-----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, UGk3NRArRWuOqNlVcXSGdjsGBiarS9dbI/N6yq+TA7957s0x8qhhk2mgKy6C/D12 QO+vxJOcJd2nhurIxM+pxA== 0000950123-96-003423.txt : 19960703 0000950123-96-003423.hdr.sgml : 19960703 ACCESSION NUMBER: 0000950123-96-003423 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960702 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-07431 FILM NUMBER: 96590350 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 S-3 1 PRIME HOSPITALITY CORP. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PRIME HOSPITALITY CORP. (Exact name of registrant as specified in its charter) DELAWARE 22-2640625 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
------------------------ 700 ROUTE 46 EAST FAIRFIELD, NEW JERSEY 07007-2700 (201) 882-1010 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ JOSEPH BERNADINO SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL PRIME HOSPITALITY CORP. 700 ROUTE 46 EAST FAIRFIELD, NEW JERSEY 07007-2700 (201) 882-1010 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: WILLIAM N. DYE JOHN D. WATSON, JR. WILLKIE FARR & GALLAGHER LATHAM & WATKINS ONE CITICORP CENTER 1001 PENNSYLVANIA AVENUE, N.W. 153 EAST 53RD STREET SUITE 1300 NEW YORK, NEW YORK 10022 WASHINGTON, D.C. 20004 (212) 821-8000 (202) 637-2200
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered in connection with dividend or interest reinvestment plans, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------ CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE - ---------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value(2)........... 8,625,000 shares $16.44 $141,795,000 $48,895 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 1,125,000 shares of Common Stock subject to the Underwriters' over-allotment option. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED JULY 2, 1996 7,500,000 SHARES PRIME LOGO COMMON STOCK All of the shares of Common Stock offered hereby (the "Offering") are being sold by Prime Hospitality Corp. ("Prime" or the "Company"). The Company's Common Stock is traded on the New York Stock Exchange under the symbol "PDQ." On July 1, 1996, the last reported sale price of the Common Stock on the New York Stock Exchange was $16.625 per share. See "Price Range of Common Stock and Dividend Policy." SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Price to Underwriting Proceeds to Public Discount(1) Company(2)(3) - ------------------------------------------------------------------------------------------------------ Per Share.............................. $ $ $ Total(3)............................... $ $ $ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company, estimated at $450,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 1,125,000 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ and the Proceeds to Company will total $ . See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Montgomery Securities on or about , 1996. ------------------------ MONTGOMERY SECURITIES BT SECURITIES CORPORATION SMITH BARNEY INC. , 1996 3 [MAP] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN MARKET PRICES OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 [PHOTOGRAPHS] 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in or incorporated by reference in this Prospectus. Unless the context indicates or requires otherwise, references in this Prospectus to the "Company" or "Prime" are to Prime Hospitality Corp. and its subsidiaries. All information in this Prospectus assumes that the overallotment option granted to the Underwriters has not been exercised. EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by the Company for the purpose of analyzing its operating performance, leverage and liquidity. Such data are not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Unless otherwise indicated, industry data is based on reports of Smith Travel Research. THE COMPANY Prime is a leading national hotel company, with a portfolio of 98 hotels containing 14,006 rooms located in 23 states and the U.S. Virgin Islands (the "Portfolio"). Prime controls two high-quality hotel brands: AmeriSuites(R) all-suites hotels and Wellesley Inns(R) limited-service hotels. The Company's hotels are modern, well-maintained assets, with an average age of approximately 12 years. The Company emphasizes hotel equity ownership, owning and operating 82 of the 98 hotels in its Portfolio (the "Owned Hotels") and managing the remaining 16 hotels for third parties (the "Managed Hotels"), with financial interests in 9 of the 16 Managed Hotels. The Company believes it creates long-term value through the development of its proprietary brands. Of the Company's 98 hotels, an aggregate of 55 hotels are included in Prime's proprietary AmeriSuites and Wellesley Inns brands. Over the past three years, Prime has achieved rapid growth in its Portfolio, increasing the number of owned rooms from 4,198 at January 1, 1993 to 10,866 at July 1, 1996. Prime has attained this strong Portfolio growth while consistently increasing profit levels. From 1993 to 1995, the Company grew EBITDA at a compound annual rate of 38.9%, from $32.0 million in 1993 to $61.8 million in 1995. Over the same period, recurring net income per share grew at a compound annual rate of 64.3%, from $0.20 in 1993 to $0.54 in 1995. These positive trends continued in the first quarter of 1996, compared to the first quarter of 1995. EBITDA grew 32.9% from $14.6 million to $19.4 million and recurring net income per share grew 30.8% from $0.13 to $0.17. The Company's hotels serve three major lodging industry segments: the all-suites segment, under the Company's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the mid-price limited-service segment, primarily under the Company's proprietary Wellesley Inns brand. All-Suites: Prime owns and operates 25 all-suites hotels under the AmeriSuites brand name. AmeriSuites are upper mid-price, all-suites hotels containing approximately 125 suites and located primarily in the Southern and Central United States. Since January 1, 1994, AmeriSuites has been the fastest growing all-suites hotel chain in the United States, expanding from 9 hotels to 25 hotels at July 1, 1996, an increase of 178%. An additional 20 AmeriSuites are currently under construction, with sites for 25 more under contract. Full-Service: Prime operates 33 upscale full-service hotels under franchise agreements with national hotel brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. Prime owns 20 of these hotels and has a financial interest in 8 of the 13 other properties that it manages. Prime's full-service hotels typically offer substantial food, beverage and banquet facilities. Prime achieved a gross operating profit margin of 36% at its full-service hotels in 1995, a 16% premium to the full-service industry average of 31% for the comparable period. Limited-Service: A total of 30 of Prime's 40 mid-price limited-service hotels are operated under its Wellesley Inns brand name. Prime owns 100% of these Wellesley Inns. The remaining limited-service hotels, seven of which are owned by Prime, are operated under franchise agreements with well-known national chains. 3 6 Wellesley Inns compete primarily with hotels such as Hampton Inns and La Quinta Inns. Wellesley Inns generated an average daily room rate ("ADR") and occupancy percentage in 1995 of $51.28 and 75.4%, respectively. GROWTH STRATEGY Prime's principal growth strategy is the accelerated expansion of its AmeriSuites brand through the construction of new AmeriSuites hotels. The Company believes that AmeriSuites, which offers an excellent guest experience and desirable suite accommodations at mid-scale prices, is well-positioned to become a preeminent brand in the rapidly growing all-suites segment. Prime expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have more than 70 AmeriSuites open by the end of 1997. At present, 25 AmeriSuites are open, with an additional 20 hotels under construction and sites for 25 more under contract. AmeriSuites are positioned in the upper mid-price segment of the lodging industry, competing predominantly with other mid-price and upscale brands such as Courtyard by Marriott and Holiday Inn. The Company markets AmeriSuites as "America's Affordable All-Suite Hotel," emphasizing superior price/value relative to traditional mid-price hotels by focusing on the chain's spacious suites, upscale facilities and considerable amenity package. The Company is committed to the expansion of the AmeriSuites brand for the following reasons: - Attractive Economic Returns: Due to low all-in development costs along with a rapid ramp up in occupancy and ADR after opening, AmeriSuites have generated attractive unit level returns. AmeriSuites opened since 1992 have, in their first 12 months of operation, produced hotel-level EBITDA constituting, on average, 15.7% of the hotel development cost. - Broad Customer Appeal: The AmeriSuites concept offers the benefits of an all-suites room at a price that appeals to a wide variety of customers. Business travelers are attracted to the fully-equipped business centers, meeting rooms, convenient locations and in-room features, including computer data ports and voice mail. Leisure travelers enjoy the exercise room, complimentary continental breakfast, living room sleeper sofa and heated swimming pool. In addition, the layout of the AmeriSuites room, each of which includes a kitchenette, appeals to the fast-growing extended-stay market segment. The Company believes AmeriSuites offers a level of amenities and services exceeding those typically found in extended-stay hotels. - High-Growth, High-Quality Brand: Prime believes it has the ability to create significant brand value by rapidly expanding AmeriSuites while consistently maintaining uniformly high quality standards. Because Prime owns and operates every AmeriSuites, it can maintain a high level of consistency and quality throughout the entire chain, and can implement chain-wide programs quickly and efficiently. - Fast Growing, Fragmented Market: The all-suites segment has seen above-market demand growth in recent years. During the 1991-1995 period, demand for all-suites rooms grew at more than double the rate of demand growth experienced by the lodging industry as a whole, and exceeded all-suites supply growth by 67%. Given the fast-growing demand for all-suites accommodations and the absence of a dominant competitor in the mid-price all-suites market, Prime believes that it can establish AmeriSuites as a preeminent brand in this market while continuing to generate attractive returns. - Proven Operating Performance: The AmeriSuites concept has been in existence since 1990 and currently operates in 20 different markets. In addition, AmeriSuites hotels have consistently generated strong operating results, with average revenue per available room ("REVPAR") for hotels open at least one year increasing by 13.7% and 11.9% in 1994 and 1995 and 19.9% in the first quarter of 1996, respectively, over comparable prior period results. Prime believes that it has sufficient resources available to fund its AmeriSuites growth strategy, including capital from the following sources: (i) net proceeds from the Offering; (ii) borrowings under its five-year secured revolving credit facility; and (iii) internally generated free cash flow from its Portfolio of 98 hotels. In addition, Prime may enter into sale/leaseback transactions involving certain of its mid-price limited-service and upscale full-service hotels, or seek additional debt financing secured by the Company's hotels. 4 7 OPERATING PERFORMANCE/INTERNAL GROWTH In addition to revenue and earnings growth generated by the expansion of the AmeriSuites brand, Prime seeks to achieve internal growth through continued operating improvements at its existing hotels. Prime has demonstrated its ability to operate its hotels effectively in each of its three segments, achieving REVPAR increases in 1995 at its comparable AmeriSuites, full-service and limited-service hotels of 11.9%, 8.7% and 9.2%, respectively, versus 1994 results. These trends continued in the first quarter of 1996, as Prime grew REVPAR by 19.9%, 10.1% and 7.5% at its comparable AmeriSuites, full-service and limited-service hotels, respectively, over first quarter 1995 levels. The Company's emphasis on efficient operations has increased operating margins, thus translating its top-line REVPAR growth into increased earnings. Prime's gross operating profit margins in 1995 of 51% at AmeriSuites, 36% at full-service hotels and 49% at limited-service hotels represented premiums of 3%, 16% and 4%, respectively, versus comparable industry statistics for these industry segments. RECENT EVENTS The Company recently entered into certain transactions that have allowed it to consolidate control over its proprietary Wellesley Inns brand and to obtain additional capital to fund its AmeriSuites growth strategy. Purchase of Wellesley Inns: On March 6, 1996, Prime acquired 18 mid-price limited-service hotels with approximately 1,713 rooms (including the remaining 16 Wellesley Inns it did not already own) for $65.1 million. As a result, Prime now has full control over 100% of its proprietary Wellesley Inns chain. The total purchase price plus the estimated cost of planned renovations equals a price per room ranging from approximately $42,000 to $43,000, which represents a discount to the average replacement cost of these hotels. See "Business -- Prime's Lodging Operations." Revolving Credit Facility: On June 28, 1996, the Company established a $100 million, five-year secured revolving credit facility (the "Revolving Credit Facility") bearing an interest rate of 2.25% over LIBOR. The Revolving Credit Facility is secured by certain of the Company's limited-service, AmeriSuites and full-service hotels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." INDUSTRY OVERVIEW The lodging industry as a whole has experienced four consecutive years in which the growth in room demand has exceeded the growth in supply. In 1995, industry wide percentage growth in demand for hotel rooms was nearly double industry-wide percentage growth in supply of hotel rooms (3.0% versus 1.6%). In the three price levels in which the Company's hotels operate, upscale, mid-price and economy, percentage growth in demand outpaced percentage growth in supply by 0.7%, 1.4% and 1.0%, respectively. These trends continued in the first quarter of 1996 with the exception of the upscale price level. On an industry-wide basis, demand growth exceeded supply by 1.2%. Demand growth continued to exceed supply growth in the mid-price and economy segments by 0.5% and 1.1% respectively. However, in the upscale segment, supply growth exceeded demand growth by a modest 0.1%. The Company believes that quarterly data are not necessarily indicative of a full year's results and that first quarter results were adversely affected by severe seasonal weather in January. Coopers & Lybrand L.L.P.'s Hospitality Directions (May 1996) ("Coopers and Lybrand Hospitality Directions") estimates that the percentage growth in industry-wide demand will exceed the percentage growth in supply by 0.8% and 0.2% in 1996 and 1997, respectively. The excess of demand growth over supply growth in the past several years has led to industry-wide increases in occupancy percentages and ADR, with occupancy rising to 65.4% in 1995 from 64.7% in 1994, and ADR increasing 5.0% in 1995 over 1994 levels. Coopers & Lybrand Hospitality Directions indicates that occupancy is expected to increase in 1996 and 1997 to 65.9% and 66.0%, respectively, and that ADR is expected to increase 5.4% in 1996 over 1995 levels and 4.8% in 1997 over 1996 levels. Historical industry performance, however, may not be indicative of future results, and there can be no assurance that such projections will be realized. 5 8 The Company is a Delaware corporation incorporated in 1985. The principal office of the Company is located at 700 Route 46 East, Fairfield, New Jersey 07007-2700 and its telephone number is (201) 882-1010. THE OFFERING Common Stock offered by the Company....... 7,500,000 shares Common Stock to be outstanding after the Offering.................................. 38,649,158 shares(1) Use of Proceeds........................... To be used as part of the financing of the Company's AmeriSuites expansion. New York Stock Exchange symbol............ PDQ - --------------- (1) Does not include 1,800,316 shares of Common Stock issuable upon the exercise of outstanding stock options and 1,443,057 shares of Common Stock issuable upon the exercise of outstanding warrants as of March 31, 1996. See "Description of Capital Stock -- Warrants." 6 9 SUMMARY CONSOLIDATED FINANCIAL DATA The table below presents summary consolidated financial data derived from the Company's historical financial statements as of and for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, related notes and other financial information included and incorporated by reference in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------- -------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA) INCOME STATEMENT DATA(1): Total revenues.................................. $108,860 $134,303 $205,628 $ 48,238 $ 58,614 Costs and expenses: Direct hotel operating expenses............... 51,335 66,620 116,565 27,179 31,548 Occupancy and other operating................. 9,827 9,799 11,763 2,611 3,482 General and administrative.................... 15,685 15,089 15,515 3,872 4,219 Depreciation and amortization................. 7,117 9,427 15,974 3,976 5,224 ------ ------ ------ ----- ----- Total costs and expenses................. 83,964 100,935 159,817 37,638 44,473 ------ ------ ------ ----- ----- Operating income................................ 24,896 33,368 45,811 10,600 14,141 Interest expense................................ (16,116) (13,993) (21,603) (4,100) (5,851) Net income: Income from recurring operations.............. 5,928 12,805 17,442 4,208 5,733 Other income (expense) -- non-recurring(2).... 2,247 5,453 23 -- 2,059 ------ ------ ------ ----- ----- Income before extraordinary items............. 8,175 18,258 17,465 4,208 7,792 Extraordinary items(3)........................ 3,989 172 104 7 149 ------ ------ ------ ----- ----- Net income...................................... $ 12,164 $ 18,430 $ 17,569 $ 4,215 $ 7,941 ====== ====== ====== ===== ===== Fully diluted net income per common share(4): Income from recurring operations.............. $ 0.20 $ 0.40 $ 0.54 $ 0.13 $ 0.17 Other income (expense) -- non-recurring....... 0.07 0.17 -- -- 0.05 ------ ------ ------ ----- ----- Income before extraordinary items............. 0.27 0.57 0.54 0.13 0.22 Extraordinary items........................... 0.13 0.01 -- -- -- ------ ------ ------ ----- ----- Fully diluted net income per common share....... $ 0.40 $ 0.58 $ 0.54 $ 0.13 $ 0.22 ====== ====== ====== ===== ===== OTHER DATA: EBITDA(5)....................................... $ 32,013 $ 42,795 $ 61,785 $ 14,576 $ 19,365 Net cash provided by operating activities....... 19,728 28,672 40,851 4,849 8,655 Net cash provided by (used in) investing activities.................................... 2,281 (34,248) (90,927) (12,918) (88,201) Net cash provided by (used in) financing activities.................................... (17,056) (23,469) 87,085 37,939 53,642 HOTEL DATA: All-suites: Number of locations........................... 8 12 19 13 22 Number of rooms............................... 993 1,494 2,319 1,620 2,640 REVPAR(6)..................................... $ 36.01 $ 39.50 $ 43.98 $ 37.60 $ 43.67 Full-service(7): Number of locations........................... 30 31 32 32 32 Number of rooms............................... 5,797 6,152 6,301 6,301 6,301 REVPAR(6)..................................... $ 48.02 $ 51.69 $ 53.64 $ 45.10 $ 51.59 Limited-service: Number of locations........................... 36 40 40 40 40 Number of rooms............................... 3,669 4,164 4,164 4,164 4,164 REVPAR(6)..................................... $ 34.61 $ 34.60 $ 37.46 $ 40.66 $ 42.58
7 10
MARCH 31, 1996 --------------------------- ACTUAL AS ADJUSTED(8) -------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents and marketable securities....................... $ 31,628 $150,099 Property, equipment and leasehold improvements............................ 529,916 529,916 Total assets.............................................................. 642,876 761,347 Current portion of debt................................................... 5,699 5,699 Long-term debt, net of current portion.................................... 335,271 335,271 Total stockholders' equity................................................ 242,974 361,445
- --------------- (1) In December 1994, the Company acquired ownership of the Marriott's Frenchman's Reef Beach Resort (the "Frenchman's Reef") as a result of the restructuring of a mortgage note receivable, which was secured by the hotel. This transaction has not had a material impact on operating income but has affected revenue and operating margins significantly. For the years ended December 31, 1993 and 1994, the Company recorded revenues related to the Frenchman's Reef in the form of interest income and management fees with no corresponding operating expenses. For the year ended December 31, 1995, the Company recorded the operating revenues and operating expenses related to this hotel. (2) Other income (expense) -- non-recurring consists primarily of income and expenses related to asset sales and other property transactions and is not considered part of the Company's recurring operations. (3) Extraordinary items consist of gains on discharges of indebtedness, net of income taxes of $2.8 million in 1993, $120,000 in 1994 and $70,000 in 1995 and $4,000 and $100,000 for the three months ended March 31, 1995 and 1996. (4) Fully diluted net income per common share, in addition to the adjustments for primary net income per common share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes due 2002 from their issuance in April 1995. (5) EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by the Company for the purpose of analyzing its operating performance, leverage and liquidity. Such data are not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. (6) "REVPAR" means revenue per available room, which is equal to total room revenue divided by the number of rooms available for sale. (7) For purposes of showing operating trends, the results of the Frenchman's Reef have been excluded from Hotel data due to the effects of the September 1995 hurricane. For full-service operating results including the Frenchman's Reef, see "Business -- Prime's Lodging Operations." (8) As adjusted to reflect the Offering. See "Use of Proceeds" and "Capitalization." The following table sets forth for the five years ended December 31, 1995 and the three months ended March 31, 1995 and 1996, operating data for the 79 Owned Hotels (hotels owned or leased by Prime) in the Company's Portfolio at March 31, 1996. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of seven Owned Hotels that were managed by the Company prior to their acquisition by the Company during the period are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR) Number of locations..................... 54 57 61 68 76 74 79 Number of rooms......................... 7,284 7,632 8,121 9,187 10,161 9,909 10,482 Occupancy %............................. 66.4% 67.9% 71.2% 69.6% 69.8% 65.4% 64.9% ADR(1).................................. $ 60.14 $ 60.73 $ 62.58 $ 65.28 $ 69.52 $ 75.03 $ 73.56 REVPAR.................................. $ 39.94 $ 41.21 $ 44.57 $ 45.45 $ 48.52 $ 49.04 $ 47.76 Room revenues........................... $105,983 $113,664 $128,512 $140,347 $169,295 $ 40,575 $ 44,956 Gross operating profit(2)............... $ 54,974 $ 51,948 $ 59,504 $ 67,651 $ 83,926 $ 19,981 $ 20,653 Gross operating profit %(2)............. 35.60% 32.24% 31.16% 35.16% 37.77% 37.57% 37.16%
- --------------- (1) "ADR" means average daily rate, which is equal to total room revenue divided by number of occupied rooms. (2) Gross operating profit is defined as total hotel revenues less direct hotel operating expenses, including room, food and beverage and selling and general expenses. For operating data with respect to the 16 Managed Hotels (hotels managed for third parties) in the Company's Portfolio at March 31, 1996, see "Business -- Prime's Lodging Operations." 8 11 RISK FACTORS Prospective purchasers of Common Stock should carefully consider, among other things, the following risk factors before purchasing the Common Stock offered hereby. AMERISUITES EXPANSION RISKS The Company is committed to expanding its AmeriSuites hotel brand to meet growing demand in the all-suites hotel segment. The Company will be required to expend significant management and financial resources to expand the AmeriSuites hotel brand and develop brand name identification. The Company competes with other companies in the all-suites segment, some of which have greater brand recognition and financial resources than the Company. As a result, there is no assurance that the Company can successfully expand the AmeriSuites hotel brand or compete effectively with these other franchises. Expansion of the AmeriSuites brand may present operating and marketing challenges that are different from those currently encountered by the Company in its existing markets. There can be no assurance that the Company will anticipate all of the changing demands that expanding operations will impose on its management and management information system or its reservation service. The failure to adapt its systems and procedures could have a material adverse effect on the Company's business. The expansion of the AmeriSuites brand will require significant capital. The Company believes that the proceeds of the Offering, the availability under the Revolving Credit Facility and cash flow from operations will be sufficient to fund the near term growth of AmeriSuites. However, there can be no assurance that the Company will be able to obtain financing to fund the growth of AmeriSuites beyond the near term. If the Company is unable to obtain additional financing, the growth prospects for AmeriSuites and the financial results of the Company would be adversely effected. The Company's growth strategy of developing new AmeriSuites hotels will subject the Company to pre-opening and pre-stabilization costs. As the Company opens additional AmeriSuites hotels, such costs may adversely affect the Company's results of operations. Newly opened hotels historically begin with lower occupancy and room rates that improve over time. While the Company has in the past successfully opened new AmeriSuites hotels, there can be no assurance that the Company will be able to continue to do so successfully. Construction of hotels involves certain risks, including the possibility of construction cost overruns and delays, site acquisition cost and availability, uncertainties as to market potential, market deterioration after commencement of the development and possible unavailability of financing on favorable terms. Although the Company seeks to manage its construction activities so as to minimize such risks, there can be no assurance that the AmeriSuites expansion will perform in accordance with the Company's expectations. The opening of the new AmeriSuites hotels will be contingent upon, among other things, receipt of all required licenses, permits and authorizations. The scope of the approvals required for a new hotel is extensive, including, without limitation, state and local land-use permits, building and zoning permits and health and safety permits. In addition, unexpected changes or concessions required by local, regulatory and state authorities could involve significant additional costs and could delay or prevent the completion of construction or the opening of a new AmeriSuites hotel. There can be no assurance that the necessary permits, licenses and approvals for the construction and operation of the new AmeriSuites hotels will be obtained, or that such permits, licenses and approvals will be obtained within the anticipated time frame. Of the Company's 25 AmeriSuites, eight, or 32%, have been open less than one year and ten, or 40%, have been open less than two years. Consequently, the results achieved by these hotels to date may not be indicative of future results for these hotels or for other new hotels. Although the revenue and profitability of the AmeriSuites have improved as the hotels have matured, there can be no assurance that future hotels will experience similar results. 9 12 RISKS OF THE LODGING INDUSTRY; COMPETITION The Company's business is subject to all of the risks inherent in the lodging industry. These risks include, among other things, adverse effects of general and local economic conditions, changes in local market conditions, oversupply of hotel space, a reduction in local demand for hotel rooms, changes in travel patterns, changes in governmental regulations that influence or determine wages, prices or construction costs, changes in interest rates, the availability of credit and changes in real estate taxes and other operating expenses. The Company's ownership of real property, including hotels, is substantial. Real estate values are sensitive to changes in local market and economic conditions and to fluctuations in the economy as a whole. Due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues and profits. The lodging industry is highly competitive. During the 1980s, construction of lodging facilities in the United States resulted in an excess supply of available rooms. This oversupply had an adverse effect on occupancy levels and room rates in the industry, although the oversupply has since largely been absorbed. Competitive factors in the industry include reasonableness of room rates, quality of accommodations, brand recognition, service levels and convenience of locations. The Company's hotels generally operate in areas that contain numerous other competitors. There can be no assurance that demographic, economic or other changes in markets will not adversely affect the convenience or desirability of the sites in which the Company's hotels are located. Furthermore, there can be no assurance that, in the markets in which the Company's hotels operate, competing hotels will not pose greater competition for guests than presently exists, or that new hotels will not enter such locales. See "Business -- Industry Overview." HOTEL ACQUISITION RISKS The Company's growth strategy includes the selective acquisition of hotels with repositioning potential, notably in the full-service segment and in locations where the Company presently operates. There can be no assurance that suitable hotel acquisition candidates will be located, that hotel acquisitions can be consummated successfully or that acquired hotels can be operated profitably or integrated successfully into the Company's operations. Growth through acquisition entails certain risks that the acquired hotels could be subject to unanticipated business uncertainties or legal liabilities. GEOGRAPHIC CONCENTRATION OF HOTELS Many of the Company's hotels are located in Florida, New Jersey and New York, and such geographic concentration exposes the Company's operating results to events or conditions which specifically affect those areas, such as local and regional economic, weather and other conditions. Adverse developments which specifically affect those areas may have a material adverse effect on the results of operations of the Company. While the Company's AmeriSuites expansion is expected to reduce these risks, the Company will remain subject to the risks associated with geographic concentration until the proposed AmeriSuites hotels are opened and their operations are stabilized. In addition, the Company owns the Marriott's Frenchman's Reef Beach Resort (the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands. The Company obtained ownership and control of this hotel in December 1994 pursuant to the restructuring of a note receivable. The Frenchman's Reef accounted for approximately 16.7% of the Company's operating income for the year ended December 31, 1995. The Frenchman's Reef's operating results have been adversely affected in recent years by hurricanes and a disruption in airline service. As a resort hotel primarily operated for leisure travelers, operating results at the Frenchman's Reef also are subject to adverse developments in general economic conditions and changes in travel patterns. Adverse developments with respect to the Frenchman's Reef may have a material adverse effect on the results of operations of the Company. In September 1995, the Frenchman's Reef suffered hurricane damage when Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier have agreed to settle the Company's property and business interruption insurance claim for $25.0 million. Due to this insurance coverage, the Company's liquidity will be affected only to the extent of its insurance deductibles, for which the Company provided a 10 13 reserve of $2.2 million in 1995. The Company has continued to operate the hotel and has repaired a majority of the damaged rooms on an interim basis. However, the impact of the hurricane has caused operating profits to decline from the 1995 level. The Company is currently assessing the extent of further refurbishment required at the Frenchman's Reef. LEVERAGE As of March 31, 1996, the Company's total long-term debt (including current portion) was $341.0 million. The Company expects it will incur additional indebtedness, including additional secured indebtedness, in connection with the implementation of its growth strategy. The degree to which the Company is leveraged, as well as its rent expense, could have important consequences to holders of Common Stock, including: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations may be dedicated to the payment of principal and interest on its indebtedness and rent expense, thereby reducing the funds available to the Company for its operation; and (iii) certain of the Company's indebtedness, including the Revolving Credit Facility, contains financial and other restrictive covenants, including those restricting the incurrence of additional indebtedness, the creation of liens, the payment of dividends and sales of assets, as well as those imposing minimum net worth requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." EMPLOYMENT AND OTHER GOVERNMENT REGULATION The lodging industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and beverage (such as health and liquor license laws) and building and zoning requirements. Also, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions and work permits requirements. The failure to obtain or retain liquor licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could adversely affect the Company. Both at the federal and state level, there are proposals under consideration to increase the minimum wage and introduce a system of mandated health insurance. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While the Company believes its hotels are substantially in compliance with these requirements, a determination that the Company is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. These and other initiatives could adversely affect the Company as well as the lodging industry in general. ENVIRONMENTAL REGULATION Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials ("ACMs") into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures. In connection with the ownership or operation of hotels, the Company may be potentially liable for any such costs. Although the Company is currently not aware of any material environmental claims pending or threatened against it, no assurance can be given that a material environmental claim will not be asserted against the Company or against the Company and its Managed Hotels. The cost of defending against claims of liability or of remediating a contaminated property could have a material adverse effect on the results of operations of the Company. 11 14 IMPORTANCE OF FRANCHISOR RELATIONSHIPS The Company currently enjoys good relationships with its major franchisors, Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson, and the Company has no reason to believe that such relationships will not continue. However, under the applicable franchise agreements, the franchisor can terminate the agreement if, among other things, its quality standards are not maintained or if payments due are not made in a timely fashion. If any of the franchise agreements were terminated by the franchisor, the Company could explore entering into a franchise agreement with another franchisor. There can be no assurance, however, that a desirable replacement relationship would be available. DEPENDENCE ON KEY EMPLOYEES The Company is dependent on its President, Chief Executive Officer and Chairman of the Board, David A. Simon, its Executive Vice President and Chief Financial Officer, John M. Elwood, its Executive Vice President of Operations, Paul H. Hower, and on certain other key members of its executive management staff, the loss of whose services could have a material adverse effect on the Company's business and future operations. See "Management." 12 15 USE OF PROCEEDS The net proceeds from the sale of the Common Stock offered hereby are estimated to be approximately $118.5 million (approximately $136.3 million if the Underwriters' over-allotment option is exercised in full) after deducting the underwriting discounts and commissions and estimated expenses related to the Offering. The Company intends to use the net proceeds as part of the financing of the Company's AmeriSuites expansion. The Company expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have more than 70 AmeriSuites open by the end of 1997. Until used, the net proceeds of this Offering will be invested in short-term investment grade marketable securities or money market funds. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the New York Stock Exchange under the symbol "PDQ." The following table sets forth, for the periods indicated, the high and low closing price of the Common Stock as reported on the New York Stock Exchange.
PRICE RANGE ------------- HIGH LOW ---- ---- YEAR ENDED DECEMBER 31, 1994 1st Quarter.......................................................... $8 1/8 $5 3/8 2nd Quarter.......................................................... 7 5/8 5 3/8 3rd Quarter.......................................................... 8 3/4 6 3/4 4th Quarter.......................................................... 9 6 7/8 YEAR ENDED DECEMBER 31, 1995 1st Quarter.......................................................... $10 3/8 $7 3/8 2nd Quarter.......................................................... 10 5/8 9 1/4 3rd Quarter.......................................................... 11 9 1/2 4th Quarter.......................................................... 10 1/4 9 3/8 YEAR ENDED DECEMBER 31, 1996 1st Quarter.......................................................... $13 5/8 $9 5/8 2nd Quarter.......................................................... 17 12 1/8 3rd Quarter (through July 1, 1996)................................... 16 5/8 16 5/8
The closing price of the Common Stock as reported on the New York Stock Exchange Composite Tape was $16.625 on July 1, 1996. As of July 1, 1996, there were approximately 2,500 holders of record of the Common Stock. The Company has not declared any cash dividends on its Common Stock since January 1, 1994, and does not currently anticipate paying any dividends on the Common Stock in the foreseeable future. The Company currently anticipates that it will retain any future earnings for use in its business. The Company is prohibited by the terms of its 10% Senior Secured Notes due 1999, and limited by the terms of its Revolving Credit Facility, 9 1/4% First Mortgage Notes due 2006 and 7% Convertible Subordinated Notes due 2002, as well as certain other debt instruments, from paying cash dividends on its Common Stock. 13 16 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company as of March 31, 1996 and as adjusted to give effect to the Offering. This table should be read in conjunction with the Consolidated Financial Statements and notes thereto included and incorporated by reference in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
MARCH 31, 1996 --------------------------- ACTUAL AS ADJUSTED(1) -------- -------------- (DOLLARS IN THOUSANDS) Current portion of debt(2)......................................... $ 5,699 $ 5,699 ======== ======== Long-term debt(3): 9 1/4% First Mortgage Notes due 2006............................. $120,000 $120,000 10% Senior Secured Notes due 1999................................ 24,403 24,403 Notes and Mortgages payable, less current portion(2)............. 104,618 104,618 7% Convertible Subordinated Notes due 2002....................... 86,250 86,250 -------- -------- Total long-term debt..................................... 335,271 335,271 Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued....................................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized; 31,049,512 shares issued and outstanding; 38,549,512 shares issued and outstanding as adjusted.......... 310 385 Capital in excess of par value................................... 185,166 303,562 Retained earnings................................................ 57,498 57,498 -------- -------- Total stockholders' equity............................... 242,974 361,445 -------- -------- Total capitalization..................................... $578,245 $696,716 ======== ========
- --------------- (1) As adjusted to reflect the Offering. (2) See Note 8 of Notes to Consolidated Financial Statements as to interest rates and maturities on long-term debt, including current portion. (3) The Revolving Credit Facility provides for availability of funds up to the lesser of $100.0 million and a borrowing base determined under the agreement. As of July 1, 1996, the Company had borrowed $40.0 million under the Revolving Credit Facility and had additional borrowing availability of approximately $22.0 million. 14 17 RECENT SELECTED CONSOLIDATED FINANCIAL DATA The table below presents recent selected consolidated financial data derived from the Company's historical financial statements as of and for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Consolidated Financial Data of the Company and its Predecessor" and the Consolidated Financial Statements, related notes and other financial information included and incorporated by reference in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA(1): Revenues: Lodging.................................... $ 69,487 $ 88,753 $146,184 $34,375 $41,974 Food and beverage.......................... 12,270 18,090 37,955 8,884 8,024 Management and other fees.................. 10,831 10,021 8,115 1,637 1,692 Interest on mortgages and notes receivable............................... 14,765 15,867 11,895 3,026 2,681 Business interruption insurance............ -- -- -- -- 3,739 Rental and other........................... 1,507 1,572 1,479 316 504 -------- -------- -------- ------- ------- Total revenues........................ 108,860 134,303 205,628 48,238 58,614 -------- -------- -------- ------- ------- Costs and expenses: Direct hotel operating expenses: Lodging.................................. 19,925 25,490 38,383 8,698 10,624 Food and beverage........................ 10,230 13,886 28,429 6,657 6,914 Selling and general...................... 21,180 27,244 49,753 11,824 14,010 Occupancy and other operating............ 9,827 9,799 11,763 2,611 3,482 General and administrative............... 15,685 15,089 15,515 3,872 4,219 Depreciation and amortization............ 7,117 9,427 15,974 3,976 5,224 -------- -------- -------- ------- ------- Total costs and expenses.............. 83,964 100,935 159,817 37,638 44,473 -------- -------- -------- ------- ------- Operating income.............................. 24,896 33,368 45,811 10,600 14,141 Investment income............................. 1,267 1,966 4,861 514 1,265 Interest expense.............................. (16,116) (13,993) (21,603) (4,100) (5,851) Other income.................................. 3,809 9,089 2,239 -- 3,432 Other expense................................. -- -- (2,200) -- -- -------- -------- -------- ------- ------- Income before income taxes and extraordinary items...................................... 13,856 30,430 29,108 7,014 12,987 Provision for income taxes.................... 5,681 12,172 11,643 2,806 5,195 -------- -------- -------- ------- ------- Income before extraordinary items............. 8,175 18,258 17,465 4,208 7,792 Extraordinary items(2)........................ 3,989 172 104 7 149 -------- -------- -------- ------- ------- Net income.................................... $ 12,164 $ 18,430 $ 17,569 $ 4,215 $ 7,941 ======== ======== ======== ======= ======= Net income per common share(3): Primary: Income before extraordinary items........ $ 0.27 $ 0.57 $ 0.54 $ 0.13 $ 0.24 Extraordinary items...................... 0.13 0.01 -- -- -- -------- -------- -------- ------- ------- Net income per common share................ $ 0.40 $ 0.58 $ 0.54 $ 0.13 $ 0.24 ======== ======== ======== ======= ======= Fully diluted: Income before extraordinary items........ $ 0.27 $ 0.57 $ 0.54 $ 0.13 $ 0.22 Extraordinary items...................... 0.13 0.01 -- -- -- -------- -------- -------- ------- ------- Net income per common share................ $ 0.40 $ 0.58 $ 0.54 $ 0.13 $ 0.22 ======== ======== ======== ======= =======
15 18
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT HOTEL DATA) OTHER DATA: EBITDA(4)............................. $ 32,013 $ 42,795 $ 61,785 $14,576 $19,365 Net cash provided by operating activities.......................... 19,728 28,672 40,851 4,849 8,655 Net cash provided by (used in) investing activities................ 2,281 (34,248) (90,927) (12,918) (88,201) Net cash provided by (used in) financing activities................ (17,056) (23,469) 87,085 37,939 53,642 HOTEL DATA: All-suites: Number of locations................. 8 12 19 13 22 Number of rooms..................... 993 1,494 2,319 1,620 2,640 REVPAR.............................. $ 36.01 $ 39.50 $ 43.98 $ 37.60 $ 43.67 Full-service(5): Number of locations................. 30 31 32 32 32 Number of rooms..................... 5,797 6,152 6,301 6,301 6,301 REVPAR.............................. $ 48.02 $ 51.69 $ 53.64 $ 45.10 $ 51.59 Limited-service: Number of locations................. 36 40 40 40 40 Number of rooms..................... 3,669 4,164 4,164 4,164 4,164 REVPAR.............................. $ 34.61 $ 34.60 $ 37.46 $ 40.66 $ 42.58
AS OF DECEMBER 31, ---------------------------------- AS OF MARCH 31, 1993 1994 1995 1996 -------- -------- -------- ------------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents and marketable securities............ $ 41,569 $ 13,641 $ 61,462 $ 31,628 Property, equipment and leasehold improvements..................... 172,786 299,291 398,201 529,916 Total assets........................ 410,685 434,932 573,241 642,876 Current portion of debt............. 19,282 5,284 5,731 5,699 Long-term debt, net of current portion.......................... 168,618 178,545 276,920 335,271 Total stockholders' equity.......... 171,364 204,065 232,916 242,974
- --------------- (1) In December 1994, the Company acquired ownership of the Frenchman's Reef as a result of the restructuring of a mortgage note receivable, which was secured by the hotel. This transaction has not had a material impact on operating income but has affected revenue and operating margins significantly. For the years ended December 31, 1993 and 1994, the Company recorded revenues related to the Frenchman's Reef in the form of interest income and management fees with no corresponding operating expenses. For the year ended December 31, 1995, the Company recorded the operating revenues and operating expenses related to this hotel. (2) Extraordinary items consist of gains on discharges of indebtedness, net of income taxes of $2.8 million in 1993, $120,000 in 1994 and $70,000 in 1995 and $4,000 and $100,000 for the three months ended March 31, 1995 and 1996. (3) Primary net income per common share was computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each period. The weighted average number of common shares used in computing primary net income per common share was 30,721,000, 32,022,000 and 32,461,000 for the years ended December 31, 1993, 1994 and 1995, respectively, and 32,365,000 and 32,865,000 for the three months ended March 31, 1995 and 1996, respectively. Fully diluted net income per common share, in addition to the adjustments for primary net income per common share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes due 2002 from their issuance in April 1995. The weighted average number of common shares used in computing fully diluted net income per common share was 37,423,000 for the year ended December 31, 1995 and 32,365,000 and 40,346,000 for the three months ended March 31, 1995 and 1996, respectively. 16 19 (4) EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by the Company for the purpose of analyzing its operating performance, leverage and liquidity. Such data are not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. (5) For purposes of showing operating trends, the results of the Frenchman's Reef have been excluded from Hotel data due to the effects of the September 1995 hurricane. For full-service operating results including the Frenchman's Reef, see "Business -- Prime's Lodging Operations." 17 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading hotel owner/operator which owns or leases 82 hotels (the "Owned Hotels") and manages 16 hotels (the "Managed Hotels") for third parties. The Company has a financial interest in the form of mortgages or profit participations (primarily incentive management fees) in 9 of the Managed Hotels. The Company consolidates the results of operations of its Owned Hotels and records management fees (including incentive management fees) and interest income, where applicable, on the Managed Hotels. The Company's principal growth strategy is the accelerated expansion of its AmeriSuites brand through the construction of new AmeriSuites hotels. For the three months ended March 31, 1996, earnings from recurring operations increased by 36.2% over the comparable period in 1995, attributable to an 11.3% increase in REVPAR at comparable hotels, the addition of 32 hotels primarily through construction or acquisition in the past two years and the impact of increased operating leverage. Although future results of operations may be adversely affected in the short-term by the costs associated with the construction and acquisition of new hotels, it is expected that this impact will be offset, after an initial period, by revenues generated by these new hotels. The Company believes that it is well positioned to benefit from the expected continued improvements in the lodging industry due to its growth strategy and its hotel equity ownership position. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The transaction enabled the Company to establish full control over its 30-hotel proprietary Wellesley Inn brand. In connection with this transaction, the Company also terminated its management agreement and junior subordinated mortgages related to the 18 hotels. Revenues and expenses from these hotels have been included in reported results from the date of acquisition. Prior to the acquisition, the Company recorded revenues in the form of management fees and interest income, with no corresponding operating expenses. On June 28, 1996, the Company established the Revolving Credit Facility with a group of financial institutions providing for availability of funds up to the lesser of $100 million and a borrowing base determined under the agreement. The Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. Additional hotels may be added subject to the approval of the lenders. As of July 1, 1996, the Company had borrowed $40.0 million under the Revolving Credit Facility and had additional borrowing availability of approximately $22.0 million. The proceeds were used to retire $20.0 million of interim financing with the remainder to be utilized principally for the development of AmeriSuites hotels. See "-- Liquidity and Capital Resources." In September 1995, the Frenchman's Reef suffered hurricane damage when Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier have agreed to settle the Company's property and business interruption insurance claim for $25.0 million. Due to this insurance coverage, the Company's liquidity will be affected only to the extent of its insurance deductibles, for which the Company provided a reserve of $2.2 million in 1995. The Company has continued to operate the hotel and has repaired a majority of the damaged rooms on an interim basis. However, the impact of the hurricane has caused operating profits to decline from the prior year level. The Company is currently assessing the extent of further refurbishment required at the Frenchman's Reef. For the three months ended March 31, 1996, the Company continued to record the operating revenues and expenses of the Frenchman's Reef. In addition, the Company estimated its business interruption insurance proceeds assuming no growth over the prior year's profit level and recorded revenue and a corresponding receivable of $3.7 million. This Prospectus contains forward-looking statements which involve risks and uncertainties relating to future events. Prospective investors are cautioned that the Company's actual events or results may differ materially from the results discussed in the forward-looking statements. Factors that might cause actual results to differ materially from those indicated by such forward-looking statements include the matters set forth under the caption "Risk Factors." 18 21 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1995 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for the three months ended March 31, 1996 and 1995. The results of the two hotels divested during 1995 and 1996 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) ------------------- ------------------- THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, ------------------- ------------------- 1995 1996 1995 1996 ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging........................................... $34,375 $41,974 $25,033 $28,279 Food and Beverage................................. 8,884 8,024 5,336 5,908 Management and Other Fees......................... 1,637 1,692 Interest on Mortgages and Notes Receivable........ 3,026 2,681 Business Interruption Insurance................... -- 3,739 Rental and Other.................................. 316 504 ------- ------- Total Revenues............................... 48,238 58,614 Direct Hotel Operating Expenses: Lodging........................................... 8,698 10,624 6,832 7,240 Food and Beverage................................. 6,657 6,914 4,382 4,884 Selling and General............................... 11,824 14,010 8,274 9,237 Occupancy and Other Operating....................... 2,611 3,482 General and Administrative.......................... 3,872 4,219 Depreciation and Amortization....................... 3,976 5,224 ------- ------- Operating Income.................................... 10,600 14,141 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue....... 25.3% 25.3% 27.3% 25.6% Food and Beverage, as a percentage of food and beverage revenue............................. 74.9% 86.2% 82.1% 82.7% Selling and General, as a percentage of lodging and food and beverage revenue...................... 27.3% 28.0% 27.2% 27.0% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue....... 6.0% 7.0% General and Administrative, as a percentage of total revenue............................... 8.0% 7.2% OTHER DATA(2): Occupancy......................................... 63.7% 65.9% 63.7% 66.8% Average Daily Rate ("ADR")........................ $ 65.97 $ 69.78 $ 65.97 $ 70.03 Revenue Per Available Room ("REVPAR")............. $ 42.02 $ 45.95 $ 42.02 $ 46.75 Gross Operating Profit............................ $10,881 $17,194 $10,881 $12,826
- --------------- (1) For purposes of this discussion of results of operations for 1996 compared to 1995, comparable Owned Hotels refers to 46 Owned Hotels that were owned or leased by the Company during all of the three months ended March 31, 1995 and 1996. The Frenchman's Reef has not been classified as a comparable Owned Hotel due to the effect of the hurricane damage. (2) For purposes of showing operating trends, the results of the Frenchman's Reef and the two disposed hotels have been excluded from the Other Data section of the table. 19 22 Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $7.6 million, or 22.1%, during the three months ended March 31, 1996 over the same period of the prior year. The increase was primarily due to incremental lodging revenues of $8.9 million from the 32 new hotels added during 1995 and 1996 with the balance coming from growth in revenues at comparable Owned Hotels. Lodging revenues for comparable Owned Hotels increased by $3.2 million, or 13.0%, for the three months ended March 31, 1996 as compared to the same period of the prior year, driven primarily by strong results at the Company's AmeriSuites hotels. The revenue gains were partially offset by a decrease of $4.2 million at the Frenchman's Reef attributable to the impact of the 1995 hurricane. The Company operates in three major segments of the industry: all-suites, full-service and limited-service. The following table illustrates the growth in REVPAR for the comparable Owned Hotels for the three months ended March 31, 1996 as compared to the same period in the prior year by industry segment:
THREE MONTHS ENDED MARCH 31, 1996 -------------- All-suites................................................... 19.9% Full-service................................................. 10.1% Limited-service.............................................. 7.5% Total.............................................. 11.3%
The REVPAR growth at comparable Owned Hotels reflects strong results in all of the Company's industry segments: its all-suites AmeriSuites, full-service and its limited-service Wellesley Inns. Repositioning efforts at both full-service and limited-service hotels contributed to the foregoing REVPAR increases. The improvements in REVPAR were generated by increases in ADR, which rose by 6.2%, and occupancy gains of 4.8% for the three month period as compared to the same period in the prior year. Food and beverage revenues decreased by $860,000, or 9.7%, for the three months ended March 31, 1996 compared to the same period in the prior year. This decrease was primarily due to lower food and beverage revenues at the Frenchman's Reef which declined by $2.4 million from the same period in the prior year due to the hurricane damage. This was partially offset by additional revenues of $1.0 million attributable to the new hotels and increased revenues at comparable Owned Hotels. Food and beverage revenues for comparable Owned Hotels increased by $572,000, or 10.7%, for the three months ended March 31, 1996, due primarily to increased banquet business at several hotels. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group, Market Segments, Inc. ("MSI"). Management and other fees increased by $55,000, or 3.4%, for the three months ended March 31, 1996 as compared to the same period in the prior year due primarily to increased incentive management fees partially offset by the conversions of Managed Hotels into Owned Hotels. Interest on mortgages and notes receivable during the period primarily related to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $345,000, or 11.4%, for the three months ended March 31, 1996 as compared to the same period in the prior year, primarily due to the Company's conversions of notes receivable into cash or hotel assets during 1995 and 1996. Interest on mortgages and notes receivable will continue to decrease and operating revenues and expenses will increase due to the March 31, 1996 conversion of a $22.4 million note into a long-term lease. Direct lodging expenses increased by $1.9 million, or 22.1%, for the three months ended March 31, 1996 compared to the same period in the prior year due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, remained constant at 25.3% during the three month periods. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.3% to 25.6% for the three month period due primarily to increases in ADR which had minimal corresponding increases in expenses. 20 23 Direct food and beverage expenses increased by $257,000, or 3.9%, for the three months ended March 31, 1996 as compared to the same period in the prior year primarily due to increased banquet business. As a percentage of food and beverage revenues, direct food and beverage expenses increased from 74.9% to 86.2% for the three month period. The increase was primarily due to the impact of decreased revenues from the food and beverage operations at the Frenchman's Reef. For comparable Owned Hotels direct food and beverage expenses, as a percentage of food and beverage revenue, remained relatively stable for both periods as the higher margins associated with the increased banquet business were offset by lower margins at the Hasbrouck Heights Crowne Plaza due to the refurbishing of the hotel. The Company anticipates completing this project during the second quarter of 1996. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $2.2 million, or 18.5%, for the three months ended March 31, 1996 as compared to the same period in the prior year due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses increased from 27.3% to 28.0% for the three month period due to increased utility and snow removal costs related to the severe winter weather. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased slightly from 27.2% to 27.0% for the three month periods, as the higher weather-related costs were offset by the impact of improved revenues. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. For the three months ended March 31, 1996, occupancy and other operating expenses increased by $871,000, or 33.4%, as compared to the same period in the prior year primarily due to the addition of new hotels and increased real estate taxes on certain hotels which were partially assessed in the prior year. As a result, occupancy and other operating expenses as a percentage of hotel revenues increased from 6.0% to 7.0% for the three month period. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $347,000, or 9.0%, for the three months ended March 31, 1996, primarily due to increased personnel, advertising and training costs associated with opening new hotels. As a percentage of total revenues, general and administrative expenses decreased from 8.0% to 7.2% for the three month period due to operating leverage. Depreciation and amortization expense increased by $1.2 million, or 31.4%, for the three months ended March 31, 1996 as compared to the same period in the prior year due to the impact of new hotel properties acquired or opened in the past year and refurbishment efforts at several hotels. Interest expense increased by $1.8 million, or 42.7%, for the three months ended March 31, 1996 as compared to the same period in the prior year primarily due to the issuance of $86.3 million of 7% Convertible Subordinated Notes due 2002 (the "Convertible Notes") in April 1995 and a net increase of $68.4 million in debt, after application of the proceeds to repay indebtedness, from the $120.0 million 9 1/4% First Mortgage Notes due 2006 (the "First Mortgage Notes") issued in January 1996. The Company anticipates incurring additional indebtedness under the Revolving Credit Facility in connection with the development of its AmeriSuites hotels. While a majority of this interest will be capitalized during the construction period, the Company expects that these borrowings will increase net interest expense. Investment income increased by $751,000 for the three month period primarily due to higher average cash balances generated by the new borrowings. Other income consists of items which are not part of the Company's recurring operations. Other income for the three months ended March 31, 1996 consisted of a gain on the settlement of a note receivable of $1.8 million and a gain on the sale of a hotel of $1.6 million. Pretax extraordinary gains of approximately $249,000 relate to the retirement of secured notes with a face value of $8.5 million. Pretax extraordinary gains of approximately $11,000 for the three months ended March 31, 1995 relate to the retirement of debt with a face value of $388,000. 21 24 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for the years ended December 31, 1995 and 1994. The results of the four hotels divested during 1994 and 1995 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) --------------------- ------------------- 1994 1995 1994 1995 -------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging......................................... $ 88,753 $146,184 $76,604 $83,190 Food and Beverage............................... 18,090 37,955 13,601 13,299 Management and Other Fees....................... 10,021 8,115 Interest on Mortgages and Notes Receivable...... 15,867 11,895 Rental and Other................................ 1,572 1,479 -------- -------- Total Revenues.......................... 134,303 205,628 Direct Hotel Operating Expenses: Lodging......................................... 25,490 38,383 20,722 21,908 Food and Beverage............................... 13,886 28,429 10,634 10,467 Selling and General............................. 27,244 49,753 23,009 24,338 Occupancy and Other Operating..................... 9,799 11,763 General and Administrative........................ 15,089 15,515 Depreciation and Amortization..................... 9,427 15,974 -------- -------- Operating Income.................................. 33,368 45,811 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue..... 28.7% 26.3% 27.1% 26.3% Food and Beverage, as a percentage of food and beverage revenue............................. 76.8% 74.9% 78.2% 78.7% Selling and General, as a percentage of lodging and food and beverage revenue................ 25.5% 27.0% 25.5% 25.2% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue..... 9.2% 6.4% General and Administrative, as a percentage of total revenue................................ 11.2% 7.5% OTHER DATA: Occupancy....................................... 68.0% 69.2% 70.4% 72.3% Average Daily Rate.............................. $ 60.36 $ 73.28 $ 59.92 $ 63.97 Revenue Per Available Room...................... $ 41.04 $ 50.71 $ 42.21 $ 46.22 Gross Operating Profit.......................... $ 40,223 $ 67,605 $35,824 $39,926
- --------------- (1) For purposes of this discussion of results of operations, comparable Owned Hotels refers to the 37 Owned Hotels that were owned or leased by the Company during all of 1994 and 1995. Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $57.4 million, or 64.7%, from $88.8 million in 1994 to $146.2 million in 1995. The increase was due to $52.1 million of lodging revenues from the addition of the Frenchman's Reef and the 19 new hotels added during 1994 and 1995 with the balance coming from growth in revenues at comparable Owned Hotels. Lodging revenues for comparable Owned Hotels increased by $6.6 million, or 8.6%, in 1995 as compared to 1994. 22 25 The Company operates in three major segments of the industry: all-suites, full-service and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for 1995, as compared to 1994, by industry segment:
YEAR ENDED DECEMBER 31, 1995 ----------------- All-suites................................................... 11.9% Full-service................................................. 8.7% 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, MSI. Management and other fees decreased by $1.9 million, or 19.0%, from $10.0 million in 1994 to $8.1 million in 1995. The decrease was primarily due to the loss of management fees on five Managed Hotels acquired by the Company during 1994 and 1995 and six additional hotels which were sold by a third party hotel owner in 1994. Partially offsetting these decreased management fees were increased base and incentive management fees associated with the remaining Managed Hotels and increased revenues generated by MSI. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $4.0 million, or 25.0%, from $15.9 million in 1994 to $11.9 million in 1995, primarily due to the Company's conversion of a $50.0 million note receivable secured by the Frenchman's Reef into an operating hotel asset in December 1994. Partially offsetting the decrease was interest income related to the purchase of $17.4 million of first mortgages secured by two hotels for $12.7 million in June 1995. Direct lodging expenses increased by $12.9 million, or 50.6%, from $25.5 million in 1994 to $38.4 million in 1995, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 28.7% in 1994 to 26.3% in 1995. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.1% in 1994 to 26.3% in 1995. Direct food and beverage expenses increased by $14.5 million, or 104.7%, from $13.9 million in 1994 to $28.4 million in 1995, primarily due to the addition of seven new full-service hotels. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 76.8% in 1994 to 74.9% in 1995. The decrease was primarily due to increased revenues in higher margin areas such as banquet departments at the new hotels. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue increased slightly from 78.2% in 1994 to 78.7% in 1995. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $22.6 million, or 82.6%, from $27.2 million in 1994 to $49.8 million in 1995, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses increased from 25.5% in 1994 to 27.0% in 1995 due to the addition of new full- 23 26 service properties which generally require higher levels of unallocated expenses. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased slightly from 25.5% in 1994 to 25.2% in 1995. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $2.0 million, or 20.0%, from $9.8 million in 1994 to $11.8 million in 1995 as the additional costs associated with the new hotels were offset by real estate tax refunds of approximately $600,000 during the year. As a percentage of hotel revenues, occupancy and other operating expenses decreased from 9.2% in 1994 to 6.4% in 1995, primarily due to operating leverage. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $426,000, or 2.8%, from $15.1 million in 1994 to $15.5 million in 1995, due to ordinary inflationary increases which were partially offset by central office payroll reductions. As a percentage of total revenues, general and administrative expenses decreased from 11.2% in 1994 to 7.5% in 1995 due to operating leverage. Depreciation and amortization expense increased by $6.6 million, or 69.4%, from $9.4 million in 1994 to $16.0 million in 1995, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels. Interest expense increased by $7.6 million, or 54.4%, from $14.0 million in 1994 to $21.6 million in 1995, primarily due to new mortgage borrowings of $39.0 million incurred in February 1995 and $86.3 million of 7% Convertible Subordinated Notes due 2002 (the "Convertible Notes") issued in April 1995. Investment income increased by $2.9 million from $2.0 million in 1994 to $4.9 million in 1995 primarily due to higher average cash balances generated by the new borrowings. Other income consists of items which are not part of the Company's recurring operations. For the year ended December 31, 1995, other income consisted of a gain on the settlement of a note receivable of $822,000 and gains on the sale of land parcels of $1.4 million. Other income for the year ended December 31, 1994 consisted primarily of a gain on the settlement of the Rose and Cohen note receivable of $6.2 million (see "Business -- Litigation"), gains on property sales of $1.0 million and rebates of prior years' insurance premiums of $1.2 million. Other expense of $2.2 million for the year ended December 31, 1995 consists of a reserve for insurance deductibles related to hurricane damage at the Frenchman's Reef. Pretax extraordinary gains of approximately $174,000 for the year ended December 31, 1995 relate to the retirement of secured notes with a face value of $22.2 million. Pretax extraordinary gains of approximately $292,000 for the year ended December 31, 1994 relate to the retirement of debt with a face value of $8.3 million. 24 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) INCOME STATEMENT DATA: Revenues: Lodging......................................... $ 69,487 $ 88,753 $62,305 $66,821 Food and Beverage............................... 12,270 18,090 10,875 11,410 Management and Other Fees....................... 10,831 10,021 Interest on Mortgages and Notes Receivable...... 14,765 15,867 Rental and Other................................ 1,507 1,572 -------- -------- Total Revenues.......................... 108,860 134,303 Direct Hotel Operating Expenses: Lodging......................................... 19,925 25,490 16,870 17,281 Food and Beverage............................... 10,230 13,886 9,029 9,143 Selling and General............................. 21,180 27,244 17,779 18,889 Occupancy and Other Operating..................... 9,827 9,799 General and Administrative........................ 15,685 15,089 Depreciation and Amortization..................... 7,117 9,427 -------- -------- Operating Income.................................. 24,896 33,368 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue..... 28.7% 28.7% 27.1% 25.9% Food and Beverage, as a percentage of food and beverage revenue............................. 83.4% 76.8% 83.0% 80.1% Selling and General, as a percentage of lodging and food and beverage revenue................ 25.9% 25.5% 24.3% 24.1% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue..... 12.0% 9.2% General and Administrative, as a percentage of total revenue................................ 14.4% 11.2% OTHER DATA: Occupancy....................................... 70.4% 68.0% 73.2% 73.1% Average Daily Rate.............................. $ 56.14 $ 60.36 $ 56.84 $ 61.16 Revenue Per Available Room...................... $ 39.52 $ 41.04 $ 41.61 $ 44.71 Gross Operating Profit.......................... $ 30,422 $ 40,223 $29,500 $32,917
- --------------- (1) For purposes of this discussion of results of operations for 1994 compared to 1993, comparable Owned Hotels refers to the 31 Owned Hotels that were owned or leased by the Company during all of 1994 and 1993. Lodging revenues increased by $19.3 million, or 27.7%, from $69.5 million in 1993 to $88.8 million in 1994. This increase was primarily due to incremental lodging revenues of $17.6 million from hotels acquired or built in 1993 and 1994 and an increase in lodging revenues at comparable Owned Hotels. Lodging revenues for comparable Owned Hotels increased by $4.5 million, or 7.2%, in 1994 compared to 1993 due to improvements in ADR. ADR increased by $4.22 or 7.5% for all hotels and $4.32 or 7.6% for comparable Owned Hotels due to repositioning and refurbishment efforts at several full-service hotels and the continued improvements in the lodging industry. In 1994, the industry continued its recovery, as demand growth continued to outpace new 25 28 hotel supply growth, resulting in higher occupancy levels which have allowed the industry to increase room rates. The Company has pursued a strategy of increasing ADR, which has a greater impact on net operating income than changes in occupancy. Occupancy rates for all hotels decreased from 70.4% in 1993 to 68.0% in 1994 due to the lower occupancy rates normally associated with new hotels, including both newly constructed hotels and repositioned hotels during the refurbishment period. Occupancy rates for comparable Owned Hotels remained constant in 1994 compared to 1993. The Company operates in three major segments of the industry: all-suites, full-service, and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for the year ended December 31, 1994 as compared to the prior year, by industry segment:
YEAR ENDED DECEMBER 31, 1994 ----------------- All-suites................................................. 13.1% Full-service............................................... 7.7% 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, MSI. Management and other fees decreased by $810,000, or 7.5%, from $10.8 million in 1993 to $10.0 million in 1994 primarily due to the loss of management fees on four Managed Hotels acquired by the Company during 1994. In addition, the Company's management contracts covering six additional hotels were terminated during 1994 upon divestiture of those hotels by the third party hotel owners. Partially offsetting these decreased management fees were the addition of two new management contracts and increased revenues associated with the remaining Managed Hotels. Interest on mortgages and notes receivable in 1993 and 1994 primarily related to mortgages secured by certain Managed Hotels including the Frenchman's Reef. Interest income on mortgages and notes receivable increased by $1.1 million, or 7.5%, from $14.8 million in 1993 to $15.9 million in 1994 primarily due to interest recognized on the Company's cash flow notes, which are subordinated or junior mortgages which remit payment based on hotel cash flow. In accordance with fresh start reporting adopted on July 31, 1992, assets and liabilities were recorded at their then-current fair market values. As these cash flow notes bear many of the characteristics and risks of operating hotel equity investments, no value was assigned to these notes on the Company's balance sheet due to substantial doubt as to their recoverability. The Company's policy is to recognize interest on cash flow notes when cash is received. In 1994, the portion of interest on mortgages and other notes receivable attributable to cash flow notes increased to $2.0 million from $1.0 million in 1993 primarily due to the execution of revised cash flow note agreements on three hotels and the improved operating performance of the underlying hotels. See "Business -- Mortgages and Notes Receivable." Approximately $4.3 million and $4.6 million of interest on mortgages and notes receivable in 1993 and 1994, respectively, was derived from the Company's $50.0 million note receivable secured by the Frenchman's Reef. This note was restructured in December 1994 and pursuant to such restructuring, the Company obtained ownership and control of the Frenchman's Reef. See "-- Liquidity and Capital Resources." Direct lodging expenses increased by $5.6 million, or 27.9%, from $19.9 million in 1993 to $25.5 million in 1994 due primarily to the addition of new hotels. As a percentage of lodging revenue, direct lodging expenses remained constant at 28.7% in 1993 and 1994. For comparable Owned Hotels, direct lodging expenses increased $411,000, or 2.4%, but decreased as a percentage of comparable lodging revenue from 27.1% in 1993 to 25.9% in 1994 primarily due to increases in ADR which had minimal corresponding increases in expenses. 26 29 Direct food and beverage expenses increased by $3.7 million, or 35.7%, from $10.2 million in 1993 to $13.9 million in 1994 due primarily to the addition of new full-service hotels. As a percentage of food and beverage revenue, direct food and beverage expenses decreased from 83.4% in 1993 to 76.8% in 1994 primarily due to increased revenues in higher margin areas such as banquet departments and sports lounges. For comparable Owned Hotels, direct food and beverage expenses increased $114,000, or 1.3%, but decreased as a percentage of food and beverage revenue from 83.0% in 1993 to 80.1% in 1994. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $6.1 million, or 28.6%, from $21.2 million in 1993 to $27.2 million in 1994 due primarily to the addition of 11 new hotels. Of these 11 hotels, four were managed by the Company in 1993 or during a portion of 1994, while the other seven had no previous relationship to the Company. As a percentage of hotel revenues (defined as rooms and food and beverage revenues), direct hotel selling and general expenses decreased slightly from 25.9% in 1993 to 25.5% in 1994. For comparable Owned Hotels, direct selling and general expenses increased $1.1 million, or 6.2%, but decreased slightly as a percentage of comparable Owned Hotel revenues from 24.3% in 1993 to 24.1% in 1994. Occupancy and other operating expenses, which consist primarily of insurance, real estate and other taxes, and rent expense, decreased by $28,000 in 1994. As a percentage of hotel revenues, occupancy and other operating expenses decreased from 12.0% in 1993 to 9.2% in 1994 primarily due to operating leverage, lower property and liability insurance charges based on favorable claims experiences and reductions in real estate taxes as a result of successful tax appeals on certain properties. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses decreased by $596,000, or 3.8%, from $15.7 million in 1993 to $15.1 million in 1994 primarily due to savings realized from the restructuring of the Company's centralized management operations in 1993. As a percentage of total revenues, general and administrative expenses decreased from 14.4% in 1993 to 11.2% in 1994. Depreciation and amortization expense increased by $2.3 million, or 32.5%, from $7.1 million in 1993 to $9.4 million in 1994, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels. Interest expense decreased by $2.1 million, or 13.2%, from $16.1 million in 1993 to $14.0 million in 1994, primarily due to the net reduction of approximately $27.4 million of debt over the past two years. Interest income on cash investments increased by approximately $700,000, or 55.2%, from $1.3 million in 1993 to $2.0 million in 1994 due to higher average cash balances in 1994. Other income for 1994 consisted primarily of a gain of approximately $6.2 million related to the settlement of the Rose and Cohen note receivable (see "Business -- Litigation"), gains on sales of other hotel assets of approximately $1.0 million and rebates of prior years' insurance premiums of $1.2 million. Pretax extraordinary gains of approximately $292,000 for 1994 relate to the retirement of secured notes with a face value of $8.3 million. Pretax extraordinary gains of approximately $6.8 million in 1993 relate to the retirement of debt with a face value of $25.8 million. LIQUIDITY AND CAPITAL RESOURCES Prime's principal growth strategy is the accelerated expansion of its AmeriSuites brand through the construction of new AmeriSuites hotels. Prime expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have more than 70 AmeriSuites open by the end of 1997. Prime believes it has sufficient resources available to fund its AmeriSuites growth strategy, including capital from the following sources: (i) net proceeds from the Offering; (ii) borrowings under its five-year 27 30 secured Revolving Credit Facility; and (iii) internally generated free cash flow from its Portfolio of 98 hotels. In addition, Prime may enter into sale/leaseback transactions involving certain of its mid-price limited-service and upscale full-service hotels, or seek additional debt financing secured by the Company's hotels. At March 31, 1996, the Company had cash and cash equivalents of $23.6 million, current marketable securities of $8.0 million and restricted cash, which is primarily collateral for various debt obligations, of $9.4 million. Cash and cash equivalents and current marketable securities decreased by $29.8 million during the three months ended March 31, 1996 primarily due to the acquisition and development of hotels and repayment of debt, partially offset by new borrowings. The Company's major sources of cash for the three months ended March 31, 1996 were net proceeds of approximately $115.0 million from the issuance of the $120.0 million First Mortgage Notes in January 1996, cash flow from operations of $8.7 million and collections of mortgage and notes receivable of $8.3 million. The Company's major uses of cash during the quarter were capital expenditures relating primarily to acquisitions and development of $103.6 million and debt payments of $61.5 million. Cash flow from operations increased to $8.7 million for the three months ended March 31, 1996 as compared to $4.9 million for the same period in the prior year due to the improved operating results. Cash flow from operations was positively impacted by the utilization of net operating loss carry forwards ("NOLs") of $2.0 million for the three months ended March 31, 1996 as compared to $1.4 million for the same period in the prior year. At March 31, 1996, the Company had federal NOLs relating to its predecessor, PMI, of approximately $119.2 million which are subject to annual utilization limitations and expire beginning in 2005 and continuing through 2007. See Note 10 to the Consolidated Financial Statements. Cash flow from operations was approximately $40.9 million for the year ended 1995 as compared to $28.7 million in 1994. Cash flow from operations was positively impacted by the utilization of NOLs and other tax basis differences of $9.5 million and $12.8 million in 1995 and 1994, respectively. The Company's other major sources of cash during 1995 were net proceeds of approximately $83.2 million from the issuance of the Convertible Notes, mortgage financings of $39.0 million and collections of mortgages and notes receivable of $27.6 million. The Company's major uses of cash in 1995 were capital expenditures of $113.5 million, debt payments of $34.0 million, the purchase of first mortgage notes for $12.7 million and purchases of marketable securities of $11.5 million. Debt. On June 28, 1996, the Company established the Revolving Credit Facility with a group of financial institutions providing for availability of funds up to the lesser of $100.0 million and a borrowing base determined under the agreement. The Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. Additional hotels may be added subject to the approval of the lenders. The Revolving Credit Facility bears interest at LIBOR plus 2.25% and is available for five years. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios. The Revolving Credit Facility also contains certain covenants which limit the incurrence of debt, liens, dividend payments, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. The aggregate amount of the Revolving Credit Facility will be reduced to $87.0 million on June 28, 1999 and $75.0 million on June 28, 2000. As of July 1, 1996, the Company had borrowed $40.0 million under the Revolving Credit Facility and had additional borrowing availability of approximately $22.0 million. The proceeds were used to retire $20.0 million of interim financing with the remainder to be utilized principally for the development of AmeriSuites hotels. In May 1996, the Company borrowed $20.0 million from a financial institution with interest at LIBOR plus 2.25%. Proceeds were utilized for the development of AmeriSuites hotels. The borrowing was subsequently repaid with the proceeds from the Revolving Credit Facility. In January 1996, the Company issued $120.0 million of First Mortgage Notes. Interest on the First Mortgage Notes is payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The First Mortgage Notes are redeemable, in whole or in part, at the option of the Company on or after January 15, 2001 at premiums to 28 31 principal which decline on each anniversary date thereafter. The Company utilized a portion of the proceeds to pay down approximately $51.6 million of indebtedness, with the remainder of the proceeds used to finance the development or acquisition of hotels or hotel portfolios. During the first quarter, the Company prepaid and retired $6.0 million of its senior secured notes resulting in pre-tax extraordinary gains of $60,000. The Company also retired $2.4 million of debt in conjunction with the sale of a hotel which resulted in a pre-tax extraordinary gain of $189,000. In April 1996, the Company, utilizing the proceeds from the settlement of a note receivable, prepaid and retired $6.5 million of senior secured notes. A pre-tax extraordinary gain of $45,000 will be recorded in the second quarter. The Company has $31.6 million of debt related to the Frenchman's Reef which was scheduled to mature in December 1996. In March 1996, the Company and the lender entered into an agreement to extend the maturity of the loan to July 1997. The loan bears interest at the same rate currently in effect and principal payments are waived until July 1997. All other terms and conditions of the loan remain in effect. Capital Investments. The Company's capital spending in the first quarter of 1996 was focused on the development of its AmeriSuites hotel chain and the consolidation of its Wellesley Inns chain. The Company spent approximately $92.9 million through March 31, 1996 on acquisitions and construction funded primarily by a combination of existing cash balances, cash flow from operations and the issuance of the First Mortgage Notes. The Company intends to rapidly expand its AmeriSuites chain through new construction. The Company has opened six new AmeriSuites hotels to date in 1996, in Miami (2), Dallas (2), Cleveland and Detroit, bringing the number of AmeriSuites to 25 as of July 1, 1996. The Company currently has 20 AmeriSuites hotels under construction and 25 additional AmeriSuites sites under contract. The Company expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have more than 70 AmeriSuites open by the end of 1997. During the first quarter of 1996, the Company spent $27.8 million on constructing new AmeriSuites hotels. The Company expects to spend a total of approximately $250 million on constructing new AmeriSuites hotels in 1996. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited service hotels for approximately $65.1 million in cash. The acquisition enabled the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The Company intends to spend approximately $7 million to $8 million to refurbish these hotels to ensure consistent quality and enhance the value of its brand. The Company and its insurance carrier have agreed to settle the Company's property and business interruption insurance claim with respect to the Frenchman's Reef for $25.0 million. Due to this insurance coverage, the Company's liquidity will be affected only to the extent of its insurance deductibles, for which the Company provided a reserve of $2.2 million in 1995. Additionally, the Company's debt in the amount of $31.6 million related to the Frenchman's Reef is further secured by an assignment of property insurance proceeds. The lender has sole discretion concerning the utilization of such proceeds for refurbishment. The Company is discussing with the lender the terms under which the lender will make such funds available. During the first quarter of 1996, the Company spent approximately $10.7 million on capital improvements at its Owned Hotels, of which approximately $4.6 million related to refurbishments and repositionings of recently acquired hotels. The Company intends to spend an additional $12 million to $13 million in 1996 relating to the refurbishing and repositioning of the Hasbrouck Heights Crowne Plaza and the 16 recently acquired Wellesley Inns. Asset Realizations. The Company has pursued a strategy of converting mortgage notes receivable and other assets into cash or operating hotel assets. Since July 31, 1992, the Company has received $122.9 million in cash and added ten operating hotel assets through note settlements, lease terminations and property sales. During the first quarter, the Company received $8.3 million in cash in settlement of notes receivable and $3.7 million in cash on sales of properties resulting in gains of $3.4 million. In January 1996, the Company obtained control of the 210-room Cocoa Beach Howard Johnson Hotel by converting its $9.7 million mortgage note receivable into a long-term lease. On March 31, 1996, the Company obtained control of the 204-room Fairfield Radisson by converting its $22.4 million mortgage note receivable into a long-term lease. 29 32 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY AND ITS PREDECESSOR The Company is the successor in interest to the Company's predecessor, Prime Motor Inns, Inc. ("PMI"), which emerged from chapter 11 reorganization on July 31, 1992 (the "Effective Date"). PMI had filed for protection under chapter 11 of the United States Bankruptcy Code in September 1990. The Company implemented "fresh start" reporting pursuant to the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" of the American Institute of Certified Public Accountants, as of the Effective Date. Accordingly, the consolidated financial statements of the Company are not comparable in all material respects to any such financial statement as of any date or for any period prior to the Effective Date. Subsequent to the Effective Date, the Company changed its fiscal year end from June 30 to December 31. The table below presents selected consolidated financial data derived from: (i) the Company's historical financial statements for the years ended December 31, 1993, 1994 and 1995 and each of the three months ended March 31, 1995 and 1996, (ii) the Company's historical financial statements as of and for the five-month period ended December 31, 1992, (iii) the Company's "fresh start" balance sheet as of the Effective Date and (iv) the historical consolidated financial statements of PMI for the one month ended July 31, 1992 and for the years ended June 30, 1991 and 1992. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included and incorporated by reference in this Prospectus.
PRE-REORGANIZATION POST-REORGANIZATION -------------------------------- ----------------------------------------------------------------------------- FOR THE AS OF AND AS OF AND FOR THE ONE FOR THE AS OF AND FOR THE YEAR MONTH FIVE MONTHS AS OF AND FOR THE YEAR ENDED THREE MONTHS ENDED ENDED JUNE 30, ENDED AS OF ENDED DECEMBER 31, MARCH 31, --------------------- JULY 31, JULY 31, DEC. 31, ------------------------------ ------------------- 1991(1) 1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 1995 1996 --------- --------- -------- -------- ----------- -------- -------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Total revenues... $ 205,699 $ 134,190 $ 8,793 -- $ 41,334 $108,860 $134,303 $205,624 $ 48,238 $ 58,614 Valuation writedowns and reserves... (59,149) (62,123) (13,000) -- -- -- -- -- -- -- Reorganization items..... (181,655) (23,194) 1,796 -- -- -- -- -- -- -- Other income (expense)... -- -- -- -- -- 3,809 9,089 39 -- 3,432 Income (loss) from continuing operations before extraordinary items(2)... (246,110) (71,965) (10,274) -- 1,393 8,175 18,258 17,465 4,208 7,792 Extraordinary items-gains on discharge of indebtedness (net of income taxes).... -- -- 249,600 -- -- 3,989 172 104 7 149 Net income (loss).... (227,188) (71,965) 239,326 -- 1,393 12,164 18,430 17,569 4,215 7,941 BALANCE SHEET DATA: Total assets.... $ 679,916 $ 554,118 -- $468,650 $ 403,314 $410,685 $434,932 $573,241 $492,438 $642,876 Long-term debt, net of current portion... 2,851 8,921 -- 204,438 192,913 168,618 178,545 276,920 221,726 335,271 Stockholders' equity (deficiency).. (157,327) (229,292) -- 135,600 137,782 171,364 204,065 232,916 210,176 242,974
- --------------- (1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at which time it owned or managed 141 hotels. During its approximately two-year reorganization, PMI restructured its assets, operations and capital structure. On the Effective Date, the Company emerged from chapter 11 reorganization with 75 Owned Hotels or Managed Hotels, $135.6 million of stockholders' equity and $266.4 million of total debt. (2) Approximately $2.3 million, $28.0 million and $25.3 million of contractual interest expense during the one month ended July 31, 1992 and for the fiscal years ended June 30, 1992 and 1991, respectively, was not accrued and was not paid due to the chapter 11 proceeding. 30 33 BUSINESS THE COMPANY Prime is a leading national hotel company, with a portfolio of 98 hotels containing 14,006 rooms located in 23 states and the U.S. Virgin Islands (the "Portfolio"). Prime controls two high-quality hotel brands: AmeriSuites(R) all-suites hotels and Wellesley Inns(R) limited-service hotels. The Company's hotels are modern, well-maintained assets, with an average age of approximately 12 years. The Company emphasizes hotel equity ownership, owning and operating 82 of the 98 hotels in its Portfolio (the "Owned Hotels") and managing the remaining 16 hotels for third parties (the "Managed Hotels"), with financial interests in 9 of the 16 Managed Hotels. The Company believes it creates long-term value through the development of its proprietary brands. Of the Company's 98 hotels, an aggregate of 55 hotels are included in Prime's proprietary AmeriSuites and Wellesley Inns brands. Over the past three years, Prime has achieved rapid growth in its Portfolio, increasing the number of owned rooms from 4,198 at January 1, 1993 to 10,866 at July 1, 1996. Prime has attained this strong Portfolio growth while consistently increasing profit levels. From 1993 to 1995, the Company grew EBITDA at a compound annual rate of 38.9%, from $32.0 million in 1993 to $61.8 million in 1995. Over the same period, recurring net income per share grew at a compound annual rate of 64.3%, from $0.20 in 1993 to $0.54 in 1995. These positive trends continued in the first quarter of 1996, compared to the first quarter of 1995. EBITDA grew 32.9% from $14.6 million to $19.4 million and recurring net income per share grew 30.8% from $0.13 to $0.17. The Company's hotels serve three major lodging industry segments: the all-suites segment, under the Company's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the mid-price limited-service segment, primarily under the Company's proprietary Wellesley Inns brand. All-Suites. Prime owns and operates 25 all-suites hotels under the AmeriSuites brand name. AmeriSuites are upper mid-price, all-suites hotels containing approximately 125 suites and located primarily in the Southern and Central United States. Since January 1, 1994, AmeriSuites has been the fastest growing all-suites hotel chain in the United States, expanding from 9 hotels to 25 hotels at July 1, 1996, an increase of 178%. An additional 20 AmeriSuites are currently under construction, with sites for 25 more under contract. Full-Service. Prime operates 33 upscale full-service hotels under franchise agreements with national hotel brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. Prime owns 20 of these hotels and has a financial interest in 8 of the 13 other properties that it manages. Prime's full-service hotels typically offer substantial food, beverage and banquet facilities. Prime achieved a gross operating profit margin of 36% at its full-service hotels in 1995, a 16% premium to the full-service industry average of 31% for the comparable period. Limited-Service. A total of 30 of Prime's 40 mid-price limited-service hotels are operated under its Wellesley Inns brand name. Prime owns 100% of these Wellesley Inns. The remaining limited-service hotels, seven of which are owned by Prime, are operated under franchise agreements with well-known national chains. Wellesley Inns compete primarily with hotels such as Hampton Inns and La Quinta Inns. Wellesley Inns generated an average daily room rate ("ADR") and occupancy percentage in 1995 of $51.28 and 75.4%, respectively. GROWTH STRATEGY Prime's principal growth strategy is the accelerated expansion of its AmeriSuites brand through the construction of new AmeriSuites hotels. The Company believes that AmeriSuites, which offers an excellent guest experience and desirable suite accommodations at mid-scale prices, is well-positioned to become a preeminent brand in the rapidly growing all-suites segment. Prime expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have more than 70 AmeriSuites open by the end of 1997. At present, 25 AmeriSuites are open, with an additional 20 hotels under construction and sites for 25 more under contract. 31 34 AmeriSuites are positioned in the upper mid-price segment of the lodging industry, competing predominantly with other mid-price and upscale brands such as Courtyard by Marriott and Holiday Inn. The Company markets AmeriSuites as "America's Affordable All-Suite Hotel," emphasizing superior price/value relative to traditional mid-price hotels by focusing on the chain's spacious suites, upscale facilities and considerable amenity package. The Company is committed to the expansion of the AmeriSuites brand for the following reasons: - Attractive Economic Returns: Due to low all-in development costs along with a rapid ramp up in occupancy and ADR after opening, AmeriSuites have generated attractive unit level returns. AmeriSuites opened since 1992 have, in their first 12 months of operation, produced hotel-level EBITDA constituting, on average, 15.7% of the hotel development cost. - Broad Customer Appeal: The AmeriSuites concept offers the benefits of an all-suites room at a price that appeals to a wide variety of customers. Business travelers are attracted to the fully-equipped business centers, meeting rooms, convenient locations and in-room features, including computer data ports and voice mail. Leisure travelers enjoy the exercise room, complimentary continental breakfast, living room sleeper sofa and heated swimming pool. In addition, the layout of the AmeriSuites room, each of which includes a kitchenette, appeals to the fast-growing extended-stay market segment. The Company believes AmeriSuites offers a level of amenities and services exceeding those typically found in extended-stay hotels. - High-Growth, High-Quality Brand: Prime believes it has the ability to create significant brand value by rapidly expanding AmeriSuites while consistently maintaining uniformly high quality standards. Because Prime owns and operates every AmeriSuites, it can maintain a high level of consistency and quality throughout the entire chain, and can implement chain-wide programs quickly and efficiently. - Fast Growing, Fragmented Market: The all-suites segment has seen above-market demand growth in recent years. During the 1991-1995 period, demand for all-suites rooms grew at more than double the rate of demand growth experienced by the lodging industry as a whole, and exceeded all-suites supply growth by 67%. Given the fast-growing demand for all-suites accommodations and the absence of a dominant competitor in the mid-price all-suites market, Prime believes that it can establish AmeriSuites as a preeminent brand in this market while continuing to generate attractive returns. - Proven Operating Performance: The AmeriSuites concept has been in existence since 1990 and currently operates in 20 different markets. In addition, AmeriSuites hotels have consistently generated strong operating results, with average REVPAR for hotels open at least one year increasing by 13.7% and 11.9% in 1994 and 1995 and 19.9% in the first quarter of 1996, respectively, over comparable prior period results. Prime believes that it has sufficient resources available to fund its AmeriSuites growth strategy, including capital from the following sources: (i) net proceeds from the Offering; (ii) borrowings under its five-year secured Revolving Credit Facility; and (iii) internally generated free cash flow from its Portfolio of 98 hotels. In addition, Prime may enter into sale/leaseback transactions involving certain of its mid-price limited-service and upscale full-service hotels, or seek additional debt financing secured by the Company's hotels. OPERATING PERFORMANCE/INTERNAL GROWTH In addition to revenue and earnings growth generated by the expansion of the AmeriSuites brand, Prime seeks to achieve internal growth through continued operating improvements at its existing hotels. Prime has demonstrated its ability to operate its hotels effectively in each of its three segments, achieving REVPAR increases in 1995 at its comparable AmeriSuites, full-service and limited-service hotels of 11.9%, 8.7% and 9.2%, respectively, versus 1994 results. These trends continued in the first quarter of 1996, as Prime grew REVPAR by 19.9%, 10.1% and 7.5% at its comparable AmeriSuites, full-service and limited-service hotels, respectively, over first quarter 1995 levels. The Company's emphasis on efficient operations has increased operating margins, thus translating its top-line REVPAR growth into increased earnings. Prime's gross operating profit margins in 1995 of 51% at 32 35 AmeriSuites, 36% at full-service hotels and 49% at limited-service hotels represented premiums of 3%, 16% and 4%, respectively, versus comparable industry statistics for these industry segments. RECENT EVENTS The Company recently entered into certain transactions that have allowed it to consolidate control over its proprietary Wellesley Inns brand and to obtain additional capital to fund its AmeriSuites growth strategy. - Purchase of Wellesley Inns: On March 6, 1996, Prime acquired 18 mid-price limited-service hotels with approximately 1,713 rooms (including the remaining 16 Wellesley Inns it did not already own) for $65.1 million. As a result, Prime now has full control over 100% of its proprietary Wellesley Inns chain. The total purchase price plus the estimated cost of planned renovations equals a price per room ranging from approximately $42,000 to $43,000, which represents a discount to the average replacement cost of these hotels. See "-- Prime's Lodging Operations." - Revolving Credit Facility: On June 28, 1996, the Company established the $100 million, five-year secured Revolving Credit Facility bearing an interest rate of 2.25% over LIBOR. The Revolving Credit Facility is secured by certain of the Company's limited-service, AmeriSuites and full-service hotels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." INDUSTRY OVERVIEW The lodging industry as a whole has experienced four consecutive years in which the growth in room demand has exceeded the growth in supply. In 1995, industry wide percentage growth in demand for hotel rooms was nearly double industry-wide percentage growth in supply of hotel rooms (3.0% versus 1.6%). In the three price levels in which the Company's hotels operate, upscale, mid-price and economy, percentage growth in demand outpaced percentage growth in supply by 0.7%, 1.4% and 1.0%, respectively. These trends continued in the first quarter of 1996 with the exception of the upscale price level. On an industry-wide basis, demand growth exceeded supply by 1.2%. Demand growth continued to exceed supply growth in the mid-price and economy segments by 0.5% and 1.1% respectively. However, in the upscale segment, supply growth exceeded demand growth by a modest 0.1%. The Company believes that quarterly data are not necessarily indicative of a full year's results and that first quarter results were adversely affected by severe seasonal weather in January. Coopers & Lybrand L.L.P.'s Hospitality Directions (May 1996) ("Coopers and Lybrand Hospitality Directions") estimates that the percentage growth in industry-wide demand will exceed the percentage growth in supply by 0.8% and 0.2% in 1996 and 1997, respectively. The excess of demand growth over supply growth in the past several years has led to industry-wide increases in occupancy percentages and ADR, with occupancy rising to 65.4% in 1995 from 64.7% in 1994, and ADR increasing 5.0% in 1995 over 1994 levels. Coopers & Lybrand Hospitality Directions indicates that occupancy is expected to increase in 1996 and 1997 to 65.9% and 66.0%, respectively, and that ADR is expected to increase 5.4% in 1996 over 1995 levels and 4.8% in 1997 over 1996 levels. Historical industry performance, however, may not be indicative of future results, and there can be no assurance that such projections will be realized. The following table was compiled from industry operating data as reported by Smith Travel Research and highlights industry data for the United States and the regions in which most of the Company's hotels are located: the Middle Atlantic region, which is comprised of New Jersey, New York and Pennsylvania; and the South Atlantic region, which is comprised of Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware. The table also includes operating data concerning the three price levels (of the five price levels classified by Smith Travel Research) in which the Company competes: upscale, 33 36 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 -------------------------------- -------------------------------- -------------------------------- THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, 1996 1996 1996 V. THREE V. THREE V. THREE MONTHS MONTHS MONTHS ENDED ENDED ENDED 1994V. 1995V. MARCH 31, 1994V. 1995V. MARCH 31, 1994V. 1995V. MARCH 31, 1993 1994 1995 1993 1994 1995 1993 1994 1995 ------ ------ -------------- ------ ------ -------------- ------ ------ -------------- United States........... 1.4% 1.6% 1.8% 4.7% 3.0% 3.0% 7.3% 6.1% 7.4% BY REGION: Middle Atlantic......... 0.4 1.1 1.0 4.0 1.2 2.6 10.5 5.8 5.6 South Atlantic.......... 1.1 1.3 1.4 3.2 3.6 3.1 4.9 6.9 7.8 BY SERVICE (PRICE LEVEL): Upscale................. 2.0 1.9 2.5 3.8 2.6 2.4 5.0 4.7 4.9 Mid-Price............... 2.0 2.4 2.6 4.2 3.8 3.1 5.5 5.9 6.5 Economy................. 1.1 2.0 1.6 2.6 3.0 2.7 5.0 6.2 7.2
PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Owned Hotels and Managed Hotels as of July 1, 1996:
MANAGED WITH FINANCIAL OWNED(1) INTEREST(2) OTHER MANAGED TOTAL ----------------- ---------------- ---------------- ----------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ------ All-Suites: AmeriSuites................. 25 3,024 0 0 0 0 25 3,024 Full-Service: Marriott.................... 1 517 0 0 1 525 2 1,042 Radisson.................... 2 476 0 0 1 192 3 668 Sheraton.................... 3 589 0 0 0 0 3 589 Crowne Plaza................ 3 717 0 0 0 0 3 717 Holiday Inn................. 1 240 4 810 0 0 5 1,050 Ramada...................... 8 1,214 3 672 2 276 13 2,162 Howard Johnson.............. 1 210 1 116 1 115 3 441 Independent................. 1 149 0 0 0 0 1 149 -- - - -- ------ ----- ----- ------ Total Full-Service... 20 4,112 8 1,598 5 1,108 33 6,818 Limited-Service: Wellesley Inn............... 30 3,013 0 0 0 0 30 3,013 Howard Johnson.............. 4 372 1 149 2 285 7 806 Other....................... 3 345 0 0 0 0 3 345 -- - - -- ------ ----- ----- ------ Total Limited-Service..... 37 3,730 1 149 2 285 40 4,164 -- - - -- ------ ----- ----- ------ Total................ 82 10,866 9 1,747 7 1,393 98 14,006 == ====== = ===== = ===== == ======
- --------------- (1) Of the 82 Owned Hotels, 11 are leased. The leases covering the Company's leased hotels provide for fixed lease rents and, in most instances, additional percentage rents based on a percentage of room revenues. The leases also generally require the Company to pay the cost of repairs, insurance and real estate taxes. In addition, some of the Company's Owned Hotels are located on land subject to long-term leases, generally for terms in excess of the depreciable lives of the improvements. (2) Nine Managed Hotels in which the Company holds a mortgage or profit participation on the property. 34 37 The following table sets forth the location of the Company's hotels as of July 1, 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 Michigan.............................. 1 128 -- -- -- -- 1 128 Nevada................................ 2 350 -- -- -- -- 2 350 New Jersey............................ 15 2,331 7 1,489 3 468 25 4,288 New York.............................. 8 941 -- -- -- -- 8 941 North Carolina........................ 1 126 -- -- -- -- 1 126 Ohio.................................. 4 508 -- -- -- -- 4 508 Oregon................................ 1 161 -- -- -- -- 1 161 Pennsylvania.......................... 3 467 2 258 -- -- 5 725 South Carolina........................ 1 111 -- -- -- -- 1 111 Tennessee............................. 2 251 -- -- -- -- 2 251 Texas................................. 2 256 -- -- -- -- 2 256 U.S. Virgin Islands................... 1 517 -- -- -- -- 1 517 Virginia.............................. 4 430 -- -- -- -- 4 430 -- -- -- -- ----- ----- ----- ------ Total........................ 82 10,866 9 1,747 7 1,393 98 14,006 == ===== == ===== == ===== == ======
35 38 The following table sets forth for the five years ended December 31, 1995 and the three months ended March 31, 1995 and 1996, operating data for the 95 hotels in the Company's portfolio as of March 31, 1996. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of 27 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
MANAGED WITH OWNED FINANCIAL INTEREST OTHER MANAGED TOTAL ------------------------- ------------------------- ------------------------- ------------------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ --------- ------ --------- ------ 1991............... 54 7,284 9 1,747 4 993 67 10,024 1992............... 57 7,632 9 1,747 4 993 70 10,372 1993............... 61 8,121 9 1,747 5 1,108 75 10,976 1994............... 68 9,187 9 1,747 7 1,393 84 12,327 1995............... 76 10,161 9 1,747 7 1,393 92 13,301 *1995.............. 74 9,909 9 1,747 7 1,393 90 13,049 *1996.............. 79 10,482 9 1,747 7 1,393 95 13,622
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ --------- ------ ------ --------- ------ ------ 1991............... 66.4% $60.14 $39.94 61.6% $56.97 $35.11 61.6% $82.44 $50.74 65.1% $61.74 $40.20 1992............... 67.9 60.73 41.21 70.7 58.50 41.33 66.2 82.83 54.81 68.2 62.39 42.54 1993............... 71.2 62.58 44.57 72.9 60.72 44.26 67.2 84.09 56.47 71.1 64.16 45.63 1994............... 69.6 65.28 45.45 72.1 66.42 47.88 69.5 77.58 53.94 70.0 66.92 46.84 1995............... 69.8 69.52 48.52 73.5 69.55 51.09 71.9 80.95 58.18 70.5 70.80 49.93 *1995.............. 65.4 75.03 49.04 66.2 67.52 44.67 62.4 77.15 48.16 65.1 74.18 48.32 *1996.............. 64.9 73.56 47.76 68.6 70.92 48.64 75.5 78.79 59.49 66.5 73.82 49.08
- --------------- * Through March 31. All-Suites Hotels Prime expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have more than 70 AmeriSuites open by the end of 1997. The Company currently owns 25 AmeriSuites hotels. AmeriSuites are all-suites, upper mid-price hotels which offer guests an attractively designed suite with a complimentary continental breakfast in a spacious lobby cafe, remote-control cable television, fully-equipped business centers, fitness centers and pool facilities. The hotels provide group meeting space, but do not include restaurant or lounge facilities. AmeriSuites attract customers principally because of the quality of the guest suites, which offer distinct living, sleeping and kitchen areas and the consistency of product quality. Each AmeriSuites contains approximately 128 suites and two to four meeting rooms. AmeriSuites are primarily located near corporate office parks and travel destinations in the Southern and Central parts of the United States. The target customer is primarily the business traveler with an average length of stay of two to three nights. AmeriSuites are marketed primarily through direct sales, national marketing programs and a central reservation system. The Company believes it has outlined a comprehensive strategy for the rapid development of the AmeriSuites brand while maintaining control of the development process. Detailed Site Selection. The Company undertakes an extensive review process in selecting sites for new AmeriSuites. Key factors in the selection of sites include close proximity to demand generators, superior visibility, ease of access and nearby guest amenities. Sites are initially identified with the assistance of a nationwide network of brokers. Once identified, the Company qualifies the sites before entering into a letter of intent. After a letter of intent is signed, the Company assesses the feasibility of the sites, which includes extensive reconnaissance by the Company's operations and sales and marketing staffs as well as independent consultants. Upon satisfactory completion of economic feasibility, the Company will enter into a contract for 36 39 the site and commence legal, engineering and environmental due diligence. The entire process, from site selection to completion of construction and opening, takes approximately 18 months. Suburban Market Focus. The Company believes that suburban markets offer a number of features which permit the rapid expansion of AmeriSuites. As opposed to major metropolitan markets, suburban markets offer ample land to construct new hotels. More importantly, the Company believes that suburban locations appeal to multiple demand generators. In addition to the business traveler, who is the target customer for AmeriSuites, the weekend/leisure traveler is attracted by the close proximity to nearby dining, shopping and entertainment amenities. Cluster Strategy. The Company intends to expand into new regions by first developing hotels in cities which it has targeted as "key" cities. The Company will then add additional hotels in that region in cities which are logical destinations from the "key" cities. This strategy permits the Company to quickly build brand recognition of AmeriSuites in a particular region. The following table sets forth for the five years ended December 31, 1995 and the three months ended March 31, 1995 and 1996, certain data with respect to AmeriSuites hotels, all of which are owned by the Company. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations.
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 59.90 39.50 1995......................... 19 2,319 67.2 65.45 43.98 *1995........................ 13 1,620 61.2 61.47 37.60 *1996........................ 22 2,640 64.9 67.29 43.67
----------------------- *Through March 31. The Company believes that the all-suites segment will continue to be a high growth segment of the industry. During the 1991-1995 period, demand for all-suites rooms grew at more than double the rate of demand growth experienced by the lodging industry as a whole, and exceeded all-suites supply growth by 67%. The operating performance of the AmeriSuites hotels is benefiting from this favorable trend. For the eight owned AmeriSuites hotels which were open for all of 1995 and 1994, REVPAR increased by 11.9% during 1995. The Company plans to develop the AmeriSuites brand primarily through new construction to assure product consistency and quality. The average age of the AmeriSuites hotels as of July 1, 1996 was 4.5 years. The Company believes that AmeriSuites provide attractive economic returns due to their reasonable cost and rapid stabilization rate. The Company's AmeriSuites have generally achieved positive net operating income within 12 months after opening. The Company believes that economic returns from AmeriSuites development have generally equaled or exceeded those prevalent in the hotel acquisition markets. In 1995, six new AmeriSuites hotels were opened in Atlanta, Greensboro, Jacksonville, Chicago, Columbia and Augusta. In addition, in 1996, the Company has opened six new AmeriSuites hotels in Miami (2), Dallas (2), Cleveland and Detroit, bringing the number of AmeriSuites owned and operated by the Company to 25. The Company currently has 20 AmeriSuites hotels under construction and 25 additional AmeriSuites sites under contract. Full-Service Hotels The Company operates 33 full-service hotels under franchise agreements with Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson. The full-service hotels are concentrated in the Northeast. The hotels are generally positioned along major highways within close proximity to corporate headquarters, office parks, airports, convention or trade centers and other major facilities. The customer base 37 40 for full-service hotels consists primarily of business travelers. Consequently, the Company's sales force markets to companies which have a significant number of employees traveling in the Company's operating regions who consistently produce a high volume demand for hotel room nights. In addition, the Company's sales force actively markets meeting and banquet services to groups and individuals for seminars, business meetings, holiday parties and weddings. The hotels are also marketed through national franchisor programs and central reservation systems. The Company's full-service hotels generally have between 150 and 300 rooms and pool, restaurant, lounge, banquet and meeting facilities. Other amenities include fitness rooms, room service, remote-control cable television and facsimile services. In order to enhance guest satisfaction, the Company also has theme concept lounges such as sports bars, fifties clubs and country and western bars in a number of its hotels. In recent years, the Company has received recognition from various franchisors and associations for its hotel quality and service. The Company owns and operates one resort hotel, the Frenchman's Reef in St. Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 517-room resort hotel which includes a 421-room eight-story building and 96 rooms in the adjacent Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive convention facilities, complete sports and beach facilities and a self-contained total energy system. Certain of these facilities were damaged in the September 1995 hurricane described in the following paragraph. The Frenchman's Reef is marketed directly through its own sales force in New York City and at the hotel, and through the Marriott reservation system. The Frenchman's Reef market includes tour groups, corporate meetings, conventions and individual vacationers. In September 1995, the Frenchman's Reef suffered hurricane damage when Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier have agreed to settle the Company's property and business interruption insurance claim for $25.0 million. Due to this insurance coverage, the Company's liquidity will be affected only to the extent of its insurance deductibles, for which the Company provided a reserve of $2.2 million in 1995. The Company has continued to operate the hotel and has repaired a majority of the damaged rooms on an interim basis. However, the impact of the hurricane has caused operating profits to decline from the 1995 level. The Company is currently assessing the extent of further refurbishment required at the Frenchman's Reef. 38 41 The following table sets forth for the five years ended December 31, 1995 and the three months ended March 31, 1995 and 1996, operating data for the 33 full-service hotels in the Company's portfolio as of March 31, 1996. Operating data for the hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of eight Owned Hotels that were managed by the Company prior to their acquisition by the Company during the five-year period are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL ------------------------ ------------------------ HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1991.................................... 18 3,608 30 6,199 1992.................................... 18 3,608 30 6,199 1993.................................... 18 3,608 31 6,314 1994.................................... 19 3,963 32 6,669 1995.................................... 20 4,112 33 6,818 *1995.................................... 20 4,112 33 6,818 *1996.................................... 20 4,112 33 6,818
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1991.................................... 62.9% $76.09 $47.86 62.5% $72.55 $45.37 1992.................................... 63.7 78.23 49.86 66.2 73.63 48.72 1993.................................... 67.9 81.68 55.44 69.4 76.51 53.06 1994.................................... 66.6 86.36 57.52 68.8 81.28 55.90 1995.................................... 66.4 91.00 60.41 69.2 85.67 59.26 *1995.................................... 60.3 99.26 59.86 62.4 89.03 55.53 *1996.................................... 58.9 92.26 54.37 63.8 86.13 54.97
- --------------- * Through March 31. The Company has taken advantage of opportunities for acquisitions of full-service hotels at attractive multiples of cash flow or at significant discounts to replacement values. In 1995, the Company acquired the 240-room Princeton Ramada Inn in New Jersey, which the Company has since converted to a Holiday Inn, and the 149-room St. Tropez Hotel and Shopping Center in Las Vegas, Nevada. The majority of the Company's repositioning efforts have been performed at the full-service hotels. Since 1993, the Company successfully completed the repositioning of ten of its full-service hotels which included changing the franchise affiliations of five such hotels. The Company recently completed the repositioning of the Hasbrouck Heights Sheraton Hotel to a Crowne Plaza. Limited-Service Hotels The Company's limited-service hotels consist of 30 Wellesley Inns and 10 other hotels operated under franchise agreements, primarily with Howard Johnson. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The acquisition enables the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The acquisition should also provide the Company with significant new opportunities to maximize the value of its brand. Of the Company's 30 Wellesley Inns, 16 are located in Florida and the remainder in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has 105 rooms and is distinguished by its classic stucco exterior, spacious lobby and amenities such as pool facilities, complimentary continental breakfast, remote control cable television and facsimile services. In connection with the acquisition of the 16 Wellesley Inns, the Company intends to refurbish these hotels to ensure consistent product quality throughout the chain. 39 42 Marketing efforts for the Wellesley Inn chain will continue to rely heavily on direct marketing and billboard advertising. In Florida, where the population has grown rapidly and development opportunities continue to exist, the Company has built a geographically concentrated group of Wellesley Inns, thereby developing regional brand name recognition in Florida. The majority of the Florida Wellesley Inns were constructed within the past five years. The Company historically has constructed these properties at a cost of approximately $40,000 per room and a construction period of approximately seven to nine months. Florida Wellesley Inns have a low cost structure and have had rapid stabilization periods generally within six to twelve months of opening. The Company's other limited-service hotels have an average of between 100 and 120 rooms and offer complimentary continental breakfast, remote control cable television, pool facilities and facsimile services, generally with restaurant facilities within a short distance of the hotel. They are designed to appeal primarily to business travelers. The following table sets forth for the five years ended December 31, 1995 and the three months ended March 31, 1995 and 1996, operating data for the 40 limited-service hotels as of March 31, 1996. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of 18 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
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 *1995.................................. 37 3,730 40 4,164 *1996.................................. 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 *1995.................................. 72.4 58.26 42.19 71.0 57.26 40.66 *1996.................................. 71.6 60.17 43.09 71.9 59.23 42.58
- --------------- * Through March 31. REFURBISHMENT PROGRAM The Company continuously refurbishes its Owned Hotels in order to maintain consistent quality standards. The Company generally spends approximately 4% to 6% of hotel revenue on capital improvements at its Owned Hotels and typically refurbishes each hotel approximately every five years. The Company believes that its Owned Hotels are in generally good physical condition, with over half of the Owned Hotels being five years old or less. The Company recommends the refurbishment and repair projects on its Managed Hotels although spending amounts vary based on the plans of such hotels' owners and the significance of the Company's interest as a mortgagee. In addition to making normal capital improvements, the Company reviews on an on-going basis each hotel's competitive position in the local market in order to decide the types of product that will best meet the market's demand characteristics. During the past three years, the Company has implemented a program of 40 43 repositioning its Owned Hotels. Repositioning a hotel generally requires renovation and refurbishment of the exterior and interior of the building and may result in a change of brand name. In 1993, 1994 and 1995, the Company spent $2.8 million, $8.9 million and $13.7 million, respectively, on the repositioning of 16 of its Owned Hotels, which included changing the franchise affiliation of ten of such hotels. In 1996, the Company completed the repositioning of the Hasbrouck Heights Crowne Plaza. Major refurbishment efforts during the remainder of 1996 will focus on the 18 hotels acquired on March 6, 1996, 16 of which are Wellesley Inns. The Company expects to spend approximately $7 million to $8 million in connection with the Wellesley Inns repositionings. MORTGAGES AND NOTES RECEIVABLE As of March 31, 1996, mortgages and notes receivable totaled $26.6 million (including the current portion) and consisted of an aggregate principal amount of $9.1 million of mortgages and notes secured by Managed Hotels, $13.8 million of mortgages secured by hotels that are leased by the Company from third parties and $3.7 million of other mortgages and notes secured primarily by other hotels. The Company has pursued a strategy of converting its mortgage and notes receivable into cash or operating hotel assets and has received $105.8 million in cash and added nine operating hotel assets through note settlements since July 31, 1992. In 1996, the Company obtained control of the 210-room Cocoa Beach Howard Johnson Plaza and the 204-room Fairfield Radisson by converting these mortgage notes receivable into long-term leasehold positions. See Note 5 to Consolidated Financial Statements. MANAGEMENT AGREEMENTS As of July 1, 1996, the Company provided hotel management services to third party hotel owners of 16 Managed Hotels. Management fees are based on fixed percentages of the property's total revenues and incentive payments based on certain measures of hotel income. Additional fees are also generated from the rendering of specific services such as accounting services, construction services, design services and sales commissions. The Company's fixed management fee percentages range from 1.0% to 5.0% and average 3.5% of total revenues before giving consideration to performance related incentive payments. The base and incentive fees comprised 56.2%, or $4.6 million, of the total management and other fees for 1995. Terms of the management agreements vary but the majority are short-term and, therefore, there are risks associated with termination of these agreements. Although management agreements may be terminated in connection with a change in ownership of the underlying hotels, such risks may be limited due to the Company's other financial interests in these hotels. The Company holds financial interests in the form of mortgages or profit participations in 9 of the 16 Managed Hotels. OPERATIONS As a leading domestic hotel operating company, the Company enjoys a number of operating advantages over other lodging companies. With 98 hotels covering a number of price points and broad geographic regions, the Company possesses the critical mass to support sophisticated operating, marketing and financial systems. The Company believes that its broad array of central services permits on-site hotel general managers to effectively focus on providing guest services, results in economies of scale and leads to above-market hotel profit margins. As a result of these operating strategies, the Company's hotels generated average operating profit margins that exceeded comparable industry averages for 1995, as reported by industry sources, by approximately 3% for all-suites hotels, 16% for full-service hotels and 4% for limited-service hotels. The Company's operating strategy combines operating service and guidance from its central management team with decentralized decision-making authority delegated to each hotel's on-site management. The on-site hotel management teams consist of a general manager and, depending on the hotel's size and market positioning, managers of sales and marketing, food and beverage, front desk services, housekeeping and engineering. The Company's operating objective is to exceed guest expectations by providing quality services and comfortable accommodations at a fair value. On-site hotel management is responsible for efficient expense controls and uses operating standards provided by the Company. Within parameters established in the operating and capital planning process, on-site management possesses broad decision-making authority on 41 44 operating issues such as guest services, marketing strategies, hiring practices and incentive programs. Each hotel's management team is empowered to take all necessary steps to ensure guest satisfaction within established guidelines. Key on-site personnel participate in an incentive program based on hotel revenues and profits. The central management team, located in Fairfield, New Jersey, provides four major categories of services: (i) operations management, (ii) sales and marketing management, (iii) financial reporting and control and (iv) hotel support services. Operations Management. Operations management consists of the development, implementation and monitoring of hotel operating standards and is provided by a network of regional operating officers who are each responsible for the operations of 10 to 30 hotels. They are supported by training, food and beverage and human resources departments, each staffed full-time by specialized professionals. The cornerstone of operations management is employee training, with a staff of professionals dedicated to training in sales, housekeeping, food service, front desk services and leadership. The Company believes these efforts increase employee effectiveness, reduce turnover and improve the level of guest services. The Company's cost-effective centralized management services benefit not only its existing operations but also provide additional opportunities for growth and development from acquisitions. In all of the recently acquired hotels, the Company's central management has assumed certain of the operational responsibilities which previously had been performed by the on-site hotel management. In addition, the Company believes it has improved operating efficiencies for each of the hotels that it has acquired. Sales and Marketing Management. Aggressive sales and marketing is a top operating priority. Sales and marketing management is directed by a corporate staff of 20 professionals, including regional marketing directors who are responsible for each hotel's sales and marketing strategies, and the Company's national sales group, Market Segments, Inc. ("MSI"). In cooperation with the regional marketing staff, on-site sales management develops and implements short- and intermediate-term marketing plans. The Company focuses on yield management techniques, which optimize the relationship between hotel rates and occupancies and seek to maximize profitability. In addition, the Company assumes prominent roles in franchise marketing associations to obtain maximum benefit from franchise affiliations. The Company's in-house creative department develops hotel advertising materials and programs at cost-effective rates. Complementing regional and on-site marketing efforts, MSI's marketing team targets specific hotel room demand generators including tour operators, major national corporate accounts, athletic teams, religious groups and others with segment-specialized sales initiatives. MSI's primary objective is to book hotel rooms at the Company's hotels and its secondary objective is to market its services on a commission basis to hotels throughout the industry. Sales activities on behalf of non-affiliated hotels increase the number of hotels where bookings can be made to support marketing efforts and defray the costs of the marketing organization. Financial Reporting and Control. The Company's system of centralized financial reporting and control permits management to closely monitor decentralized hotel operations without the cost of financial personnel on site. Centralized accounting personnel produce detailed financial and operating reports for each hotel. Additionally, central management directs budgeting and analysis, processes payroll, handles accounts payable, manages each hotel's cash, oversees credit and collection activities and conducts on-site hotel audits. Hotel Support Services. The Company's hotel support services combine a number of technical functions in central, specialized management teams to attain economies of scale and minimize costs. Central management handles purchasing, directs construction and maintenance and provides design services. Technical staff teams support each hotel's information and communication systems needs. Additionally, the Company directs safety/risk management activities and provides central legal services. FRANCHISE AGREEMENTS The Company enters into non-exclusive franchise licensing agreements with franchisors, which agreements typically have a ten year term and allow the Company to benefit from franchise brand recognition and loyalty. The non-exclusive nature of the franchise agreement allows the Company the flexibility to continue to 42 45 develop properties with the brands that have shown success in the past or to develop in conjunction with other brand names. This flexibility also plays an important role in the Company's repositioning strategy, which emphasizes proper positioning of its properties within their respective markets to maximize their return on investment. Over the past three years, the Company has repositioned several hotels. These repositionings include the Portland, Oregon Crowne Plaza (formerly Howard Johnson), the Las Vegas, Nevada Crowne Plaza (formerly Howard Johnson), the Saratoga Springs, New York Sheraton (formerly Ramada Renaissance), the Fairfield, New Jersey Radisson (formerly Sheraton), the Orlando, Florida Shoney's Inn (formerly Howard Johnson), the Trevose, Pennsylvania Radisson (formerly Ramada), the Princeton, New Jersey Holiday Inn (formerly Ramada) and the Hasbrouck Heights Crowne Plaza (formerly Sheraton). The Company believes its relationships with numerous nationally recognized franchisors provides significant benefits for both its existing hotel portfolio and prospective hotel acquisitions. While the Company currently enjoys good relationships with its franchisors, there can be no assurance that a desirable replacement would be available if any of the franchise agreements were to be terminated. The franchise agreements require the Company to pay annual fees, to maintain certain standards and to implement certain programs which require additional expenditures by the Company such as remodeling or redecorating. The payment of annual fees, which typically total 7% to 8% of room revenues, cover royalties and the costs of marketing and reservation services provided by the franchisors. Franchise agreements, when initiated, generally provide for an initial fee in addition to annual fees payable to the franchisor. LITIGATION In May 1996, the Company received a favorable ruling from the U.S. Court of Appeals for the 11th Circuit (the "Court of Appeals") in its litigation with Financial Security Assurance, Inc. ("FSA") in which FSA sought approximately $31,200,000 received by the Company in settlement of a note and guaranty from Allen V. Rose and Arthur Cohen ("Rose and Cohen"). The Company had reached a settlement in 1993 with Rose and Cohen which provided for Rose or his affiliate to pay the Company $25,000,000 plus proceeds from the sale of approximately 1,100,000 shares of the Company's common stock held by Rose, bringing the total settlement proceeds to approximately $31,200,000. FSA asserted that, under the terms of an intercreditor agreement, it was entitled to receive the settlement proceeds otherwise payable to the Company. The U.S. Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") ruled in April 1994 that the Company alone was entitled to the settlement proceeds, and the Company used $25,000,000 of the settlement proceeds to retire certain senior secured notes. FSA appealed to the U.S. District Court for the Southern District of Florida (the "District Court"), which affirmed the Bankruptcy Court's ruling. On May 12, 1995, the Company used the remaining proceeds plus accrued interest to prepay the remaining senior secured notes outstanding. FSA appealed to the Court of Appeals, which on May 21, 1996 affirmed the District Court's ruling. While the decision of the Court of Appeals is subject to appeal, the Company believes that any further appeal will affirm the Court of Appeals ruling and that there will be no effect on the Company's financial position, results of operations or liquidity. 43 46 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........... 44 President, Chief Executive Officer and Chairman of the Board of Directors John M. Elwood........... 42 Executive Vice President, Chief Financial Officer and Director Howard M. Lorber(1)...... 47 Director Herbert Lust, II(1)...... 69 Director Jack H. Nusbaum.......... 55 Director Allen J. Ostroff(1)...... 60 Director A.F. Petrocelli(1)....... 52 Director Paul H. Hower............ 62 Executive Vice President Timothy E. Aho........... 52 Senior Vice President/Development Denis W. Driscoll........ 51 Senior Vice President/Human Resources John H. Leavitt.......... 44 Senior Vice President/Sales and Marketing Joseph Bernadino......... 49 Senior Vice President, Secretary and General Counsel Richard T. Szymanski..... 39 Vice President and Corporate Controller Douglas W. Vicari........ 36 Vice President and Treasurer
- --------------- (1) Member of the Compensation and Audit Committee. The following is a biographical summary of the experience of the directors and executive officers of the Company: David A. Simon has been President, Chief Executive Officer and a Director since 1992 and Chairman of the Board of Directors of the Company since 1993. Mr. Simon was a director of PMI from 1991 to 1992. Mr. Simon was the Chief Executive Officer of PMI from 1991 to 1992. John M. Elwood has been a Director and Executive Vice President of the Company since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the Director of Reorganization of PMI from 1991 to 1992. Howard M. Lorber has been a Director and a member of the Compensation and Audit Committee since 1994. Mr. Lorber is Chairman of the Board of Directors of Nathan's Famous, Inc. and Hallman & Lorber Associates, Inc. and a director of New Valley Corporation, United Capital Corp. and Alpine Lace Brands, Inc. Mr. Lorber has been Chief Executive Officer of Hallman & Lorber Associates, Inc. for more than the past five years, President and Chief Operating Officer of New Valley Corporation since 1994 and Chief Executive Officer of Nathan's Famous, Inc. since 1993. Mr. Lorber has also been a general partner or shareholder of a corporate general partner of various limited partnerships organized to acquire and operate real estate properties. Herbert Lust, II has been a Director since 1992 and Chairman of the Compensation and Audit Committee of the Company since 1993. Mr. Lust was a member of the Committee of Unsecured Creditors of PMI from 1991 to 1992. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust. Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman of the law firm of Willkie Farr & Gallagher, where he has been a partner for more than the past twenty-five years. He also is a director of Pioneer Companies, Inc., W.R. Berkley Corporation, The Topps Company, Inc. and Fine Host Corporation. Allen J. Ostroff has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Ostroff has been a Managing Director of the Prudential Realty Group, a 44 47 subsidiary of The Prudential Insurance Company of America, since June 1994 and was a Senior Vice President of the Prudential Realty Group from 1991 to June 1994. A.F. Petrocelli has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Petrocelli has been the Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years. He is also a director of Nathan's Famous, Inc. Paul H. Hower has been an Executive Vice President of the Company since 1993. Mr. Hower was President of Integrity Hospitality Services from 1991 to 1993 and Vice President and Hotel Division Manager of B.F. Saul Co. in 1991. Timothy E. Aho has been a Senior Vice President of the Company since 1994. Mr. Aho was a Senior Vice President of Development for Boykin Management Company from 1993 to 1994 and Vice President of Development for Interstate Hotels Corporation from 1991 to 1993. Denis W. Driscoll has been a Senior Vice President of the Company since 1993. Mr. Driscoll was President of Driscoll Associates, a human resources consulting organization, from 1991 to 1993. John H. Leavitt has been a Senior Vice President of the Company since 1992. Mr. Leavitt was a Senior Vice President of PMI from 1991 to 1992 and a Senior Vice President of Medallion Hotel corporation in 1991. Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of the Company since 1992. Mr. Bernadino was an Assistant Secretary and Assistant General Counsel of PMI from 1991 to 1992. Richard T. Szymanski has been a Vice President and Corporate Controller of the Company since 1992. Mr. Szymanski was Corporate Controller of PMI from 1991 to 1992. Douglas W. Vicari has been a Vice President and Treasurer of the Company since 1992 and was Vice President and Treasurer of PMI during 1992. Mr. Vicari was the Director of Budget and Financial Analysis of PMI from 1991 to 1992. 45 48 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 75,000,000 shares of Common Stock and 20,000,000 shares of Preferred Stock. COMMON STOCK At March 31, 1996, 31,049,512 shares of Common Stock were issued and outstanding. Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the Company's stockholders, including the election of directors. The Common Stock does not have cumulative voting rights. Subject to the preferential rights of any outstanding series of Preferred Stock, the holders of Common Stock will be entitled to such dividends as may be declared from time to time by the Board of Directors from funds legally available therefor, and will be entitled to receive pro rata all assets of the Company available for distribution to such holders upon liquidation. All shares of Common Stock are fully paid and non-assessable. PREFERRED STOCK The Board of Directors has authority to establish the designations, liquidation preferences, dividend rights, terms of redemption, conversion rights, sinking fund terms and all other preferences and rights (including voting rights) of any series of Preferred Stock. The ability of the Board of Directors to issue Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting powers of holders of Common Stock and, under certain circumstances, may discourage an attempt by others to gain control of the Company. WARRANTS Warrants to purchase 2,106,383 shares of Common Stock were issued to former shareholders of the Company's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share. The exercise price was determined from the average per share daily closing price of the Common Stock during the year following the effective date of the PMI reorganization. As of March 31, 1996, warrants to purchase 663,326 shares of Common Stock had been exercised. ANTI-TAKEOVER PROVISIONS Certain provisions of the Certificate of Incorporation and Bylaws of the Company summarized below may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including an attempt that might result in a premium over the market price for the shares held by stockholders. Staggered Board of Directors. The Certificate of Incorporation and the Bylaws provide that the Board of Directors will be divided into three classes of Directors, each class constituting approximately one-third of the total number of Directors and with the classes serving staggered three-year terms. The classification of Directors will have the effect of making it more difficult for shareholders to change the composition of the Board of Directors. The Company believes, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure continuity and stability of the Company's management and policies. The classification provisions could also have the effect of discouraging a third party from accumulating large blocks of the Company's stock or attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. Fair Price Provisions. Provisions of the Certificate of Incorporation (the "Fair Price Provisions") limit the ability of an Interested Stockholder (defined as the beneficial owner of 20% of outstanding voting shares) to effect certain transactions involving the Company. Unless the Fair Price Provisions are satisfied, an 46 49 Interested Stockholder may not engage in a business combination involving the Company unless approved by 75% of the Company's outstanding voting shares or a majority of the Disinterested Directors (as defined therein). A business combination includes a merger, consolidation, sale of assets valued at over $25.0 million or issuance or transfer of securities valued at over $25.0 million, or a similar transaction. In general, the Fair Price Provisions require that an Interested Stockholder pay shareholders at least the same amount of cash or the same amount and type of consideration paid by the Interested Stockholder when it initially acquired the Company's shares. The Fair Price Provisions are designed to discourage attempts to take over the Company in non-negotiated transactions utilizing two-tier pricing tactics, which typically involve the accumulation of a substantial block of the target corporation's stock followed by a merger or other reorganization of the acquired company on terms determined by the purchaser. Due to the difficulties of complying with the requirements of the Fair Price Provisions, the Fair Price Provisions generally discourage attempts to obtain control of the Company. LIMITATIONS ON DIRECTORS' LIABILITY The Company's Certificate of Incorporation provides that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or redemptions or repurchases pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors under Federal securities laws. CERTAIN PROVISIONS OF DELAWARE LAW REGARDING AN INTERESTED STOCKHOLDER Section 203 of the Delaware General Corporation Law prohibits certain transactions between a Delaware corporation and an "interested stockholder," which is defined as a person who, together with any affiliates or associates of such person, beneficially owns, directly or indirectly, 15% or more of the outstanding voting shares of a Delaware corporation. This provision prohibits certain business combinations (defined broadly to include mergers, consolidations, sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation) between an interested stockholder and a corporation for a period of three years after the date the interested stockholder becomes an interested stockholder, unless (i) the business combination is approved by the corporation's board of directors prior to the date the interested stockholder becomes an interested stockholder; (ii) the interested stockholder acquired at least 85% of the voting stock of the corporation (other than stock held by directors who are also officers or by certain employee stock plans) in the transaction in which it becomes an interested stockholder; or (iii) the business combination is approved by a majority of the board of directors and by the affirmative vote of 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. 47 50 UNDERWRITING The Underwriters named below have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock opposite their respective names at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, and that the Underwriters are committed to purchase all of such shares if they purchase any.
UNDERWRITER NUMBER OF SHARES --------------------------------------------------------------------- ---------------- Montgomery Securities................................................ BT Securities Corporation............................................ Smith Barney Inc. ................................................... --------- Total...................................................... 7,500,000 =========
The Underwriters have advised the Company that they propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a discount of not more than $ per share to other dealers. The public offering price and the concession and discount to dealers may be changed by the Underwriters after the public offering of the shares. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted the Underwriters an option for 30 days to purchase up to an additional 1,125,000 shares of Common Stock solely to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act of 1933, as amended (the "Securities Act"), or will contribute to payments the Underwriters may be required to make in respect thereof. The Company and its directors and executive officers have agreed not to offer for sale, sell, distribute or otherwise dispose of any shares of Common Stock, or any securities convertible into or warrants to purchase shares of Common Stock, now owned or hereafter acquired for a period of approximately 90 days after the date of this Prospectus, except under certain circumstances, without prior written consent of Montgomery Securities. BT Securities Corporation is an affiliate of Bankers Trust Company, which is the agent and a lender under the Revolving Credit Facility, and with respect to which Bankers Trust Company has received and will receive customary compensation. Bankers Trust Company and its affiliates have provided other commercial and investment banking services to the Company, with respect to which Bankers Trust Company and its affiliates have received customary compensation. Smith Barney Inc. from time to time has provided financial advisory services to the Company. Smith Barney Inc. has received customary fees for such services. LEGAL MATTERS Certain legal matters with respect to the legality of the shares of Common Stock offered hereby will be passed upon for the Company by Willkie Farr & Gallagher, New York, New York. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Latham & Watkins, Washington, D.C. Jack H. Nusbaum, a Director of the Company who beneficially owns 10,000 shares of Common Stock and an additional 40,000 shares of Common Stock underlying stock options, is a partner in the law firm of Willkie Farr & Gallagher. 48 51 EXPERTS The consolidated financial statements included in this Prospectus and elsewhere in the Registration Statement, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said report. 49 52 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). The reports and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates. The Company's Common Stock, par value $.01 per share, 9 1/4% First Mortgage Notes due 2006 and 7% Convertible Subordinated Notes due 2002 are listed on the New York Stock Exchange. Reports, proxy materials and other information concerning the Company may also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which are omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, including the exhibits and schedules. The Registration Statement, together with its exhibits and schedules thereto, may be inspected, without charge, at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20459, and also at the regional offices of the Commission listed above. Copies of such material may also be obtained from the Commission upon the payment of prescribed fees. Statements contained in the Prospectus as to any contracts, agreements or other documents filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is hereby made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement for a full statement of the provisions thereof, and each such statement in the Prospectus is qualified in all respects by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, the Company's Current Report on Form 8-K, as amended on Form 8-K/A, dated March 6, 1996 and the description of the Common Stock contained in the Company's Registration Statement on Form 8-A dated June 5, 1992, as amended on July 9, 1992 and December 21, 1992, each previously filed by the Company with the Commission, are incorporated herein by reference. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and before the termination of the Offering shall be deemed incorporated herein by reference, and such documents shall be deemed to be a part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement as so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, on the request of any such person, a copy of any or all of the above documents incorporated herein by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the documents that this Prospectus incorporates). Requests should be directed to Prime Hospitality Corp., 700 Route 46 East, Fairfield, New Jersey 07007-2700, Attention: Joseph Bernadino, Senior Vice President, Secretary and General Counsel, (201) 882-1010. 50 53 PRIME HOSPITALITY CORP. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated: Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited).................. F-2 Statements of Income (Unaudited) for the Three Months Ended March 31, 1995 and March 31, 1996......................................................................... F-3 Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1995 and March 31, 1996................................................................... F-4 Notes to Interim Consolidated Financial Statements.................................... F-5 Report of Arthur Andersen LLP......................................................... F-7 Consolidated: Balance Sheets at December 31, 1994 and 1995........................................ F-8 Statements of Income for the Years Ended December 31, 1993, 1994 and 1995........... F-9 Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995............................................................................. F-10 Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995....... F-11 Notes to Consolidated Financial Statements............................................ F-12
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 54 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND MARCH 31, 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31, 1995 1996 ------------ --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................................... $ 49,533 $ 23,629 Marketable securities available for sale........................... 11,929 7,999 Restricted cash.................................................... 8,973 9,434 Accounts receivable, net of reserves............................... 13,139 14,318 Current portion of mortgages and notes receivable.................. 1,533 1,173 Other current assets............................................... 8,070 9,928 -------- -------- Total current assets....................................... 93,177 66,481 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization...................................... 398,201 529,916 Mortgages and notes receivable, net of current portion............... 64,962 25,405 Other assets......................................................... 16,901 21,074 -------- -------- TOTAL ASSETS............................................... $573,241 $ 642,876 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt............................................ $ 5,731 $ 5,699 Other current liabilities.......................................... 38,961 40,250 -------- -------- Total current liabilities.................................. 44,692 45,949 Long-term debt, net of current portion............................... 276,920 335,271 Other liabilities.................................................... 18,713 18,682 -------- -------- Total liabilities.......................................... 340,325 399,902 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued......................................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized; 31,004,499 and 31,049,512 shares issued and outstanding at December 31, 1995 and March 31, 1996, respectively.................................................... 310 310 Capital in excess of par value....................................... 183,050 185,166 Retained earnings.................................................... 49,556 57,498 -------- -------- Total stockholders' equity................................. 232,916 242,974 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $573,241 $ 642,876 ======== ========
See Accompanying Notes to Interim Consolidated Financial Statements. F-2 55 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, --------------------- 1995 1996 ------- ------- Revenues: Lodging.............................................................. $34,375 $41,974 Food and beverage.................................................... 8,884 8,024 Management and other fees............................................ 1,637 1,692 Interest on mortgages and notes receivable........................... 3,026 2,681 Business interruption insurance...................................... -- 3,739 Rental and other..................................................... 316 504 ------- ------- Total revenues............................................... 48,238 58,614 ------- ------- Costs and expenses: Direct hotel operating expenses: Lodging........................................................... 8,698 10,624 Food and beverage................................................. 6,657 6,914 Selling and general............................................... 11,824 14,010 Occupancy and other operating........................................ 2,611 3,482 General and administrative........................................... 3,872 4,219 Depreciation and amortization........................................ 3,976 5,224 ------- ------- Total costs and expenses..................................... 37,638 44,473 ------- ------- Operating income....................................................... 10,600 14,141 Investment income...................................................... 514 1,265 Interest expense....................................................... (4,100) (5,851) Other income........................................................... -- 3,432 ------- ------- Income before income taxes and extraordinary items..................... 7,014 12,987 Provision for income taxes............................................. 2,806 5,195 ------- ------- Income before extraordinary items...................................... 4,208 7,792 Extraordinary items -- gains on discharges of indebtedness (net of income taxes)................................................ 7 149 ------- ------- Net income............................................................. $ 4,215 $ 7,941 ======= ======= Earnings per common share: Primary: Income before extraordinary items.................................... $ .13 $ .24 Extraordinary items.................................................. -- -- ------- ------- Net earnings........................................................... $ .13 $ .24 ======= ======= Fully diluted: Income before extraordinary items.................................... $ .13 $ .22 Extraordinary items.................................................. -- -- ------- ------- Net earnings........................................................... $ .13 $ .22 ======= =======
See Accompanying Notes to Interim Consolidated Financial Statements. F-3 56 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------ 1995 1996 -------- --------- Cash flows from operating activities: Net income........................................................ $ 4,215 $ 7,941 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 3,976 5,224 Business interruption insurance revenue........................ -- (3,739) Utilization of net operating loss carryforwards................ 1,418 1,958 Gains on settlements of notes receivable....................... -- (1,778) Gains on discharges of indebtedness............................ (11) (249) Gains on sales of assets....................................... -- (1,956) Compensation expense related to stock options.................. 12 -- Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable............................................ (1,965) (1,179) Other current assets........................................... (538) 1,883 Other liabilities.............................................. (2,258) 550 -------- --------- Net cash provided by operating activities...................... 4,849 8,655 -------- --------- Cash flows from investing activities: Net proceeds from mortgages and other notes receivable............ 3,211 8,275 Disbursements for mortgages and notes receivable.................. -- (800) Proceeds from sales of property, equipment and leasehold improvements................................................... 13 3,706 Purchases of property, equipment and leasehold improvements....... (16,072) (103,648) Increase in restricted cash....................................... (585) (461) Proceeds from sales of marketable securities...................... 100 4,856 Other............................................................. 415 (129) -------- --------- Net cash used in investing activities..................... (12,918) (88,201) -------- --------- Cash flows from financing activities: Net proceeds from issuance of debt................................ 39,000 114,979 Payments of debt.................................................. (1,533) (61,494) Proceeds from the exercise of stock options and warrants.......... 472 157 -------- --------- Net cash provided by financing activities................. 37,939 53,642 -------- --------- Net increase (decrease) in cash and cash equivalents................ 29,870 (25,904) Cash and cash equivalents at beginning of period.................... 12,524 49,533 -------- --------- Cash and cash equivalents at end of period.......................... $ 42,394 $ 23,629 ======== =========
See Accompanying Notes to Interim Consolidated Financial Statements. F-4 57 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION In the opinion of management, the accompanying interim unaudited consolidated financial statements of Prime Hospitality Corp. and subsidiaries (the "Company") contain all material adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 1996 and the results of its operations for the three months ended March 31, 1995 and 1996 and cash flows for the three months ended March 31, 1995 and 1996. The financial statements for the three months ended March 31, 1995 and 1996 were prepared on a consistent basis with the audited consolidated financial statements for the year ended December 31, 1995. The consolidated results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. NOTE 2 -- ACQUISITIONS On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65,100,000 in cash. The acquisition enabled the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The acquisition price was comprised of approximately $60,400,000 to purchase the first mortgage on the 18 hotels with a face value of approximately $70,500,000 and $4,700,000 to purchase the interests of the three partnerships which owned the hotels. Approximately $1,900,000 of the total purchase price was paid to a partnership in which a general partner is the father of the Company's President and Chief Executive Officer. In connection with the transaction, the Company also terminated its management agreements and junior subordinated mortgages related to the 18 hotels. The transaction has been accounted for as a purchase and, accordingly, the revenues and expenses of these hotels have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements since January 1, 1996, reported results would not have been materially different. NOTE 3 -- DEBT On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First Mortgage Notes due 2006. Interest on the notes is payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after January 15, 2001 at premiums to principal which decline on each anniversary date. The Company utilized a portion of the proceeds to pay down $51,601,000 of debt. NOTE 4 -- EARNINGS PER COMMON SHARE Primary earnings per common share was computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each period. The weighted average number of common shares used in computing primary earnings per share was 32,365,000 and 32,865,000 for the three months ended March 31, 1995 and 1996, respectively. Fully diluted earnings per share, in addition to the adjustments for primary earnings per share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% convertible subordinated notes from their issuance in April 1995. The weighted average number of F-5 58 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) common shares used in computing fully diluted earnings per share was 32,365,000 and 40,346,000 for the three months ended March 31, 1995 and 1996, respectively. NOTE 5 -- BUSINESS INTERRUPTION INSURANCE REVENUE In September 1995, the Company-owned Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef") in St. Thomas U.S. Virgin Islands suffered hurricane damage. Due to extensive property and business interruption insurance, the Company believes that its liquidity will be affected only to the extent of its insurance deductibles for which the Company provided a reserve of $2,200,000 in 1995. The Company has continued to operate the hotel and has repaired a majority of the damaged rooms on an interim basis. However, the impact of the hurricane has caused operating profits to decline from the prior year level. For the three months ended March 31, 1996, the Company continued to record the operating revenues and expenses of the Frenchman's Reef. In addition, the Company estimated its business interruption insurance proceeds assuming no growth over the prior year's profit level and recorded revenue and a corresponding receivable of $3,739,000. The Company is currently engaged in discussions with its insurance carrier regarding the amount of property and business interruption insurance proceeds to be paid and is assessing the extent of refurbishment required at the Frenchman's Reef. NOTE 6 -- OTHER INCOME Other income consists of items which are not considered part of the Company's recurring operations. For the three months ended March 31, 1996, other income consisted of a gain on the settlement of a note receivable of $1,778,000 and a gain on the sale of a hotel of $1,654,000. NOTE 7 -- SUBSEQUENT EVENT On July 2, 1996, the Company filed a registration statement covering the sale of 7.5 million shares of its common stock. The Company intends to use the net proceeds from this offering to fund the development and growth of its AmeriSuites all-suites hotel brand. The offering is subject to a number of risks that should be considered by prospective investors. See "Risk Factors" included elsewhere in this Registration Statement. F-6 59 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Prime Hospitality Corp.: We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 1994 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey January 31, 1996, except with respect to the matters discussed in Note 16 as to which the date is July 2, 1996 F-7 60 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-8 61 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR 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-9 62 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL COMMON STOCK 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........... -- -- 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-10 63 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR 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-11 64 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994 AND 1995 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES: Prime Hospitality Corp. (the "Company") is a hotel owner/operator with ownership or management of hotels in the United States and the U.S. Virgin Islands. The Company's hotels primarily provide moderately priced, quality accommodations in secondary markets, and operate under franchise agreements with national hotel chains or under the Company's proprietary Wellesley Inns or AmeriSuites brand names. BASIS OF PRESENTATION: The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992. Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximate the present values of amounts to be paid determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: Cash equivalents are highly liquid unrestricted investments with a maturity of three months or less when acquired. MARKETABLE SECURITIES: Marketable securities consist primarily of commercial paper and other corporate debt and equity securities which mature or are available for sale within one year. Marketable securities are valued at current market value, which approximates cost. F-12 65 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RESTRICTED CASH: Restricted cash consists primarily of highly liquid investments that serve as collateral for debt obligations due within one year. MORTGAGES AND NOTES RECEIVABLE: Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted for payments and other advances since that date. The amount of interest income recognized on mortgages and notes receivable is generally based on the stated interest rate and the carrying value of the notes. The Company has a number of subordinated or junior mortgages which remit payment based on hotel cash flow. Because there was substantial doubt that the Company would recover any value, these mortgages were assigned no value in the Company's consolidated financial statements when the Company adopted fresh-start reporting on July 31, 1992. Interest on cash flow mortgages and delinquent loans is generally recognized when cash is received. In 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan (SFAS 114)" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118)". As defined in SFAS 114 and SFAS 118, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS 114 and SFAS 118 require that the measurement of impairment of a loan be based on the present value of expected future cash flows (net of estimated costs to sell) discounted at the loan's effective interest rate. Impairment can also be measured based on a loan's observable market price or the fair value of collateral, if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company will establish a valuation allowance, or adjust existing valuation allowances, with a corresponding charge or credit to operations. The effect of adopting these new accounting standards was immaterial in 1995. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Properties identified for disposal are stated at their estimated net realizable value. During 1995, the Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121)". Following this standard, the Company evaluates whether impairment has occurred at each of its properties based upon the future cash flows (undiscounted and before interest charges) as compared to the carrying value of the property. Based upon its evaluation as of December 31, 1995, the Company has determined that no impairment has occurred. OTHER ASSETS: Other assets consist primarily of deferred issuance costs related to the Company's 7% Convertible Subordinated Notes due 2002 and other debt obligations. Deferred issuance costs are amortized over the respective terms of the loans using the effective interest method. SELF-INSURANCE PROGRAMS: The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay. F-13 66 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company. Provisions have been made in the combined financial statements which represent the expected future payments based on the estimated ultimate cost for incidents incurred through the balance sheet date. INCOME TAXES: The Company and its subsidiaries file a consolidated Federal income tax return. For financial reporting purposes, the Company follows SFAS No. 109 "Accounting for Income Taxes". In accordance with SFAS 109, as well as SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized. NET INCOME PER COMMON SHARE: Primary net income per common share is computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each year. The weighted average number of common shares used in computing primary net income per share was 30,721,000, 32,022,000 and 32,461,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Fully diluted net income per share, in addition to the adjustments for primary net income per share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes from their issuance in April 1995. The weighted average number of common share used in computing fully diluted net income per share was 37,423,000 for the year ended December 31, 1995. Fully diluted net income per share has not been presented in the consolidated financial statements because the dilutive effect is not material. PRE-OPENING COSTS: Non-capital expenditures incurred prior to opening new or renovated hotels such as payroll and other operating supplies are deferred and expensed within one year after opening. Preopening costs charged to expense were $0, $86,000 and $364,000 for the years ended December 31, 1993, 1994 and 1995. As of December 31, 1995, $261,000 of pre-opening costs are included in other current assets. INTEREST RATE SWAPS: The Company has entered into an interest rate swap agreement which reduces the Company's exposure to interest rate fluctuations. The accounting treatment for the Company's off balance sheet interest rate swap agreement is to accrue net interest to be received or to be paid as an adjustment to interest expense. RECLASSIFICATIONS: Certain reclassifications have been made to the December 31, 1993 and 1994 consolidated financial statements to conform them to the December 31, 1995 presentation. NOTE 2 -- HOTEL PROPERTY ACQUISITIONS In March 1995, the Company acquired the option of ShoLodge, Inc. ("ShoLodge") to purchase a 50% interest in eleven of the Company's AmeriSuites hotels and also acquired the remaining AmeriSuites hotel not F-14 67 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) already owned by the Company. In 1993, the Company and its wholly-owned subsidiary, Suites of America, Inc. ("SOA") entered into agreements with ShoLodge, a company controlled by a former director, designed to further the growth of its AmeriSuites hotels from the six hotels owned by the Company at that time. Pursuant to these agreements, (i) ShoLodge agreed to build and finance six additional AmeriSuites hotels and received an option to purchase a 50% interest in SOA and (ii) the Company received an option pursuant to which it could require ShoLodge to purchase a 50% interest in SOA. The exercise of the option by ShoLodge was scheduled to occur in January 1995, when the Company and ShoLodge began to negotiate the Company's buyout of ShoLodge's option. The consideration payable by the Company was based upon the fair market value of the properties. The consideration totaled $19,700,000 and was comprised of (i) $16,100,000 in cash, which was paid in 1995, plus (ii) $18,500,000 in notes maturing in 1997, less (iii) $14,900,000 of existing debt on five hotels, which was forgiven at face value. The transaction resulted in a net increase of approximately $3,600,000 of long-term debt. No gain or loss was recorded on the forgiveness of debt. As a result of this transaction, the Company assumed management of these hotels. In August 1995, the Company entered into an agreement to purchase four Bradbury Suites hotels for $18,700,000. The hotels, comprising 447 rooms, were subsequently converted to the Company's proprietary AmeriSuites brand. In August 1995, the Company also purchased the 149 room all-suite St. Tropez Hotel and Shopping Center in Las Vegas for $15,200,000. Revenues and expenses from these transactions have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements for the full year, reported results would not have been materially different. NOTE 3 -- CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of the following (in thousands):
DECEMBER 31, ------------------- 1994 1995 ------- ------- Cash..................................................... $ 5,953 $ 4,312 Commercial paper and other cash equivalents.............. 6,571 45,221 ------- ------- Totals......................................... $12,524 $49,533 ======= =======
NOTE 4 -- MARKETABLE SECURITIES Marketable securities are comprised of the following (in thousands):
DECEMBER 31, ------------------ 1994 1995 ------ ------- Equity securities......................................... $1,117 $ 3,796 Corporate debt securities................................. -- 8,133 ------ ------- Totals.......................................... $1,117 $11,929 ====== =======
F-15 68 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
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 operated by the Company under management agreements. Pursuant to these mortgage agreements, the Company is entitled to receive the majority of excess cash flow generated by these hotel properties and to participate in any future sales proceeds. With regard to these properties, third parties hold significant senior mortgages. The junior mortgages mature on various dates from 1999 through 2002. In accordance with the adoption of fresh start reporting under SOP 90-7, no value was assigned to the junior portions of the notes or the junior mortgages and subordinated interests on the other hotels as there was substantial doubt at the time of valuation that the Company would recover any of their value. As a result, interest income on these junior or cash flow mortgages is recognized when cash is received. During 1993, 1994 and 1995, the Company recognized $976,000, $2,000,000 and $1,950,000, respectively, of interest income related to these mortgages. Future recognition of interest income on these mortgages is dependent primarily upon the net cash flow of the underlying hotels after debt service, which is senior to the Company's junior positions. (b) Other notes receivable currently bear interest at effective rates ranging from 4.0% to 10.0%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company. F-16 69 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
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 ======== ========
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-17 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 approximately $4,800,000. These notes are currently held by the third party agent and have not been retired due to certain restrictions under the note agreements. The purchases were recorded as investments on the Company's balance sheet and no gains are recorded until the notes mature or are redeemed. During 1994, approximately $1,137,000 of the notes were retired resulting in a pretax extraordinary gain of approximately $105,000. During 1995, approximately $1,738,000 of the notes were retired resulting in a pretax extraordinary gain of $174,000. As of December 31, 1995, the Company had unrecognized holding gains of approximately $177,000 related to these securities. (b) In 1995, the Company sold $86,250,000 of 7% Convertible Subordinated Notes due 2002. The notes are convertible into common stock at a price of $12 per share at the option of the holder and mature on April 15, 2002. The notes are redeemable, in whole or in part, at the option of the Company after April 17, 1998 at premiums to principal which decline on each anniversary date. (c) The Company has mortgage and other notes payable of approximately $158,904,000 that are secured by mortgage notes receivable and hotel properties with a book value of $260,116,000. F-18 71 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1995 these notes bear interest at rates ranging from 6.6% to 10.5%, with a weighted average interest rate of 9.3%, and mature from 1996 through 2007. Subsequent to December 31, 1995, the Company entered into an agreement to extend the maturity of a loan in the amount of $32,097,000 secured by the Frenchman's Reef from December 1996 to July 1997. The loan will bear interest at the same rate currently in effect and principal payments will be waived until July 1997. All other terms and conditions of the loan shall remain in effect. The December 31, 1995 consolidated financial statements reflect the impact of this amendment. Additionally, the Company's debt related to the Frenchman's Reef is further secured by an assignment of property insurance proceeds related to the hurricane damage (See Notes 7 and 11). The lender has sole discretion concerning the utilization of such proceeds for refurbishment. The Company is discussing with the lender the terms under which the lender will make such funds available for refurbishment. (d) The Company has $7,123,000 of capital lease obligations. Principal and interest on these capital lease obligations are generally paid monthly. At December 31, 1995, these leases bear interest at rates ranging from 6.7% to 12.45%, with a weighted average interest rate of 10.8%, and mature through 2001. In August 1995, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40 million of variable interest rate debt. Under the agreement, on a monthly basis the Company will pay a fixed rate of interest of 6.18% and will receive a floating interest rate payment equal to the 30 day LIBOR rate on a $40 million notional principal amount. The agreement commenced in October 1995 and expires in 1999. Maturities of long-term debt for the next five years ending December 31 are as follows (in thousands): 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-19 72 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule, by year, of future minimum lease payments required under the remaining operating leases that have terms in excess of one year as of December 31, 1995 (in thousands): 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. FSA asserted that, under the terms of an intercreditor agreement, it was entitled to receive the settlement proceeds otherwise payable to the Company. The U.S. Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") ruled in favor of the Company in April 1994 and the Company used $25,000,000 of the settlement proceeds to retire certain senior secured notes. FSA appealed to the U.S. District Court, which affirmed the Bankruptcy Court's ruling. On May 12, 1995, the Company used the remaining proceeds plus accrued interest to prepay the 10% Senior Secured Notes. On May 23, 1995, FSA filed a notice of appeal with the U.S. Court of Appeals for the 11th Circuit. The Company believes that the U.S. Court of Appeals will affirm the U.S. District Court ruling and that there will be no effect on the Company's financial position or results of operations. The Company is involved in various other proceedings incidental to the normal course of its business. The Company believes that the resolution of these contingencies will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. F-20 73 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- INCOME TAXES The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 1993, 1994 and 1995 (in thousands):
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. 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 F-21 74 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company recognized $4,525,000, $5,861,000 and $3,370,000, respectively of such benefits as a contribution to stockholders' equity. Additionally, the Company recognized $6,954,000 and $6,167,000 as a contribution to stockholders' equity for the years ended December 31, 1994 and 1995, which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable. As a result of reflecting substantially all of the deferred tax provisions as a contribution to stockholders' equity, the Company had no material deferred tax assets or liabilities as of December 31, 1994 and 1995. NOTE 11 -- OTHER INCOME/EXPENSE Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following as of December 31, 1993, 1994 and 1995 (in thousands):
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........................ -- 1,579 -- premiums 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 (in thousands). 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)
The fair value for mortgages and notes receivable is based on the valuation of the underlying collateral utilizing discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or at current rates available to the Company for debt of the same maturities. The fair value of the interest rate swap agreement is based on the estimated amount the Company would pay to terminate the agreement. The Company's mortgages and other notes receivable (See Note 5) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many of the same risks as the Company's operating hotel assets. A significant portion of the collateral is located in the Northeastern and Southeastern United States. F-22 75 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13 -- RELATED PARTY TRANSACTIONS The following summarizes significant financial information with respect to transactions with present and former officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 1993, 1994 and 1995 (in thousands):
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 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 F-23 76 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) options can be exercised during a participant's employment in equal annual installments over a three year period and expire six years from the date of grant. Options to purchase 315,000, 30,000 and 60,000 shares of common stock were issued to non-employee directors of the Company in 1993, 1994 and 1995, respectively, under the Company's 1992 Stock Option Plan. The options were granted at prices which approximate fair market value at the date of grant. Generally, one-third of these options were exercisable at the date of grant and the remaining options vest in equal annual installments over a two-year period. The options expire six years after the date of grant. During 1992, options to purchase 350,000 shares were granted to employee officers and directors under the Company's 1992 Stock Option Plan. All 350,000 shares are currently exercisable at December 31, 1995. In addition, options to purchase 330,000 shares were granted to a former officer in 1992. At December 31, 1995, all of these options were exercised. The exercise prices of the above options are based on the average market price one year from the date of grant which was determined to be $2.71 per share. Based on this exercise price, the amount of compensation expense attributable to these options was $225,000, $60,000 and $16,000 for the years ended December 31, 1993, 1994 and 1995, respectively. During 1995, the Financial Accounting Standards Board issued "Accounting for Stock Based Compensation (SFAS 123)." The new standard specifies permissible methods for valuing compensation attributable to stock options, as well as certain required disclosures. The Company is required to adopt the new standard beginning in 1996. The Company intends to continue to follow the compensation measurement method currently used, which is one of the permissible methods under SFAS 123. As a result, compensation expense attributable to stock option plans will continue to be measured by the excess, if any, of the market price of the Company's common stock on the date of grant over the exercise price of the option. Additional disclosures showing the pro forma effect of an alternative method will be included in the notes to financial statements. The following is a summary of the various stock option plans:
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. F-24 77 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 1993, 1994 and 1995 (in thousands):
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 $ --
Cash paid for interest was $16,347,000, $15,504,000 and $22,444,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Cash paid for income taxes was $2,697,000, $1,900,000 and $1,237,000 for the years ended December 31, 1993, 1994 and 1995, respectively. NOTE 16 -- SUBSEQUENT EVENTS On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First Mortgage Notes due 2006. Interest on the notes will be payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after five years at premiums to principal which decline on each anniversary date. The Company utilized a portion of the proceeds to pay down $51,601,000 of debt outstanding as of December 31, 1995. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65,100,000 in cash. The acquisition enables the Company to establish full control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated by the Company. The acquisition price was comprised of approximately $60,400,000 to purchase the first mortgage on the 18 hotels with a face value of approximately $70,500,000 and $4,700,000 to purchase the interests of the three partnerships which owned the hotels. Approximately $1,900,000 of the total purchase price was paid to a partnership in which a general partner is the father of David A. Simon, the Company's President and Chief Executive Officer. In connection with the transaction, the Company also terminated its management agreements and junior subordinated mortgages related to the 18 hotels. On July 2, 1996, the Company filed a registration statement covering the sale of 7.5 million shares of its common stock. The Company intends to use the net proceeds from this offering to fund the development and growth of its AmeriSuites all-suites hotel brand. The offering is subject to a number of risks that should be considered by prospective investors. See "Risk Factors" included elsewhere in this Registration Statement. F-25 78 - ------------------------------------------------------ - ------------------------------------------------------ No dealer, salesman or other person is authorized to give any information or to make any representation in connection with this offering not contained in this Prospectus, and any information or representation not contained herein must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy of any securities other than the Common Stock or an offer to any person in any jurisdiction where such offer would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. ---------------------------- TABLE OF CONTENTS ----------------------------
Page ---- Prospectus Summary.................... 3 Risk Factors.......................... 9 Use of Proceeds....................... 13 Price Range of Common Stock and Dividend Policy..................... 13 Capitalization........................ 14 Recent Selected Consolidated Financial Data................................ 15 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 18 Selected Consolidated Financial Data of the Company and its Predecessor......................... 30 Business.............................. 31 Management............................ 44 Description of Capital Stock.......... 46 Underwriting.......................... 48 Legal Matters......................... 48 Experts............................... 49 Available Information................. 50 Incorporation of Certain Documents by Reference........................... 50 Index to Financial Statements......... F-1
- ------------------------------------------------------ - ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 7,500,000 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ MONTGOMERY SECURITIES BT SECURITIES CORPORATION SMITH BARNEY INC. , 1996 ------------------------------------------------------ ------------------------------------------------------ 79 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the Notes being registered which will be paid solely by the Company. All the amounts shown are estimates, except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee: SEC Registration Fee...................................................... $ 48,895 NASD Fee.................................................................. 14,680 Printing and Engraving Expenses........................................... 100,000 Legal Fees and Expenses................................................... 175,000 Accounting Fees and Expenses.............................................. 50,000 Blue Sky Fees and Expenses................................................ 20,000 Transfer Agent Fees and Expenses.......................................... 25,000 Miscellaneous Expenses.................................................... 16,425 -------- Total........................................................... $450,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. A corporation may, in advance of the final action of any civil, criminal, administrative or investigative action, suit or proceeding, pay the expenses (including attorneys' fees) incurred by any officer, director, employee or agent in defending such action, provided that the director or officer undertakes to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. A corporation may indemnify such person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation to procure a judgment in its favor under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses (including attorneys' fees) which he or she actually and reasonably incurred in connection therewith. The indemnification provided is not deemed to be exclusive of any other rights to which an officer or director may be entitled under any corporation's by-law, agreement, vote or otherwise. In accordance with Section 145 of the DGCL, Article 8 of the Company's Restated Certificate of Incorporation (the "Restated Certificate") and the Company's By-Laws (the "By-Laws") provide that the Company shall indemnify to the fullest extent permitted under and in accordance with the laws of the State of Delaware any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request II-1 80 of the Company as director, officer, trustee, employee or agent of or in any other capacity with another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The indemnification provided by the Restated Certificate and the By-Laws shall not be deemed exclusive of any other rights to which any of those seeking indemnification or advancement of expenses may be entitled under any other contract or agreement between the Company and any officer, director, employee or agent of the Company. Expenses incurred in defending a civil or criminal action, suit or proceeding shall (in the case of any action, suit or proceeding against a director of the Company) or may (in the case of any action, suit or proceeding against an officer, trustee, employee or agent) be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors of the Company upon receipt of an undertaking by or on behalf of the indemnified person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company. Subparagraph (d) of Article 8 of the Restated Certificate provides that neither the amendment or repeal of, nor the adoption of any provision inconsistent with, the above-referenced provisions of the Restated Certificate shall eliminate or reduce the effect of such provisions in respect of any matter occurring before such amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter which would have given rise to a right of indemnification or right to receive expenses pursuant to such provisions if any such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. Subparagraph (e) of Article 8 of the Restated Certificate provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or any amendment thereto or successor provision thereto, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended. ITEM 16. EXHIBITS
EXHIBIT REPORT OR REGISTRATION STATEMENT IN NUMBER DESCRIPTION WHICH DOCUMENT IS CONTAINED - ------ ------------------------------------- ------------------------------------- 1.1 -- Form of Underwriting Agreement Filed herewith 2.1 -- Senior Secured Revolving Credit To be filed by amendment Agreement, dated as of June 26, 1996, among the Company, the lenders party thereto, Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent 4.1 -- Specimen Common Stock Certificate Filed as Exhibit 1(a) to the Company's Form 8-A dated June 5, 1992 5.1 -- Opinion of Willkie Farr & Gallagher To be filed by amendment 23.1 -- Consent of Willkie Farr & Gallagher Contained within Exhibit 5.1 23.2 -- Consent of Arthur Andersen LLP Filed herewith 24.1 -- Power of Attorney Included on the signature page hereto
ITEM 17. UNDERTAKINGS (1) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to its Certificate, By-Laws, the II-2 81 Underwriting Agreement or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (2) The Registrant hereby undertakes that (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497 (h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and this Offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof. II-3 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 2nd day of July, 1996. PRIME HOSPITALITY CORP. By: /s/ DAVID A. SIMON ------------------------------------ David A. Simon, Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY The undersigned officers and directors of Prime Hospitality Corp., hereby severally constitute and appoint David A. Simon and John M. Elwood, and each of them, attorneys-in-fact for the undersigned, in any and all capacities, with the power of substitution, to sign any amendments to this Registration Statement (including post-effective amendments) and any subsequent registration statement for the same offering which may be filed under Rule 462(b) under the Securities Act of 1933, as amended, and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all interests and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof. II-4 83 Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons, in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------ ------------------------------------- ------------- /s/ DAVID A. SIMON Chairman of the Board, President, July 2, 1996 - ------------------------------------------ Chief Executive Officer and David A. Simon Director (principal executive officer) /s/ JOHN M. ELWOOD Chief Financial Officer, Executive July 2, 1996 - ------------------------------------------ Vice President and Director John M. Elwood (principal financial and accounting officer) /s/ HERBERT LUST, II Director July 2, 1996 - ------------------------------------------ Herbert Lust, II /s/ JACK H. NUSBAUM Director July 2, 1996 - ------------------------------------------ Jack H. Nusbaum /s/ ALLEN J. OSTROFF Director July 2, 1996 - ------------------------------------------ Allen J. Ostroff /s/ A.F. PETROCELLI Director July 2, 1996 - ------------------------------------------ A.F. Petrocelli /s/ HOWARD M. LORBER Director July 2, 1996 - ------------------------------------------ Howard M. Lorber
II-5 84 APPENDIX I This Registration Statement contains spaces for the following graphic and image materials: (1) The front cover will be folded. The inside front cover contains a map of the United States showing the states where the Company's hotels are located or under development. (2) The fold-out portion of the front cover contains photographs of hotels and a map. The left side contains photographs of AmeriSuites hotels and a map indicating the location of AmeriSuites hotels. The right side contains photographs of additional AmeriSuites hotels in the Company's Portfolio. (3) The inside back cover contains additional photographs of full-service and limited-service hotels in the Company's Portfolio. 85 EXHIBIT INDEX
REPORT OR REGISTRATION STATEMENT SEQUENTIALLY EXHIBIT IN NUMBERED NUMBER DESCRIPTION WHICH DOCUMENT IS CONTAINED PAGES - ------ --------------------------------------- --------------------------------- ------------ 1.1 -- Form of Underwriting Agreement Filed herewith 2.1 -- Senior Secured Revolving Credit To be filed by amendment Agreement, dated as of June 26, 1996, among the Company, the lenders party thereto, Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent 4.1 -- Specimen Common Stock Certificate Filed as Exhibit 1(a) to the Company's Form 8-A dated June 5, 1992 5.1 -- Opinion of Willkie Farr & Gallagher To be filed by amendment 23.1 -- Consent of Willkie Farr & Gallagher Contained within Exhibit 5.1 23.2 -- Consent of Arthur Andersen LLP Filed herewith 24.1 -- Power of Attorney Included on the signature page hereto
EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 PRIME HOSPITALITY CORP. ____________ Shares of Common Stock UNDERWRITING AGREEMENT July __, 1996 MONTGOMERY SECURITIES BT SECURITIES CORP. SMITH BARNEY, INC. c/o Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: SECTION 1. Introductory. Prime Hospitality Corp., a Delaware corporation (the "Company"), proposes to issue and sell __________ shares of common stock, par value $.01, of the Company ("Firm Shares") to the several underwriters named in Schedule A hereto (the "Underwriters"). The Company also proposes to issue and sell to the Underwriters not more than ___________ shares of additional shares (the "Additional Shares") of common stock, if requested by the Underwriters as provided in Section 4 hereof. The Firm Shares and the Additional Shares are herein collectively called the "Shares". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock". The Underwriters have advised the Company that they propose to make a public offering of their respective portions of the Shares on the effective date of the registration statement hereinafter referred to, or as soon thereafter as in their judgment is advisable. The Company hereby confirms its agreements with respect to the purchase of the Shares by the Underwriters as follows: SECTION 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Underwriters that: (a) A registration statement on Form S-3 (Registration No. 333-________) with respect to the Shares, including a preliminary form of prospectus, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act") and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission; one or 1 2 more amendments to such registration statement may have been so prepared and may have been, or may be, so filed, including either (i) prior to effectiveness of such registration statement, a further amendment to such registration statement (including the form of final prospectus) or (ii) after effectiveness of such registration statement, a final prospectus in accordance with Rules 430A and 424(b)(1) or (4) under the Act. Copies of such registration statement and amendments, each related preliminary prospectus (the "Preliminary Prospectus") (including three fully executed copies of the registration statement and each amendment thereto) and the pre-effective prospectus or final form of prospectus have been delivered to the Underwriters. Such registration statement as amended at the time it becomes effective or, if a post-effective amendment is filed with respect thereto, as amended by such post-effective amendment at the time of its effectiveness, including in each case information incorporated by reference therein and financial statements and exhibits, and the information (if any) contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be a part of the registration at the time of its effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement;" and such prospectus as then amended including such information incorporated by reference therein, or first used to confirm sales, whether or not filed with the Commission pursuant to Rule 424(b) under the Act, is herein after referred to as the "Prospectus." (b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, or to the knowledge of the Company, has been threatened to be issued. (c) Each part of the Registration Statement, when such part became or becomes effective, each Preliminary Prospectus, on the date of filing thereof with the Commission, and the Prospectus and any amendment or supplement thereto, on the date of filing thereof with the Commission, or as first used to confirm sales, at the Closing Date (as hereinafter defined), and at any Option Closing Date (as hereinafter defined), conformed or will conform in all material respects with the requirements of the Act and the Rules and Regulations; each part of the Registration Statement, when such part became or becomes effective, did not or will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; each Preliminary Prospectus, on the date of filing thereof with the Commission, and the Prospectus and any amendment or supplement thereto, on the date of filing thereof with the Commission, or when first used to confirm sales, at the Closing Date, and at any Option Closing Date, did not or will not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were or will be made, not misleading; except that the foregoing shall not apply to statements in or omissions from any such document in reliance upon, and in conformity with, written information relating to the Underwriters furnished to the Company by or on behalf of the Underwriters, specifically for use in the preparation thereof. The documents incorporated by reference in the Prospectus, when they were filed with the Commission, conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 2 3 (d) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit __ to the Company's Annual Report on Form 10-K/A for the year ended December 31, 1995. The Company and each of the Company's subsidiaries has been duly incorporated and is an existing corporation in good standing under the laws of its respective jurisdiction of incorporation, has full power and authority (corporate and other) to conduct its business as described in the Registration Statement and Prospectus and is duly qualified to do business in each jurisdiction in which it owns or leases real property or in which the conduct of its business requires such qualification except where the failure to be so qualified, considering all such cases in the aggregate, would not have a material adverse effect on the condition (financial or other), business, property or results of operations of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). (e) The Company has an authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the Common Stock (including the Shares) has been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, conform to the description thereof contained in the Prospectus and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights.. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable and (except as otherwise stated in the Registration Statement) are owned beneficially by the Company subject to no security interest, other encumbrance or adverse claim. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Registration Statement, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (f) This Agreement has been duly authorized, executed and delivered by the Company. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any agreement or instrument to which the Company or any of its subsidiaries is a party or by which it is bound or to which any of the property of the Company or any of its subsidiaries is subject, the charter or by-laws of the Company or any of its subsidiaries, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties; no consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance or sale of the Shares by the Company, except such as may be required under the Act or state securities laws; and the Company has full power and authority to authorize, issue and sell the Shares as contemplated by this Agreement. 3 4 (g) Arthur Andersen LLP is an independent public accountant with respect to the Company as required by the Act. (h) The financial statements and schedules of the Company and its predecessor and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of the Company and its predecessor, as the case may be, as of the respective dates of such financial statements and schedules, and the results of operations and changes in financial position of the Company and its predecessor, as the case may be, for the respective periods covered thereby. Such statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by Arthur Andersen LLP. No other financial statements or schedules are required to be included in the Registration Statement. The selected financial data set forth in the Prospectus under the captions "Capitalization," "Summary Recent Financial and Other Data," "Recent Consolidated Financial Data," and "Selected Consolidated Financial Data of the Company and its Predecessor," fairly present the information set forth therein on the basis stated in the Registration Statement. (i) Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture, mortgage, deed of trust or other contract, lease or other instrument to which the Company or any of its subsidiaries is a party or by which they or any of their property is bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject except for any such violation or default that could not have a Material Adverse Effect. (j) The descriptions in the Registration Statement and the Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown. There are no contracts or documents of the Company or any of its subsidiaries that are required to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations that have not been so filed. (k) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, none of the Company or any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, that are material to the Company and its subsidiaries, and there has not been any material adverse change, on a consolidated basis, in the capital stock, short-term debt or long-term debt of the Company and its subsidiaries, or any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or other), business, net worth or results of operations of the Company and its subsidiaries, taken as a whole. (l) There is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending, or to the knowledge of the Company, threatened or contemplated to which the Company or any of its subsidiaries is or may be a party or to which the business or property of the Company or any of its subsidiaries is or may be subject, (ii) to the knowledge of the Company, no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or that has been proposed 4 5 by any governmental body (other than Blue Sky laws, regulations or orders), or (iii) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction to which the Company or any of its subsidiaries is or may be subject issued and outstanding that, in the case of clauses (i), (ii) and (iii) above, (1) is required to be disclosed in the Registration Statement or the Prospectus and that is not so disclosed, (2) might suspend the effectiveness of the Registration Statement, (3) might prevent or suspend the use of any Preliminary Prospectus in any jurisdiction, (4) except as disclosed in the Registration Statement or the Prospectus, might have a Material Adverse Effect, (5) would interfere with or adversely affect the transactions contemplated by this Agreement in any material respect, or (6) might in any manner invalidate any provisions of this Agreement. (m) Except as otherwise disclosed in the Prospectus, the Company and each of its subsidiaries has good and marketable title, free and clear of all liens, claims, encumbrances and restrictions, to all property and assets described in the Prospectus as being owned by it, except for (i) liens for taxes not yet due and payable and (ii) such liens, claims, encumbrances and restrictions as are not material to the condition (financial or other), business, net worth or results of operations of the Company and its subsidiaries, taken as a whole. (n) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, direct, indirect or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company and its subsidiaries; (ii) the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and its subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock or indebtedness (other than the Shares) material to the Company and its subsidiaries (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties or results of operations of the Company and its subsidiaries, taken as a whole. (o) The Company and each of its subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own, lease and operate its respective properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries. (p) Except as disclosed in or specifically contemplated by the Prospectus, the Company and its subsidiaries have sufficient trademarks, trade names, patent rights, mask works, 5 6 copyrights, licenses, approvals and governmental authorizations to conduct their businesses as now conducted; and the Company has no knowledge of any material infringement by it or its subsidiaries of trademark, trade name, patent, mask works, copyrights, licenses, trade secret or other similar rights of others, and there is no claim being made against the Company or its subsidiaries regarding trademark, trade name, patent, mask work, copyright, license, trade secret or other infringement which could have a Material Adverse Effect. (q) The Company has not been advised, and has no reason to believe, that either it or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, the failure to comply with which could have a Material Adverse Effect. None of the Company or any of its subsidiaries is in violation of any safety or similar law applicable to its business, nor any federal, state or foreign law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal, state or foreign wages and hours laws, nor any provisions of the Employee Retirement Income Security Act, as amended, or the rules and regulations promulgated thereunder ("ERISA"), which in each case could have a Material Adverse Effect. (r) Neither the Company nor any of its subsidiaries is involved in any material labor dispute nor, to the best of the knowledge of the Company and its subsidiaries, is any material labor dispute threatened which, if such dispute were to occur, would have a Material Adverse Effect. (s) Except as disclosed in the Registration Statement, the Company and its subsidiaries are in compliance with all applicable existing federal, state, local and foreign laws and regulations relating to the protection of human health or the environment or imposing liability or requiring standards of conduct concerning any Hazardous Materials ("Environmental Laws"), except for such instances of noncompliance which, either singly or in the aggregate, would not have a Material Adverse Effect. The term "Hazardous Material" means (a) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (b) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (c) any petroleum or petroleum product, (d) any polychlorinated biphenyl and (e) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. There is no alleged liability, or to the best knowledge and information of the Company potential liability (including, without limitation, alleged or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) of the Company or any of its subsidiaries arising out of, based on or resulting from (i) the presence or release into the environment of any Hazardous Material at any location at which the Company or any of its subsidiaries has previously conducted or is currently conducting any business (whether or not owned by the Company or any of its subsidiaries) or has previously owned or currently owns any property or (ii) any violation or alleged violation of any Environmental Law, in either case (x) which alleged or potential liability is required to be disclosed in the Registration Statement, other than as disclosed therein, or (y) which alleged or potential liability, singly or in the aggregate, would have a Material Adverse Effect. 6 7 (t) All tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, except to the extent such failure to file would not, individually or in the aggregate, have a Material Adverse Effect, and all material taxes (including, but not limited to, withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from any taxing authority) have been paid other than those (i) being contested in good faith and for which adequate reserves have been provided or (ii) currently payable without penalty or interest. (u) The Company is not an "investment company" under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (v) The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the Prospectus, the Registration Statement and the other materials permitted by the Act. (w) The Company and each of its subsidiaries maintain insurance insuring against such losses and risks as are adequate in accordance with customary industry practice to protect the Company and each of its subsidiaries and their respective businesses, except where the failure to maintain such insurance could not have a Material Adverse Effect. (x) Neither the Company nor any of its subsidiaries has at any time (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (y) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (z) Any material real property leases to which the Company or any of its subsidiaries is a party are valid and binding and no default has occurred and is continuing thereunder which would result in any Material Adverse Effect, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such material real property leases to which any of them is party as lessee with such exceptions as do not materially interfere with the use made of such property by the Company or such subsidiary. (aa) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement. (ab) The Company has complied with all provisions of Section 517.075 Florida Statutes, relating to doing business with the Government of Cuba or with any person or any affiliate located in Cuba. (ac) The Company maintains a system of internal accounting controls sufficient to provide assurance that: (1) transactions are executed in accordance with management's general 7 8 or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (ad) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement, or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (ae) The order confirming the Company's (or its predecessor's) plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code (the "Code") is a valid and binding order (i) as to which a notice of appeal or petition for certiorari can no longer be timely filed and as to which no timely-filed appeal or certiorari proceeding is pending and (ii) which has not been overturned by a court of competent jurisdiction. There has been "substantial consummation" (as defined in Section 1101(2) of the Code) of the Plan. (af) The Shares have been approved for listing on the New York Stock Exchange subject to official notice of issuance. (ag) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. SECTION 3. Representations and Warranties of the Underwriters. The Underwriters represent and warrant to the Company that the information set forth (i) on the cover page of the Prospectus with respect to price, underwriting discounts and commissions and terms of offering and (ii) under "Underwriting" in the Prospectus was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus and is correct in all material respects. SECTION 4. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $______ per share (the "Purchase Price"), the respective number of Firm Shares set forth opposite the name of such Underwriter in Schedule A hereto. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell up to ___________ Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to __________ Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in 8 9 part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. Such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date specified in such notice shall be a business day (a) no earlier than the Closing Date, (b) no later than ten business days after such notice has been given and (c) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule A bears to the total number of Firm Shares. Delivery of certificates for the Firm Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed upon by the Company and the Underwriters) at such time and date, not later than the fifth full business day following the first date that any of the Shares are released by the Underwriters for sale to the public, as the Underwriters shall designate by at least 48 hours prior notice to the Company (or at such other time and date, not later than one week after such fifth full business day as may be agreed upon by the Company and the Underwriters) (the "Closing Date"); provided, however, that if the Prospectus is at any time prior to the Closing Date recirculated to the public, the Closing Date shall occur upon the later of the fifth full business day following the first date that any of the Shares are released by the Underwriters for sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Additional Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed upon by the Company and the Underwriters) on the date specified in the applicable exercise notice given pursuant to this Section 4 (an "Option Closing Date"). Any such Option Closing Date and the location of delivery of and the form of payment for such Additional Shares may be varied by agreement between the Underwriters and the Company. Delivery of certificates for the Shares shall be made by or on behalf of the Company to the Underwriters against payment by the Underwriters of the purchase price therefor by certified or official bank checks payable in next day funds to the order of the Company. The certificates for the Shares shall be registered in such names and denominations as the Underwriters shall have requested at least two full business days prior to the Closing Date or an Option Closing Date, as the case may be, and shall be made available for checking and packaging on the business day preceding the Closing Date or an Option Closing Date, as the case may be, at a location in New York, New York, as may be designated by the Underwriters. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. Subject to the terms and conditions hereof, the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the effective date of the Registration Statement as in the judgment of the Underwriters is advisable and at the public offering price set forth on the cover page of and on the terms set forth in the Prospectus. SECTION 5. Covenants of the Company. The Company covenants and agrees that: 9 10 (a) The Company will cause the Prospectus to be filed with the Commission as required by Section 2(a) hereof (but only if the Underwriters have not reasonably objected thereto by notice to the Company after having been furnished a copy a reasonable time prior to filing) and will notify the Underwriters promptly of such filing; the Company will notify the Underwriters promptly of the time when any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed and of any request by the Commission for any amendment or supplement to the Registration Statement or Prospectus or for additional information; the Company will prepare and file with the Commission, promptly upon the Underwriters' request, any amendments or supplements to the Registration Statement or Prospectus that, in the Underwriters' opinion, may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; and the Company will file no amendment or supplement to the Registration Statement or Prospectus to which the Underwriters shall reasonably object by notice to the Company after having been furnished a copy a reasonable time prior to the filing. (b) The Company will advise the Underwriters, promptly after it shall have received notice or obtained knowledge thereof, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and the Company will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued. (c) Within the time during which a prospectus relating to the Shares is required to be delivered under the Act, the Company will comply as far as it is able with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Shares as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Company will promptly notify the Underwriters and will amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. (d) The Company will make generally available to its security holders as soon as practicable, but in any event not later than 15 months after the end of the Company's current fiscal quarter, an earnings statement (which need not be audited) covering a 12-month period beginning after the effective date of the Registration Statement that shall satisfy the provisions of Section 11(a) of the Act. (e) The Company will furnish to the Underwriters copies of the Registration Statement (four of which will be signed and will include all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements to such documents, in each case as soon as available and in such quantities as the Underwriters may from time to time reasonably request. 10 11 (f) The Company will use its best efforts to qualify the Shares for sale under the securities laws of such jurisdictions as the Underwriters reasonably designate and to continue such qualifications in effect so long as required for the distribution of the Shares but in no event for more than 180 days, except that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or to subject itself to general taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will also arrange for the determination of the eligibility for investment of the Shares under the laws of such jurisdictions as the Underwriters reasonably request. (g) During the period of five years hereafter, the Company will furnish to the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission the National Association of Securities Dealers, Inc. ("NASD") or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 90 days after the first date that any of the Shares are released by the Underwriters for sale to the public, without the prior written consent of Montgomery Securities (which consent may be withheld at the sole discretion of Montgomery Securities), the Company will not, and will obtain the agreement of each of the directors and executive officers of the Company listed under the heading "Management" contained in the Prospectus not to issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock or other equity security. (i) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder for the purposes set forth in the Prospectus. The Underwriters, may, in their sole discretion waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 6. Payment of Expenses. The Company, whether or not the transactions contemplated hereunder are consummated or this Agreement is prevented from becoming effective under the provisions of Section 13(a) hereof or is terminated, will pay all expenses incident to the performance of its obligations hereunder, will pay the expenses of printing all documents relating to the offering, and will reimburse the Underwriters for any expenses (including reasonable fees and disbursements of counsel) incurred by the Underwriters in connection with the matters referred to in Section 5(f) hereof and the preparation of memoranda relating thereto and for any filing fee of the NASD relating to the Shares; provided, however, that except as provided in this Section 6 and in Section 8, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel and any costs and expenses incurred by the Underwriters for any advertising in connection with the sale of the Shares. 11 12 The Company shall not in any event be liable to the Underwriters for loss of anticipated profits from the transactions covered by this Agreement. SECTION 7. Conditions of the Obligations of the Underwriters. The obligations of the Underwriters to purchase and pay for the Shares on the Closing Date or Option Closing Date, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of the Closing Date or such Option Closing Date, as the case may be, to the accuracy of the statements of Company's officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., Washington, D.C. time, on the date of this Agreement or at such later time as shall have been consented to by the Underwriters; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date or Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company or the Underwriters, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or otherwise, shall have been complied with to the Underwriters' satisfaction. (b) The Underwriters shall be reasonably satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock of the Company or any of its subsidiaries or any material change in the indebtedness (other than as a result of the sale of the Shares or in the ordinary course of business) of the Company or any of its subsidiaries, (ii) except as set forth or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company or any of its subsidiaries, which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company and its subsidiaries, (iii) no loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries shall have been sustained which could have a Material Adverse Effect, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of its subsidiaries which is material to the Company and its subsidiaries or which affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened, and (v) there shall not have been any material change in the condition (financial or otherwise), business, management results of operations or prospects of the Company and its subsidiaries which makes it impractical or inadvisable in the judgment of the Underwriters to proceed with the public offering or purchase of the Shares as contemplated hereby. (c) There shall have been furnished to the Underwriters on each Closing Date, in form and substance satisfactory to the Underwriters, except as otherwise expressly provided below: 12 13 (i) An opinion of Willkie Farr & Gallagher, counsel for the Company, addressed to the Underwriters and dated such Closing Date, to the effect that: (A) The Company and each of the Company's Significant Subsidiaries (as defined under Rule 1-02 of Regulation S-X under the Exchange Act) has been duly incorporated and is an existing corporation in good standing under the laws of its respective jurisdiction of incorporation, has full power and authority (corporate and other) to conduct its business as described in the Registration Statement and Prospectus and is duly qualified to do business in each jurisdiction in which it owns or leases real property or in which the conduct of its business requires such qualification except where the failure to be so qualified, considering all such cases in the aggregate, would not have a Material Adverse Effect. (B) The Shares have been duly authorized and reserved for issuance and will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and conform in all material respects to the description thereof contained in the Prospectus; the Company has authorized and outstanding capital stock as set forth under "Capitalization" and "Description of Capital Stock" in the Prospectus; and the stockholders of the Company have no preemptive rights created by the Delaware General Corporation Law or by the Certificate of Incorporation or By-laws of the Company with respect to the Shares. (C) The Registration Statement has become effective under the Act; the Prospectus has been filed with the Commission as required by Section 2(a) hereof and to the best knowledge of such counsel no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of such counsel, threatened by the Commission. (D) Each part of the Registration Statement, when such part became effective, and the Prospectus, and any amendment or supplement thereto, as of the respective date thereof, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations (other than the financial statements and related schedules and financial and statistical data therein, as to which such counsel need express no opinion). (E) The descriptions in the Registration Statement and Prospectus of statutes, legal and governmental proceedings, contracts and other documents are accurate in all material respects and fairly present the information required to be shown; and such counsel does not know of any statutes or legal or governmental proceedings required to be described in the Prospectus that are not described as required, or of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. 13 14 (F) The Company is not an "investment company" under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (G) To such counsel's knowledge, there is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or threatened, to which the Company or any of its Significant Subsidiaries is or may be a party or to which the business or property of the Company or any of its Significant Subsidiaries is or may be subject, and (ii) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction to which the Company or any of its Significant Subsidiaries is or may be subject issued that, in the case of clauses (i) and (ii) above, (a) is required to be disclosed in the Registration Statement or the Prospectus and that is not so disclosed, (b) might suspend the effectiveness of the Registration Statement, (c) to such counsel's knowledge, might prevent or suspend the use of any preliminary prospectus in any jurisdiction, (d) except as disclosed in the Registration Statement or the Prospectus, would have a Material Adverse Effect or (e) would in any manner invalidate any provisions of this Agreement. (I) No consent, approval, authorization or order of, or filing or qualification with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement or in connection with the sale of the Shares by the Company pursuant to this Agreement, except such as have been obtained and made under the Act and such as may be required under state securities law or by the NASD. (J) This Agreement has been duly authorized, executed and delivered by the Company. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute or any agreement or instrument filed as an exhibit to the Registration Statement, the charter or by-laws of the Company, or, to such counsel's knowledge, any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties; and the Company has full power and authority to authorize, issue and sell the Shares as contemplated by this Agreement. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent certified public accountants of the Company and the Underwriters at which the contents of the Registration Statement, the Prospectus and any amendment thereof or supplement thereto and related matters were discussed and, although such counsel has not undertaken to investigate or verify independently, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus or any amendment thereof or supplement thereto on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives) no facts have come to the attention of such counsel that would lead them to believe that either the Registration Statement at the time it became effective (or any amendment thereof made prior to the Closing Date, as the case may be, as of the 14 15 date of such amendment) contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of the date thereof (of any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that in each such case such counsel expresses no belief or opinion with respect to the financial statements and schedules and other financial or statistical data included therein). (ii) An opinion of Joseph Bernadino, Esq., Senior Vice President, Secretary and General Counsel of the Company, addressed to the Underwriters and dated such Closing Date, to the effect that: (A) To the best knowledge of such counsel, none of the Company or any of its subsidiaries is in violation of any safety or similar law applicable to its business, nor any federal, state or foreign law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal, state or foreign wages and hours laws, nor any provisions of ERISA, which in each case would have a Material Adverse Effect. (B) To the best knowledge of such counsel, except as set forth in the Registration Statement, the Company and its subsidiaries are in compliance with all applicable existing federal, state, local and foreign laws and regulations relating to Environmental Laws, except for such instances of noncompliance which, either singly or in the aggregate, would not have a Material Adverse Effect. There is no alleged liability, or, to the best of his knowledge, potential liability (including, without limitation, alleged or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) of the Company or any of its subsidiaries arising out of, based on or resulting from (i) the presence or release into the environment of any Hazardous Material at any location at which the Company or any of its subsidiaries has previously conducted or is currently conducting any business (whether or not owned by the Company or any of its subsidiaries) or has previously owned or currently owns any property or (ii) any violation or alleged violation of any Environmental Law, in either case (x) which alleged or potential liability is required to be disclosed in the Registration Statement, other than as disclosed therein, or (y) which alleged or potential liability, singly or in the aggregate, would have a Material Adverse Effect. (C) Neither the Company nor any of its Subsidiaries is involved in any material labor dispute nor, to the best of his knowledge, is any material labor dispute threatened which, if such dispute were to occur, would have a Material Adverse Effect. (D) Except as would not have a Material Adverse Effect, neither the Company nor any of its subsidiaries is in violation of its charter or by-laws and, to the best of his knowledge, neither the Company nor any of its subsidiaries is in default in the 15 16 performance of any obligation, agreement or condition contained in any of the agreements filed as an exhibit to the Registration Statement. (E) All of the outstanding shares of capital stock of each such subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and (except as otherwise stated in the Registration Statement), to the best of his knowledge, are owned beneficially by the Company subject to no security interest, other encumbrance or adverse claim. (iii) Such opinion or opinions of Latham & Watkins, counsel for the Underwriters, dated such Closing Date, with respect to the validity of the Shares, the Registration Statement, the Prospectus and other related matters as you reasonably may request, and such counsel shall have received such papers and information as they reasonably request to enable them to pass upon such matters. (iv) A certificate of the Company executed by the Chairman of the Board or President and the chief financial or accounting officer of the Company, dated such Closing Date, to the effect that: (A) The representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the Closing Date and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied under this Agreement on or prior to such Closing Date; (B) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act; (C) Each of the respective signers of the certificate has carefully examined the Registration Statement and the Prospectus; in his opinion and to the best of his knowledge, the Registration Statement and the Prospectus and any amendments or supplements thereto contain all statements required to be stated therein regarding the Company and its subsidiaries; and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (D) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, (a) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), business, properties, results of operations or 16 17 management of the Company and its subsidiaries; (b) no legal or governmental action, suit or proceeding is pending or, to the best of their knowledge, threatened against the Company or any of its subsidiaries which is material to the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, or which may adversely affect the transactions contemplated by this Agreement; (c) since such dates and except as so disclosed, neither the Company nor any of its subsidiaries has (i) entered into any verbal or written agreement or other transaction which is not in the ordinary course of business, which could result in a material reduction in the future earnings of the Company or which should have been set forth in an amendment to the Registration Statement or in a supplement to or amendment of any prospectus which has not been disclosed in such supplement or prospectus, (ii) incurred, other than in the ordinary course of business, any material liability or obligation, direct, indirect or contingent, (iii) made any change in its capital stock, (iv) made any material change in its short-term debt or funded debt or (v) repurchased or otherwise acquired any of the Company's capital stock; and (d) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to such Closing Date. (v) On the date this Agreement is executed and also on the Closing Date, a letter addressed to you, as Representatives of the Underwriters, from Arthur Andersen LLP, independent accountants, the first one to be dated the date of this Agreement and the second one to be dated such Closing Date, in form and substance satisfactory to you. (vi) On or before such Closing Date, letters from each of the directors and executive officers of the Company listed under the heading "Management" contained in the Prospectus, in form and substance satisfactory to the Underwriters, confirming that for a period of 90 days after the first date that any of the Common Stock are released by the Underwriters for sale to the public, such person will not directly or indirectly sell or offer to sell or otherwise dispose of any shares of Common Stock or any right to acquire such shares without the prior written consent of Montgomery Securities, which consent may be withheld at the sole discretion of Montgomery Securities, as the case may be. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to you and to Latham & Watkins, counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of the Company and delivered to the Underwriters or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the Closing Date is not so satisfied, this Agreement at the Underwriters' election will terminate upon notification by the Underwriters to the Company without liability on the part of any Underwriter or the Company except for the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 7 hereof and except to the extent provided in Section 10 hereof. 17 18 SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding any other provisions hereof, if this Agreement shall be terminated by the Underwriters pursuant to Section 7, or if the sale to the Underwriters of the Shares at the Closing or any Option Closing, as the case may be, is not consummated because of any refusal, inability or failure on the part of the Company, at or prior to the Closing Date or Option Closing Date, as the case may be, to perform any agreement herein or to comply with any provision hereof (unless such failure to perform or comply be due to any default or omission by any Underwriter), the Company agrees to reimburse the Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Underwriters in connection with the Underwriters' investigation, preparing to market and marketing the Common Stock or in contemplation of performing the Underwriters' obligations hereunder, including but not limited to reasonable fees and disbursements of counsel, printing expenses, travel expenses, postage, telegraph charges and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section. This Section 8, Section 6 and Section 10 shall at all times be effective and shall apply. SECTION 9. Effectiveness of Registration Statement. The Underwriters and the Company will use their and its best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 10. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading, or arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company contained herein or any failure of the Company to perform its obligations hereunder or under law; and will reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with the information furnished by or on behalf of the Underwriters to the Company specifically for use in the preparation of the Registration Statement; and, provided, further, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any 18 19 Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented, if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. In addition to its other obligations under this Section 10(a), the Company agrees that as an interim measure during the pendency of any claim action, investigation inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, or any inaccuracy in the representations and warranties of the Company herein or failure to perform its obligations hereunder, all as described in this Section 10(a), it will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse each Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company together with interest compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person if any, who controls the Company within the meaning of the Act against any losses, claims, damages, liabilities or expenses to which the Company, or any such director, officer, or controlling person may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished by or on behalf of the Underwriters to the Company specifically for use in the preparation of the Registration Statement, and will reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating defending, compromising or paying any such loss, claim, damage, liability, expense or action. In addition 19 20 to its other obligations under this Section 10(b), each Underwriter severally agrees that as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission or any alleged statement or omission, described in this Section 10(b) which relates to information furnished by the Underwriters to the Company specifically for use in the preparation of the Registration Statement, it will reimburse the Company (and, to the extent applicable, each officer, director or controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action investigation inquiry or other proceeding notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company (and, to the extent applicable, each officer, director or controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director or controlling person) shall promptly return it to the Underwriters together with interest compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of any claim or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the claim or the commencement of such action, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise under the indemnity agreement contained in this Section 10 except to the extent it is prejudiced by such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Underwriters in the case of paragraph (a), representing the indemnified parties who are parties to such action) 20 21 or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. Each indemnified party shall use its best efforts to cooperate with the indemnifying party in the defense of any action or claim. No indemnifying party shall be liable for any settlement effected without its written consent. (d) If the indemnification provided for in this Section 10 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion, in the case of the Company as the total price paid to the Company for the Shares sold by it to the Underwriters (net of underwriting commissions but before deducting expenses) bears to the total price to the public set forth on the cover of the Prospectus, and in the case of the Underwriters, as the underwriting commissions received by them bears to the total price to the public set forth on the cover of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subparagraph (c) of this Section 10, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subparagraph (c) of this Section 10 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subparagraph (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subparagraph (c) for purposes of indemnification. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. Notwithstanding the provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Act) shall be entitled to contribution from any person who was not guilty of such 21 22 fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 10 are several in proportion to their respective underwriting commitments and not joint. SECTION 11. Default of Underwriters. It shall be a condition to this Agreement and the obligation of the Company to sell and deliver the Shares hereunder, and of each Underwriter to purchase the Shares in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Shares agreed to be purchased by such Underwriter hereunder upon tender to the Underwriters of all such Shares in accordance with the terms hereof. If either Underwriter defaults in its obligation to purchase Shares hereunder on the Closing Date or an Option Closing Date, as the case may be, and the aggregate amount of Shares which such defaulting Underwriter agreed but failed to purchase on the Closing Date or an Option Closing Date, as the case may be, does not exceed 10% of the total amount of Shares which the Underwriters are obligated to purchase on such Closing Date or an Option Closing Date, as the case may be, the non-defaulting Underwriter shall be obligated to purchase the Shares which such defaulting Underwriter agreed but failed to purchase on such Closing Date or an Option Closing Date, as the case may be. If either Underwriter so defaults and the aggregate amount of Shares with respect to which such default occurs is more than the above percentage and arrangements satisfactory to the non-defaulting Underwriter and the Company for the purchase of such Shares by other persons are not made within 48 hours after such default, this Agreement will terminate without liability on the part of the non-defaulting Underwriter or the Company except for the expenses to be paid by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof. In the event that Shares to which a default relates are to be purchased by the non-defaulting Underwriter or by another party or parties, the non-defaulting Underwriter or the Company shall have the right to postpone the Closing Date or an Option Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 12. Effective Date. This Agreement shall become effective immediately as to Sections 6, 8, 10, 13 and 14 and, as to all other provisions, (i) if at the time of execution of this Agreement, the Registration Statement has not become effective, at 11:00 a.m., New York City time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement, the Registration Statement has been declared effective, at 11:00 a.m., New York City time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as the Underwriters may determine on and by notice to the Company or by release of any of the Shares for sale to the public. For the purposes of this Section 12, the Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Shares or upon the release by the Underwriters of telegrams (i) advising the Underwriters that the Shares are released for public offering, or (ii) offering the Shares for sale to securities dealers, whichever may occur first. SECTION 13. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: 22 23 (a) This Agreement may be terminated by the Company by notice to the Underwriters or by the Underwriters by notice to the Company at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company to any Underwriter (except for the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof) or of any Underwriter to the Company (except to the extent provided in Section 10 hereof). (b) This Agreement may also be terminated by the Underwriters prior to the Closing Date by notice to the Company (i) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial material adverse change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Underwriters, to affect adversely the marketability of the Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or which is not reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect, or (iv) if there shall be any action suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or any of its subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Representatives, may materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Shares. Any termination pursuant to this subsection (b) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to any Underwriter (except for expenses to be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof). SECTION 14. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. SECTION 15. Notices. All communications hereunder shall be in writing and, if sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed to the Underwriters at 600 Montgomery Street, San Francisco, California 94111, Attention: George W. Yandell, III, with a copy to John D. Watson, Esq., Latham & Watkins, 1001 Pennsylvania Avenue, Suite 1300, Washington, D.C. 20004; and if sent to the Company shall be mailed, delivered or telegraphed and confirmed to the Company at 700 Route 46 East, Fairfield, New Jersey 07004 with a copy to William N. Dye, Esq., 23 24 Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022. The Company or the Underwriters may change the address for receipt of communications hereunder by giving notice to the others. SECTION 16. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 11 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 10, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 17. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 18. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of California. SECTION 19. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original and all of which shall constitute one and the same document. In this Agreement the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and the Underwriters. [signature page follows] 24 25 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement between the Company and the Underwriters, all in accordance with its terms. Very truly yours, PRIME HOSPITALITY CORP. By: __________________________ Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted by us in San Francisco, California as of the date first above written. MONTGOMERY SECURITIES BT SECURITIES CORP. SMITH BARNEY, INC. MONTGOMERY SECURITIES By: _____________________________ Name: Title: 25 26 SCHEDULE A
Shares of Underwriter Common Stock ----------- ------------ Montgomery Securities............................... BT Securities Corp.................................. Smith Barney, Inc................................... Total..................................... ===========
26 EX-23.2 3 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Prime Hospitality Corp.: As independent public accountants, we hereby consent to the use of our report dated January 31, 1996, except with respect to the matters discussed in Note 16 as to which the date is July 2, 1996, covering the Company's consolidated financial statements for the years ended December 31, 1993, 1994 and 1995 and to all references to our firm included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP Roseland, New Jersey July 2, 1996 -----END PRIVACY-ENHANCED MESSAGE-----