount thereof shall become due and payable plus premium, if any, accrued and unpaid interest, if any, to the date of payment. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of, premium, if any, or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture and, in addition, may pursue any remedy available under any of the Collateral Documents or otherwise available under applicable law with respect to any of the Collateral. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 43 50 SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Section 9.02 hereof, Holders of a majority in aggregate principal amount of the then outstanding Notes by notice to the Trustee may waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal of, premium, if any, or interest on any Note held by a non-consenting Holder. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture and the Collateral Documents but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in aggregate principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, or that the Trustee determines may be unduly prejudicial to the rights of other Holders or that may involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. SECTION 6.06. LIMITATION ON SUITS. A Holder may pursue a remedy with respect to this Indenture or the Notes only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default or the Trustee receives such notice from the Company; (2) the Holders of at least 25% in aggregate principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (5) during such 60-day period the Holders of a majority in aggregate principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, and interest on the Note, on or after the respective due dates expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. 44 51 SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company or any Guarantor for the whole amount of principal, premium, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any other amounts due the Trustee under Section 7.07 hereof) and the Holders allowed in any judicial proceedings relative to the Company or any Guarantor (or any other obligor upon the Notes), their creditors or their property and shall be entitled and empowered to collect, receive and distribute any money or securities or other property payable or deliverable on any such claims and to distribute the same, and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders of the Notes may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects or receives any money or securities or other property pursuant to this Article, it shall pay out the money or securities or other property in the following order: First: to the Trustee, its agents and counsel for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders for amounts due and unpaid on the Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind (including defaulted interest), according to the amounts due and payable on the Notes for principal, premium, if any, and interest, respectively; Third: without duplication, to Holders for any other obligations owing to the Holders under the Notes, this Indenture or the Collateral Documents; and 45 52 Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any such payment to Holders. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in aggregate principal amount of the then outstanding Notes. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (1) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and the Collateral Documents, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (2) Except during the continuance of an Event of Default: (a) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Collateral Documents and the Trustee need perform only those duties that are specifically set forth in this Indenture and the Collateral Documents and no others, and no implied covenants or obligations shall be read into this Indenture or the Collateral Documents against the Trustee; and (b) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture or the Collateral Documents. (3) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) this paragraph does not limit the effect of paragraph (2) of this Section; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and 46 53 (c) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (4) Whether or not therein expressly so provided, every provision of this Indenture and the Collateral Documents that in any way relates to the Trustee is subject to paragraphs (1), (2) and (3) of this Section. (5) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (6) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. Subject to TIA Section 315: (1) The Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (2) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (3) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed and monitored with due care. (4) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by the Indenture. (5) Unless otherwise specifically provided in the Indenture or the Collateral Documents, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (6) Without limiting the provisions of Section 7.01(5), the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of the Holders of a majority in aggregate principal amount of the then outstanding Notes pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. (7) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. 47 54 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company, any Subsidiary of the Company or any Affiliate of the foregoing with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Notes or the Collateral Documents, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision hereof, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known by a Trust Officer of the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal or interest on any Note, the Trustee may withhold the notice if and so long as a Trust Officer in good faith determines that withholding the notice is in the interests of Holders. The Trustee shall comply with TIA Section 315(b). SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May 15 beginning with the May 15, 1996 following the date hereof, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to Holders shall be submitted to the SEC and each stock exchange, if any, on which the Notes are listed. The Company shall promptly notify the Trustee when the Notes are listed on or delisted by any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company agrees to pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company agrees to reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services, including disbursements, advances and expenses made or incurred pursuant to the Collateral Documents. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. 48 55 The Company agrees to indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth in the next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder except to the extent the Company has been prejudiced thereby. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and, if the Company or the Trustee shall have been advised by its respective counsel that representation of the Trustee and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed), the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The provisions of this paragraph shall survive the satisfaction and discharge of this Indenture. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own gross negligence or willful misconduct. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture and the Collateral Documents. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Lien securing the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of the Indenture and the Collateral Documents. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(9) or (10) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign at any time by so notifying the Company in writing at least 30 days prior to the date of the proposed resignation. The Holders of a majority in aggregate principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee at its discretion or if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian or public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. 49 56 If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in aggregate principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. Subject to the provision of TIA Section 315(e), if the Trustee after written request by any Holder who has been a bona fide holder of a Note or Notes for at least six months fails to comply with Section 7.10, such Holder, on behalf of himself and others similarly situated, may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture and the Collateral Documents. The successor Trustee shall mail a notice of its succession to the Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company' obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America or of any state thereof authorized under such laws to exercise corporate trustee powers, shall be subject to supervision or examination by Federal or state authority and shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a). The Trustee is subject to TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. 50 57 ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01. DEFEASANCE AND DISCHARGE OF THIS INDENTURE AND THE NOTES. (a) The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, with respect to the Notes, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. (b) If the Company and all of the Guarantors, if any, elect to have either Section 8.02 or 8.03 hereof applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8, then upon request of the Company and all of the Guarantors, if any, and after the effective time of such Legal Defeasance or Covenant Defeasance, the Trustee shall release all Collateral subject to a Lien held by the Trustee pursuant to the Collateral Documents other than the defeasance trust (as defined in Section 8.04 hereof). SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and the Guarantors, if any, shall be deemed to have been discharged from their obligations with respect to all outstanding Notes and Subsidiary Guarantees thereof, if any, on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in clauses (i) and (ii) of this Section 8.02, and to have satisfied all its other obligations under such Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due solely from amounts deposited with the Trustee as provided in Section 8.04 hereof, (ii) the Company's and the Guarantors' obligations with respect to the Notes under Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.11 and 4.02 hereof, (iii) the rights, powers, trusts, duties, indemnities and immunities of the Trustee and the Company's obligations in connection therewith and (iv) this Article 8. SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company and the Guarantors, if any, shall be released from their obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.16, 4.18, 4.22, 4.23 5.01, 11.02 and the Collateral Documents (other than with respect to any indemnification obligations contained in the Environmental Indemnity Agreement) with respect to the outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, such Covenant Defeasance means that, with respect to the outstanding Notes, the Company and the Guarantors may omit 51 58 to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01(3) hereof but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, any event described in Sections 6.01(4) through 6.01(10) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 8.02 or Section 8.03 hereof to the outstanding Notes: (i) the Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 hereof who shall agree to comply with the provisions of this Article 8 applicable to it), in trust (the "defeasance trust"), for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (a) cash in United States dollars in an amount, or (b) non-callable Government Securities which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, cash in United States dollars in an amount, or (c) a combination thereof, in such amounts, as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge the principal of, premium, if any, and interest (including defaulted interest) on the outstanding Notes and any other obligations owing to the Holders of the Notes, under the Notes, this Indenture or the Collateral Documents on the stated maturity or on the applicable redemption date, as the case may be, of such principal or installment of principal of, premium, if any, and interest on the outstanding Notes, provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such non-callable Government Securities to said payments with respect to the Notes; (ii) in the case of an election under Section 8.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States (which counsel may be an employee of the Company or any Subsidiary of the Company) reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issuance Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same time, as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of an election under Section 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States (which counsel may be an employee of the Company or any Subsidiary of the Company) reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the 52 59 same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds applied to such deposit) or, insofar as Section 6.01(9) or 6.01(10) hereof is concerned, at any time in the period ending on the 91st day after the date of such deposit (or greater period of time in which any such deposit of trust funds may remain subject to bankruptcy or insolvency laws insofar as those apply to the deposit by the Company) (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) in the case of an election under either Section 8.02 or 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, assuming no intervening bankruptcy of the Company between the date of deposit and the 91st day following the deposit and assuming no Holder of the Notes is an insider of the Company, after the 91st day following the deposit, as of the date of such opinion, the trust funds will not be subject to avoidance under Section 547 of the United States Bankruptcy Code (or any successor provision thereto) and related judicial decisions or any other applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally under any United States or state law; (vii) in the case of an election under either Section 8.02 or 8.03 hereof, the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election under Section 8.02 or 8.03 hereof was not made by the Company with the intent of preferring the Holders of Notes over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in the United States (which counsel may be an employee of the Company or any Subsidiary of the Company), each stating that all conditions precedent provided for relating to either the Legal Defeasance under Section 8.02 hereof or the Covenant Defeasance under Section 8.03 hereof (as the case may be) have been complied with as contemplated by this Section 8.04. SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. 53 60 The Company and the Guarantors, if any, shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the Company's request any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(i) hereof), are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO THE COMPANY. The Trustee shall promptly pay to the Company after request therefor any excess money held at such time in excess of amounts required to pay any of the Company's Obligations then owing with respect to the Notes. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for one year after such principal, premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in The New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 8.07 REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any cash or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company and the Guarantors, if any, under this Indenture, the Notes and the Subsidiary Guarantees, if any, shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company or any Guarantor makes any payment of principal of, premium, if any, or interest on any Note following the reinstatement of its obligations, the Company or such Guarantor shall be subrogated to the rights of the Holders of such Note to receive such payment from the money held by the Trustee or Paying Agent. 54 61 ARTICLE 9 AMENDMENTS SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company, any Guarantor and the Trustee, as applicable, may amend or supplement this Indenture, the Notes, and Subsidiary Guarantee and the Collateral Documents without the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; (2) to comply with Section 5.01; (3) to provide for uncertificated Notes in addition to or in place of certificated Notes; (4) to provide for the assumption of the Company's obligations to Holders of the Notes under this Indenture or any Guarantor's obligations under its Subsidiary Guarantee in the case of a merger, consolidation or sale of assets involving the Company or such Guarantor, as applicable, pursuant to Article 5 or Article 11 hereof; (5) to make any change that would provide any additional rights or benefits to the Holders of the Notes (including providing for Subsidiary Guarantees and any supplemental indenture required pursuant to Section 4.15 hereof) or that does not adversely affect the legal rights under the Indenture of any such Holder; (6) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; and (7) to enter into additional or supplemental Collateral Documents or to amend any Collateral Documents to evidence a Lien on any additional Collateral securing the Notes, including the Additional Notes, if any. Upon the request of the Company and any Restricted Subsidiary, in its capacity as a Guarantor, accompanied by a resolution of the Board of Directors of the Company or such Restricted Subsidiary, as applicable, authorizing the execution of any such supplemental indenture or supplemental Collateral Document, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company and any such Restricted Subsidiary in the execution of any supplemental indenture or supplemental Collateral Document authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into such supplemental indenture or supplemental Collateral Document which adversely affects its own rights, duties or immunities under this Indenture, the Collateral Documents or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS. Except as provided below in this Section 9.02, the Company, any Guarantor and the Trustee together may amend this Indenture, the Notes, any Subsidiary Guarantee or the Collateral Documents with the written consent of the Holders of at least a majority in aggregate principal amount of the then 55 62 outstanding Notes (including consents obtained in connection with a purchase of or a tender offer or exchange offer for Notes). Upon the request of the Company, accompanied by a resolution of the Board of Directors of the Company, authorizing the execution of any such supplemental indenture or supplemental Collateral Document, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company and any Guarantor, as the case may be, in the execution of such supplemental indenture or supplemental Collateral Document unless such supplemental indenture or supplemental Collateral Document adversely affects the Trustee's own rights, duties or immunities under this Indenture, the Collateral Documents or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture or supplemental Collateral Document. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of each Note affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding (including consents obtained in connection with a purchase of or a tender offer or exchange offer for Notes) may waive any existing default or compliance in a particular instance by the Company or any Guarantor with any provision of this Indenture, the Notes or the Collateral Documents. However, without the consent of each Holder affected, an amendment or waiver under this Section may not (with respect to any Notes held by a non-consenting Holder): (1) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any Note or waive any of the provisions with respect to the redemption of the Notes; (3) reduce the rate of or change the time for payment of interest on any Note; (4) waive a Default or an Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the then outstanding Notes and a waiver of the payment default that resulted from such acceleration); (5) make any Note payable in money other than that stated in the Note; (6) make any change in the provisions of this Indenture or the Collateral Documents relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or interest on the Notes; 56 63 (7) release all or substantially all of the Collateral from the Lien of the Indenture or the Collateral Documents; (8) waive a redemption payment with respect to any Note; (9) make any change in Section 6.04 or 6.07 hereof; (10) except pursuant to Article 8 or pursuant to Section 11.04, release any Guarantor from its obligations under a Subsidiary Guarantee, or change any Subsidiary Guarantee in any manner that would adversely affect the Holders in any material respect; or (11) make any change in the foregoing amendment and waiver provisions. In addition, without the consent of at least 662/3% in principal amount of the Notes then outstanding, an amendment or waiver may not make any change to, or be effective with respect to, Section 4.14 hereof. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to this Indenture or the Notes shall be set forth in an amendment or supplemental indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his or her Note if the Trustee receives written notice of revocation before the date the waiver or amendment becomes effective. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Holder. The Company may fix a record date for determining which Holders must consent to such amendment or waiver. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee prior to such solicitation pursuant to Section 2.06, or (ii) such other date as the Company shall designate. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment or waiver. 57 64 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment or supplemental indenture or supplemental Collateral Document authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing such amendment or supplemental indenture or supplemental Collateral Document, the Trustee shall be entitled to receive, and, subject to Section 7.01 hereof, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment or supplemental indenture or supplemental Collateral Document is authorized or permitted by this Indenture or the Collateral Documents, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. The Company may not sign an amendment or supplemental indenture or supplemental Collateral Document until the Board of Directors of the Company or any Restricted Subsidiary in its capacity as a Guarantor, as applicable, approves it. ARTICLE 10 COLLATERAL AND SECURITY SECTION 10.01. COLLATERAL AND SECURITY. The due and punctual payment of the principal of, premium, if any, and interest on the Notes when and as the same shall be due and payable, whether on an interest payment date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of, interest (to the extent permitted by law), if any, on the Notes and performance of all other Obligations of the Company to the Holders or the Trustee under this Indenture and the Notes, according to the terms hereunder or thereunder, shall be secured as provided in the Collateral Documents. Each Holder, by its acceptance of a Note, consents and agrees to the terms of the Collateral Documents (including, without limitation, the provisions providing for foreclosure and release of Collateral) as the same may be in effect or may be amended from time to time in accordance with the terms thereof and hereof and authorizes and directs the Trustee to enter into each of the Collateral Documents and to perform its respective obligations and exercise its respective rights thereunder in accordance therewith. The Company will do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Collateral Documents, to assure and confirm to the Trustee the security interest in the Collateral contemplated hereby and by the Collateral Documents, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein expressed. The Company shall take any and all actions reasonably required to cause the Collateral Documents to create and maintain, as security for the Obligations of the Company under this Indenture and the Notes, valid and enforceable, perfected (except as expressly provided therein and for such liens that can not be perfected by the filing of a mortgage or financing statement in an appropriate office) Liens in and on all the Collateral, in favor of the Trustee, superior to and prior to the rights of all third persons, and subject to no other Liens, other than as provided herein and therein. SECTION 10.02. RECORDING, TITLE INSURANCE, ETC. (a) The Company shall furnish to the Trustee promptly after the execution and delivery of this Indenture an Opinion of Counsel either (i) stating that in the opinion of such counsel, assuming the taking of certain actions with respect to the recording, registering and filing of this Indenture, financing statements or other instruments, the Lien intended to be created by the Collateral Documents will become 58 65 effective, and reciting the details of such action, or (ii) stating that, in the opinion of such counsel, no such action is necessary to make such Lien effective. (b) The Company shall furnish to the Trustee within 3 months after each anniversary of the date of this Indenture, an Opinion of Counsel, dated as of such date, stating either that (i) in the opinion of such counsel, all action has been taken with respect to the recording, registering, filing, re-recording, re-registering and refiling of this Indenture and all supplemental indentures, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain the Lien of the Collateral Documents and reciting the details of such action or (ii) in the opinion of such counsel, no such action is necessary to maintain such Lien. (c) The Company shall furnish to the Trustee promptly after the execution and delivery of this Indenture (or promptly after the imposition of a Lien on Substitute Collateral or Qualified Collateral which constitutes real property) the commitment of a title insurance company reasonably satisfactory to the Trustee agreeing to issue to the Trustee, for the benefit of the Holders, lenders policies of title insurance relating to the Collateral. SECTION 10.03. PROTECTION OF THE TRUST ESTATE. The Trustee shall have the power to enforce the obligations of the Company and the Restricted Subsidiaries under this Indenture or the Collateral Documents, to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral under any of the Collateral Documents and in the profits, rents, revenues and other income arising therefrom, including the power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair any Collateral or be prejudicial to the interests of the Holders or the Trustee, to the extent permitted thereunder. Upon receipt of notice that the Company is not in compliance with any of the requirements of the Deeds of Trust, with respect to maintenance of insurance, the Trustee may, but shall have no obligation to purchase, at the Company's expense, such insurance coverage necessary to comply with the appropriate section of the respective Collateral Documents. SECTION 10.04. RELEASE OF LIEN. (a) Collateral may be released from the Lien and security interest created by this Indenture and the Collateral Documents at any time or from time to time in accordance with the provisions of the Collateral Documents and as provided hereby. Concurrently with the payment in full of all of the Company's Obligations under the Notes, this Indenture and the Collateral Documents (other than with respect to any indemnification obligations), the Collateral shall be released from the Lien and security interest created by this Indenture (b) Upon the request of the Company pursuant to an Officers' Certificate certifying that all conditions precedent hereunder have been met (and at the sole cost and expense of the Company) and upon the satisfaction of such conditions precedent hereunder, the Trustee, must release (upon presentment to it of documents in execution forms adequate to effect the requested release) (i) Collateral which is sold, disposed of, or is the subject of a Restricted Payment (other than any such sale, disposition or Restricted Payment to the Company or any Restricted Subsidiary) provided such transaction is or will be in accordance with all of the provisions of this Indenture including, without limitation, the requirement that the Net Proceeds from such Asset Sale are or will be applied in accordance with Section 4.10 hereof, to 59 66 the extent applicable, and that no Default or Event of Default has occurred or would be continuing immediately following such release, (ii) Collateral which may be released with the consent of the Holders pursuant to Article 9 hereof and (iii) all Collateral (except as provided in Article 8 hereof) upon discharge or defeasance of this Indenture in accordance with Article 8 hereof. Notwithstanding any provision in any Collateral Document to the contrary, the Trustee shall have no obligation or discretion to release any Collateral from the Lien created by this Indenture or any Collateral Document unless all conditions precedent under the Indenture, including those contained in this Section 10.04, have been met. (c) Upon receipt of such Officers' Certificate, the Trustee must execute, deliver or acknowledge any necessary or proper instruments of termination, satisfaction or release presented to it for execution to evidence the release of any Collateral permitted to be released pursuant to this Indenture or the Collateral Documents. (d) The release of any Collateral from the terms of this Indenture and the Collateral Documents will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms hereof. To the extent applicable, the Company and any other obligor shall cause TIA Section 314(d) relating to the release of property from the Lien arising out of the Collateral Documents to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an Officer of the Company; provided, however, that to the extent required by TIA Section 314(d), any such certificate or opinion shall be made by an independent engineer, appraiser or other expert (as such terms are set forth in TIA Section 314(d)), who is not an Affiliate of the Company or any Restricted Subsidiary of the Company. Whenever Collateral is to be released pursuant to this Section 10.04, the Trustee will execute any reasonable document or termination statement presented to it in execution form necessary to release the Lien of this Indenture and Collateral Documents. SECTION 10.05. COLLATERAL AGENT. The Trustee may, from time to time, appoint one or more Collateral Agents hereunder. Each of such Collateral Agents may be delegated any one or more of the duties or rights of the Trustee hereunder or under the Collateral Documents or which are specified in any Collateral Documents, including without limitation, the right to hold any Collateral in the name of, registered to, or in the physical possession of such Collateral Agent, for the ratable benefit of the Holders. Each such Collateral Agent shall have such rights and duties as may be specified in an agreement between the Trustee and such Collateral Agent. SECTION 10.06. AUTHORIZATION OF ACTIONS TO BE TAKEN BY THE TRUSTEE UNDER THE COLLATERAL DOCUMENTS. Each Holder, by acceptance of a Note, authorizes and directs the Trustee to enter into the Collateral Documents. The Trustee may, in its sole discretion and without the consent of the Holders, on behalf of the Holders, take all actions it deems necessary or appropriate in order to (a) enforce any of the terms of the Collateral Documents and (b) collect and receive any and all amounts payable in respect of the Obligations of the Company hereunder. The Trustee in its own name or through a Collateral Agent shall have power to institute and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Collateral Documents or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including 60 67 the power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee). SECTION 10.07. AUTHORIZATION OF RECEIPT OF FUNDS BY THE TRUSTEE UNDER THE COLLATERAL DOCUMENTS. The Trustee is authorized to receive in its own name or through any Collateral Agent any funds for the benefit of the Holders distributed under the Collateral Documents, and to make further distributions of such funds to the Holders according to the provisions of this Indenture. ARTICLE 11 SUBSIDIARY GUARANTEES SECTION 11.01. SUBSIDIARY GUARANTEES. The Company's Obligations under the Notes, this Indenture and the Collateral Documents will be jointly and severally guaranteed by any Restricted Subsidiary (a "Guarantor") which is required to execute and deliver a supplemental indenture pursuant to Section 4.15 hereof (the "Subsidiary Guarantees"). Subject to the provisions of this Article 11, any such Guarantor will, jointly and severally, unconditionally guarantee to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes or the Obligations of the Company under this Indenture or the Notes, that: (i) the principal of, premium, if any, and interest on the Notes will be paid in full when due, whether at the maturity or interest payment or mandatory redemption date, by acceleration, call for redemption, offer to purchase or otherwise, and interest on the overdue principal of, premium, and interest, if any, on the Notes and all other Obligations of the Company to the Holders or the Trustee under this Indenture, the Collateral Documents, or the Notes will be promptly paid in full or performed, all in accordance with the terms of this Indenture, the Collateral Documents, and the Notes; (ii) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, they will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise; and (iii) any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under any Subsidiary Guarantee will be paid. Failing payment when due of any amount so guaranteed for whatever reason, any Guarantor will be obligated ( subject to any grace periods allowed pursuant to Section 6.01 hereof) to pay the same whether or not such failure to pay has become an Event of Default which could cause acceleration pursuant to Section 6.02 hereof. An Event of Default under this Indenture or the Notes shall constitute an event of default under any Subsidiary Guarantee, and shall entitle the Holders of Notes to accelerate the Obligations of any Guarantor hereunder in the same manner and to the same extent as the Obligations of the Company. Any Guarantor will agree that its Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of any Guarantor. Any Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of either or both of the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee will not be 61 68 discharged except by complete performance of its Obligations under the Notes and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, any Guarantor or any Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or any Guarantor any amount paid by any such entity to the Trustee or such Holder, any Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Any Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holder in respect of any Obligations guaranteed hereby until payment in full of all Obligations guaranteed hereby. Any Guarantor will agree that, as between it, on the one hand, and the Holders of Notes and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes hereof, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any acceleration of such Obligations as provided in Article 6 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purpose of such Subsidiary Guarantee. A Guarantor shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holder under its Subsidiary Guarantee. SECTION 11.02. WHEN A GUARANTOR MAY MERGE, ETC. No Guarantor shall consolidate or merge with or into (whether or not such Guarantor is the surviving person), another corporation, Person or entity whether or not affiliated with such Guarantor unless: (i) the person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the Obligations of such Guarantor pursuant to a supplemental indenture in the form of Exhibit B hereto and appropriate Collateral Documents in form and substance reasonably satisfactory to the Trustee, under the Notes, this Indenture and the Collateral Documents; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; and (iii) such Guarantor or any person formed by or surviving any such consolidation or merger, (A) will have Consolidated Net Worth (immediately after giving effect to such transaction) equal to or greater than the Consolidated Net Worth of such Guarantor immediately preceding the transaction and (B) would be permitted by virtue of the Company's Fixed Charge Coverage Ratio set forth in the first paragraph of Section 4.09 hereof to incur, immediately after giving effect to such transaction, at least $1.00 of additional Indebtedness. The Guarantor shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel, covering clauses (i) and (ii) (in the case of clause (ii), to such counsel's knowledge), stating that the proposed transaction and such supplemental indenture comply with this Indenture. The Trustee shall be entitled to conclusively rely upon such Officers' Certificate and Opinion of Counsel. Notwithstanding the foregoing, (A) a Guarantor may consolidate with or merge with or into the Company; provided, however, that the surviving corporation (if other than the Company) shall expressly assume by supplemental indenture complying with the requirements of this Indenture, the due and punctual payment of the principal of, premium, if any, and interest on all of the Notes, and the due and 62 69 punctual performance and observance of all the covenants and conditions of this Indenture and the Collateral Documents to be performed by the Company and (B) a Guarantor may consolidate with or merge with or into any other Guarantor. SECTION 11.03. LIMITATION OF GUARANTOR'S LIABILITY. For purposes of the this Article 11 and any Subsidiary Guarantee, each Guarantor's liability will be that amount from time to time equal to the aggregate liability of such Guarantor hereunder and thereunder, but shall be limited to the least of (i) the aggregate amount of the obligations of the Company under the Notes and this Indenture or (ii) the amount, if any, which would not have (A) rendered such Guarantor "insolvent" (as such term is defined in the federal Bankruptcy Code and in the Debtor and Creditor Law of the State of New York) or (B) left it with unreasonably small capital at the time its Subsidiary Guarantee was entered into, after giving effect to the incurrence of existing Indebtedness immediately prior to such time; provided that, it shall be a presumption in any lawsuit or other proceeding in which a Guarantor is a party that the amount guaranteed pursuant to the Subsidiary Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of such guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Guarantor is limited to the amount set forth in clause (ii). In making any determination as to the solvency or sufficiency of capital of a Guarantor in accordance with the previous sentence, the right of such Guarantor to contribution from other Guarantors and any other rights such Guarantor may have, contractual or otherwise, shall be taken into account. SECTION 11.04. RELEASE OF A GUARANTOR. Concurrently with the payment in full of all of the Company's Obligations under the Notes, this Indenture and the Collateral Documents (other than with respect to any indemnification obligations), each Guarantor shall be released from and relieved of its Obligations under this Article 11. In the event of a sale or other disposition of all of the assets of any Guarantor, which sale or other disposition is otherwise in compliance with the terms of this Indenture, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) will be automatically and unconditionally released and relieved of any obligations under its Subsidiary Guarantee. The Trustee shall deliver an appropriate instrument evidencing any such release under this Section 11.04 upon receipt of a request by the Company accompanied by an Officers' Certificate and an Opinion of Counsel certifying as to the compliance with this Section 11.04. The provisions of Section 11.02 shall not apply to any merger or consolidation pursuant to which a Guarantor is released from its Obligations under this 11.04. ARTICLE 12 MISCELLANEOUS SECTION 12.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of TIA Section 318(c), the imposed duties shall control. 63 70 SECTION 12.02. NOTICES. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in Person or mailed by first-class mail (registered or certified, return receipt requested), or sent by telex, telecopier or overnight air courier guaranteeing next Business Day delivery, to the other's address: If to the Company: Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, N.J. 07007-2700 Attention: Corporate Secretary Telecopier No.: (201) 882-8577 With a copy to: Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, N.Y. 10022 Attention: William N. Dye, Esq. Telecopier No.: (212) 821-8111 If to the Trustee: Norwest Bank Minnesota, National Association Sixth Street & Marquette Avenue Minneapolis, MN 55479-0069 Attention: Corporate Trust Telecopier No.: (612) 667-9825 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next Business Day delivery. Any notice or communication to a Holder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed or given in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. 64 71 If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 12.05) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been complied with. SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to Section 4.04 and TIA Section 314(a)(4)) shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificate of public officials. SECTION 12.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. 65 72 SECTION 12.07. LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, a Sunday, or a day on which banking institutions in The City of New York are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. SECTION 12.08. RECOURSE AGAINST OTHERS. No director, officer, partner, employee, agent, manager, stockholder, incorporator or other Affiliate, as such, of the Company or of a Guarantor, if any, shall have any liability for any obligations of the Company or any Guarantor under the Notes or the Indenture or a Subsidiary Guarantee, if any, or for any claim based upon, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Notwithstanding the foregoing, nothing in this provision shall be construed as a waiver or release of any claims under the federal securities laws. SECTION 12.09. DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. SECTION 12.10. GOVERNING LAW. The internal law of the State of New York shall govern and be used, without reference to its choice of law principles (other than Sec. 5-1401 of the General Obligation Law), to construe this Indenture, the Notes and any Subsidiary Guarantees. SECTION 12.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.12. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 12.13. SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 66 73 SECTION 12.14. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 12.15. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. [signature page follows] 67 74 IN WITNESS WHEREOF, the parties hereto have caused their names to be signed hereto by their respective duly authorized officers as of the date first written above. SIGNATURES PRIME HOSPITALITY CORP. By: ----------------------------- Its: ----------------------------- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee By: ----------------------------- Its: ----------------------------- 68 75 EXHIBIT A (Face of Note) 9 1/4% First Mortgage Note due 2006 No. $__________ PRIME HOSPITALITY CORP. promises to pay to _____________________________ or registered assigns, the principal sum of _____________________________ Dollars on January 15, 2006. Interest Payment Dates: January 15 and July 15. Record Dates: January 1 and July 1. Dated: PRIME HOSPITALITY CORP. By:______________________________ Name: Title: Trustee's Certificate of Authentication: This is one of the Notes referred to in the within- mentioned Indenture: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee By:__________________________________ A-1 76 (Back of Note) 9 1/4% First Mortgage Note due 2006 of Prime Hospitality Corp. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. Prime Hospitality Corp., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this 9 1/4% First Mortgage Note due 2006 (the "Note") at the rate and in the manner specified below. The Company shall pay interest on the principal amount of this Note in cash at the rate per annum shown above. The Company shall pay interest semi-annually on each January 15 and July 15, commencing July 15, 1996, or if any such day is not a Business Day (as defined in the Indenture referred to below), on the next succeeding Business Day (each an "Interest Payment Date"). Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months for the actual number of days elapsed. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of this Note. To the extent lawful, the Company shall pay interest on overdue principal and premium at the rate of 1% per annum in excess of the then applicable interest rate on this Note; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. 2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the January 1 and July 1 next preceding the Interest Payment Date, even if such Notes are cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.13 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest may be made by check mailed to the Holders at their addresses set forth in the register of Holders. Such payment shall be in such coin or currency of the United Sates of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, Norwest Bank Minnesota, National Association, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company, any Guarantor or any other of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture dated as of January 23, 1996 (the "Indenture") among the Company, as issuer, and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Notes. The Notes are secured by the Collateral pursuant to the Collateral Documents referred to in the Indenture. 5. OPTIONAL REDEMPTION. On or after January 15, 2001, the Company may redeem all or any portion of the Notes, at any time upon not less than 30 nor more than 60 days' notice, at the redemption A-2 77 prices (expressed as percentages of principal amount) set forth below (the "Redemption Percentages") plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
Year Percentage ---- ---------- 2001 ......................................................... 104.625% 2002 ......................................................... 103.083% 2003 ......................................................... 101.542% 2004 and thereafter........................................... 100.000%
Notwithstanding the foregoing, prior to January 15, 1999, the Company may redeem, on any one or more occasions, with the net cash proceeds of any public offering of its common equity (within 60 days of the consummation of any such public offering), up to $30.0 million in aggregate principal amount of the Notes at a redemption price equal to 109.25% of the principal amount of such Notes plus accrued and unpaid interest thereon, if any, to the redemption date; provided, however, that at least $100.0 million in aggregate principal amount of Notes (including Additional Notes, if any) must remain outstanding immediately following any such redemption. 6. OFFERS TO PURCHASE. Subject to the Company's obligation to make an offer to purchase Notes in connection with Asset Sales and a Change of Control (as described in the Indenture), the Company has no mandatory redemption or sinking fund obligations with respect to the Notes. Notice of any such offer to purchase will be given as provided in the Indenture. Holders of Notes that are the subject of an offer to purchase may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below and taking certain other actions, all as set forth in the Indenture. 7. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 8. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000 of principal amount. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Company shall not be required to exchange or register the Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 of the Indenture and ending at the close of business on the day of selection, or to exchange or register any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part, or to exchange or register a Note between a record date and the next succeeding Interest Payment Date. 9. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 10. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the Notes then outstanding. The Change of Control purchase feature of the Notes may not be amended or waived without the consent of at least 662/3% in principal amount of the Notes then outstanding. Without the consent of any Holder of a Note, the Indenture or the Notes may be amended or supplemented to cure A-3 78 any ambiguity, defect or inconsistency, to comply with Section 5.01, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of the Notes under the Indenture or any Guarantor's Obligations under its Subsidiary Guarantee in the case of a merger, consolidation or sale of assets involving the Company or such Guarantor, as applicable, pursuant to Article 5 or Article 11 of the Indenture, to make any change that would provide any additional rights or benefits to the Holders of the Notes (including providing for Subsidiary Guarantees and any supplemental indenture required pursuant to Section 4.15 of the Indenture) or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA and to enter into additional or supplemental Collateral Documents to evidence a Lien on any additional Collateral securing the Notes. 11. DEFAULTS AND REMEDIES. Events of Default include: (i) default for 30 days in the payment when due of interest on the Notes; (ii) default in payment when due of the principal of or premium, if any, on the Notes; (iii) failure by the Company or any Restricted Subsidiaries of the Company to comply with Sections 3.09, 4.07, 4.09, 4.10, 4.14 or 5.01 of the Indenture; (iv) failure by the Company or any Guarantor for 60 days in the performance of any other covenant, warranty or agreement in the Indenture or the Notes after written notice shall have been given to the Company by the Trustee or to the Company and the Trustee from Holders of at least 25% in principal amount of the Notes then outstanding; (v) default under (a) Non- Recourse Indebtedness of the Company or any of its Restricted Subsidiaries with an aggregate principal amount in excess of 10% of the aggregate assets of the Company and its Restricted Subsidiaries measured as of the end of the Company's most recent fiscal quarter for which internal financial statements are available immediately preceding the date on which such default occurred, determined on a pro forma basis, or (b) any other mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the Issuance Date and, in each case, the principal amount of which, together with the principal amount of any other such Indebtedness under which there has been a Payment Default (as defined below) or the maturity of which has been so accelerated, aggregates $10.0 million or more, which default, in either case, (x) is caused by a failure to pay when due principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (y) results in the acceleration of such Indebtedness prior to its express maturity or shall constitute a default in the payment of such issue of Indebtedness at final maturity of such issue; (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments rendered against them (other than judgment liens without recourse to any assets or property of the Company or any of its Restricted Subsidiaries other than assets or property securing Non- Recourse Indebtedness) aggregating in excess of $10.0 million, which judgments are not paid, discharged or stayed for a period of 90 days (other than any judgments as to which a reputable insurance company has accepted full liability); (vii) breach by the Company of any material representation or warranty set forth in any of the Collateral Documents, or default by the Company for 30 days in the performance of any covenant set forth in the Collateral Documents after written notice shall have been given to the Company by the Trustee or to the Company and the Trustee from Holders of at least 25% in principal amount of the Notes then outstanding, or the repudiation by the Company of its obligations under, or the unenforceability of any of the Collateral Documents for any reason that would materially impair the benefits to the Trustee or the Holders of the Notes thereunder; (viii) except as permitted by the Indenture, any Subsidiary Guarantee with respect to the Notes shall be held in a judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor (or its successors or assigns), or any Person acting on behalf of such Guarantor (or its successors or assigns), shall deny or disaffirm its Obligations or shall fail to comply with any Obligations under its Subsidiary Guarantee; and (ix) certain events of bankruptcy or insolvency with respect to the Company, any Guarantor or any of the Company's Subsidiaries that would constitute a Significant Subsidiary or any group of the Company's Subsidiaries that, taken together, would constitute a Significant Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising A-4 79 from certain events of bankruptcy or insolvency, with respect to the Company, any of its Subsidiaries that would constitute a Significant Subsidiary or any group of its Subsidiaries that, taken together, would constitute a Significant Subsidiary or any Guarantor, all outstanding Notes will become due and payable without further action or notice. Under certain circumstances, the Holders of a majority in principal amount of the outstanding Notes may rescind any acceleration with respect to the Notes and its consequences. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. The Company must furnish an annual compliance certificate to the Trustee. 12. SUBSIDIARY GUARANTEES. Payment of principal, premium, if any, and interest (including interest on overdue principal and overdue interest, if lawful) on the Notes will be unconditionally guaranteed by the Guarantors, if any, pursuant to, and subject to the terms of, Article 11 of the Indenture. 13. SECURITY. The Notes will be secured by the Collateral as provided by the Collateral Documents and the Indenture. From time to time the Collateral may be released in accordance with the terms of the Indenture and the Collateral Documents. 14. NO RECOURSE AGAINST OTHERS. No director, officer, employee, incorporator, shareholder or agent of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. 15. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07007 Attention: Corporate Secretary A-5 80 Assignment Form To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to - -------------------------------------------------------------------------------- (Insert assignee's Social Security or tax I.D. No.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint________________________________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: --------------------- Your Signature: ------------------------------------------------------- (Sign exactly as your name appears on the face of this Note) Signature Guarantee:* ------------------------------------------------- - ---------- * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-6 81 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, check the box below: / / Section 4.10 / / Section 4.14 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $ ----------- Date: Your Signature: (Sign exactly as your name appears on the Note) Tax Identification No.: ------------------------- Signature Guarantee:*/ -------------------------- - --------------- *Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A-7 82 EXHIBIT B FORM OF SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE This "Supplemental Indenture", dated as of _______________, between __________________ (the "Guarantor"), a subsidiary of Prime Hospitality Corp., a Delaware corporation (the "Company"), and Norwest Bank Minnesota, National Association, as trustee under the indenture referred to below (the "Trustee"). W I T N E S S E T H WHEREAS, the Company, a Delaware corporation, has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of January 23, 1996, providing for the issuance of up to an aggregate principal amount of $120,000,000 of 9 1/4% First Mortgage Notes due 2006 plus up to $80,000,000 of Additional Notes that may be issued from time to time pursuant to Section 2.02 thereof (the "Notes"); WHEREAS, Section 4.15 of the Indenture provides that under certain circumstances the Company is required to cause the Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which the Guarantor shall unconditionally guarantee all of the Company's Obligations under the Notes pursuant to a Subsidiary Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. AGREEMENT TO GUARANTEE. The Guarantor hereby agrees, jointly and severally with all other Guarantors, to guarantee the Company's obligations under the Notes on the terms and subject to the conditions set forth in Article 11 of the Indenture and to be bound by all other applicable provisions of the Indenture. 3. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, shareholder or agent of the Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Notes, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. 4. NEW YORK LAW TO GOVERN. The internal law of the State of New York shall govern and be used to construe this Supplemental Indenture. B-1 83 5. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: , ------------ --- ---- [Guarantor] By: --------------------------- Name: Title: Norwest Bank Minnesota, National Association, as Trustee By: --------------------------- Name: Title: B-2 84 EXHIBIT C FORM OF DEED OF TRUST EX-10.Y 4 EMPLOYMENT AGREEMENT, JOHN ELWOOD & THE COMPANY 1 Exhibit 10.Y JBWP51Docs-EAJE 5/15/95-D-1 JB:jm EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 15, 1995, between John M. Elwood ("Executive") and Prime Hospitality Corp., a Delaware corporation ("Employer"). In consideration of the premises and the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. EMPLOYMENT OF EXECUTIVE Employer hereby agrees to employ Executive, and Executive hereby agrees to be and remain in the employ of Employer, upon the terms and conditions hereinafter set forth. 2. EMPLOYMENT PERIOD Subject to earlier termination as provided in section 5, the term of Executive's employment under this Agreement (the "Employment Period") shall commence as of the date hereof and shall continue for a period of three (3) years. Either party may terminate this Agreement at the end of three (3) years or this Agreement may be renewed on a day to day basis pending the negotiation of a new agreement. 3. DUTIES AND RESPONSIBILITIES 3.1 GENERAL. During the Employment Period, Executive (i) shall have the titles of Executive Vice President and Chief Financial Officer of Employer and (ii) shall devote substantially all of his business time and expend his best efforts, energies and skills to the business of Employer. Executive shall perform such duties, consistent with his status as Executive Vice President and Chief Financial Officer of Employer, as he may be assigned from time to time by Employer's Chief Executive Officer. 4. COMPENSATION AND RELATED MATTERS 4.1 BASE SALARY. For each twelve-month period of the Employment Period, commencing with the twelve-month period beginning on the date of this Agreement (each such period, an "Employment Year"), Employer shall pay to Executive a base salary (the "Base Salary") equal to $280,000 for the first Employment Year and for each ensuing Employment Year, the greater of (x) $280,000 and (y) $280,000 multiplied by a fraction, (i) the numerator of which shall be the Consumer Price Index for Urban Wage Earners and Clerical Workers (1967 2 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm = 100) (the "Index"), published by the Bureau of Labor Statistics of the United States Department of Labor in the column for the New York- Northern New Jersey area entitled "All Items" for the month in which such ensuing Employment Year commences and (ii) the denominator of which shall be such Index number for the month of May, 1995. If publication of the Index is discontinued, the parties shall accept comparable statistics on the cost of living for the New York-Northern New Jersey area as computed and published by any recognized authority acceptable to the parties. the Base Salary for each Employment Year shall be payable in equal weekly installments. 4.2 ANNUAL BONUS. For each calendar year (the "Bonus Year"), at the discretion of the Board of Directors, Executive may receive a cash bonus ("Bonus") based upon attainment of annual performance objectives to be reasonably established by the Chief Executive Officer and approved by the Board of Directors for the Bonus Year in consultation with Executive, such performance objectives to be established as soon as possible following the beginning of the Bonus Year. The Bonus earned for the Bonus Year shall be payable promptly following the determination thereof, on the earlier of (i) fifteen (15) days after the members of the Board of Directors have received the audited financial statements for the Bonus Year, or (ii) the next meeting of the Board of Directors. The Bonus Year 1995 will be deemed to commence on January 1. To the extent specifically provided in Section 6 hereof, the Bonus payable for the Bonus Year in which the Employment Period terminates shall equal the Bonus that would have been paid had the Employment Period not so terminated, multiplied by a fraction, the numerator of which shall be the number of days of the Employment Period within the Bonus Year and the denominator of which shall be 365. 4.3 LIFE INSURANCE. Employer shall maintain in effect at all times during the Employment Period, at Employer's expense, a policy of term insurance on the life of Executive in the amount equal to $1,000,000 naming such person as Executive shall designate from time to time as the owner and beneficiary thereof. Executive agrees that Employer shall have the right to obtain other life insurance on Executive's life, at Employer's sole expense and with Employer or an affiliate thereof as the sole beneficiary thereof. Executive shall (i) cooperate fully with Employer in obtaining all such insurance, (ii) sign any necessary consents, applications and other related forms or documents, and (iii) take any required medical examinations. 4.4 AUTOMOBILE. Employer shall provide Executive with the use of a vehicle at Employer's expense. Executive will be entitled to continue to use that automobile for the term of this Agreement. Employer shall be responsible for all expenses of use, maintenance and operation of that vehicle, except if Executive's operation of the vehicle causes penalty insurance rates, in which case Executive will bear such costs. 4.5 OTHER BENEFITS. During the Employment Period, subject to, and to the extent Executive is eligible under their respective terms, Executive shall be entitled to receive such -2- 3 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm fringe benefits as are, or are from time to time hereafter generally provided by Employer to Employer's senior management employees or other employees (other than those provided under or pursuant to separately negotiated individual employment agreements or arrangements) under any pension or retirement plan, disability plan or insurance, group life insurance, medical and dental insurance, travel accident insurance, phantom stock or other similar plan or program of Employer. Executive's Base Salary shall (where applicable) constitute the compensation on the basis of which the amount of Executive's benefits under any such plan or program shall be fixed and determined. 4.6 EXPENSE REIMBURSEMENT. Employer shall reimburse Executive for all business expenses reasonably incurred by him in the performance of his duties under this Agreement upon his presentation of signed, itemized accounts of such expenditures, all in accordance with Employer's procedures and policies as adopted and in effect from time to time and applicable to its senior management employees. 4.7 VACATIONS. Executive shall be entitled to 20 days vacation for each calendar year during the Employment Period with reasonable one year carry-over allowances, which vacations shall be taken at such time or times as shall not unreasonably interfere with Executive's performance of his duties under this Agreement. 4.8 STOCK OPTIONS. On the date hereof and on the first and second anniversary dates of this Agreement (with respect to each such date the "Option Grant Date"), Employer shall grant to Executive an option to purchase 80,000 shares of Common Stock pursuant and subject to the provisions of Employer's 1995 Employee Stock Option Plan. With respect to each grant, the exercise price per share for the grant shall be equal to the share price of Employer's stock on the New York Stock Exchange as of the close of business on the Option Grant Date. Each grant shall vest and be exercisable in equal installments of one-third each (1/3) on the first, second and third anniversaries of the Option Grant Date with respect to such grant, subject, however, to Executive's continuing employment with Employer on the date of vesting. In the event of the termination of Executive for any reason (except for termination for cause), the Executive will have the right to all options which are provided for in this Agreement. 4.9 TAX GROSS-UP. To the extent that payments made by Employer to or on behalf of Executive pursuant to the provisions of Sections 4.3 and 4.4 hereof are subject to federal, state or local income taxes, Employer shall pay to Executive, not later than forty-five (45) days after the end of the calendar year for which such payments are includable in Executive's gross income, the amount of such additional taxes, calculated by assuming application of the highest applicable tax rates, plus such additional amount as shall be necessary to hold harmless Executive, as nearly as practicable, from the obligation to pay such taxes in respect of amounts payable pursuant to this Section 4.9. -3- 4 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm 5. TERMINATION OF EMPLOYMENT PERIOD 5.1 TERMINATION WITHOUT CAUSE. Employer may, by notice to Executive at any time during the Employment Period, terminate the Employment Period without cause. The effective date of termination from the Employer to the Executive shall be the date on which such notice is given. 5.2 BY EMPLOYER FOR CAUSE. Employer may, at any time during the Employment Period by notice to Executive (but only after compliance with the procedure hereinafter set forth in this Section 5.2 in the event of the cause specified in clause (ii) below), terminate the Employment Period "for cause" effective immediately. Such notice shall specify the conduct which is the basis for termination for cause in reasonable detail. For the purposes hereof, "for cause" means: (i) the conviction of Executive in a court of competent jurisdiction of a crime constituting a felony in such jurisdiction involving money or other property of the Company or any of its affiliates or any other felony (whether or not involving money or other property of the Company) involving moral turpitude; or (ii) the willful engaging in misconduct that is materially injurious to Employer, monetarily or otherwise. For the purposes hereof, no act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that such action or omission was in or not opposed to the best interests of Employer. Termination "for cause" pursuant to clause (ii) of the preceding sentence shall be effected only if (i) Employer has delivered to Executive a copy of a notice of termination that complies with the foregoing paragraph and that gives Executive, on at least ten business days' prior notice, the opportunity, together with Executive's counsel, to be heard before Employer's Board of Directors, and (ii) the Board of Directors (after such notice and opportunity to be heard), adopts a resolution that in the good faith opinion of the Board of Directors Executive was guilty of conduct set forth in clause (ii) of the preceding sentence, and specifying the particulars thereof in reasonable detail. 5.3 BY EXECUTIVE FOR GOOD REASON. Executive may, at any time during the Employment Period by notice to Employer, terminate the Employment Period under this Agreement "for good reason" effective immediately. For the purposes hereof, "good reason" means any material breach by Employer of any provision of this Agreement. Without limiting the generality of the foregoing, each of the following shall be deemed to be a material breach of -4- 5 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm this Agreement by Employer: (i) a failure by the Employer to comply with any provision of this Agreement which has not been cured within ten (10) days after notice of such noncompliance has been given by Executive to the Employer, (ii) the assignment to Executive by Employer of duties inconsistent with Executive's position, responsibilities or status with Employer as in effect on the date of this Agreement including, but not limited to, any reduction whatsoever in such position, duties, responsibilities or status, any change in Executive's titles, offices or perquisites, as then in effect, or any removal of Executive from, or any failure to re-elect Executive to, any of such positions (except for Executive's election to the Board of Directors), except in connection with the termination of his employment on account of his death, disability, or for cause, (iii) any failure to pay (or any reduction in) compensation (including benefits) paid or payable to Executive pursuant to the provisions of Section 4 hereof, or (iv) any purported termination of Executive's employment for cause which is not effected in accordance with the requirements of Section 5.2 hereof (and for purposes of this Agreement no such purported termination shall be effective). 5.4 DISABILITY. During the Employment Period, if, as a result of physical or mental incapacity or infirmity, Executive shall be unable to perform his duties under this Agreement for (i) a continuous period of at least 180 days, or (ii) periods aggregating at least 270 days during any period of 12 consecutive months (each a "Disability Period"), and at the end of the Disability Period there is no reasonable probability that Executive can promptly resume his duties hereunder, Executive shall be deemed disabled (the "Disability") and Employer, by notice to Executive, shall have the right to terminate the Employment Period for Disability at, as of or after the end of the Disability Period. The existence of the Disability shall be determined by a reputable, licensed physician mutually selected by Employer and Executive, whose determination shall be final and binding on the parties. Executive shall cooperate in all reasonable respects to enable an examination to be made by such physician. Notwithstanding the foregoing, Employer may conclusively determine Executive to be disabled at any time after the end of the Disability Period if Executive has then commenced receiving benefits under the long-term disability insurance policy obtained pursuant to Section 4.5 hereof. 5.5 DEATH. The Employment Period shall end on the date of Executive's death. 6. TERMINATION COMPENSATION 6.1 TERMINATION WITHOUT CAUSE BY EMPLOYER OR FOR GOOD REASON BY EXECUTIVE. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.1 hereof or by Executive pursuant to the provisions of Section 5.3 hereof, Employer will pay to Executive (i) within thirty (30) days following the date of termination an amount equal to the greater of the (a) Base Salary for the balance of the Employment Period (assuming no termination) and (b) one year's Base Salary (calculated in each case at the Base Salary rate then in effect); and (ii) on the date due pursuant to the provisions of Section 4.2 hereof, the bonus for -5- 6 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm the then current Bonus Year, without proration. All other benefits provided for in Sections 4.3, 4.4, 4.5 and Section 4.9 shall be continued at the expense of Employer for the longer of the balance of the unexpired of the Employment Period (assuming no termination) and twelve months from the date of termination. 6.2 CERTAIN OTHER TERMINATIONS. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.2, or by death, pursuant to the provisions of Section 5.5, Employer shall pay to Executive, within thirty (30) days of the date of termination, Executive's Base Salary through the date of termination. Provided the date of termination is after the end of a calendar year for which a Bonus is payable, but prior to the date of payment, Employer shall also pay to Executive, when due pursuant to provisions of Section 4.2 hereof, the Bonus for the Bonus Year in which the date of termination occurred. Employer shall have no obligation to continue any other benefits provided for in Section 4 past the date of termination. 6.3 TERMINATION FOR DISABILITY. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.4, Employer shall make all payments and continue all benefits for the period specified in Section 6.1; provided, however, that such payment shall be reduced by any amounts actually paid to Executive pursuant to any disability insurance or other such similar program maintained by Employer, including amounts paid pursuant to any long-term disability policy purchased pursuant to Section 4.5 hereof. 6.4 NO OTHER TERMINATION COMPENSATION. Executive shall not, except as set forth in this Section 6, be entitled to any compensation following termination of the Employment Period. 6.5 MITIGATION. Executive shall not be required to mitigate the amount of any payments or benefits provided for hereunder upon termination of the Employment Period by seeking employment with any other person, or otherwise, nor shall the amount of any such payments or benefits be reduced by any compensation, benefit or other amount earned by, accrued for or paid to Executive as the result of Executive's employment by or consultancy or other association with any other person or entity, provided, that any medical, dental or hospitalization insurance or benefits provided to Executive in connection with his employment by or consultancy with any person or entity unaffiliated with the Employer during such period shall be primary to the benefits to be provided to Executive pursuant to this Agreement for the purposes of coordination of benefits. Notwithstanding the foregoing, if Executive elects to be covered by the insurance or benefits provided by an entity or person unaffiliated with the Employer, Executive agrees that Employer may terminate any insurance or benefits provided to the Executive. 7. INDEMNIFICATION Employer shall indemnify and hold Executive harmless from and against any expenses -6- 7 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm (including reasonable attorneys' fees of the attorneys selected by Executive to represent him, which shall be advanced as incurred), judgments, fines and amounts paid in settlement incurred by him by reason of his being made a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of any act or omission to act by Executive during or before the Employment Period or otherwise by reason of the fact that he is or was an employee, director or officer of Employer, or of Prime Motor Inns, Inc., or of any subsidiary or affiliate included as a part of the Company, or of Prime Motor Inns, Inc., to the fullest extent and in the manner set forth and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time in effect. If any action, suit or proceeding is brought or threatened against Executive in respect of which indemnity may be sought against Employer, its subsidiaries, affiliates or predecessors pursuant to the foregoing, Executive shall notify Employer in writing of the institution of such action, suit or proceeding. In any such action, suit or proceeding Executive shall have the right to designate separate counsel acceptable to Executive in his sole discretion. 8. CONFIDENTIALITY Unless otherwise required by law or judicial process, Executive shall retain in confidence after termination of Executive's employment with Employer pursuant to this Agreement all confidential information known to the Executive concerning the Company and its businesses for the shorter of one (1) year following such termination or until such information is publicly disclosed by the Company or otherwise becomes publicly disclosed other than through Executive's actions. 9. SUCCESSORS; BINDING AGREEMENT (a) This Agreement shall be binding upon and inure to the benefit of Employer and any successor of Employer, including, without limitation, any corporation or corporations acquiring directly or indirectly all or a substantial portion of the stock, business or assets of Employer, whether by merger, restructuring, reorganization, consolidation, division, sale or otherwise (and such successor shall thereafter be deemed "the Employer" for the purposes of this Agreement). (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other beneficiary or, if there be no such beneficiary, to Executive's estate. -7- 8 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm 10. SURVIVORSHIP The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 11. MISCELLANEOUS 11.1 NOTICES. Any notice, consent or authorization required or permitted to be given pursuant to this Agreement shall be in writing and sent to the party for or to whom intended, at the address of such party set forth below, by registered or certified mail, postage paid (deemed given five days after deposit in the U.S. mails) or personally or by facsimile transmission (deemed given upon receipt), or at such other address as either party shall designate by notice given to the other in the manner provided herein. If to Employer: Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, NJ 07007-2700 Attn.: Secretary If to Executive: Mr. John M. Elwood Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, NJ 07007-2700 11.2 LEGAL FEES. Employer shall promptly reimburse the Executive for the reasonable legal fees and expenses incurred by Executive in connection with enforcement of Executive's rights hereunder, provided that Executive shall not be reimbursed for legal fees and expenses in the event Executive has not acted in good faith. 11.3 TAXES. Employer is authorized to withhold (from any compensation or benefits payable hereunder to Executive) such amounts for income tax, social security, unemployment compensation and other taxes as shall be necessary or appropriate in the reasonable judgment of Employer to comply with applicable laws and regulations. 11.4 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed therein. -8- 9 JBWP51Docs-EAJE 5/15/95-D-1 JB:jm 11.5 ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Fairfield, New Jersey in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitration award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until expiration of the Employment Period during the pendency of any arbitration. 11.6 HEADINGS. All descriptive headings in this Agreement are inserted for convenience only and shall be disregarded in construing or applying any provision of this Agreement. 11.7 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 11.8 SEVERABILITY. If any provision of this Agreement, or any part thereof, is held to be unenforceable, the remainder of such provision and this Agreement, as the case may be, shall nevertheless remain in full force and effect. 11.9 ENTIRE AGREEMENT AND REPRESENTATION. This Agreement contains the entire agreement and understanding between Employer and Executive with respect to the subject matter hereof. No representations or warranties of any kind or nature relating to Employer or its several businesses, or relating to Employer's assets, liabilities, operations, future plans or prospects have been made by or on behalf of Employer to Executive. This Agreement supersedes any prior agreement between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PRIME HOSPITALITY CORP. BY: -------------------------- -------------------------- JOHN M. ELWOOD -9- EX-10.Z 5 EMPLOYMENT AGREEMENT, DAVID SIMON & THE COMPANY 1 Exhibit 10.Z JBWP51Docs-EADAS 5/15/95-D-1 JB:jm EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of August 1, 1995, between David A. Simon ("Executive") and Prime Hospitality Corp., a Delaware corporation ("Employer"). In consideration of the premises and the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. EMPLOYMENT OF EXECUTIVE Employer hereby agrees to employ Executive, and Executive hereby agrees to be and remain in the employ of Employer, upon the terms and conditions hereinafter set forth. 2. EMPLOYMENT PERIOD Subject to earlier termination as provided in section 5, the term of Executive's employment under this Agreement (the "Employment Period") shall commence as of the date hereof and shall continue for a period of three (3) years. Either party may terminate this Agreement at the end of three (3) years or this Agreement may be renewed on a day to day basis pending the negotiation of a new agreement. 3. DUTIES AND RESPONSIBILITIES 3.1 GENERAL. During the Employment Period, Executive (i) shall have the titles of President and Chief Executive Officer of Employer and (ii) shall devote substantially all of his business time and expend his best efforts, energies and skills to the business of Employer. Executive shall perform such duties, consistent with his status as President and Chief Executive Officer of Employer, as he may be assigned from time to time by Employer's Board of Directors. 4. COMPENSATION AND RELATED MATTERS 4.1 BASE SALARY. For each twelve-month period of the Employment Period, commencing with the twelve-month period beginning on the date of this Agreement (each such period, an "Employment Year"), Employer shall pay to Executive a base salary ("Base Salary") equal to $350,000 for the first Employment Year and for each ensuing Employment Year, the greater of (x) $350,000 and (y) $350,000 multiplied by a fraction, (i) the numerator of which shall be the Consumer Price Index for Urban Wage Earners and Clerical Workers (1967 = 100) (the "Index"), published by the Bureau of Labor Statistics of the United States Department of Labor in the column for the New York-Northern New Jersey area entitled "All Items" for the 2 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm month in which such ensuing Employment Year commences and (ii) the denominator of which shall be such Index number for the month of July, 1995. If publication of the Index is discontinued, the parties shall accept comparable statistics on the cost of living for the New York-Northern New Jersey area as computed and published by any recognized authority acceptable to the parties. The Base Salary for each Employment Year shall be payable in equal weekly installments. 4.2 ANNUAL BONUS. For each calendar year (the "Bonus Year"), at the discretion of the Board of Directors, Executive may receive a cash bonus ("Bonus") based upon attainment of annual performance objectives to be reasonably established by the Board of Directors for the Bonus Year in consultation with Executive, such performance objectives to be established as soon as possible following the beginning of the Bonus Year. Bonus earned for the Bonus Year shall be payable promptly following the determination thereof, on the earlier of (i) fifteen (15) days after the members of the Board of Directors have received the audited financial statements for the Bonus Year, or (ii) the next meeting of the Board of Directors. The Bonus Year 1995 will be deemed to commence on January 1. To the extent specifically provided in Section 6 hereof, the Bonus payable for the Bonus Year in which the Employment Period terminates shall equal the Bonus that would have been paid had the Employment Period not so terminated, multiplied by a fraction, the numerator of which shall be the number of days of the Employment Period within the Bonus Year and the denominator of which shall be 365. 4.3 LIFE INSURANCE. Employer shall maintain in effect at all times during the Employment Period, at Employer's expense, a policy of term insurance on the life of Executive in the amount equal to $1,000,000, naming such person as Executive shall designate from time to time as the owner and beneficiary thereof. Executive agrees that Employer shall have the right to obtain other life insurance on Executive's life, at Employer's sole expense and with Employer or an affiliate thereof as the sole beneficiary thereof. Executive shall (i) cooperate fully with Employer in obtaining all such insurance, (ii) sign any necessary consents, applications and other related forms or documents, and (iii) take any required medical examinations. 4.4 AUTOMOBILE. Employer shall provide Executive with the use of a vehicle at Employer's expense. Executive will be entitled to continue to use that automobile for the term of this Agreement. Employer shall be responsible for all expenses of use, maintenance and operation of that vehicle, except if Executive's operation of the vehicle causes penalty insurance rates, in which case Executive will bear such costs. 4.5 OTHER BENEFITS. During the Employment Period, subject to, and to the extent Executive is eligible under their respective terms, Executive shall be entitled to receive such fringe benefits as are, or are from time to time hereafter generally provided by Employer to Employer's senior management employees or other employees (other than those provided under or pursuant to separately negotiated individual employment agreements or arrangements) under -2- 3 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm any pension or retirement plan, disability plan or insurance, group life insurance, medical and dental insurance, travel accident insurance, phantom stock or other similar plan or program of Employer. Executive's Base Salary shall (where applicable) constitute the compensation on the basis of which the amount of Executive's benefits under any such plan or program shall be fixed and determined. 4.6 EXPENSE REIMBURSEMENT. Employer shall reimburse Executive for all business expenses reasonably incurred by him in the performance of his duties under this Agreement upon his presentation of signed, itemized accounts of such expenditures, all in accordance with Employer's procedures and policies as adopted and in effect from time to time and applicable to its senior management employees. 4.7 VACATIONS. Executive shall be entitled to 20 days vacation for each calendar year during the Employment Period with reasonable one year carry-over allowances, which vacations shall be taken at such time or times as shall not unreasonably interfere with Executive's performance of his duties under this Agreement. 4.8 STOCK OPTIONS. On the date hereof and on the first and second anniversary dates of this Agreement (with respect to each such date the "Option Grant Date"), Employer shall grant to Executive an option to purchase 100,000 shares of Common Stock pursuant and subject to the provisions of Employer's 1995 Employee Stock Option Plan. With respect to each grant, the exercise price per share for the grant shall be equal to the share price of Employer's stock on the New York Stock Exchange as of the close of business on the Option Grant Date. Each grant shall vest and be exercisable in equal installments of one-third each (1/3) on the first, second and third anniversaries of the Option Grant Date with respect to such grant, subject, however, to Executive's continuing employment with Employer on the date of vesting. In the event of the termination of Executive for any reason (except for termination for cause), the Executive will have the right to all options which are provided for in this Agreement. 4.9 TAX GROSS-UP. To the extent that payments made by Employer to or on behalf of Executive pursuant to the provisions of Sections 4.3 and 4.4 hereof are subject to federal, state or local income taxes, Employer shall pay to Executive, not later than forty -five (45) days after the end of the calendar year for which such payments are includable in Executive's gross income, the amount of such additional taxes, calculated by assuming application of the highest applicable tax rates, plus such additional amount as shall be necessary to hold harmless Executive, as nearly as practicable, from the obligation to pay such taxes in respect of amounts payable pursuant to this Section 4.9. 5. TERMINATION OF EMPLOYMENT PERIOD 5.1 TERMINATION WITHOUT CAUSE. Employer may, by notice to Executive at any time -3- 4 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm during the Employment Period, terminate the Employment Period without cause. The effective date of termination from the Employer to the Executive shall be the date on which such notice is given. 5.2 BY EMPLOYER FOR CAUSE. Employer may, at any time during the Employment Period by notice to Executive (but only after compliance with the procedure hereinafter set forth in this Section 5.2 in the event of the cause specified in clause (ii) below), terminate the Employment Period "for cause" effective immediately. Such notice shall specify the conduct which is the basis for termination for cause in reasonable detail. For the purposes hereof, "for cause" means: (i) the conviction of Executive in a court of competent jurisdiction of a crime constituting a felony in such jurisdiction involving money or other property of the Company or any of its affiliates or any other felony (whether or not involving money or other property of the Company) involving moral turpitude; or (ii) the willful engaging in misconduct that is materially injurious to Employer, monetarily or otherwise. For the purposes hereof, no act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that such action or omission was in or not opposed to the best interests of Employer. Termination "for cause" pursuant to clause (ii) of the preceding sentence shall be effected only if (i) Employer has delivered to Executive a copy of a notice of termination that complies with the foregoing paragraph and that gives Executive, on at least ten business days' prior notice, the opportunity, together with Executive's counsel, to be heard before Employer's Board of Directors, and (ii) the Board of Directors (after such notice and opportunity to be heard), adopts a resolution that in the good faith opinion of the Board of Directors Executive was guilty of conduct set forth in clause (ii) of the preceding sentence, and specifying the particulars thereof in reasonable detail. 5.3 BY EXECUTIVE FOR GOOD REASON. Executive may, at any time during the Employment Period by notice to Employer, terminate the Employment Period under this Agreement "for good reason" effective immediately. For the purposes hereof, "good reason" means any material breach by Employer of any provision of this Agreement. Without limiting the generality of the foregoing, each of the following shall be deemed to be a material breach of this Agreement by Employer: (i) a failure by the Employer to comply with any provision of this Agreement which has not been cured within ten (10) days after notice of such noncompliance has been given by Executive to the Employer, (ii) the assignment to Executive by Employer of duties -4- 5 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm inconsistent with Executive's position, responsibilities or status with Employer as in effect on the date of this Agreement including, but not limited to, any reduction whatsoever in such position, duties, responsibilities or status, any change in Executive's titles, offices or perquisites, as then in effect, or any removal of Executive from, or any failure to re-elect Executive to, any of such positions (except for Executive's election to the Board of Directors), except in connection with the termination of his employment on account of his death, disability, or for cause, (iii) any failure to pay (or any reduction in) compensation (including benefits) paid or payable to Executive pursuant to the provisions of Section 4 hereof, or (iv) any purported termination of Executive's employment for cause which is not effected in accordance with the requirements of Section 5.2 hereof (and for purposes of this Agreement no such purported termination shall be effective). 5.4 DISABILITY. During the Employment Period, if, as a result of physical or mental incapacity or infirmity, Executive shall be unable to perform his duties under this Agreement for (i) a continuous period of at least 180 days, or (ii) periods aggregating at least 270 days during any period of 12 consecutive months (each a "Disability Period"), and at the end of the Disability Period there is no reasonable probability that Executive can promptly resume his duties hereunder, Executive shall be deemed disabled (the "Disability") and Employer, by notice to Executive, shall have the right to terminate the Employment Period for Disability at, as of or after the end of the Disability Period. The existence of the Disability shall be determined by a reputable, licensed physician mutually selected by Employer and Executive, whose determination shall be final and binding on the parties. Executive shall cooperate in all reasonable respects to enable an examination to be made by such physician. Notwithstanding the foregoing, Employer may conclusively determine Executive to be disabled at any time after the end of the Disability Period if Executive has then commenced receiving benefits under the long-term disability insurance policy obtained pursuant to Section 4.5 hereof. 5.5 DEATH. The Employment Period shall end on the date of Executive's death. 6. TERMINATION COMPENSATION 6.1 TERMINATION WITHOUT CAUSE BY EMPLOYER OR FOR GOOD REASON BY EXECUTIVE. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.1 hereof or by Executive pursuant to the provisions of Section 5.3 hereof, Employer will pay to Executive (i) within thirty (30) days following the date of termination an amount equal to the greater of the (a) Base Salary for the balance of the Employment Period (assuming no termination) and (b) one year's Base Salary (calculated in each case at the Base Salary rate then in effect); and (ii) on the date due pursuant to the provisions of Section 4.2 hereof, the bonus for the then current Bonus Year, without proration. All other benefits provided for in Sections 4.3, 4.4, 4.5 and Section 4.9 shall be continued at the expense of Employer for the longer of the balance of the unexpired portion of the Employment Period (assuming no termination) and twelve -5- 6 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm months from date of termination. 6.2 CERTAIN OTHER TERMINATIONS. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.2, or by death, pursuant to the provisions of Section 5.5, Employer shall pay to Executive, within thirty (30) days of the date of termination, Executive's Base Salary through the date of termination. Provided the date of termination is after the end of a calendar year for which a Bonus is payable, but prior to the date of payment, Employer shall also pay to Executive, when due pursuant to provisions of Section 4.2 hereof, the Bonus for the Bonus Year in which the date of termination occurred. Employer shall have no obligation to continue any other benefits provided for in Section 4 past the date of termination. 6.3 TERMINATION FOR DISABILITY. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.4, Employer shall make all payments and continue all benefits for the period specified in Section 6.1; provided, however, that such payment shall be reduced by any amounts actually paid to Executive pursuant to any disability insurance or other such similar program maintained by Employer, including amounts paid pursuant to any long-term disability policy purchased pursuant to Section 4.5 hereof. 6.4 NO OTHER TERMINATION COMPENSATION. Executive shall not, except as set forth in this Section 6, be entitled to any compensation following termination of the Employment Period. 6.5 MITIGATION. Executive shall not be required to mitigate the amount of any payments or benefits provided for hereunder upon termination of the Employment Period by seeking employment with any other person, or otherwise, nor shall the amount of any such payments or benefits be reduced by any compensation, benefit or other amount earned by, accrued for or paid to Executive as the result of Executive's employment by or consultancy or other association with any other person or entity, provided, that any medical, dental or hospitalization insurance or benefits provided to Executive in connection with his employment by or consultancy with any person or entity unaffiliated with the Employer during such period shall be primary to the benefits to be provided to Executive pursuant to this Agreement for the purposes of coordination of benefits. Notwithstanding the foregoing, if Executive elects to be covered by the insurance or benefits provided by an entity or person unaffiliated with the Employer, Executive agrees that Employer may terminate any insurance or benefits provided to the Executive. 7. INDEMNIFICATION Employer shall indemnify and hold Executive harmless from and against any expenses (including reasonable attorneys' fees of the attorneys selected by Executive to represent him, which shall be advanced as incurred), judgments, fines and amounts paid in settlement incurred by him by reason of his being made a party or threatened to be made a party to any threatened, -6- 7 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of any act or omission to act by Executive during or before the Employment Period or otherwise by reason of the fact that he is or was an employee, director or officer of Employer, or of Prime Motor Inns, Inc., or of any subsidiary or affiliate included as a part of the Company, or of Prime Motor Inns, Inc., to the fullest extent and in the manner set forth and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time in effect. If any action, suit or proceeding is brought or threatened against Executive in respect of which indemnity may be sought against Employer, its subsidiaries, affiliates or predecessors pursuant to the foregoing, Executive shall notify Employer in writing of the institution of such action, suit or proceeding. In any such action, suit or proceeding Executive shall have the right to designate separate counsel acceptable to Executive in his sole discretion. 8. CONFIDENTIALITY Unless otherwise required by law or judicial process, Executive shall retain in confidence after termination of Executive's employment with Employer pursuant to this Agreement all confidential information known to the Executive concerning the Company and its businesses for the shorter of one (1) year following such termination or until such information is publicly disclosed by the Company or otherwise becomes publicly disclosed other than through Executive's actions. 9. SUCCESSORS; BINDING AGREEMENT (a) This Agreement shall be binding upon and inure to the benefit of Employer and any successor of Employer, including, without limitation, any corporation or corporations acquiring directly or indirectly all or a substantial portion of the stock, business or assets of Employer, whether by merger, restructuring, reorganization, consolidation, division, sale or otherwise (and such successor shall thereafter be deemed "the Employer" for the purposes of this Agreement). (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other beneficiary or, if there be no such beneficiary, to Executive's estate. 10. SURVIVORSHIP The respective rights and obligations of the parties hereunder shall survive any termination -7- 8 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 11. MISCELLANEOUS 11.1 NOTICES. Any notice, consent or authorization required or permitted to be given pursuant to this Agreement shall be in writing and sent to the party for or to whom intended, at the address of such party set forth below, by registered or certified mail, postage paid (deemed given five days after deposit in the U.S. mails) or personally or by facsimile transmission (deemed given upon receipt), or at such other address as either party shall designate by notice given to the other in the manner provided herein. If to Employer: Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, NJ 07007-2700 Attn.: Secretary If to Executive: Mr. David A. Simon Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, NJ 07007-2700 11.2 LEGAL FEES. Employer shall promptly reimburse the Executive for the reasonable legal fees and expenses incurred by Executive in connection with enforcement of Executive's rights hereunder, provided that Executive shall not be reimbursed for legal fees and expenses in the event Executive has not acted in good faith. 11.3 TAXES. Employer is authorized to withhold (from any compensation or benefits payable hereunder to Executive) such amounts for income tax, social security, unemployment compensation and other taxes as shall be necessary or appropriate in the reasonable judgment of Employer to comply with applicable laws and regulations. 11.4 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed therein. 11.5 ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Fairfield, New Jersey in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on -8- 9 JBWP51Docs-EADAS 5/15/95-D-1 JB:jm the arbitration award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until expiration of the Employment Period during the pendency of any arbitration. 11.6 HEADINGS. All descriptive headings in this Agreement are inserted for convenience only and shall be disregarded in construing or applying any provision of this Agreement. 11.7 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 11.8 SEVERABILITY. If any provision of this Agreement, or any part thereof, is held to be unenforceable, the remainder of such provision and this Agreement, as the case may be, shall nevertheless remain in full force and effect. 11.9 ENTIRE AGREEMENT AND REPRESENTATION. This Agreement contains the entire agreement and understanding between Employer and Executive with respect to the subject matter hereof. No representations or warranties of any kind or nature relating to Employer or its several businesses, or relating to Employer's assets, liabilities, operations, future plans or prospects have been made by or on behalf of Employer to Executive. This Agreement supersedes any prior agreement between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PRIME HOSPITALITY CORP. By: -------------------------- ----------------------------- DAVID A. SIMON -9- EX-23.A 6 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of Prime Hospitality Corp.: As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement No. 33-54995. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Roseland, New Jersey March 27, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 49,533 11,929 13,352 213 4,564 8,070 431,749 33,548 573,241 38,961 282,651 310 0 0 232,606 232,916 0 205,628 0 159,817 2,200 88 21,603 29,108 11,643 17,465 0 104 0 17,569 .54 .54
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