-----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, TOoB9SorpCp+m4WwXRFd8L25yRUlJWdN16lYW+mjszhj6L3rJeWcZvz2Tnr44K1O m8ToH9euiOiy7spW3tattA== 0000950123-97-008870.txt : 19971028 0000950123-97-008870.hdr.sgml : 19971028 ACCESSION NUMBER: 0000950123-97-008870 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19971024 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-4 SEC ACT: SEC FILE NUMBER: 333-38749 FILM NUMBER: 97700769 BUSINESS ADDRESS: STREET 1: 700 RTE 46 E 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-4 1 PRIME HOSPITALITY CORP. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRIME HOSPITALITY CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7011 22-2640625 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) 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, ESQ. 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) ------------------------ with a copy to: WILLIAM N. DYE, ESQ. WILLKIE FARR & GALLAGHER ONE CITICORP CENTER 153 EAST 53RD STREET NEW YORK, NEW YORK 10022 (212) 821-8000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
======================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PRICE(1) PRICE(1) FEE(2) - -------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value...... 6,513,292 shares $22.22 $144,725,349 $43,857 ========================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 0-11 under the Securities Exchange Act of 1934 (the "Exchange Act"). (2) Of this amount, $24,344 was previously paid in accordance with Rule 0-11 under the Exchange Act in connection with the Preliminary Proxy Statement of Homegate Hospitality, Inc. on Schedule 14A, as filed with the Commission on August 22, 1997. ------------------------ 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 HOMEGATE HOSPITALITY, INC. 111 CONGRESS AVENUE SUITE 2600 AUSTIN, TEXAS 78701 October 27, 1997 Dear Stockholder: You are cordially invited to attend a Special Meeting of Stockholders of Homegate Hospitality, Inc. ("Homegate") to be held at 9:00 a.m. local time on December 1, 1997 at The Four Seasons Hotel, 98 San Jacinto, Austin, Texas 78701. At the Special Meeting you will be asked to consider a proposal to authorize and adopt the Agreement and Plan of Merger, dated as of July 25, 1997, (the "Merger Agreement"), providing for the merger (the "Merger") of a subsidiary of Prime Hospitality Corp. ("Prime") with and into Homegate and to authorize the other transactions contemplated by the Merger Agreement. The consummation of the Merger will result in, among other things, Homegate becoming a subsidiary of Prime and the issuance and exchange of each outstanding share of common stock, par value $.01 per share, of Homegate ("Homegate Common Stock") for 0.6073 of a newly issued share of common stock, par value $.01 per share, of Prime (the "Exchange Ratio"), all as more fully described in the accompanying Proxy Statement-Prospectus. ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET FORTH IN THE ACCOMPANYING PROXY STATEMENT-PROSPECTUS AND THE ANNEXES THERETO, WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY. PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME. HOMEGATE'S BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS AND CONDITIONS OF THE PROPOSED MERGER AND HAS DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST INTERESTS OF, HOMEGATE AND ITS STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND THE AUTHORIZATION OF THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. Certain stockholders of Homegate beneficially owning 6,096,416 shares of Common Stock as of October 24, 1997, the Record Date for the Special Meeting (the "Homegate Record Date"), representing approximately 56.8% of the outstanding Homegate Common Stock, have advised Homegate that they have granted irrevocable proxies in favor of Prime to vote all of such stockholders' shares of Homegate Common Stock owned as of the Homegate Record Date in favor of approval of the Merger Agreement. The proposal to adopt the Merger Agreement requires the approval of the holders of at least two-thirds of the outstanding shares of Homegate Common Stock. In view of the importance of the action to be taken at this Special Meeting of Homegate stockholders, we urge you to review carefully the accompanying Notice of Special Meeting of Stockholders and the Proxy Statement-Prospectus, including the annexes thereto, which also include information on Homegate and Prime. Whether or not you expect to attend the Special Meeting, please complete, sign and date the enclosed proxy and return it to Homegate as promptly as possible. Very truly yours, ROBERT A. FAITH Chairman of the Board, Chief Executive Officer and President 3 HOMEGATE HOSPITALITY, INC. 111 CONGRESS AVENUE SUITE 2600 AUSTIN, TEXAS 78701 ------------------------ NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD DECEMBER 1, 1997 ------------------------ To the Stockholders of Homegate Hospitality, Inc.: The Special Meeting of Stockholders of Homegate Hospitality, Inc., a Delaware corporation ("Homegate"), will be held at The Four Seasons Hotel, 98 San Jacinto, Austin, Texas 78701, on December 1, 1997 at 9:00 a.m. local time, for the following purposes: 1. To consider and vote on a proposal (the "Merger Proposal") to adopt the Agreement and Plan of Merger, dated as of July 25, 1997 (the "Merger Agreement"), among Prime Hospitality Corp., a Delaware corporation ("Prime"), PH Sub Corporation, a wholly owned subsidiary of Prime ("Sub"), and Homegate, providing for the merger (the "Merger") of Sub with and into Homegate, and to authorize the Merger and the other transactions contemplated thereby. The consummation of the Merger will result in, among other things, Homegate becoming a wholly owned subsidiary of Prime and the issuance and exchange of outstanding shares of common stock, par value $.01 per share, of Homegate (the "Homegate Common Stock") for newly issued shares of common stock, par value $.01 per share, of Prime, all as more fully described in the accompanying Proxy Statement-Prospectus. A copy of the Merger Agreement is attached as Annex A to the accompanying Proxy Statement-Prospectus. 2. To transact such other business as may properly come before the meeting, or any adjournment or postponement thereof. The Board of Directors of Homegate has fixed the close of business on October 24, 1997, as the record date for the determination of the holders of Homegate Common Stock entitled to notice of, and to vote at, the meeting and adjournments or postponements thereof. The Merger Proposal requires the approval of the holders of not less than two-thirds of the outstanding shares of Homegate Common Stock. Information regarding the proposed Merger, the Merger Agreement and related matters is contained in the accompanying Proxy Statement-Prospectus and the annexes thereto, which are incorporated by reference herein and form a part of this Notice. All Stockholders are cordially invited to attend the Special Meeting. To ensure your representation at the Special Meeting, however, you are urged to complete, date, sign and return the enclosed proxy as promptly as possible. A postage prepaid envelope is enclosed for that purpose. Any Stockholder attending the Special Meeting may vote in person even if that Stockholder has returned a proxy. By Order of the Board of Directors ROBERT A. FAITH Chairman of the Board, Chief Executive Officer and President Dated: October 27, 1997 PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME. 4 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 OCTOBER 24, 1997 Homegate Hospitality, Inc. Prime Hospitality Corp. 111 Congress Avenue, Suite 2600 700 Route 46 East Austin, Texas 78701 Fairfield, New Jersey 07007 (512) 477-6400 (201) 882-1010
HOMEGATE HOSPITALITY, INC PROXY STATEMENT ------------------------ PRIME HOSPITALITY CORP. PROSPECTUS This Proxy Statement-Prospectus (the "Proxy Statement-Prospectus") is being furnished to the holders of common stock, par value $0.01 per share (the "Homegate Common Stock"), of Homegate Hospitality, Inc., a Delaware corporation ("Homegate"), in connection with the solicitation of proxies by the Board of Directors of Homegate (the "Homegate Board of Directors") for use at a Special Meeting of Stockholders of Homegate to be held at The Four Seasons Hotel, 98 San Jacinto, Austin, Texas 78701, on December 1, 1997, at 9:00 a.m. local time, and at any and all adjournments or postponements thereof (the "Homegate Special Meeting"). This Proxy Statement-Prospectus relates to the proposed merger (the "Merger") into Homegate of PH Sub Corporation ("Sub"), a wholly owned subsidiary of Prime Hospitality Corp. ("Prime"), pursuant to an Agreement and Plan of Merger, dated as of July 25, 1997 (the "Merger Agreement"), among Prime, Sub and Homegate. Upon consummation of the Merger, Homegate will become a wholly owned subsidiary of Prime. In the Merger, each outstanding share of Homegate Common Stock (other than shares owned by Homegate or its subsidiaries or by Prime or its subsidiaries, all of which will be canceled) will be converted into and represent the right to receive 0.6073 of a share (the "Exchange Ratio") of common stock, par value $.01 per share, of Prime (the "Prime Common Stock") and cash in lieu of fractional shares of Prime Common Stock. Consummation of the Merger is subject to various conditions, including the approval of not less than two-thirds of the outstanding shares of Homegate Common Stock at the Homegate Special Meeting. Pursuant to certain Voting Agreements, dated as of July 25, 1997, among Prime and certain stockholders of Homegate (the "Voting Agreements"), certain stockholders of Homegate have granted irrevocable proxies in favor of Prime to vote all of such stockholders' shares of Homegate Common Stock as of October 24, 1997, the record date for the Homegate Special Meeting (the "Homegate Record Date"), in favor of the Merger (6,096,416 shares of Homegate Common Stock, representing approximately 56.8% of the outstanding Homegate Common Stock as of the Homegate Record Date). Such stockholders have sole voting and investment power with respect to all the Homegate Common Stock held of record by them. This Proxy Statement-Prospectus also constitutes the Prospectus of Prime with respect to 6,513,292 shares of Prime Common Stock to be issued in connection with the Merger. Upon consummation of the Merger, former holders of Homegate Common Stock will beneficially own approximately 13.8% of the outstanding Prime Common Stock. Prime Common Stock is traded on The New York Stock Exchange (the "NYSE") under the symbol "PDQ." On October 23, 1997, the closing sales price for Prime Common Stock as reported on the NYSE was $22 3/16 per share. At such price, the equivalent value of a share of Homegate Common Stock (the "Equivalent Value") would be $13.47, calculated on the basis of the Exchange Ratio, and the aggregate consideration in the Merger would be approximately $144.5 million. The actual value of the Prime Common Stock is subject to fluctuation and could be more or less than the market price of the Prime Common Stock on the date of this Proxy Statement-Prospectus or the date of the Homegate Special Meeting. Any such change will cause a corresponding change in the Equivalent Value and the aggregate consideration in the Merger. Holders of Homegate Common Stock are urged to obtain more recent market information relating to the closing sales price for the Prime Common Stock. The Boards of Directors of Homegate, Prime and Sub, and Prime as the holder of all the outstanding capital stock of Sub, have approved the Merger Agreement. THE HOMEGATE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF HOMEGATE COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. See "The Merger -- Interests of Certain Persons in the Merger." Proxies for the Homegate Special Meeting may be revoked, subject to the procedures described herein, at any time up to and including the date of the Homegate Special Meeting. See "The Homegate Special Meeting -- Record Date; Voting Rights; Proxies." All information contained in this Proxy Statement-Prospectus with respect to Homegate has been provided by Homegate. All information contained in this Proxy Statement-Prospectus with respect to Prime and Sub has been provided by Prime. This Proxy Statement-Prospectus and the accompanying forms of proxy are first being mailed to stockholders of Homegate on or about October 27, 1997. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE EVALUATED IN CONNECTION WITH THE MERGER. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS OCTOBER 27, 1997. 5 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................................................................. iii FORWARD LOOKING STATEMENTS............................................................ iii INCORPORATION OF DOCUMENTS BY REFERENCE............................................... iv SUMMARY............................................................................... 1 RISK FACTORS.......................................................................... 12 Risk Relating to Integration of Homegate and Prime.................................. 12 AmeriSuites and Homegate Expansion Risks............................................ 12 Risks of the Lodging Industry; Competition.......................................... 13 Hotel Acquisition Risks............................................................. 13 Geographic Concentration of Hotels.................................................. 13 Leverage............................................................................ 14 Employment and Other Government Regulation.......................................... 14 Environmental Regulation............................................................ 14 Importance of Franchisor Relationships.............................................. 15 Dependence on Key Employees......................................................... 15 THE HOMEGATE SPECIAL MEETING.......................................................... 16 Purpose of the Homegate Special Meeting............................................. 16 Record Date; Voting Rights; Proxies................................................. 16 Solicitation of Proxies............................................................. 16 Required Vote....................................................................... 16 THE MERGER............................................................................ 18 General............................................................................. 18 Effective Date...................................................................... 18 Conversion of Shares; Procedures for Exchange of Certificates....................... 18 Background to the Merger............................................................ 19 Recommendation of the Board of Directors of Homegate; Reasons for the Merger........ 24 Interests of Certain Persons in the Merger.......................................... 26 Opinion of Homegate's Financial Advisor............................................. 28 Certain Federal Income Tax Consequences............................................. 31 Accounting Treatment................................................................ 32 Certain Legal Matters............................................................... 33 Federal Securities Law Consequences................................................. 33 Registration Rights................................................................. 33 Listing............................................................................. 34 Appraisal Rights.................................................................... 34 Certain Effects of the Interim Financing and the Termination Fee.................... 34 THE MERGER AGREEMENT.................................................................. 35 The Merger.......................................................................... 35 Effective Date...................................................................... 35 Terms of the Merger................................................................. 35 Exchange Procedures................................................................. 36 Representations and Warranties...................................................... 37 Certain Covenants................................................................... 37 No Solicitation..................................................................... 38 Indemnification and Insurance....................................................... 38 Conditions.......................................................................... 39 Termination; Fees and Expenses...................................................... 39 Amendment; Waiver................................................................... 40 THE INTERIM FINANCING................................................................. 41
i 6
PAGE ---- RECENT SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PRIME........................ 42 PRIME MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 45 SELECTED CONSOLIDATED FINANCIAL DATA OF PRIME AND ITS PREDECESSOR..................... 61 BUSINESS OF PRIME..................................................................... 62 MANAGEMENT OF PRIME................................................................... 77 SELECTED CONSOLIDATED FINANCIAL DATA OF HOMEGATE...................................... 79 HOMEGATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 80 BUSINESS OF HOMEGATE.................................................................. 85 MANAGEMENT OF HOMEGATE................................................................ 93 COMPARATIVE PER SHARE DATA............................................................ 96 PRO FORMA CONDENSED FINANCIAL INFORMATION............................................. 98 DESCRIPTION OF PRIME CAPITAL STOCK.................................................... 109 Common Stock........................................................................ 109 Preferred Stock..................................................................... 109 Warrants............................................................................ 109 Anti-Takeover Provisions............................................................ 109 Limitations on Directors' Liability................................................. 110 Certain Provisions of Delaware Law Regarding an Interested Stockholder.............. 110 Transfer Agent and Registrar........................................................ 110 COMPARISON OF STOCKHOLDER RIGHTS...................................................... 111 SECURITY OWNERSHIP OF HOMEGATE........................................................ 113 OTHER MATTERS......................................................................... 115 LEGAL MATTERS......................................................................... 115 EXPERTS............................................................................... 115 HOMEGATE STOCKHOLDER PROPOSALS........................................................ 115 INDEX TO FINANCIAL STATEMENTS......................................................... F-1 Annex A -- Merger Agreement Annex B -- Opinion of Bear, Stearns & Co. Inc.
ii 7 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE HEREOF OR INCORPORATED BY REFERENCE HEREIN SINCE THE DATE HEREOF. AVAILABLE INFORMATION Homegate and Prime are subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the following Regional Offices of the Commission: Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. The Homegate Common Stock is listed on the Nasdaq National Market. Material filed by Homegate can be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Prime Common Stock is listed on the NYSE. Material filed by Prime can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Proxy Statement-Prospectus does not contain all the information set forth in the Registration Statement on Form S-4 and exhibits relating thereto, including any amendments (the "Registration Statement"), of which this Proxy Statement-Prospectus is a part, and which Prime has filed with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). Reference is made to such Registration Statement for further information with respect to Prime and the securities of Prime offered hereby. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission or attached as an annex hereto. The information in this Proxy Statement-Prospectus concerning Homegate and Prime has been furnished by Homegate and Prime, respectively. FORWARD LOOKING STATEMENTS Certain statements in this Proxy Statement-Prospectus under the captions "Summary," "Risk Factors," "Prime Management's Discussion and Analysis of Financial Condition and Results of Operations," "Homegate Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business of Prime" and "Business of Homegate" and elsewhere constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Prime or Homegate, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; industry trends; expansion and construction costs; competition; changes in business strategy or development iii 8 plans; availability, terms and deployment of capital; availability of qualified personnel; changes in, or the failure or inability to comply with, government regulation, including, without limitation, environmental regulations; and other factors referenced in this Proxy Statement-Prospectus. See "Risk Factors." These forward-looking statements speak only as of the date of this Proxy Statement-Prospectus. Prime and Homegate each expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Prime's or Homegate's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. INCORPORATION OF DOCUMENTS BY REFERENCE Prime (Commission File No. 1-6869) hereby incorporates by reference into this Proxy Statement-Prospectus the following documents previously filed with the Commission pursuant to the Exchange Act: 1. Prime's Annual Report on Form 10-K for the year ended December 31, 1996; 2. Prime's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997; 3. The description of the Prime Common Stock contained in Prime's Registration Statement on Form 8-A, dated June 5, 1992, as amended on July 9, 1992 and December 21, 1992; and 4. Prime's Current Reports on Form 8-K dated March 3, 1997 and July 25, 1997. In addition, all reports and other documents filed by Prime pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the consummation of the Merger shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such reports and documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement-Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is incorporated or deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement-Prospectus. THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE FILED BY PRIME WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST FROM ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT-PROSPECTUS IS DELIVERED, FROM PRIME HOSPITALITY CORP., 700 ROUTE 46 EAST, FAIRFIELD, NEW JERSEY 07007, ATTENTION: SECRETARY (TEL. (201) 882-1010). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 21, 1997. iv 9 SUMMARY The following summary is intended only to highlight certain information contained elsewhere in this Proxy Statement-Prospectus and the Annexes hereto. This summary is not intended to be complete and is qualified in its entirety by the more detailed information contained elsewhere or incorporated by reference in this Proxy Statement-Prospectus. Stockholders of Homegate and Prime should read carefully this Proxy Statement-Prospectus in its entirety. EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by Prime for the purpose of analyzing its operating performance, leverage and liquidity. Hotel EBITDA represents EBITDA generated from the operations of owned hotels. Hotel EBITDA excludes management fee income, interest income from mortgages and notes receivable, general and administrative expenses and other revenues and expenses which do not directly relate to operations of owned hotels. EBITDA and Hotel EBITDA are not measures of financial performance under generally accepted accounting principles and should not be considered as alternatives to net income as an indicator of Prime's operating performance or as alternatives to cash flows as a measure of liquidity. THE COMPANIES Prime. Prime is a national hotel company, with a portfolio of 117 hotels containing 16,631 rooms located in 28 states and the U.S. Virgin Islands (the "Portfolio"). Prime controls two high-quality hotel brands -- AmeriSuites(R) and Wellesley Inns(R) -- as well as a portfolio of upscale full-service hotels. One of the country's largest hotel owner/operators, Prime has positioned itself to benefit significantly from favorable lodging industry fundamentals that have prevailed in recent years. From 1994 to 1996, Prime's EBITDA has grown at a compound annual rate of 44.0%, from $42.8 million in 1994 to $88.8 million in 1996, while recurring net income has grown at a compound annual rate of 48.7%, from $12.8 million to $28.3 million over the same period. The positive trends continued in the first half of 1997. For the six months ended June 30, 1997, EBITDA increased by 39.2% to $59.4 million and recurring net income increased by 76.2% to $20.5 million over the same period in 1996. Prime's strategy is to capitalize on two lodging industry trends perceived by management: (i) favorable industry fundamentals, which are producing strong earnings growth due to the operating leverage inherent in hotel ownership and (ii) growing consumer preferences for newer all-suite accommodations with strong brand identities. Reflecting this strategy, Prime owns and operates 105 of the 117 hotels in the Portfolio (the "Owned Hotels") and holds financial or equity interests in 7 of the remaining 12 hotels managed by Prime for third parties (the "Managed Hotels"). Furthermore, more than 85% of Prime's capital spending in 1995 and 1996 was dedicated to the growth of Prime's proprietary AmeriSuites and Wellesley Inns brands. Through its focus on hotel equity ownership, Prime is benefiting from the operating leverage inherent in the lodging industry. Through its development of proprietary brands, Prime is positioning itself to generate additional revenue not dependent on investment in real estate. Prime's Portfolio is modern and well-maintained, with an average hotel age of approximately nine years. Over the past three years, Prime has achieved rapid growth in the Portfolio, from 5,092 owned rooms at January 1, 1994 to 14,093 owned rooms at October 1, 1997. At the same time, Prime has focused on brand development, with the number of Owned Hotels operated under Prime's proprietary AmeriSuites and Wellesley Inns brands increasing from 19 of the 41 Owned Hotels at January 1, 1994 to 83 of the 105 Owned Hotels at October 1, 1997. Prime's hotels serve three major lodging industry segments: the all-suites segment, under Prime's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the limited-service segment, primarily under Prime's proprietary Wellesley Inns brand. All-Suites: Prime owns and operates 55 all-suite hotels under the AmeriSuites brand name, and currently has another 44 AmeriSuites under development, including 22 under construction. AmeriSuites are upper mid-price, all-suite hotels containing approximately 128 suites and located primarily near suburban 1 10 commercial centers, corporate office parks and other travel destinations, with close proximity to dining, shopping and entertainment amenities. Since January 1, 1995, AmeriSuites has been one of the fastest growing domestic hotel chains, expanding from 13 hotels to 55 hotels at October 1, 1997, an increase of 323%. In 1996, AmeriSuites contributed approximately $26.0 million, or 28.6%, of Prime's Hotel EBITDA. For the six months ended June 30, 1997, AmeriSuites contributed approximately $23.0 million, or 37.2%, of Prime's Hotel EBITDA, a percentage which Prime believes will continue to increase significantly during the second half of 1997 and 1998. Full-Service: Prime operates 29 upscale full-service hotels with food service and banquet facilities under franchise agreements with national hotel brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. In 1996, Prime's full-service hotels contributed approximately $44.5 million, or 48.9%, of Prime's Hotel EBITDA. For the six months ended June 30, 1997, Prime's full-service hotels contributed approximately $26.8 million, or 43.3%, of Prime's Hotel EBITDA. Limited-Service: Prime operates 33 limited-service hotels, 28 of which are Wellesley Inns. Prime owns all of the Wellesley Inns, which compete primarily in the mid-price segment with hotels such as Hampton Inns and La Quinta Inns. The remaining five limited-service hotels, four of which are managed for third parties, are operated under franchise agreements with well-known national chains. In 1996, Prime's limited-service hotels contributed approximately $20.5 million, or 22.5%, of Prime's Hotel EBITDA. For the six months ended June 30, 1997, Prime's limited-service hotels contributed approximately $12.1 million, or 19.5%, of Prime's Hotel EBITDA. Operating Performance and Internal Growth. Prime seeks to achieve internal growth through the use of sophisticated operating, marketing and financial systems at its hotels. Prime has demonstrated its ability to operate its hotels effectively in each of its three segments, achieving revenue per available room ("REVPAR") increases in 1996 at its comparable AmeriSuites, full-service and limited-service hotels of 11.7%, 15.8% and 5.2%, respectively, versus 1995 results. These trends continued in 1997, as Prime achieved REVPAR increases in the second quarter of 1997 at its comparable AmeriSuites, full-service and limited-service hotels of 10.7%, 15.3% and 7.5%, respectively, versus 1996 results. Management believes that: (i) the AmeriSuites chain is positioned to benefit from increased critical mass and name recognition resulting from the chain's rapid growth, expanded marketing initiatives and product improvements; (ii) the upscale full-service segment, located principally in the Northeast, is positioned to benefit from strong regional and segment fundamentals, including significant barriers to entry; and (iii) Prime's Wellesley Inns are positioned to benefit from a $9.0 million renovation and reimaging program completed in March 1997. Prime's emphasis on efficient operations has increased operating margins, thus translating its top-line REVPAR growth into increased earnings for each of its three industry segments. In 1996, gross operating profit increased by 17.0%, 25.9% and 10.4%, respectively, for comparable AmeriSuites, full-service and limited-service hotels, versus 1995 results. These trends continued in 1997, as gross operating profit in the second quarter of 1997 increased by 13.5%, 26.2% and 12.7%, respectively, for comparable AmeriSuites, full-service and limited-service hotels. Prime expects to further improve its operating performance through the implementation of a new proprietary yield management system, an enhanced central reservations system serving the AmeriSuites and Wellesley Inns chains, digital telecommunications conversions, improved telephone call accounting systems and significant increases in employee training programs. AmeriSuites Expansion. Prime's external growth focuses on the accelerated expansion of its Ameri- Suites brand through the construction of new AmeriSuites hotels. Prime believes that AmeriSuites, which offers an excellent guest experience and desirable suite accommodations at mid-scale prices, is well-positioned to become a preeminent brand in the rapidly growing all-suites segment. Prime plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. At present, 55 AmeriSuites are open, with an additional 44 hotels under development, including 22 under construction. At these levels, Prime believes that it is approaching the critical mass necessary to begin development of franchising programs, which would further leverage the value of its proprietary brands. Prime's AmeriSuites franchise initiatives will initially include forming strategic alliances with regional and national developers and REITs and developing franchise marketing, training and quality assurance programs. 2 11 AmeriSuites are positioned in the upper mid-price segment of the lodging industry, competing predominantly with other mid-price and upscale brands such as Courtyard by Marriott and Holiday Inn. Prime markets AmeriSuites as "America's All-Suite Hotel," emphasizing superior price/value relative to traditional mid-price hotels by focusing on the chain's spacious suites, upscale facilities and attractive amenity package. Prime is committed to the expansion of the AmeriSuites brand due to its attractive investment returns, rapid stabilization, broad customer appeal and positioning in the fast growing all-suites segment. Prime believes that it will have access to sufficient resources to implement its planned expansion of the AmeriSuites brand, including capital from the following sources: (i) borrowings under Prime's $100 million revolving credit facility (the "Revolving Credit Facility"); (ii) internally generated free cash flow from hotel operations; and (iii) proceeds from anticipated sale/leaseback transactions with respect to certain of its properties. Prime may also from time to time seek additional debt or equity financing. On September 22, 1997, Prime entered into a strategic alliance with Equity Inns, Inc. ("Equity Inns"), a real estate investment trust, for purposes of financing its brand development through the sale/leaseback of AmeriSuites hotels. Under the agreement, Equity Inns has certain rights to acquire AmeriSuites hotels developed by Prime over the next three years. As part of the alliance, Prime has entered into an initial agreement with Equity Inns for the sale of 10 AmeriSuites hotels for aggregate consideration of $86.3 million, consisting of $77.7 million in cash and $8.6 million in Equity Inns limited partnership operating units. Prime has also agreed to lease the hotels from Equity Inns for a term of 10 years, with certain renewal options. Prime is a Delaware corporation incorporated in 1985. The principal office of Prime is located at 700 Route 46 East, Fairfield, New Jersey 07007-2700 and its telephone number is (201) 882-1010. Homegate. Homegate's goal is to become a national provider of high quality extended-stay hotels in strategically selected markets located throughout North America. Homegate is rapidly developing a chain of mid-price extended-stay hotels under the HOMEGATE Studios & Suites(R) brand name to capitalize on what management believes is a large and underserved market for extended-stay accommodations. This market includes business travelers, professionals on temporary work assignments, persons between domestic situations, and persons relocating or purchasing a home, who often desire accommodations for an extended duration. As of June 30, 1997, Homegate owned 8 hotels and had 34 more under development, including 17 under construction. Additionally, as of such date Homegate had 11 sites under contract with letters of intent and other arrangements. Homegate's objective is to have approximately 65 extended-stay hotels open or under construction by December 31, 1998. Homegate was founded by management and by affiliates of the following three entities: Trammell Crow Residential Company ("TCR"), one of the nation's leading developers of multi-family housing units with 22 regional offices; Greystar Capital Partners, L.P. ("Greystar"), a private investment company with substantial multi-family housing development and construction expertise; and Crow Realty Investors d/b/a Crow Investment Trust ("Crow"), the real estate investment arm of the various descendants of Mr. and Mrs. Trammell Crow and various corporations, partnerships, trusts and other entities beneficially owned or controlled by such persons known collectively as "Crow Family." In TCR, Greystar, and Crow, Homegate brings together extensive experience in developing, constructing and managing properties on a national scale and in structuring, financing and executing national real estate investment programs. TCR, Greystar, Crow and their affiliates own approximately 59.6% of the outstanding Homegate Common Stock. See "Security Ownership of Homegate." Homegate has entered into a master development agreement with a partnership (the "Developer Partnership"), comprised of TCR and Greystar (the "Developer Affiliates"), to provide site selection, construction and development services for Homegate's objective to open or begin construction on approximately 65 hotels by December 31, 1998 (the "Initial Hotel Program"). Management believes the Developer Affiliates' expertise and local market presence will significantly enhance Homegate's ability to execute its Initial Hotel Program, while minimizing Homegate's development costs and administrative overhead. 3 12 Homegate also has entered into a master management assistance agreement (the "Management Agreement") with a subsidiary of Wyndham Hotel Corporation (together with its predecessors and affiliates "Wyndham"), which owns, operates or franchises more than 70 hotels in North America, to manage Homegate's hotels pursuant to 10-year management contracts. Wyndham has agreed to be acquired by Patriot American Hospitality Corp. ("Patriot"). The Crow Family currently owns approximately 43.7% of Wyndham's common stock which will be converted into an ownership interest in Patriot as a result of the acquisition. If the Merger is consummated, Homegate, Prime and Wyndham have agreed to terminate the Management Agreement (and each of the underlying contracts). Homegate's product strategy is to develop a well-recognized national brand under the HOMEGATE Studios & Suites name by offering consistent, high quality accommodations in a standard format, providing much of the value offered by limited service hotels with many of the added features and comforts of apartment living. HOMEGATE Studios & Suites hotels features three functional room configurations, each with a fully-equipped kitchen, upscale residential-quality furnishings and accessories, and separated cooking, living, as well as sleeping areas. In addition, other amenities, such as weekly maid service, twice-weekly linen service, resident laundry facilities, direct telephone service with voice mail messaging and dataport capabilities, cable T.V., a business center and an exercise facility are also offered. See "Business of Homegate -- Product Concept." Homegate currently operates a total of eight hotels located in the following areas: Austin, Texas on Towne Lake; Grand Prairie, Texas near Dallas/Fort Worth International Airport and Six Flags Amusement Park; Irving, Texas also near Dallas/Fort Worth International Airport; two in San Antonio, Texas located near the airport and Fiesta Park Amusement Center; El Paso, Texas; Amarillo, Texas; and Phoenix, Arizona near Phoenix Sky Harbor Airport. The Austin and Grand Prairie hotels were purchased on December 31, 1996, and May 31, 1996, respectively. The Phoenix hotel was developed and built using the TCR Phoenix office. The other five hotels, referred to as the "Westar" hotels, were purchased on September 6, 1996. The Westar hotels contain an aggregate of 622 units, all of which are studio units similar to the studio units in the HOMEGATE Studios & Suites prototype. The Westar hotels are being renovated at an aggregate anticipated cost of $6.6 million, of which $3.7 million has been spent through June 30, 1997, to conform to the quality standards of Homegate's prototype, and will be operated under the HOMEGATE Studios & Suites brand name. The Grand Prairie property contains 139 units. The Austin Towne Lake property contains 149 units which enjoy views of the lake and downtown Austin. The Towne Lake property had been operated as an extended-stay property by the previous owner. Homegate plans to "reflag" the property. Homegate does not plan to renovate this property as it currently conforms to Homegate's quality standards. The Phoenix property contains 139 units and is prototypical of the Homegate brand and standard. Homegate was incorporated in August 1996 as a Delaware corporation to succeed to the business of a predecessor partnership. Homegate's executive offices are at 111 Congress Avenue, Suite 2600, Austin, Texas 78701, and its telephone number is (512) 477-6400. Combined Company. After giving effect to the Merger, the combined Company, on a pro forma basis as of June 30, 1997, would have had approximately $1.1 billion in assets, of which approximately 91.2% is attributable to Prime and 8.8% is attributable to Homegate. For the six months ended June 30, 1997, on a pro forma basis, the total revenues of the combined Company would have been approximately $163.5 million, of which approximately 97.5% is attributable to Prime and 2.5% is attributable to Homegate. The percentage of assets and revenues attributable to Homegate reflects the start-up nature of the Homegate operations. As the Homegate brand is developed, the percentage contribution of the Homegate operations to the combined Company is expected to increase. Prime intends to rapidly develop both the AmeriSuites and Homegate brands. Prime plans to have 69 AmeriSuites and 20 Homegate hotels open by the end of 1997 and 100 AmeriSuites and 50 Homegate hotels open by the end of 1998. In order to accomplish this growth, the Company intends to utilize Homegate's development alliances with TCR, Greystar and Crow, and the existing internal development teams at both 4 13 companies. The Company intends to operate the Homegate hotels as a separate operating division. The Wyndham management agreement will be terminated and the Homegate hotels will be managed by Prime's central management team in the same manner as other Prime hotels. Certain Homegate management, administrative and financial positions are expected to be eliminated in connection with the integration of operations. By the end of 1997, the Company expects to have approximately 150 hotels under operation, including 69 AmeriSuites and 20 Homegate hotels. Upon consummation of the Merger, former Homegate shareholders will own approximately 6.5 million shares of Prime Common Stock, which will represent approximately 13.8% of the outstanding Prime Common Stock. THE HOMEGATE SPECIAL MEETING Time, Place and Date A Special Meeting of the stockholders of Homegate will be held at The Four Seasons Hotel, 98 San Jacinto, Austin, Texas 78701, on December 1, 1997, at 9:00 a.m. local time (including any and all adjournments or postponements thereof, the "Homegate Special Meeting"). Purpose of the Meeting At the Homegate Special Meeting, holders of Homegate Common Stock will consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger, dated as of July 25, 1997, among Homegate, Prime and Sub, a copy of which is attached as Annex A to this Proxy Statement-Prospectus, providing for the Merger of Sub with and into Homegate. As a result of the Merger, Homegate will become a wholly owned subsidiary of Prime. In the Merger, each outstanding share of Homegate Common Stock will be converted into and represent the right to receive 0.6073 of a share of Prime Common Stock. Stockholders of Homegate will also consider and vote upon any other matter that may properly come before the meeting. Vote Required; Record Date The Merger will require approval and adoption of the Merger Agreement by the affirmative vote of not less than two-thirds of the outstanding shares of Homegate Common Stock entitled to vote thereon. Holders of Homegate Common Stock are entitled to one vote per share. Only holders of Homegate Common Stock at the close of business on October 24, 1997 (the "Homegate Record Date") will be entitled to notice of and to vote at the Homegate Special Meeting. On the Homegate Record Date, there were 10,725,000 shares of Homegate Common Stock outstanding and entitled to vote. Pursuant to the Voting Agreements, certain stockholders of Homegate have granted irrevocable proxies in favor of Prime to vote all of such stockholders' shares of Homegate Common Stock as of the Homegate Record Date in favor of the Merger (6,096,416 shares of Homegate Common Stock, representing approximately 56.8% of the outstanding Homegate Common Stock as of the Homegate Record Date). See "The Homegate Special Meeting." RECOMMENDATION OF THE BOARD OF DIRECTORS OF HOMEGATE; REASONS FOR THE MERGER The Board of Directors of Homegate believes that the terms of the Merger are fair to and in the best interests of its stockholders and have approved the Merger Agreement and the related transactions. The Homegate Board of Directors unanimously recommends that its stockholders approve and adopt the Merger Agreement. The Homegate Board believes that the proposed Merger provides its stockholders the opportunity to participate on attractive terms in a substantially larger entity that has access to the capital required to continue aggressive development of the HOMEGATE Studios & Suites brand. In addition, the Homegate Board believes that the combination of the HOMEGATE Studios & Suites brand with Prime's AmeriSuites and Wellesley Inns brands will afford Homegate's stockholders the opportunity to participate, as stockholders of Prime, in an exciting multi-brand strategy. See "The Merger -- Background of the Merger," "-- Recommendation of the Board of Directors of Homegate; Reasons for the Merger" and "-- Interests of Certain Persons in the Merger." 5 14 INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the Homegate Board of Directors with respect to the Merger Agreement and the transactions contemplated thereby, Homegate stockholders should be aware that certain members of Homegate's management and the Homegate Board of Directors have certain interests in the Merger that are in addition to the interests of stockholders of Homegate generally. These interests arise from, among other things, certain employee benefit plans, indemnification and insurance arrangements and other matters which Prime will assume or has agreed to provide after the Merger. See "The Merger -- Interests of Certain Persons in the Merger." In connection with the Merger, John Kratzer, the Chief Operating Officer of Homegate, is expected to enter into an employment agreement with Prime to serve as Senior Vice President. As of October 27, 1997, the specific terms of such employment agreement had not been determined. In addition, Tim Keith will receive a severance payment of $82,500 in connection with the Merger, and Prime has agreed to pay Mr. Keith his 1997 bonus of $35,000 in January 1998. As a result of the Merger, all options outstanding under Homegate's 1996 Long-Term Incentive Plan (other than those issued to non-employee directors, which were fully vested and exercisable when granted) will become immediately exercisable. Robert A. Faith, John C. Kratzer, Tim V. Keith and Joel Kinzie Oldham, IV, each an executive officer of Homegate, hold an aggregate of 321,250 of the options granted in October 1996 with exercise prices of $11.50 (having an aggregate market value of $602,344 based on the closing price of the Homegate Common Stock on October 23, 1997) and an aggregate of 38,000 of the options granted in March 1997 with exercise prices of $8.37 (having an aggregate market value of $190,190 based on the closing price of the Homegate Common Stock on October 23, 1997). Each of Messrs. Faith, Keith and Oldham, is a beneficiary of an agreement with Prime pursuant to which, if such executive's employment with Homegate is terminated within one year following the Merger, such executive's options will be extended so that they will not expire until their original expiration dates (ten years from the date of grant). THE MERGER Merger Consideration On the effective date of the Merger (the "Effective Date"), each outstanding share of Homegate Common Stock (other than shares owned by Homegate or its subsidiaries and Prime or its subsidiaries, all of which will be canceled) will be automatically converted (subject to certain provisions described herein with respect to fractional shares) into and represent the right to receive 0.6073 of a share of Prime Common Stock. Cash will be paid in lieu of fractional shares. Upon consummation of the Merger, Sub will be merged with and into Homegate and Homegate, as the surviving corporation in the Merger, will become a wholly owned subsidiary of Prime. See "The Merger Agreement -- Terms of the Merger." Conditions to the Merger; Termination The respective obligations of Homegate and Prime to consummate the Merger are subject to the fulfillment of the following conditions: (a) obtaining requisite approval of the holders of Homegate Common Stock; (b) the effectiveness of the Registration Statement; (c) the absence of any order or injunction against the consummation of the Merger; (d) the receipt of necessary consents, authorizations, orders and approvals of any governmental commission, board or other regulatory body; and (e) the approval of the Prime Common Stock for listing on the NYSE. The obligations of each of Homegate and Prime to effect the Merger are also subject to the satisfaction or waiver by the other party prior to the Effective Date of the following conditions: (a) the other party shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement and the representations and warranties of the other party and its subsidiaries set forth in the Merger Agreement shall be true in all material respects as of the Effective Date; (b) Homegate and Prime shall have received opinions of their respective counsel that the Merger will qualify as a tax-free reorganization; (c) Homegate and Prime shall have each received a "comfort" letter from the other party's independent public accountants and (d) from the date of the Merger Agreement through the Effective Date, there shall not have occurred any change, individually or together with other changes, that has had, or would reasonably 6 15 be expected to have, a material adverse change in the financial condition, business, results of operations or prospects of either Homegate or Prime and its subsidiaries, taken as a whole. The Merger Agreement may be terminated at any time prior to the Effective Date, before or after the approval by the stockholders of Homegate: (a) by the mutual consent of Homegate and Prime; (b) by action of the Board of Directors of either Homegate or Prime if (i) the Merger shall not have been consummated by December 31, 1997, (ii) the approval of the Merger Agreement by Homegate's stockholders shall not have been obtained, or (iii) a court or governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order, decree, ruling or other action shall have become final and non-appealable; (c) by action of the Board of Directors of Homegate, if (i) in the exercise of its good faith judgment as to fiduciary duties to its stockholders imposed by law, the Board of Directors of Homegate determines that such termination is required by reason of an Alternative Proposal (as defined in "The Merger Agreement -- No Solicitation"), (ii) there has been a breach by Prime or Sub of any representation or warranty contained in the Merger Agreement which would have or would be reasonably likely to have a material adverse effect or (iii) there has been a material breach by Prime of any covenant or agreement contained in the Merger Agreement which is not cured; or (d) by action of the Board of Directors of Prime, if (i) the Board of Directors of Homegate shall have withdrawn or modified in a manner adverse to Prime its approval or recommendation of the Merger Agreement or the Merger, or shall have recommended an Alternative Proposal to Homegate stockholders, (ii) there has been a breach by Homegate of any representation or warranty contained in the Merger Agreement which would have or would be reasonably likely to have a material adverse effect or (iii) there has been a material breach by Homegate of any covenant or agreement contained in the Merger Agreement which is not cured. If (x) Homegate terminates the Merger Agreement because its Board of Directors, in the exercise of its good faith judgment as to its fiduciary duties to its stockholders imposed by law, determines that such termination is required by reason of an Alternative Proposal being made for Homegate, (y) Prime terminates the Merger Agreement because the Board of Directors of Homegate shall have withdrawn or modified in a manner adverse to Prime its approval or recommendation of the Merger Agreement or the Merger or shall have recommended an Alternative Proposal to Homegate stockholders or (z) any person shall have made an Alternative Proposal and thereafter the Merger Agreement is terminated by either party as a result of the requisite approval of the holders of Homegate Common Stock having not been obtained, or by Prime as a result of Homegate's intentional failure to perform one of its agreements contained in the Merger Agreement or intentional breach of one of its representations or warranties contained in the Merger Agreement, and within 12 months thereafter such Alternative Proposal shall have been consummated, then Homegate (or the successor thereto) is required to pay in cash to Prime a termination fee of $3,325,000 (the "Termination Fee"), within two days after such termination (in the case of (x) or (y)) or consummation (in the case of (z)). Certain aspects of the Termination Fee could have the effect of discouraging a third party from pursuing an acquisition transaction involving Homegate. See "The Merger -- Certain Effects of the Interim Financing and the Termination Fee." Accounting Treatment It is expected that the Merger will be accounted for as a pooling of interests for accounting and financial reporting purposes. See "The Merger -- Accounting Treatment." Listing It is a condition to the Merger that the shares of Prime Common Stock to be issued in the Merger be authorized for listing on the NYSE, subject to official notice of issuance. See "The Merger -- Listing." 7 16 Appraisal Rights Under Delaware law, the holders of Homegate Common Stock are not entitled to any appraisal rights in connection with the Merger. See "The Merger -- Appraisal Rights." Voting Agreements As a condition to entering into the Merger Agreement, Prime required certain stockholders of Homegate to enter into the Voting Agreements pursuant to which such stockholders agreed to vote their shares of Homegate Common Stock in favor of the approval of the Merger Agreement and granted irrevocable proxies in favor of Prime to vote all of such stockholders' shares of Homegate Common Stock held on the Homegate Record Date (equal to approximately 56.8%, or 6,096,416 shares, of the issued and outstanding shares of Homegate Common Stock as of the Homegate Record Date) in favor of the approval of the Merger. OPINION OF HOMEGATE'S FINANCIAL ADVISOR Homegate retained Bear, Stearns & Co. Inc. ("Bear Stearns") to act as its financial advisor and to render its opinion as to whether the consideration to be received by the public shareholders of Homegate pursuant to the Merger is fair, from a financial point of view. Bear Stearns is an internationally recognized investment banking firm and is continually engaged in the valuation of businesses and their securities and in rendering opinions in connection with mergers, acquisitions, corporate transactions and other purposes. Homegate retained Bear Stearns based on its qualifications, expertise and reputation in providing advice to companies with respect to transactions similar to the Merger. At a meeting held on July 24, 1997, Bear Stearns orally advised Homegate's Board of Directors of its conclusions and subsequently delivered its written opinion to the effect that, based upon and subject to the various considerations set forth in such opinion, as of the date of such opinion, the consideration to be received by the public shareholders of Homegate pursuant to the Merger is fair, from a financial point of view, to such shareholders. The summary of Bear Stearns' opinion set forth in this Proxy Statement-Prospectus is qualified in its entirety by reference to the full text of such opinion, which is attached as Annex B to this Proxy Statement-Prospectus. Homegate shareholders are urged to, and should, read such opinion carefully in its entirety in connection with this Proxy Statement-Prospectus for assumptions made, matters considered and limits of the review by Bear Stearns. See "The Merger -- Opinion of Homegate's Financial Advisor." THE INTERIM FINANCING Prime agreed to provide, pending consummation of the Merger, up to $65.0 million of interim secured financing (the "Interim Loans") to Homegate to enable Homegate to acquire and develop certain hotel properties. As of October 27, 1997, an aggregate of $32.6 million in Interim Loans was outstanding. See "The Interim Financing." Certain aspects of the interim financing could have the effect of discouraging a third party from pursuing an acquisition involving Homegate. See "The Merger Agreement -- Certain Effects of the Interim Financing and the Termination Fee." HOMEGATE PLANS IF THE MERGER IS NOT CONSUMMATED If the Merger is not consummated, Homegate will face an immediate working capital shortage that will require it to seek additional financing and take measures to preserve cash. Homegate would also be required to seek replacement financing for the Interim Loans, which will mature on April 30, 1998. There can be no assurance that the required additional financing would be available or that it would be available on acceptable terms. Measures taken to preserve cash would most likely include the interruption of construction activity on some or all projects under development. Interruption of construction activity would preclude Homegate from meeting its growth plans, which would most likely have at least a temporary material adverse effect on the market price of Homegate Common Stock. 8 17 RISK FACTORS Holders of Homegate Common Stock, in voting on the Merger, should consider among other factors the following factors: (i) risks relating to integration of Homegate and Prime; (ii) AmeriSuites expansion risks; (iii) risks of the lodging industry and competition; (iv) hotel acquisition strategy; (v) geographic concentration of hotels; (vi) leverage; (vii) employment and other regulation; (viii) environmental regulation; (ix) importance of franchisor relationships; and (x) dependence on key employees. See "Risk Factors." CERTAIN FEDERAL INCOME TAX CONSEQUENCES Consummation of the Merger is conditioned upon Homegate and Prime receiving opinions of their respective counsel to the effect that the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). See "The Merger -- Certain Federal Income Tax Consequences." Accordingly, except as more fully described under "The Merger -- Certain Federal Income Tax Consequences," no gain or loss will be recognized by Homegate stockholders except with respect to cash received in lieu of fractional shares and no gain or loss will be recognized by Homegate, Prime or Sub as a result of the Merger. PRIME COMMON STOCK There are 75,000,000 shares of Prime Common Stock authorized, of which, as of October 17, 1997, there were 40,690,463 shares outstanding, an additional 2,602,025 shares issuable upon exercise of outstanding options and 721,465 shares issuable upon exercise of outstanding warrants and 7,187,500 shares reserved for issuance with respect to $86,250,000 aggregate principal amount of Convertible Subordinated Notes due 2002. It is anticipated that on the Effective Date, 6,513,292 shares of Prime Common Stock will be issued to the holders of Homegate Common Stock, representing approximately 13.8% of the outstanding Prime Common Stock after such issuance, and an additional 389,431 shares of Prime Common Stock will be issuable upon the exercise of options which were previously exercisable for shares of Homegate Common Stock. Prime Common Stock trades on the NYSE under the symbol "PDQ." See "Description of Prime Capital Stock." COMPARATIVE RIGHTS OF STOCKHOLDERS The rights of Homegate stockholders currently are governed by Delaware law, Homegate's Certificate of Incorporation and Homegate's By-laws. Upon consummation of the Merger, stockholders of Homegate will become stockholders of Prime, which is also a Delaware corporation, and their rights as stockholders of Prime will be governed by Delaware law, Prime's Certificate of Incorporation and Prime's By-laws. For a comparison of the rights of Homegate stockholders and the rights of Prime stockholders, see "Comparison of Stockholder Rights." MARKET AND MARKET PRICES Prime Prime Common Stock trades on the NYSE under the symbol "PDQ." The following table sets forth the high and low sale prices of the Prime Common Stock as reported by the NYSE for each of the quarters in the two year period ended December 31, 1996 and for the first, second, third and fourth quarters (through October 23) of 1997.
HIGH LOW ---- --- 1995 ------------------------------------------------------------- First Quarter................................................ $10 3/8 $ 7 3/8 Second Quarter............................................... 10 5/8 9 1/4 Third Quarter................................................ 11 9 1/2 Fourth Quarter............................................... 10 1/4 9 3/8
9 18
HIGH LOW ---- --- 1996 ------------------------------------------------------------- First Quarter................................................ $13 5/8 $ 9 5/8 Second Quarter............................................... 17 1/4 12 Third Quarter................................................ 19 7/8 16 3/8 Fourth Quarter............................................... 17 1/4 14 1997 ------------------------------------------------------------- First Quarter................................................ $18 1/8 $14 1/8 Second Quarter............................................... 20 7/8 14 3/4 Third Quarter................................................ 22 1/4 17 1/2 Fourth Quarter (through October 23).......................... 23 3/16 21 /16
On October 23, 1997, the last sales price of Prime Common Stock on the NYSE was $22 3/16. The public announcement of the Merger Agreement occurred on July 25, 1997. Homegate Since October 25, 1996, Homegate Common Stock has traded on Nasdaq under the symbol "HMGT." The following table sets forth the high and low sale prices of the Homegate Common Stock as reported by Nasdaq for the fourth quarter in the period ended December 31, 1996 and for the first, second, third and fourth quarters (through October 23) of 1997.
HIGH LOW ---- --- 1996 ------------------------------------------------------------- Fourth Quarter............................................... $12 1/4 $6 3/4 1997 ------------------------------------------------------------- First Quarter................................................ $ 9 1/4 $6 15/16 Second Quarter............................................... 10 3/8 6 Third Quarter................................................ 13 5/8 8 15/16 Fourth Quarter (through October 23).......................... 13 7/8 12 5/8
On October 23, 1997, the last sales price of Homegate Common Stock on Nasdaq was $13 3/8. The public announcement of the Merger Agreement occurred on July 25, 1997. EQUIVALENT PER SHARE DATA The following tables set forth certain data concerning the historical book value per share, cash dividends declared per share and net income (loss) per fully diluted share for Prime and Homegate, respectively, on a pro forma basis after giving effect to the Merger, as if such transaction had occurred at the beginning of the period presented. The information should be read in conjunction with the unaudited Pro Forma Condensed Financial Information of Prime contained elsewhere in this Proxy Statement-Prospectus, the historical financial statements of Prime incorporated herein by reference and the historical financial statements of Homegate contained elsewhere herein. The unaudited pro forma equivalent per share data shows for each share of Prime Common Stock and Homegate Common Stock before the Merger and its equivalent position after giving effect to the Merger. Homegate stockholders will receive 0.6073 of a share of Prime Common Stock for each share of Homegate Common Stock outstanding. 10 19 Historical
AS OF AND FOR AS OF AND FOR THE THE AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1997 DECEMBER 31, 1996 1995 1994 ----------------- ----------------- ---------------- ---------------- PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE ------ -------- ------ -------- ----- -------- ----- -------- Book value per share............ $11.01 $ 5.95 $10.55 $ 6.03 $7.51 $ -- $6.71 $ -- Cash dividends per share........ -- -- -- -- -- -- -- -- Net income (loss) per fully diluted share................. $ .48 $ (.08) $ .80 $ (.08) $ .54 $ -- $ .58 $ --
Prime -- Pro Forma
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- ----------------- ----------------- Book value per share................ $ 10.66 $ 10.46 $ $ Cash dividends per share............ -- -- -- -- Net income per fully diluted share............................. $ .41 $ .69 $ .54 $ .58
Homegate -- Equivalent Pro Forma
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- ----------------- ----------------- Book value per share................ $ 6.47 $ 6.35 $ -- $ -- Cash dividends per share............ -- -- -- -- Net income per fully diluted share............................. $ .25 $ .42 $ .33 $ .35
SURRENDER OF STOCK CERTIFICATES On the Effective Date, Prime will instruct Continental Stock Transfer & Trust Company, in its capacity as exchange agent for the Merger (the "Exchange Agent"), to mail to each holder of record of Homegate Common Stock a transmittal letter within three business days. The transmittal letter will contain instructions with respect to the surrender of certificates representing Homegate Common Stock to be exchanged for Prime Common Stock. See "The Merger -- Conversion of Shares; Procedures for Exchange of Certificates." 11 20 RISK FACTORS Holders of Homegate Common Stock should consider carefully all of the information contained in this Proxy Statement-Prospectus, including the following risk factors: RISK RELATING TO INTEGRATION OF HOMEGATE AND PRIME The realization of certain benefits anticipated as a result of the Merger will depend in part on the integration of Homegate's extended-stay hotel business with Prime and the successful inclusion of Homegate's hotels in Prime's Portfolio. The dedication of management resources to such integration may detract attention from the day-to-day business of Prime. Extended-stay lodging is a market in which Prime does not currently operate. There can be no assurance that there will not be substantial costs associated with the transition process or that there will not be other material adverse effects as a result of these integration efforts. There can be no assurance that Homegate's business can be operated profitably or integrated successfully into Prime's operations. Such effects could have a material adverse effect on the financial results of Prime. AMERISUITES AND HOMEGATE EXPANSION RISKS Prime is committed to expanding its AmeriSuites hotel brand and, upon consummation of the Merger, the Homegate hotel brand, to meet growing demand in the all-suite and extended stay hotel segments. Prime will be required to expend significant management and financial resources to expand its hotel brands and develop brand name identification. Prime competes with other companies in the all-suites segment and, following the Merger, in the extended stay segment, some of which companies have greater brand recognition and financial resources than Prime. As a result, there is no assurance that Prime can successfully expand its hotel brands or compete effectively with these other franchises. Prime will be expanding into hotel markets where it does not currently operate. There can be no assurance that Prime will anticipate all of the changing demands that expanding operations will impose on its management and management information system or its reservation service. The failure to adapt its systems and procedures could have a material adverse effect on Prime's business. The expansion of its brands will require significant capital. Prime believes that the availability under the Revolving Credit Facility, cash flow from operations and proceeds from anticipated sale/leaseback transactions will be sufficient to fund the near term growth of its brands. However, there can be no assurance that Prime will be able to obtain financing to fund the growth of its brands beyond the near term. If Prime is unable to obtain additional financing, the growth prospects for its brands and the financial results of Prime would be adversely affected. Prime's growth strategy of developing new AmeriSuites and Homegate hotels will subject Prime to pre-opening and pre-stabilization costs. As Prime opens additional hotels, such costs may adversely affect Prime's results of operations. Newly opened hotels historically begin with lower occupancy and room rates that improve over time. While Prime has in the past successfully opened new hotels, there can be no assurance that Prime will be able to continue to do so successfully. Construction of hotels involves certain risks, including the possibility of construction cost overruns and delays, site acquisition cost and availability, uncertainties as to market potential, market deterioration after commencement of the development and possible unavailability of financing on favorable terms. Although Prime seeks to manage its construction activities so as to minimize such risks, there can be no assurance that its brand expansion will perform in accordance with Prime's expectations. The opening of the new AmeriSuites and Homegate hotels will be contingent upon, among other things, receipt of all required licenses, permits and authorizations. The scope of the approvals required for a new hotel is extensive, including, without limitation, state and local land-use permits, building and zoning permits and health and safety permits. In addition, unexpected changes or concessions required by local, regulatory and state authorities could involve significant additional costs and could delay or prevent the completion of construction or the opening of a new hotel. There can be no assurance that the necessary permits, licenses and approvals for the construction and operation of the new hotels will be obtained, or that such permits, licenses and approvals will be obtained within the anticipated time frame. 12 21 Of Prime's 55 AmeriSuites, 30, or 54.5%, have been open less than one year and 37, or 67.3%, have been open less than two years. Of the eight Homegate hotels, all have been acquired or constructed by Homegate within the past year. Consequently, the results achieved by these hotels to date may not be indicative of future results for these hotels or for other new hotels. Although the revenue and profitability of the AmeriSuites and Homegate have improved as the hotels have matured, there can be no assurance that future hotels will experience similar results. RISKS OF THE LODGING INDUSTRY; COMPETITION Prime's business is subject to all of the risks inherent in the lodging industry. These risks include, among other things, adverse effects of general and local economic conditions, changes in local market conditions, oversupply of hotel space, a reduction in local demand for hotel rooms, changes in travel patterns, changes in governmental regulations that influence or determine wages, prices or construction costs, changes in interest rates, the availability of credit and changes in real estate taxes and other operating expenses. Prime's ownership of real property, including hotels, is substantial. Real estate values are sensitive to changes in local market and economic conditions and to fluctuations in the economy as a whole. Due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues and profits. The lodging industry is highly competitive. During the 1980s, construction of lodging facilities in the United States resulted in an excess supply of available rooms. This oversupply had an adverse effect on occupancy levels and room rates in the industry, although the oversupply has since largely been absorbed. Competitive factors in the industry include reasonableness of room rates, quality of accommodations, brand recognition, service levels and convenience of locations. Prime's hotels generally operate in areas that contain numerous other competitors. There can be no assurance that demographic, economic or other changes in markets will not adversely affect the convenience or desirability of the sites in which Prime's hotels are located. Furthermore, there can be no assurance that, in the markets in which Prime's hotels operate, competing hotels will not pose greater competition for guests than presently exists, or that new hotels will not enter such locales. See "Business of Prime -- Industry Overview." HOTEL ACQUISITION RISKS Prime from time to time makes selective acquisitions of hotels with repositioning potential, notably in the full-service segment and in locations where Prime presently operates. There can be no assurance that hotel acquisitions can be consummated successfully or that acquired hotels can be operated profitably or integrated successfully into Prime's operations. Hotel acquisition entails certain risks that the acquired hotels could be subject to unanticipated business uncertainties or legal liabilities. GEOGRAPHIC CONCENTRATION OF HOTELS Many of Prime's hotels open or under development are located in Florida, New Jersey, New York, Georgia, Texas and Tennessee, and such geographic concentration exposes Prime's operating results to events or conditions which specifically affect those areas, such as local and regional economic, weather and other conditions. Adverse developments which specifically affect those areas may have a material adverse effect on the results of operations of Prime. While Prime's AmeriSuites and Homegate expansion is expected to reduce these risks, Prime will remain subject to certain risks associated with geographic concentration. In addition, Prime owns the Marriott's Frenchman's Reef Beach Resort (the "Frenchman's Reef ") in St. Thomas, U.S. Virgin Islands. Prime obtained ownership and control of this hotel in December 1994 pursuant to the restructuring of a note receivable. The Frenchman's Reef accounted for approximately 12.9% of Prime's EBITDA for the year ended December 31, 1996 and 10.1% during the six months ended June 30, 1997. The Frenchman's Reef's operating results have been adversely affected in recent years by hurricanes and a disruption in airline service. As a resort hotel primarily operated for leisure travelers, operating results at the Frenchman's Reef also are subject to adverse developments in general economic conditions and changes in 13 22 travel patterns. Adverse developments with respect to the Frenchman's Reef may have a material adverse effect on the results of operations of Prime. In September 1995, the Frenchman's Reef suffered hurricane damage when Hurricane Marilyn struck the U.S. Virgin Islands. Prime and its insurance carrier settled Prime's property and business interruption insurance claim for $25.0 million. Due to this insurance coverage, Prime's liquidity was affected only to the extent of its insurance deductibles, for which Prime provided a reserve of $2.2 million in 1995. In July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. Prime is currently reviewing its claims for property damage and business interruption insurance with its insurance carrier with respect to the damage caused by Hurricane Bertha. Although Prime has continued to operate the hotel, the impact of the hurricanes has caused operating profits to decline. Prime is currently underway with plans to refurbish and upgrade the Frenchman's Reef. Prime estimates that the cost of refurbishment will be approximately $35.0 million. Due to the extent of the renovations and the additional damage caused by Hurricane Bertha, Prime closed the hotel in April 1997 and plans to reopen the hotel in December 1997, although there can be no assurance that the Frenchman's Reef will reopen at such time or that the cost of refurbishment will not exceed Prime's estimate. Prime does not believe the closing of the Frenchman's Reef will have a material impact on its cash flow due to the seasonality of the hotel's operations and its business interruption insurance coverage. LEVERAGE As of June 30, 1997, after giving effect to the Merger, Prime's total long-term debt (including current portion) would have been $489.5 million. Prime expects it may incur additional indebtedness in connection with the implementation of its growth strategy. The degree to which Prime is leveraged, as well as its rent expense, could have important consequences to holders of Prime Common Stock, including: (i) Prime's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) a substantial portion of Prime's cash flow from operations may be dedicated to the payment of principal and interest on its indebtedness and rent expense, thereby reducing the funds available to Prime for its operation; and (iii) certain of Prime's indebtedness, including the Revolving Credit Facility, contains financial and other restrictive covenants, including those restricting the incurrence of additional indebtedness, the creation of liens, the payment of dividends and sales of assets, as well as those imposing minimum net worth requirements. See "Prime Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." EMPLOYMENT AND OTHER GOVERNMENT REGULATION The lodging industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and beverage (such as health and liquor license laws) and building and zoning requirements. Also, Prime is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions and work permits requirements. The failure to obtain or retain liquor licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could adversely affect Prime. Both at the federal and state level, there are proposals under consideration to increase the minimum wage and introduce a system of mandated health insurance. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While Prime believes its hotels are substantially in compliance with these requirements, a determination that Prime is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. These and other initiatives could adversely affect Prime as well as the lodging industry in general. ENVIRONMENTAL REGULATION Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Certain environmental laws and common law principles could be used to impose liability for release of asbestos- 14 23 containing materials ("ACMs") into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures. In connection with the ownership or operation of hotels, Prime may be potentially liable for any such costs. Although Prime is currently not aware of any material environmental claims pending or threatened against it, no assurance can be given that a material environmental claim will not be asserted against Prime or against Prime and its Managed Hotels. The cost of defending against claims of liability or of remediating a contaminated property could have a material adverse effect on the results of operations of Prime. IMPORTANCE OF FRANCHISOR RELATIONSHIPS Prime currently enjoys good relationships with its major franchisors, Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson, and Prime has no reason to believe that such relationships will not continue. However, under the applicable franchise agreements, the franchisor can terminate the agreement if, among other things, its quality standards are not maintained or if payments due are not made in a timely fashion. If any of the franchise agreements were terminated by the franchisor, Prime could explore entering into a franchise agreement with another franchisor. There can be no assurance, however, that a desirable replacement relationship would be available. DEPENDENCE ON KEY EMPLOYEES Prime is dependent on its President, Chief Executive Officer and Chairman of the Board, David A. Simon, its Executive Vice President and Chief Financial Officer, John M. Elwood, its Executive Vice President of Operations, Paul H. Hower, and on certain other key members of its executive management staff, the loss of whose services could have a material adverse effect on Prime's business and future operations. See "Management of Prime." 15 24 THE HOMEGATE SPECIAL MEETING PURPOSE OF THE HOMEGATE SPECIAL MEETING At the Homegate Special Meeting, holders of Homegate Common Stock will consider and vote upon a proposal to approve and adopt the Merger Agreement and such other matters as may properly be brought before the Homegate Special Meeting. THE BOARD OF DIRECTORS OF HOMEGATE HAS APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. RECORD DATE; VOTING RIGHTS; PROXIES The Homegate Board of Directors has fixed the close of business on October 24, 1997 as the Homegate Record Date for determining holders entitled to notice of and to vote at the Homegate Special Meeting. As of the Homegate Record Date, there were 10,725,000 shares of Homegate Common Stock issued and outstanding, each of which entitles the holder thereof to one vote. All shares of Homegate Common Stock represented by properly executed proxies will, unless such proxies have been previously revoked, be voted in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF HOMEGATE COMMON STOCK WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Homegate does not know of any matters other than as described in the Notice of Special Meeting that are to come before the Homegate Special Meeting. If any other matter or matters are properly presented for action at the Homegate Special Meeting, the persons named in the enclosed form of proxy and acting thereunder will have the discretion to vote on such matters in accordance with their best judgment, unless such authorization is withheld. A stockholder who has given a proxy may revoke it at any time prior to its exercise by giving written notice thereof to the Secretary of Homegate, by signing and returning a later dated proxy, or by voting in person at the Homegate Special Meeting; however, mere attendance at the Homegate Special Meeting will not in and of itself have the effect of revoking the proxy. The presence in person or by properly executed proxy of holders of a majority of the issued and outstanding shares of Homegate Common Stock entitled to vote is necessary to constitute a quorum at the Homegate Special Meeting. Votes cast by proxy or in person at the Homegate Special Meeting will be tabulated by the election inspectors appointed for the meeting who will determine whether or not a quorum is present. Where, as to any matter submitted to the stockholders for a vote, proxies are marked as abstentions (or stockholders appear in person but abstain from voting), such abstentions will be treated as shares that are present and entitled to vote for purposes of determining the presence of a quorum but as unvoted for purposes of determining the approval of any matter submitted to the stockholders for a vote. If a broker indicates on the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter. SOLICITATION OF PROXIES Homegate will bear its own cost of solicitation of proxies. In addition to the use of the mails, proxies may be solicited by the directors and officers of Homegate by personal interview, telephone, telegram or electronic mail. Such directors and officers will not receive additional compensation for such solicitation but may be reimbursed for out-of-pocket expenses incurred in connection therewith. Arrangements may also be made with brokerage firms and other custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of shares of Homegate Common Stock held of record by such persons, in which case Homegate will reimburse such brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in connection therewith. REQUIRED VOTE The approval of the Merger requires the affirmative vote of the holders of not less than two-thirds of the outstanding shares of Homegate Common Stock. An abstention will have the same effect as a vote against the 16 25 Merger. As of the Homegate Record Date, there were 10,725,000 shares of Homegate Common Stock outstanding and entitled to vote held by approximately 29 stockholders of record. As of the Homegate Record Date, directors and officers of Homegate as a group beneficially owned 6,309,356 shares of Homegate Common Stock, or approximately 58.7% of those shares of Homegate Common Stock outstanding as of such date. All directors and executive officers of Homegate have indicated that they intend to vote their shares for approval and adoption of the Merger Agreement. Pursuant to the Voting Agreements, certain stockholders of Homegate have granted irrevocable proxies in favor of Prime to vote all of such stockholders' shares of Homegate Common Stock held as of the Homegate Record Date in favor of the Merger Agreement and the Merger (6,096,416 shares of Homegate Common Stock, or approximately 56.8% of the outstanding shares of Homegate Common Stock as of the Homegate Record Date). THE MATTERS TO BE CONSIDERED AT THE HOMEGATE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF HOMEGATE. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT-PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE. 17 26 THE MERGER GENERAL The Merger Agreement provides that the Merger will be consummated if the approval of the Homegate stockholders required therefor is obtained and all other conditions to the Merger are satisfied or waived. Upon consummation of the Merger, Sub will be merged with and into Homegate, and Homegate will become a wholly owned subsidiary of Prime. Upon consummation of the Merger, each outstanding share of Homegate Common Stock (other than shares owned by Homegate as treasury stock or by its subsidiaries or by Prime or its subsidiaries, all of which will be canceled) will be automatically converted (subject to provisions with respect to fractional shares) into the right to receive 0.6073 of a share of Prime Common Stock. Cash will be paid in lieu of fractional shares. Based upon the capitalization of Homegate and Prime as of the Homegate Record Date, the stockholders of Homegate will own approximately 13.8% of the outstanding Prime Common Stock following consummation of the Merger. Such percentage could change depending on the number of shares of Prime Common Stock and Homegate Common Stock issued upon exercise of outstanding Homegate and Prime stock options. EFFECTIVE DATE The Effective Date of the Merger will occur upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware (the "Certificate of Merger") or at such later Prime as is specified on such certificate. The filing of the Certificate of Merger will occur as soon as practicable after the satisfaction of the conditions set forth in the Merger Agreement. The Merger Agreement may be terminated by either party if the Merger has not been consummated on or before December 31, 1997 and under certain other conditions. See "The Merger Agreement -- Conditions" and "-- Termination; Fees and Expenses." CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES The conversion, at the Exchange Ratio, of Homegate Common Stock into the right to receive Prime Common Stock will occur automatically at the Effective Date. On the Effective Date, Prime will instruct the Exchange Agent to mail to each holder of record of Homegate Common Stock within three business days a transmittal letter and instructions for use in effecting the surrender of certificates which represented shares of Homegate Common Stock. Upon receipt of such certificates, the Exchange Agent will deliver full shares of Prime Common Stock to such stockholder and cash in lieu of fractional shares pursuant to the terms of the Merger Agreement and in accordance with the transmittal letter, together with any dividends or other distributions to which such stockholder is entitled without interest. If any issuance of shares of Prime Common Stock in exchange for shares of Homegate Common Stock is to be made to a person other than the holder of Homegate Common Stock in whose name the certificate is registered at the Effective Date, it will be a condition of such exchange that the certificate so surrendered be properly endorsed or otherwise in proper form for transfer and that the holder of Homegate Common Stock requesting such issuance either pay any transfer or other tax required or establish to the satisfaction of Prime that such tax has been paid or is not payable. After the Effective Date, there will be no further transfers of Homegate Common Stock on the stock transfer books of Homegate. If a certificate representing Homegate Common Stock is presented for transfer, it will be canceled and a certificate representing the appropriate number of full shares of Prime Common Stock and cash in lieu of fractional shares and any dividends and distributions will be issued in exchange therefor, without interest. After the Effective Date and until surrendered, shares of Homegate Common Stock will be deemed for all corporate purposes, other than the payment of dividends and distributions, to evidence ownership of the number of full shares of Prime Common Stock into which such shares of Homegate Common Stock were 18 27 converted on the Effective Date. No dividends or other distributions, if any, payable to holders of Prime Common Stock will be paid to the holders of any certificates for shares of Homegate Common Stock until such certificates are surrendered. Upon surrender of such certificates, all such declared dividends and distributions payable after the Effective Date will be paid to the holder of record of the full shares of Prime Common Stock represented by the certificate issued in exchange therefor, without interest. HOLDERS OF HOMEGATE COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HOLDERS OF HOMEGATE COMMON STOCK SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY. BACKGROUND TO THE MERGER In early 1997, Homegate began to explore its options for raising the additional capital that would be required for it to continue its hotel development program after the expenditure of the remaining funds from its October 1996 initial public offering and existing credit facility. The Company sought both conventional first mortgage financing and "mezzanine financing," consisting of subordinated debt financing for an additional portion of hotel development costs (beyond that provided by the first mortgage financing) that would most likely require returns comparable to an equity investment. The most promising financing option then being considered included mezzanine financing that would be dilutive to equity through the issuance of warrants to the party providing the financing. In this context, Homegate had a number of discussions with Bear Stearns, which had been the lead managing underwriter of Homegate's initial public offering. Prime has announced that it is pursuing a strategy which focuses on the development of proprietary brands with the objective of evolving into a multi-brand franchise company. Against this background, on February 5, 1997 representatives of Homegate and Prime attending an industry conference in New York met and, at Prime's suggestion, began to explore the desirability of a business combination transaction whereby (i) Homegate would become a subsidiary of Prime with Homegate's stockholders receiving shares of Prime Common Stock in the merger and (ii) Prime would continue development of the Homegate brand as part of a multi-brand strategy, together with Prime's AmeriSuites brand. At this meeting, the parties agreed to share certain confidential information so that they might further assess their mutual interests in pursuing a possible transaction. On February 11, 1997, a confidentiality agreement was signed pursuant to which the parties began to exchange information. On March 3, 1997, representatives of Prime met with representatives of Homegate in Dallas, Texas to understand further Homegate's concept, to view a prototype property and to discuss further their interest in the potential transaction. On March 24, 1997, the Board of Directors of Homegate (the "Homegate Board") met in Dallas and considered various financing alternatives, including the potential use of mezzanine financing with warrants attached and/or the issuance of convertible debt securities in a private or public transaction. At this meeting the Homegate Board was briefed by Homegate's management concerning the discussions with Prime, and the Homegate Board instructed management to continue the discussions with Prime. The Homegate Board believed that the potential business combination with Prime should be explored fully before committing to a financing that would dilute the existing Homegate stockholders' percentage ownership in Homegate's extended stay lodging business in order that such dilution could be avoided if the potential business combination appeared attractive and was to be pursued in the near term. While the Homegate Board recognized that a business combination transaction with Prime would dilute the Homegate stockholders' interest in the extended stay business conducted by Homegate, the Homegate Board also noted that the Homegate stockholders would gain an interest in a much larger lodging business conducted by Prime. On May 1, 1997, representatives of Homegate and Prime met in Phoenix, Arizona. At this meeting, the parties had their first preliminary discussions of the terms on which a business combination might be pursued. The parties contemplated that the transaction would be structured as a tax-free, stock-for-stock merger and that Prime would provide Homegate with a bridge financing facility to enable Homegate to continue its hotel 19 28 development program during the pendency of the process. At this meeting, Prime preliminarily indicated that it was contemplating an exchange ratio that would value Homegate Common Stock at approximately $10.00 per share, but indicated that it would continue to refine its valuation analysis as it continued its due diligence. On May 5, 1997, in conjunction with Homegate's annual meeting of stockholders in Austin, Texas, the Homegate Board met to discuss, among other things, its strategic options, including the pursuit of financing from third party sources to continue its hotel development program and the potential business combination transaction with Prime. Representatives of Bear Stearns attended a portion of the meeting and presented to the Homegate Board certain background information concerning Prime and, based on published research reports, indicated its preliminary view that a transaction could be accretive to Prime with merger consideration per share of Homegate Common Stock in excess of $11.50. At this meeting, James D. Carreker, a Homegate director and the Chairman and Chief Executive Officer of Wyndham, made a proposal to the Homegate Board outlining Wyndham's interest in providing Homegate with alternative mezzanine financing that would be less dilutive to equity than that currently being considered by Homegate but would be conditioned upon amendment of the Master Management Assistance Agreement between Homegate and Wyndham to provide for a significant increase in the termination fee payable in the event such agreement was terminated prematurely in connection with a change of control or otherwise. At this meeting, the Homegate Board had its first of several extensive discussions of the relative merits of the strategic alternatives before it, focusing on the potential risks and rewards attendant the more highly leveraged financing alternative and the benefits to Homegate stockholders of the business combination alternative. Ultimately, the Homegate Board instructed management to continue its discussions with Wyndham and the other third party financing source and its discussions with Prime, focusing in the Prime context on increasing the value Prime would be willing to provide Homegate stockholders in the business combination. At this meeting, the Homegate Board also considered the likelihood of finding another party with which a business combination could then be negotiated that would provide benefits for Homegate stockholders competitive with those that might be gained from a combination with Prime. The Homegate Board concluded that, given (i) Homegate's short existence, (ii) its having only recently commenced the execution of its business plan and (iii) its general understanding of other major lodging companies and their strategies, it was not likely that there were any other attractive acquirors with which a combination could then be negotiated. Accordingly, other merger candidates were not actively solicited. Mr. Carreker and two other Homegate Directors, Harlan R. Crow and Anthony W. Dona, excused themselves from the May 5 meeting during the discussions concerning Wyndham and advised that they would refrain from participating in any subsequent Homegate Board actions or discussions concerning Wyndham because of the potential conflicts presented by their separate relationships with Wyndham. CF Securities, L.P., an affiliate of Mr. Crow and Crow Family, owns approximately 43.7% of the outstanding shares of common stock of Wyndham, and Mr. Dona is an executive officer of Crow, which is also an affiliate of Mr. Crow and Crow Family. Thereafter, Messrs. Carreker, Crow and Dona did not participate in any Homegate Board actions or deliberations concerning Wyndham and related matters. On May 14, 1997, Prime provided to Homegate an initial term sheet indicating Prime's interest in pursuing a transaction pursuant to which Homegate stockholders would be offered Prime Common Stock pursuant to an exchange ratio that valued Homegate Common Stock at $11.50 per share. The exchange ratio was to be set based on the average closing price of Prime Common Stock for the ten trading days preceding execution of a definitive agreement. The Prime proposal included an adjustment mechanism providing for a decrease in the exchange ratio (of up to 6.5%) if the value of Prime Common Stock should increase prior to the closing of the business combination, without a corresponding increase in the exchange ratio if the market price of Prime Common Stock should decrease prior to the closing. The proposal also contemplated, among other terms, the execution by various Homegate affiliates of agreements providing for the development by TCR and Greystar of other (non-Homegate) branded hotels for the benefit of Prime, and noncompetition by Homegate affiliates for two years following the business combination. Furthermore, the proposal contemplated, as a condition of closing, that termination of the Master Management Assistance Agreement with Wyndham should be effected for a termination fee not to exceed $975,000. 20 29 On May 19, 1997, the Homegate Board held a telephonic meeting to consider, among other things, the receipt of the initial term sheet from Prime and the results of continued discussions with Wyndham regarding Wyndham's willingness to provide mezzanine financing. At this meeting, the Homegate Board of Directors determined to continue to pursue both alternatives and to continue to seek more value from Prime in the business combination context. The Board further requested that management and Bear Stearns prepare preliminary financial analyses of the strategic alternatives. On May 27, 1997, the Homegate Board met again and considered further the strategic alternatives in light of the preliminary financial analyses received from management and Bear Stearns. At the May 27 meeting, management presented to the Homegate Board the results of its financial analyses valuing Homegate under two capitalization scenarios, one assuming continuing operations through the year 2000 utilizing the proposed Wyndham mezzanine financing as a supplement to conventional first mortgage financing and the other assuming continuing operations through the same period with the same financing but with a $50 million equity offering assumed as of January 1, 1999 (with the proceeds of the offering being used to repay the Wyndham mezzanine financing). The stabilized occupancy rate used in the analysis was in line with industry norms, and the construction cost, average weekly room rate and lease-up assumptions were consistent with comparable figures reported by competitors in the mid-price segment of the extended stay market. It was assumed for purposes of the analyses that the market price of Homegate Common Stock would begin to reflect the following year's earnings estimates half way through a given year. Earnings per share amounts for each of 1999 and 2000 were then multiplied by a factor of 17.7 and discounted back to December 31, 1997, yielding values ranging from $15.83 to $23.30. It was noted that the earnings multiple of 17.7, while in line with multiples for corporations in the lodging business generally, was higher than the average of 14.4 for corporations in the extended stay lodging business. The valuation analysis included sensitivity analyses reflecting the effect of various occupancy rates and lease-up assumptions. A real estate liquidation analysis was also performed on similar assumptions using net operating income multiples of 7.0 to 10.0, assuming that a projected portfolio of 50 hotels was liquidated in 1999. The liquidation analysis yield per share values ranging from $12.20 to $23.60. At the May 27 meeting, Bear Stearns presented to the Homegate Board an analysis of the Prime merger alternative. After reciting the terms of the current Prime merger proposal, the Bear Stearns report (i) analyzed the premiums implied by merger consideration amounts ranging from $11.50 to $14.00 per share, (ii) presented the multiples of projected 1997 and 1998 EBITDA and earnings implied by such merger consideration amounts, (iii) analyzed one percent extended stay merger and acquisition transaction, (iv) presented a relative contribution analysis showing, on a pro forma basis, Prime's and Homegate's relative contribution to a combined entity's enterprise value, equity value, revenues, EBITDA, FBIT and net income, (v) summarized certain analysts' reports concerning Prime; (vi) calculated pro forma implied trading values for Prime Common Stock based on Prime's current earnings multiple and that for Prime's peer group as a whole, using published estimates of Prime's 1997 and 1998 earnings, (vii) presented a survey of lodging companies showing their current market valuation, total debt, operating cash flow, current trading multiples and coverage ratios, and (viii) presented a preliminary merger consequences analysis. The preliminary merger consequences analysis calculated accretion/dilution to Prime implied by merger consideration amounts ranging from $11.50 to $14.00 per share, assuming both pooling of interests and purchase accounting, for both 1997 and 1998 projected earnings. Much of the preliminary analysis reflected in Bear Stearns' report was thereafter finalized and included in the final report given by it to the Homegate Board in connection with its fairness opinion. See "-- Opinion of Homegate's Financial Advisor." After further discussion of the alternatives' relative merits, the Homegate Board indicated its preference to pursue the financing alternative if the value of Prime's proposal was to be capped at $11.50. On June 4, 1997, Prime notified Homegate that it was withdrawing its earlier proposal in light of Homegate's lack of interest in pursuing a transaction with an exchange ratio, based on an $11.50 price. On June 5, 1997, this event was reported to Homegate's Board of Directors, who instructed management to pursue the financing alternative. Thereafter, Homegate continued to negotiate with Wyndham and its other financing source in an effort to secure a satisfactory debt and mezzanine financing package. 21 30 On June 20, 1997, Prime notified Homegate of its continued interest in effecting a business combination and of its continued belief that the combination of Prime's AmeriSuites chain with Homegate would provide a desirable multi-brand offering. Prime requested Homegate to consider the May 14 term sheet as reinstated with the exception that Prime would be willing to offer an exchange ratio that valued the Homegate Common Stock at $12.75 per share, and that was fixed (as before) by dividing $12.75 by the average closing price of Prime Common Stock for the ten trading days preceding the execution of a definitive merger agreement. On June 23, 1997, representatives of Prime and Homegate met at Prime's headquarters in New Jersey to negotiate further the terms of the business combination. At this meeting, there was preliminary discussion of Prime's willingness to provide a bridge financing facility in the amount of $65 million and discussion of other transaction terms, including Prime's requirement of a fixed exchange ratio, without adjustments for increases or decreases in the market price of Prime Common Stock following the execution of a definitive agreement. On June 24, 1997, a representative of Wyndham advised Homegate that Wyndham believed that it had reached a binding agreement with Homegate concerning the provision of financing and related amendment of the Master Management Assistance Agreement to provide for increased termination fees. Wyndham's view in this regard was subsequently reiterated in a letter from Wyndham to the Homegate Board in which Wyndham stated that the "loan program" had been agreed to by Mr. Carreker, on behalf of Wyndham, and Mr. Faith, on behalf of Homegate, at a meeting in New York on June 3, 1997. In the letter, Wyndham alleged that this agreement was subsequently approved by the Boards of Directors of both Wyndham and Homegate and threatened to "vigorously protect [its] rights" if anyone with which Homegate was discussing "an inconsistent" transaction should seek to interfere with the alleged agreement. Despite the delivery of this advice and letter, Wyndham continued to negotiate with Homegate the terms on which it would be willing to provide mezzanine financing. On June 28, 1997, Mr. Carreker resigned from the Homegate Board, citing as the reason for his resignation lender liability issues and the advice of counsel that it would be unwise for him to continue as a director of an entity to which Wyndham was lending and/or investing $52 million (the amount of mezzanine financing that could ultimately be made available to Homegate by Wyndham under Wyndham's financing proposal). On June 30, 1997, the Homegate Board met telephonically to discuss the renewed proposal from Prime, as supplemented by the negotiations of June 23. At that meeting, the Homegate Board established a special committee of the Homegate Board (the "Special Committee") comprised of Charles E. Noell, John R. Huff and William B. Buchanan, Jr. to consider these strategic alternatives, including both the Prime merger proposal and the financing alternative. During the week of June 30, 1997, Homegate and Prime conducted further due diligence and continued their discussions concerning a potential business combination and the related bridge financing. During that week it became clear that, in light of the requirement that any business combination involving Homegate be approved by holders of two-thirds of the outstanding shares of Homegate Common Stock, Prime would require that Homegate's major stockholders, at the time of execution of a definitive agreement, to agree to vote the shares over which they had voting authority in favor of the transaction. Mr. Crow told Homegate and Prime that, as a major stockholder and director of both Homegate and Wyndham, he felt Homegate and Wyndham should resolve matters between them without any involvement or action by Mr. Crow, including then committing to vote the shares of Homegate Common Stock over which he had voting control (representing approximately 24.9% of the outstanding shares, assuming Mr. Crow would direct the voting of one-half of the shares owned by Developer Extended Stay Partners, L.P.) in connection with the business combination, that might favor one company over the other. See "Security Ownership of Homegate." On July 3, 1997, Prime advised Homegate that, in light of Mr. Crow's unwillingness to commit to vote his shares in favor of the transaction, Prime was unwilling to devote further resources in pursuit of the transaction. This position was confirmed in writing by Prime on July 7. On July 9, 1997, Wyndham delivered to Homegate a revised version of the term sheet with respect to Wyndham's proposal to provide mezzanine financing. While the parties conducted some negotiations 22 31 following the delivery of this term sheet, a further revised term sheet was never received by Homegate. The final Wyndham financing proposal (as evidenced by the term sheet delivered on July 9, as modified by these further negotiations between the parties) contemplated that, in connection with first mortgage financing to be provided by another party covering 60% of project costs, Wyndham would provide junior financing for another 20% of project costs on the following terms: (i) The obligation to provide the financing was to be capped at $20 million initially and was to increase to $56 million upon the consummation of the pending acquisition of Wyndham by Patriot. Amounts were to be advanced under such facility against project costs, including construction period interest, for approved projects commenced during the first 24 months following the date on which the facility was established (the "Facility Closing Date"), with an option to extend the 24-month period to 48 months upon the occurrence of certain conditions. (ii) Amounts outstanding under the facility were to bear interest at LIBOR plus 7% during the first 12 months following the Facility Closing Date and at LIBOR plus 9% thereafter. Interest was to be payable monthly at LIBOR plus 5%, with the remaining accrued interest ("Deferred Interest") payable by Revenue Payments (defined below) and, if not already paid, on the seventh anniversary (extendable by Homegate to the tenth anniversary in certain circumstances) of the Facility Closing Date (the "Facility Maturity Date") or earlier in certain circumstances. Commencing in the 25th month following the Facility Closing Date, outstanding amounts were to bear additional interest ("Additional Interest") equal to the lesser of 3.5% per annum or the difference obtained by subtracting from the Revenue Payments for each 12-month period an amount equal to 4% per annum on all outstanding amounts during that 12-month period. The Additional Interest was to be paid only out of Revenue Payments. (iii) Beginning with the 37th month of the facility, Homegate was to make annual payments to Wyndham (the "Revenue Payments") equal to the lesser of (a) the amount of Additional Interest and Deferred Interest, and (b) an amount calculated, for each stabilized project, as a percentage of project revenues during the preceding 12-month period. The applicable percentage was based on project performance, and ranged from 0% to 3% initially and, beginning with the payment due on the 61st month, from 0% to 6%. Revenue Payments were also to be made with respect to a project upon the sale of the project to a third party. Revenue Payments were to be applied first to the Additional Interest and then to the Deferred Interest. (iv) Beginning on the fifth anniversary of the Facility Closing Date, Wyndham was to have the option, exercisable from time to time, to convert any loans outstanding under the facility into Homegate Common Stock at a 15% discount from the market price at the time of such conversion. Homegate was to have the right to force such conversion in certain circumstances. Wyndham was also to have the right to appoint one member of Homegate's Board of Directors while the facility was in existence, and Homegate was to pay Wyndham a commitment fee equal to 1.5% of the initial facility amount and, upon an increase in the commitment, 1.5% of the increased amount. In connection with such financing, the Wyndham Master Management Assistance Agreement was to be modified to provide that the exclusivity of such arrangement would be extended for so long as Wyndham's financing facility was in effect, that the agreement could not be terminated in connection with a change in control of Homegate (provided that the exclusivity aspect of such agreement could be eliminated when 45 individual hotel management agreements had been executed thereunder) and that the termination fees payable under the individual management agreements would be increased. Loans were to be required to be prepaid in connection with the sale of projects, in connection with any change of control of Homegate and with the proceeds of future equity or permitted debt financings. On July 10, 1997, Prime advised Homegate of Prime's willingness to proceed with a business combination transaction without resolution of Wyndham's claims and without adjustment of the proposed transaction consideration, provided that Homegate's principal stockholders would agree to vote their shares of Homegate Common Stock in favor of the transaction. Communication of Prime's position to Mr. Crow did not result in a change in his position. 23 32 On July 10, 1997, Homegate was also informed that Wyndham would require a cash payment of at least $14 million to settle its claims against Homegate. On July 12, 1997, Prime advised Homegate that it would be willing to commit to a settlement with Wyndham that would provide Wyndham with a 25% premium to the termination payment provided for under the Master Management Assistance Agreement with Wyndham or, if Wyndham should reject such offer, Prime's willingness to agree to resolve Wyndham's claims through binding arbitration. Prime emphasized that it remained unwilling to move forward with a business combination unless Mr. Crow would agree at the time of execution of the definitive agreement to vote the shares of Homegate Common Stock he controlled in favor of the transaction. The Special Committee met on July 1, July 2, July 7, July 14, July 17 and July 18 to discuss the relative merits of the Prime business combination and Wyndham financing alternatives, the progress in the negotiations with Prime, the status of negotiations with Wyndham concerning the provision of financing, Homegate's need for liquidity, the litigation threat posed by Wyndham, the unavailability of a commitment by Mr. Crow to vote his shares in favor of the Prime transaction prior to resolution of the issues between Homegate and Wyndham, the suspected derivation of the $14 million amount of Wyndham's threatened claim, the projected termination fees that would be payable under the existing Master Management Assistance Agreement with Wyndham, the ongoing developments in the efforts to negotiate a settlement with Wyndham that would facilitate Homegate's reaching an agreement with Prime with respect to a business combination and the relative ranges of value represented by the Wyndham financing and the Prime transaction. During these meetings the members of the Special Committee gradually came to the view that there were numerous risks inherent in pursuing the Wyndham financing alternative that would be avoided in a merger with Prime. Included in these risks were those associated with a highly leveraged structure, the need to refinance the Wyndham debt prior to the prescribed escalation of interest rates and the potential dilution to Homegate's stockholders in connection with Wyndham's right to convert its Homegate debt into Homegate Common Stock at a discount from the then current market price if the Wyndham debt could not be refinanced on a timely basis. The Special Committee also considered the chilling effect the required changes to the Wyndham Master Management Assistance Agreement (and underlying management contracts) would have on any future attempt to effect a business combination or sale of the company. Based in large part on the foregoing factors, the Special Committee came to the view that a merger with Prime was the preferable alternative. On July 16, 1997, after discussions with Prime, Homegate advised Wyndham that Homegate would be willing to pay to Wyndham, upon consummation of the Prime transaction, $8 million in full and final settlement of all Wyndham's claims. Wyndham indicated in response that it would be unwilling to accept any amount less than $14 million. At this point, Mr. Crow offered that Crow Hotel Realty Investors, L.P. ("CHRI"), an affiliate of Mr. Crow, would pay one-half, or $3 million, of the difference between Homegate's settlement offer and Wyndham's demand, and suggested that other founding stockholders of Homegate (or their affiliates) might fund the balance of the difference. Homegate believes that Mr. Crow made such offer (and ultimately agreed, as described below, that CHRI would pay the entirety of the amount by which Wyndham's settlement demand exceeded $8 million) because he desired that the differences between the two companies (Wyndham and Homegate) in which his affiliates have significant holdings not impede Homegate's desire to pursue the Merger with Prime. On July 18, 1997, Homegate was advised by a representative of Mr. Crow that CHRI would be willing to fund the entirety of a Wyndham settlement beyond the $8 million offered by Prime/Homegate. Such excess amount was ultimately negotiated downward to $4 million. The only way in which the Merger will benefit Mr. Crow (or CHRI, which indirectly owns shares of Homegate Common Stock through its interest in CRI/ESH Partners, L.P.) differently than the public holders of Homegate Common Stock is that affiliates of Mr. Crow (including CRI/ESH Partners, L.P.) receiving shares of Prime Common Stock as a result of the Merger will be afforded the benefits of a registration rights agreement with Prime pursuant to which Prime has agreed to register such affiliates' resales of such shares (which registration is unnecessary to enable non-affiliates of Homegate to effect public sales of the shares of Prime Common Stock they receive in the Merger). The settlement with Wyndham will result in the payments by Homegate and CHRI described above and will otherwise have the effects described in "Homegate Management's Discussion and Analysis of 24 33 Financial Condition and Results of Operations -- Wyndham Settlement Agreement." Another affiliate of Mr. Crow, CF Securities, L.P., owns approximately 43.7% of the outstanding shares of Wyndham common stock. Beginning on July 21, 1997, the parties and their counsel met in New York to finalize their negotiation of the exchange ratio and the other unresolved issues to be addressed in the definitive agreement and related documentation, including a settlement agreement with Wyndham and a commitment letter with respect to Prime's provision of interim financing. The Special Committee met again on July 22 and 23, 1997, to discuss the progress of negotiations and on July 23, concluded that the settlement with Wyndham was necessary to permit the Prime transaction and unanimously resolved to recommend to the Homegate Board (i) the approval and adoption of the Prime transaction and (ii) the approval of the Wyndham settlement as fair to and in the best interest of all shareholders. On July 23, 1997, the Homegate Board met by telephone and received the recommendation of the Special Committee. Representatives of Bear Stearns participated in the meetings of both the Special Committee and the Homegate Board and during each meeting gave a preview of the fairness opinion it expected to render the following day and the analyses underlying such opinion. Management and Homegate's counsel described for both the Special Committee and the Homegate Board the status of negotiation of the final open points, including whether Homegate would have a representative on Prime's Board of Directors, the general outline of severance benefits to be provided by Prime for Homegate employees terminated in connection with the Merger, the situations in which Homegate would owe a fee in connection with the termination of the Merger Agreement, details of the indemnification and insurance arrangements to be provided by Prime following the Merger for the benefit of Homegate's former officers and directors, the terms of the Voting Agreements to be executed by certain Homegate stockholders and the terms of a settlement agreement with Wyndham. On July 24, 1997, the Homegate Board met again by telephone. At this meeting Bear Stearns rendered to the Homegate Board its fairness opinion and discussed at length the underlying rationale. See "Opinion of Financial Advisor." Management and Homegate's counsel advised the Homegate Board of the resolution of the final open points (ultimately reflected in the definitive agreements). At the conclusion of the meeting, the Homegate Board determined that the Merger and Wyndham settlement were in the best interests of Homegate stockholders and authorized the execution, delivery and performance of the Merger Agreement and the related agreements. On July 25, 1997, the Merger Agreement, the Commitment Letter and the agreement embodying the Wyndham settlement were executed by the parties thereto and a public announcement of the transactions was made. By written consent dated October 21, 1997, the Homegate Board unanimously resolved to recommend to the stockholders of Homegate that they approve and adopt the Merger Agreement. RECOMMENDATION OF THE BOARD OF DIRECTORS OF HOMEGATE; REASONS FOR THE MERGER The Homegate Board of Directors believes that the terms of the Merger are fair to, and in the best interests of, Homegate and the Homegate stockholders and has approved the Merger Agreement and the related transactions. The Homegate Board of Directors unanimously recommends that the Homegate stockholders approve and adopt the Merger Agreement. The Homegate Board believes that the proposed Merger provides its stockholders the opportunity to participate on attractive terms in a substantially larger entity that has access to the capital required to continue aggressive development of the HOMEGATE Studios & Suites brand. In addition, the Homegate Board believes that the combination of the HOMEGATE Studios & Suites brand with Prime's AmeriSuites and Wellesley Inns brands will afford Homegate's stockholders the opportunity to participate, as stockholders of Prime, in an exciting multi-brand strategy. While the Homegate Board evaluated as an alternative to the Merger continuing Homegate's initial hotel program as an independent entity by obtaining financing from third party sources, such alternative was, in the opinion of the Homegate Board, less attractive to Homegate and its stockholders. In reaching its determina- 25 34 tion that the terms of the Merger are fair to and in the best interests of Homegate and the Homegate stockholders and its decision to approve the Merger Agreement, the Homegate Board considered the following material factors, understanding that the implications of some of the factors were negative: (i) The Homegate Board noted the financial condition, results of operations, cash flow, business and prospects of Homegate. In particular, with regard to Homegate's prospects, the Homegate Board considered that, despite management's continued efforts throughout 1997 to secure the additional financing necessary to continue Homegate's aggressive pursuit of its initial hotel program, such financing was not available on attractive terms. While senior debt financing was available to Homegate on satisfactory terms, the Homegate Board was advised that, as a result of the decline in the price of Homegate Common Stock following Homegate's October 1996 initial public offering (from the initial public offering price of $11.50 to a low of $6.00 during the quarter ended June 30, 1997), it would be challenging to raise in a public transaction the equity required to take advantage of the available senior debt financing. Private equity, convertible debt and mezzanine financing options were investigated as a means of supplementing the available senior debt financing, but such options were potentially significantly dilutive to Homegate's stockholders and ultimately were deemed, in the opinion of the Homegate Board and in light of the risks inherent in a highly leveraged capital structure, not as attractive for Homegate and its stockholders as the Merger. (ii) The Homegate Board considered the benefits to Homegate and its stockholders that would arise from the Merger through the Homegate stockholders' participation, as Prime stockholders, in a much larger entity with a multi-brand strategy and access to the capital required to continue aggressive development of the HOMEGATE Studios & Suites brand. The Homegate Board also considered the Merger's synergistic possibilities through Prime's potential to leverage Homegate's relationships with its development affiliates, Trammell Crow Residential Company and Greystar Capital Partners, L.P. Affiliates of TCR and Greystar are limited partners of Development Extended Stay Partners, L.P., which has contracted to provide site selection, construction and development services for Homegate's initial hotel program. As of June 30, 1997, the Developer Partnership owned approximately 9.8% of the outstanding shares of Homegate Common Stock and, as a result of the Merger, will own approximately 1.4% of the outstanding shares of Prime Common Stock. (iii) The Homegate Board considered the terms of the Merger Agreement, the consideration to be received by Homegate stockholders in the Merger and the treatment of the Merger as a tax-free exchange. In this regard, the Homegate Board considered the opportunity presented to Homegate stockholders by the Merger, based in part on certain financial compilations and analyses prepared by and discussed with Bear Stearns. The Homegate Board considered current financial conditions, market conditions, historical market prices, volatility and trading information with respect to Homegate Common Stock. The Homegate Board also considered the historical and projected financial results of Homegate, the historical performance of both Homegate Common Stock and Prime Common Stock individually, in comparison to individual competitors and in comparison to their peer groups, commentary and analyses prepared by the investment community on Prime and an analysis of current holders of the common stock of each of Homegate and Prime. In addition, the Homegate Board considered a review of similar transactions within the industry, an analysis of the transaction premium offered over the current market price of Homegate Common Stock, a review of premiums paid in similar transactions within the industry, a review of the historical correlation between the market prices of Homegate Common Stock and Prime Common Stock, and an analysis of Prime's historical and projected future performance. With respect to the analyses prepared by Bear Stearns, the Homegate Board did not review any conclusions reached by Bear Stearns with respect to each separate analysis, nor did the Homegate Board reach any conclusions with respect to each separate analysis. See "-- Opinion of Homegate's Financial Advisor." (iv) The Homegate Board considered the opinion of Bear Stearns as to the fairness of the consideration to be received by Homegate's public stockholders pursuant to the Merger Agreement as described under "-- Opinion of Homegate's Financial Advisor." The foregoing discussion of the factors considered and given weight by the Homegate Board is not intended to be exhaustive but is believed to include all material factors considered by the Homegate Board. In 26 35 view of the variety of factors considered in connection with its evaluation of the proposed Merger, the Homegate Board did not deem it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination that the terms of the proposed Merger are fair to, and in the best interests of, Homegate and its stockholders. At a telephonic meeting held on July 24, 1997, Homegate's Board of Directors approved the terms of the proposed Merger as fair to, and in the best interests of, Homegate and its stockholders and approved the Merger Agreement. Mr. Dona abstained from the vote to approve the settlement with Wyndham but did vote, with all other directors present at the meeting, in favor of the approval of the Merger Agreement. Mr. Crow was not present at the meeting. The Homegate Board unanimously recommends that Homegate stockholders vote "FOR" approval and adoption of the Merger Agreement. In considering the recommendation of the Homegate Board with respect to the Merger Agreement, Homegate stockholders should be aware that certain officers and directors of Homegate (or their affiliates) have certain interests in the proposed Merger that are different from and in addition to the interests of Homegate stockholders generally. The Homegate Board was aware of these interests and considered them in approving the Merger Agreement. See "-- Interests of Certain Persons in the Merger." THE HOMEGATE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF HOMEGATE COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the Homegate Board with respect to the Merger Agreement, Homegate stockholders should be aware that certain officers and directors of Homegate (or their affiliates) have certain interests in the proposed Merger and related transactions that are different from and in addition to the interests of Homegate stockholders generally. The Homegate Board was aware of these interests and considered them in approving the Merger Agreement. Homegate Options. By virtue of the Merger, all options (the "Homegate Options") outstanding as of the Effective Date under the Homegate Hospitality, Inc. 1996 Long-Term Incentive Plan (the "Homegate Stock Option Plan"), whether or not then exercisable, will be assumed by Prime and converted into and become a right with respect to Prime Common Stock. Each Homegate Option assumed by Prime will be exercisable upon the same terms and conditions as under the applicable Homegate Stock Option Plan and applicable option agreements issued thereunder, and Prime will assume the Homegate Stock Option Plan for such purposes. Pursuant to the Merger Agreement, from and after the Effective Date, (i) each Homegate Option assumed by Prime may be exercised solely for Prime Common Stock, (ii) the number of shares of Prime Common Stock subject to each Homegate Option will be equal to the product (rounded to the nearest whole share) of (A) the number of shares of Homegate Common Stock subject to the original Homegate Option immediately prior to the Effective Date, times (B) the Exchange Ratio and (iii) the per share exercise price for each such Homegate Option will be equal to (A) the per share exercise price for the share of Homegate Common Stock otherwise purchasable pursuant to each Homegate Option immediately prior to the Effective Date divided by (B) the Exchange Ratio (rounded up to the nearest full cent). Each of the agreements for Homegate Options provides that the unvested portion of such option will vest automatically by reason of the Merger. As of the Record Date, there were 641,250 shares of Homegate Common Stock subject to outstanding Homegate Options. The average exercise price per share of all Homegate Options outstanding as of the Record Date is $10.90 per share. Assuming the exercise of all such options immediately after the Effective Date, the holders thereof would hold less than 1% of all Prime Common Stock issued and outstanding immediately after the Effective Date (without including any Prime Common Stock otherwise held by such holders). 27 36 Executive officers of Homegate as set forth below hold an aggregate of 321,250 of the options granted in October 1996 with exercise prices of $11.50 and an aggregate of 38,000 of the options granted in March 1997 with exercise prices of $8.37, which options will be converted as of the Effective Date.
NUMBER OF OPTIONS --------------------------- OCTOBER 1996 MARCH 1997 MARKET EXECUTIVE OFFICER AT $11.50 AT $8.37 VALUE(1) ------------------------------------------------- ------------ ---------- -------- Robert A. Faith.................................. 125,000 10,000 $284,425 John C. Kratzer.................................. 93,750 10,000 225,831 Tim V. Keith..................................... 62,500 10,000 167,238 Joel Kinzie Oldham IV............................ 40,000 8,000 115,040 ------- ------ -------- TOTAL.................................. 321,250 38,000 $792,534 ======= ====== ========
- --------------- (1) Based on the closing price of the Homegate Common Stock on October 23, 1997. Each of Messrs. Faith, Keith and Oldham, is a beneficiary of an agreement with Prime pursuant to which, if such executive's employment with Homegate is terminated within one year following the Merger, such executive's options will be extended so that they will not expire until their original expiration dates (ten years from the date of grant). Pursuant to the Merger Agreement, Prime has agreed to cause to be included under a registration statement on Form S-8 to be filed by Prime with the Commission as soon as reasonably practicable after the Effective Date all shares of Prime Common Stock subject to such options and to maintain the effectiveness of such registration until all such options have expired or been exercised or forfeited. Employment Agreement. In connection with the Merger, John Kratzer, the Chief Operating Officer of Homegate, is expected to enter into an employment agreement with Prime to serve as a Senior Vice President. As of October 27, 1997, the specific terms of such employment agreement had not been determined. In addition, Tim Keith will receive a severance payment of $82,500 in connection with the Merger, and Prime has agreed to pay Mr. Keith his 1997 bonus of $35,000 in January 1998. Indemnification; Insurance. As provided in the Merger Agreement, Prime is required to indemnify, defend and hold harmless the officers, directors and employees of Homegate and its subsidiaries (the "Indemnified Parties") from and against all losses, expenses, claims, damages or liabilities arising out of the transactions contemplated by the Merger Agreement to the fullest extent permitted or required under applicable law, including without limitation the advancement of expenses. Prime has agreed that all rights to indemnification existing in favor of the directors, officers or employees of Homegate as provided in Homegate's Certificate of Incorporation or Bylaws, with respect to matters occurring through the Effective Date, shall survive the Merger and continue in full force and effect for a period of not less than six years from the Effective Date. For a period of three years after the Effective Date, Prime is obligated to cause the Surviving Corporation to maintain in effect policies of directors' and officers' liability insurance covering certain Indemnified Parties presently covered by Homegate insurance policies that are equivalent to those maintained by Homegate with respect to matters occurring prior to the Effective Date, provided that Prime shall not be required in order to maintain such coverage to pay an annual premium in excess of two times the current annual premium paid by Homegate for its existing coverage, but in such case shall purchase as much coverage as possible for such amount. Management Agreement. If the Merger is consummated, Homegate, Prime and Wyndham have agreed to terminate the Management Agreement (and each of the underlying contracts). In settlement of the Wyndham claims relating to the termination of the Management Agreement, CHRI, an affiliate of Harlan R. Crow, a director of Homegate and the controlling stockholder of Wyndham, agreed to fund $4 million of the Wyndham settlement. 28 37 OPINION OF HOMEGATE'S FINANCIAL ADVISOR Homegate retained Bear Stearns to act as its financial advisor and to render its opinion as to whether the consideration to be received by the public shareholders of Homegate pursuant to the Merger is fair, from a financial point of view. Bear Stearns is an internationally recognized investment banking firm and is continually engaged in the valuation of businesses and their securities and in rendering opinions in connection with mergers, acquisitions, corporate transactions and other purposes. Homegate retained Bear Stearns based on its qualifications, expertise and reputation in providing advice to companies with respect to transactions similar to the Merger. At a meeting held on July 24, 1997, Bear Stearns orally advised Homegate's Board of Directors of its conclusions and subsequently delivered its written opinion to the effect that, based upon and subject to the various considerations set forth in such opinion, as of the date of such opinion, the consideration to be received by the public shareholders of Homegate pursuant to the Merger is fair, from a financial point of view, to such shareholders. The summary of Bear Stearns' opinion set forth in this Proxy Statement-Prospectus is qualified in its entirety by reference to the full text of such opinion, which is attached as Annex B to this Proxy Statement-Prospectus. Bear Stearns has consented to the attachment of its opinion to this Proxy Statement-Prospectus. Homegate shareholders are urged to, and should, read such opinion carefully in its entirety in connection with this Proxy Statement-Prospectus for assumptions made, matters considered and limits of the review by Bear Stearns. In rendering its opinion, Bear Stearns did not opine as to any other transactions or contractual arrangements to be entered into or payments to be made by or to Homegate or any other person concurrently with the Merger. Bear Stearns' opinion was directed to the Board of Directors of Homegate and addresses solely the fairness, from a financial point of view, of the consideration to be received by the public shareholders of Homegate in the Merger and does not address Homegate's underlying business decision to effect the Merger and is not a recommendation to Homegate shareholders as to whether to approve or vote for the Merger. In arriving at its opinion, Bear Stearns: (i) reviewed the Merger Agreement and certain related agreements; (ii) reviewed Homegate's Annual Report to Stockholders and Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and its Quarterly Report on Form 10-Q for the period ended March 31, 1997; (iii) reviewed certain operating and financial information, including projections provided to Bear Stearns by Homegate's senior management, relating to Homegate's business and prospects; (iv) met with certain members of Homegate's senior management to discuss Homegate's business and operations, historical financial performance, current situation and future prospects; (v) reviewed Prime's Annual Report to Stockholders and Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and its Quarterly Report on Form 10-Q for the period ended March 31, 1997; (vi) reviewed certain operating and financial information, including projections provided to Bear Stearns by Prime's senior management, relating to Prime's business and prospects; (vii) met with certain members of Prime's senior management to discuss Prime's business and operations, historical financial performance, current situation and future prospects; (viii) reviewed the historical prices and trading volumes of the common stock of Homegate and Prime; (ix) reviewed publicly available financial data and stock market performance data of companies that Bear Stearns deemed generally comparable to Homegate and Prime; (x) reviewed the terms of recent acquisitions of companies that Bear Stearns deemed generally comparable to Homegate; and (xi) conducted such other studies, analyses, inquiries and investigations as Bear Stearns deemed appropriate. In rendering its opinion, Bear Stearns considered (i) Homegate's recent financial performance, current financial condition and future prospects; (ii) Homegate's prospects for raising debt and/or equity in the public and private capital markets; and (iii) various terms and conditions of the Merger, including that (x) the Merger is subject to a vote of Homegate's shareholders, (y) the no solicitation and termination provisions of the Merger Agreement provide the Board of Directors of Homegate with the flexibility to exercise its fiduciary duty to pursue certain alternative transactions in lieu of the Merger and (z) the voting agreements pursuant to which several major stockholders of Homegate have agreed to vote their shares of Homegate Common Stock in favor of the Merger. 29 38 The following is a summary of the principal financial and valuation analyses that were performed by Bear Stearns to arrive at its opinion. Based on these financial and valuation analyses and the other factors discussed herein, Bear Stearns determined that, as of the date of its opinion, the consideration to be received by the shareholders of Homegate pursuant to the Merger is fair, from a financial point of view, to such shareholders. In arriving at its opinion, Bear Stearns did not attribute any particular weight to any analysis or factor considered by it, nor did it express separate conclusions with respect to each analysis performed, but rather made a single judgment as to fairness based on its experience and professional judgment and the analyses as a whole. Review and Analysis of Homegate's Financial and Operating Performance. Bear Stearns reviewed and analyzed the historical financial and operating performance of Homegate for fiscal year ended December 31, 1996, and the quarter ended March 31, 1997. This review and analysis considered Homegate's reported total revenues, earnings before interest expense, taxes, depreciation and amortization ("EBITDA"), and net income, adjusted to reflect the elimination of certain non-recurring items. Bear Stearns noted that Homegate's results for fiscal year 1996 and the quarter ended March 31, 1997 were total revenues of $2.2 million and $2.4 million, respectively; EBITDA of $0.06 million and $0.3 million, respectively; and net income/(loss) of ($0.9) million and ($0.5) million, respectively. Bear Stearns compared these financial and operating performance measures to those of three publicly traded extended stay hotel companies that Bear Stearns deemed generally comparable to Homegate and to those of four companies that were acquired in selected precedent merger and acquisition transactions that Bear Stearns deemed generally comparable to the Merger. See "-- Analysis of Selected Publicly Traded Companies" and "-- Analysis of Selected Precedent Merger and Acquisition Transactions." Analysis of the Merger Consideration. Bear Stearns calculated the value of the consideration to be received by the shareholders of Homegate pursuant to the Merger at approximately $140.3 million based on the closing price for Prime Common Stock on July 23, 1997, and the aggregate value of the Merger (including the net indebtedness outstanding as of July 23, 1997, of approximately $28.5 million to be assumed by Prime) at approximately $168.8 million (the "Transaction Value"). Bear Stearns considered the Transaction Value as a multiple of estimated EBITDA. Bear Stearns' analysis indicated Transaction Value multiples of estimated 1997 and 1998 EBITDA of 28.5x and 9.8x, respectively, assuming average net debt and based on the closing price for Prime Common Stock of July 23, 1997. See "-- Analysis of Selected Publicly Traded Companies" and "-- Analysis of Selected Precedent Merger and Acquisition Transactions." Bear Stearns' analysis indicated that Prime Common Stock had recently traded at $20.56 per share, and that the range of closing prices for Prime Common Stock in the preceding 12 months was $14.00 to $20.88 per share. See "-- Analysis of the Securities to be Issued." Bear Stearns noted that at the fixed exchange ratio of 0.6073, the implied value of the Merger Consideration during this period would have been $8.50 to $12.68 per share, compared to a range of trading prices for Homegate Common Stock of $6.00 to $11.50. Bear Stearns noted that the implied Merger Consideration exceeded Homegate's trading price at all times following December 1996. Analysis of Selected Publicly Traded Companies. Bear Stearns compared certain operating and financial information of Homegate to certain publicly available operating, financial, trading and valuation information of three publicly traded extended stay hotel companies, which, in Bear Stearns' judgment, were reasonably comparable to Homegate for purposes of this analysis. These companies included Extended Stay America, Candlewood Hotels, and Suburban Lodges of America (collectively, the "HHI Comparable Companies"). Bear Stearns' analysis of the HHI Comparable Companies included reviewing their enterprise values as a multiple of estimated 1997 and 1998 EBITDA and their stock prices as a multiple of estimated 1998 earnings per share. Bear Stearns' analysis of the Comparable Companies indicated that (i) the range of enterprise value to estimated 1997 EBITDA multiples was 17.7x to 39.1x with a harmonic mean (the reciprocal of the arithmetic mean of reciprocals) of 26.3x; (ii) the range of enterprise value to estimated 1998 EBITDA multiples was 6.1x to 12.9x with a harmonic mean of 8.8x and (iii) the range of stock price to estimated 1998 earnings per share multiples was 12.5x to 37.4x with a harmonic mean of 19.0x. Bear Stearns' analysis indicated that Homegate had estimated 1997 and 1998 EBITDA multiples of 22.5x and 8.6x, respectively, and an estimated 1998 earnings per share multiple of 12.9x. 30 39 Analysis of Selected Precedent Merger and Acquisition Transactions. Bear Stearns reviewed and analyzed the publicly available financial terms of four selected merger and acquisition transactions in the lodging industry, which in Bear Stearns' judgment, were reasonably comparable to the Merger for purposes of this analysis. The four transactions consisted of (acquiror/target): Extended Stay America / Studio Plus, Marriott International / Renaissance Hotel Group, Patriot American Hospitality / Wyndham Hotel Corporation, and DoubleTree Hotel Corporation / Red Lion Hotels (collectively, the "Precedent M&A Transactions"). Bear Stearns reviewed the prices paid in the Precedent M&A Transactions and analyzed various and financial information and imputed valuation multiples. Bear Stearns' analysis of the Precedent M&A Transactions indicated that the range of enterprise value to current fiscal year and next fiscal year estimated EBITDA multiples were 10.0x to 16.5x and 9.0x to 13.9x, respectively, with a harmonic mean of 13.3x and 10.4x, respectively. Has/Gets Analysis. Bear Stearns compared the earnings, cash flow (net income plus depreciation and amortization) and net book value represented by a share of Homegate Common Stock on a standalone basis (e.g., what a Homegate shareholder "Has") to the Merger Consideration of 0.6073 shares of Prime, (e.g., what a Homegate shareholder "Gets" as a result of the Merger) based on management projections. Bear Stearns noted that on a Has basis, each Homegate share represents EPS in 1997, 1998 and 1999 of ($0.15), $0.43 and $0.97, respectively, compared to $0.47, $0.69 and $0.93 on a Gets basis. Bear Stearns noted that on a Has basis, each Homegate share represents cash flow (as defined) in 1997, 1998, 1999 of $(.05), $1.67 and $3.22, respectively, compared to $1.07, $1.77 and $3.91 on a Gets basis. Bear Stearns noted that on a Has basis, each Homegate share represents net book value in 1997, 1998 and 1999 of $5.86, $6.22 and $7.12, respectively, compared to $5.62, $7.99 and $9.80 on a Gets basis. Relative Contribution Analysis. Bear Stearns compared the contribution to Enterprise Value and Equity Value of Homegate and Prime based on Homegate's preannouncement trading price of $9.125 and the Merger Consideration. Bear Stearns noted that on a trading basis Homegate contributed 9.8% and 8.8%, respectively, of the Enterprise Value and Equity Value of Prime/Homegate combined compared to 11.6% or 11.5%, respectively, based on the Merger Consideration. Bear Stearns also compared Homegate's contribution to Homegate/Prime combined in terms of 1997 and 1998 management estimates of revenues, EBITDA, EBIT and net income. Bear Stearns noted that based on these projections, Homegate's contribution of revenues, EBITDA, EBIT and net income in 1997 was 3.5%, 2.3%, 0.2% and (4.2%), respectively, compared to projected contribution in 1998 of 11.9%, 15.4%, 14.1% and 7.5%, respectively. Analysis of the Securities to be Issued. Bear Stearns compared certain operating and financial information of Prime to certain publicly available operating, financial, trading and valuation information of six publicly traded companies, which, in Bear Stearns' judgment, were reasonably comparable to Prime for purposes of this analysis. These companies included Promus Hotel Corporation, La Quinta Inns, DoubleTree Corporation, Extended Stay America, Choice Hotels International, and Wyndham Hotel Corporation (collectively, the "PHI Comparable Companies"). Bear Stearns' analysis of the PHI Comparable Companies included reviewing their enterprise values as a multiple of estimated fiscal year 1997 and 1998 EBITDA and their stock prices as a multiple of estimated 1997 and 1998 earnings per share. Bear Stearns' analysis of the PHI Comparable Companies indicated that (i) the range of enterprise value to estimated 1997 EBITDA multiples was 9.9x to 39.1x with a harmonic mean of 13.5x; (ii) the range of enterprise value to estimated 1998 EBITDA multiples was 8.2x to 12.9x with a harmonic mean of 10.4x; and (iii) the range of stock price to estimated 1997 earnings per share multiples was 19.7x to 35.8x with a harmonic mean of 26.6x; and (iv) the range of stock price to estimated 1998 earnings per share multiples was 15.2x to 37.3x with a harmonic mean of 22.7x. Bear Stearns calculated Prime's enterprise value as a multiple of estimated 1997 and 1998 EBITDA of 9.1x and 6.2x, respectively, and Prime's stock price as a multiple of estimated 1997 and 1998 earnings per share as 22.3x and 18.2x, respectively. Pro Forma Merger Analysis. Bear Stearns analyzed certain pro forma effects resulting from the Merger, including among other things, the impact of the Merger on Prime's projected earnings per share for fiscal years 1997, 1998 and 1999, based on the internal Homegate and Prime management estimates. The results of the pro forma merger analysis suggested that the Merger could be dilutive to Prime on an EPS basis in 1997, 31 40 marginally accretive in 1998 and accretive in 1999. The actual results achieved by the combined company may vary from projected results and variations may be material. Discounted Cash Flow Analysis. Based on a review of Homegate's recent financial performance, current financial condition and projections, and its prospects for raising required additional capital on a timely basis, Bear Stearns determined that discounted cash flow methodology was not appropriate valuation measure. The foregoing summary does not purport to be a complete description of the analyses performed and factors considered by Bear Stearns in arriving at its opinion. The preparation of a fairness opinion is a complex process and is not susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analysis as a whole, could create an incomplete view of the processes underlying Bear Stearns' opinion. In arriving at its opinion, Bear Stearns considered the results of all such reviews, calculations and analyses. No company or transaction used in the analyses described above as a comparison is identical to Homegate, Prime or the proposed transaction. Accordingly, an analysis of the results of the foregoing is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading or private market values of the company or companies to which they are being compared. The analyses were prepared solely for purposes of providing Bear Stearns' opinion as to the fairness, from a financial point of view, of the consideration to be received by the public shareholders of Homegate pursuant to the Merger and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities might actually be sold to other parties. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based on numerous factors or events beyond the control of the parties or their respective advisors, neither Homegate nor Bear Stearns or any other person assumes responsibility if future results are materially different from those forecast. Bear Stearns' opinion does not imply any conclusion as to the likely trading range for Prime Common Stock following the consummation of the Merger, which may vary depending upon, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. In the ordinary course of business, Bear Stearns may actively trade the securities of Homegate and Prime for its own account and for the account of customers and, accordingly, may at any time hold a long or short position in such securities. Bear Stearns has previously rendered investment banking and financial advisory services to Homegate and Prime for which Bear Stearns received customary compensation. Pursuant to a letter agreement dated July 1, 1997, entered into by Homegate and Bear Stearns, Homegate has agreed to pay Bear Stearns (i) a cash fee of $200,000 upon the rendering of its opinion and (ii) a cash fee equal to 1.25% of the total consideration paid by Prime in the Merger up to $100 million and 1.0% on all amounts above that paid by Prime in the Merger in respect of (x) assets or operations of Homegate, (y) Homegate's securities and (z) the assumption, directly or indirectly (by operation of law or otherwise), or repayment of indebtedness for borrowed money (including, without, limitation, indebtedness secured by assets of Homegate) and other liabilities of Homegate, less a credit for any amount paid pursuant to (i). Homegate has agreed to reimburse Bear Stearns for its out-of-pocket expenses, including the fees and disbursements of counsel. Homegate has agreed to indemnify Bear Stearns and certain related persons against certain liabilities in connection with the engagement of Bear Stearns, including certain liabilities under the federal securities laws. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a discussion of the material federal income tax consequences of the Merger and the exchange by the holders of Homegate Common Stock of such shares for shares of Prime Common Stock. THIS DISCUSSION DOES NOT ADDRESS ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO PARTICULAR STOCKHOLDERS IN LIGHT OF THEIR PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR TO CERTAIN TYPES OF STOCKHOLDERS (INCLUDING INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, BROKER-DEALERS, TAX-EXEMPT ORGANIZATIONS, FOREIGN CORPORATIONS 32 41 AND PERSONS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, NOR DOES IT DISCUSS ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS. EACH HOMEGATE STOCKHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX AND FINANCIAL ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER AS A RESULT OF SUCH HOLDER'S OWN PARTICULAR STATUS AND CIRCUMSTANCES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. Neither Prime nor Homegate has requested or will receive an advance ruling from the Internal Revenue Service (the "IRS") as to the federal income tax consequences of the Merger. However, Prime will receive an opinion of its counsel, Willkie Farr & Gallagher, and Homegate will receive an opinion of its counsel, Vinson & Elkins L.L.P., relating to the federal income tax consequences of the Merger. Such opinions will be based upon facts and assumptions of fact described therein, and upon customary representations provided by Prime, Sub, Homegate and certain Homegate stockholders. Counsels' opinions will also be based upon the Code, the Treasury Regulations thereunder, administrative rulings and practice by the IRS, and judicial authority, in each case existing at the time such opinions are delivered. Any change in applicable law or pertinent facts could affect the continuing validity of such opinions and this discussion. In addition, an opinion of counsel is not binding upon the IRS, and there can be no assurance, and none is hereby given, that the IRS will not take a position contrary to one or more positions reflected in counsels' opinions, or that such opinions will be upheld by the courts if challenged by the IRS. However, Prime and Homegate have agreed in the Merger Agreement not to take any action which would disqualify the Merger as a reorganization which is tax-free to the stockholders of Homegate pursuant to Section 368(a) of the Code. If it were determined that the Merger did not qualify as a reorganization, each Homegate stockholder would be required to recognize gain or loss equal to the difference between such stockholder's tax basis in the Homegate Common Stock and the fair market value of the Prime Common Stock received in the Merger. Based upon and subject to the foregoing, the opinions of counsel will collectively state, among other matters, that: (i) the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and Prime, Sub, and Homegate will each be a party to the reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by Prime, Sub or Homegate as a result of the Merger; (iii) no gain or loss will be recognized by a Homegate stockholder who receives solely shares of Prime Common Stock in exchange for Homegate Common Stock; (iv) the receipt of cash in lieu of fractional shares of Prime Common Stock will be treated as if the fractional shares were distributed as part of the exchange and then were redeemed by Prime; (v) the tax basis of the shares of Prime Common Stock received by a Homegate stockholder will be equal to the tax basis of the Homegate Common Stock exchanged therefor, excluding any basis allocable to a fractional share of Prime Common Stock for which cash is received; and (vi) the holding period of the shares of Prime Common Stock received by a Homegate stockholder will include the holding period or periods of the Homegate Common Stock exchanged therefor, provided that such Homegate Common Stock was held as a capital asset by such stockholder within the meaning of Section 1221 of the Code at the Effective Date. ACCOUNTING TREATMENT It is expected that the Merger will be accounted for as a pooling of interests under APB Opinion No. 16 if the Merger is closed and consummated in accordance with the Merger Agreement. Prime, Sub and Homegate have agreed not to intentionally take any action that would disqualify treatment of the Merger as a pooling of interests for accounting purposes. 33 42 Under the pooling of interests method of accounting, the historical basis of the assets and liabilities of Prime and Homegate will be combined at the Effective Date and carried forward at their previously recorded amounts, the stockholders' equity accounts of Prime and Homegate will be combined on the consolidated balance sheet of Prime and no goodwill or other intangible assets will be created. Consolidated financial statements of Prime issued after the Merger will be restated retroactively to reflect the consolidated operations of Prime and Homegate as if the Merger had taken place prior to the periods covered by such consolidated financial statements. The unaudited pro forma financial information contained in this Proxy Statement-Prospectus has been prepared using the pooling-of-interests accounting method to account for the Merger. Consistent with pooling of interests accounting treatment, the direct costs related to the Merger will be taken as a non-recurring charge to earnings in the quarter in which the Merger is consummated. See "Pro Forma Condensed Financial Information." CERTAIN LEGAL MATTERS No federal or state regulatory requirements or approvals (other than those that arise in connection with the registration of Prime Common Stock to be issued in the Merger and the effectiveness of this Proxy Statement-Prospectus, those that have already been obtained and certain notice filings after the Effective Date) must be complied with or obtained in connection with the Merger. FEDERAL SECURITIES LAW CONSEQUENCES All Prime Common Stock issued in connection with the Merger will be freely transferable, except that any Prime Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of Homegate or Prime prior to the Merger may be sold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act with respect to affiliates of Homegate, or Rule 144 under the Securities Act with respect to persons who are or become affiliates of Prime, or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of Homegate or Prime generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. Affiliates may not sell their shares of Prime Common Stock acquired in connection with the Merger, except pursuant to an effective registration under the Securities Act covering such shares or in compliance with Rule 145 (or Rule 144 under the Securities Act in the case of persons who become affiliates of Prime) or another applicable exemption from the registration requirements of the Securities Act. In general, under Rule 145, for one year following the Effective Date an affiliate (together with certain related persons) would be entitled to sell shares of Prime Common Stock acquired in connection with the Merger only through unsolicited "broker transactions" or in transactions directly with a "market maker," as such terms are defined in Rule 144. Additionally, the number of shares to be sold by an affiliate (together with certain related persons and certain persons acting in concert) within any three-month period for purposes of Rule 145 may not exceed the greater of 1% of the outstanding shares of Prime Common Stock or the average weekly trading volume of such stock during the four calendar weeks preceding such sale. Rule 145 would only remain available, however, to affiliates if Prime remained current with its informational filings with the Commission under the Exchange Act. Beginning one year after the Effective Date, an affiliate would be able to sell such Prime Common Stock without such manner of sale or volume limitations provided that Prime was current with its Exchange Act informational filings and such affiliate was not then an affiliate of Prime. Two years after the Effective Date, an affiliate would be able to sell such shares of Prime Common Stock without any restrictions so long as such affiliate had not been an affiliate of Prime for at least three months prior thereto. See "-- Registration Rights" and "The Merger Agreement -- Certain Covenants." 34 43 REGISTRATION RIGHTS In connection with the Merger, Prime agreed, for the benefit of certain affiliates of Homegate, to use commercially reasonable efforts to cause such holders' offering and resale of shares of Prime Common Stock received by them in the Merger to be registered under the Securities Act and to keep such registration statement effective until Prime determines in good faith that such shares are no longer subject to restrictions on transfer under Rule 144 or 145, up to the first anniversary of the Effective Date. Prime will bear any registration fee, the listing fee and the fees and expenses of counsel for Prime, while the respective holders will bear all other fees and expenses in connection with the registration and sale of such shares. LISTING It is a condition to the Merger that the shares of Prime Common Stock to be issued in connection with the Merger be authorized for listing on the NYSE, subject to official notice of issuance. APPRAISAL RIGHTS UNDER THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, THE HOLDERS OF HOMEGATE COMMON STOCK ARE NOT ENTITLED TO ANY APPRAISAL RIGHTS WITH RESPECT TO THE MERGER. CERTAIN EFFECTS OF THE INTERIM FINANCING AND THE TERMINATION FEE Certain aspects of the interim financing provided to Homegate by Prime, as well as certain aspects of the Termination Fee payable by Homegate provided for in the Merger Agreement, may have the effect of discouraging persons who might now or prior to the consummation of the Merger be interested in acquiring all of or a significant interest in Homegate from considering or proposing such an acquisition. See "The Interim Financing" and "The Merger Agreement -- Termination; Fees and Expenses." 35 44 THE MERGER AGREEMENT The following description of the Merger Agreement describes all material provisions of the Merger Agreement, a copy of which is attached to this Proxy Statement-Prospectus as Annex A and incorporated herein by reference. Stockholders of Homegate and Prime are urged to read the Merger Agreement in its entirety. THE MERGER The Merger Agreement provides that, subject to the approval of the Merger by the stockholders of Homegate and the satisfaction or waiver of the other conditions to the Merger, Sub will be merged with and into Homegate in accordance with Delaware law, whereupon the separate existence of Sub will cease and Homegate will be the Surviving Corporation of the Merger. On the Effective Date, the conversion of Homegate Common Stock and the conversion of shares of the common stock of Sub pursuant thereto will be effected as described below. The Certificate of Incorporation and By-laws of Homegate will be the Certificate of Incorporation and By-laws of the Surviving Corporation, as amended pursuant to the terms of the Merger Agreement or otherwise. The directors of Sub immediately prior to the Effective Date will become the directors of the Surviving Corporation and the officers of Homegate immediately prior to the Effective Date will be the officers of the Surviving Corporation, in each case until their respective successors are duly elected and qualified. EFFECTIVE DATE Following the adoption of the Merger Agreement and subject to satisfaction or waiver of certain terms and conditions, including conditions to closing, contained in the Merger Agreement, the Merger will become effective on such date as the Certificate of Merger is duly filed with the Secretary of State of Delaware or at such time thereafter as is provided in such Certificate. The filing of the Certificate of Merger will be made as soon as practicable after all conditions contemplated by the Merger Agreement have been satisfied or waived. TERMS OF THE MERGER At the Effective Date: (i) each share of Homegate Common Stock held by Homegate or any subsidiary of Homegate or held by Prime, Sub or any other subsidiary of Prime on the Effective Date will be canceled, and no payment will be made with respect thereto; (ii) each remaining outstanding share of Homegate Common Stock will be converted into and represent the right to receive 0.6073 of a share of Prime Common Stock, with cash in lieu of fractional shares; and (iii) each issued and outstanding share of the capital stock of Sub will be converted into and represent one fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation. As of the Effective Date, present holders of Homegate Common Stock will cease to have any rights as holders of such shares, but will have the rights of holders of Prime Common Stock. After the Effective Date, the stock transfer books of Homegate will be closed and there will be no further transfers of Homegate Common Stock. See "The Merger -- Conversion of Shares; Procedures for Exchange of Certificates" and "Comparison of Stockholder Rights." By virtue of the Merger, all options (the "Homegate Options") outstanding as of the Effective Date under any Homegate stock option plan (collectively, the "Homegate Stock Option Plans"), whether or not then exercisable, will be assumed by Prime and converted into and become a right with respect to Prime Common Stock. Each Homegate Option assumed by Prime will be exercisable upon the same terms and conditions as under the applicable Homegate Stock Option Plans and applicable option agreements issued thereunder, and Prime will assume the Homegate Stock Option Plans for such purposes. Pursuant to the 36 45 Merger Agreement, from and after the Effective Date, (i) each Homegate Option assumed by Prime may be exercised solely for Prime Common Stock, (ii) the number of shares of Prime Common Stock subject to each Homegate Option will be equal to the product (rounded to the nearest whole share) of (A) the number of shares of Homegate Common Stock subject to the original Homegate Option immediately prior to the Effective Date, times (B) the Exchange Ratio and (iii) the per share exercise price for each such Homegate Option will be equal to (A) the per share exercise price for the share of Homegate Common Stock otherwise purchasable pursuant to each Homegate Option immediately prior to the Effective Date divided by (B) the Exchange Ratio (rounded up to the nearest full cent). No Homegate Options will be accelerated by reason of the Merger unless the agreement or arrangement under which it was granted or by which it is otherwise governed specifically provides for such acceleration. EXCHANGE PROCEDURES Promptly after the Effective Date, the Exchange Agent will mail to each person who was, as of the Effective Date, a holder of record of shares of Homegate Common Stock, a letter of transmittal to be used by such holders in forwarding their certificates representing shares of Homegate Common Stock ("Certificates"), and instructions for effecting the surrender of the Certificates in exchange for certificates representing shares of Prime Common Stock. Upon surrender to the Exchange Agent of a Certificate for cancellation, together with such letter of transmittal, the holder of such Certificate will be entitled to receive a certificate representing that number of whole shares of Prime Common Stock, cash in lieu of any fractional shares (as described below) and unpaid dividends and distributions, if any, which such holder has the right to receive in respect of the Certificate surrendered (as described below), and the Certificate so surrendered will be cancelled. HOMEGATE STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. No fractional shares of Prime Common Stock will be issued and any holder of shares of Homegate Common Stock entitled under the Merger Agreement to receive a fractional share will be entitled to receive only a cash payment in lieu thereof, which payment will be in an amount equal to such fractional part of a share of Prime Common Stock multiplied by the average of the closing sales prices of the Prime Common Stock on the NYSE over the last ten trading days preceding the Effective Date. No dividends on shares of Prime Common Stock will be paid with respect to any shares of Homegate Common Stock or other securities represented by a Certificate until such Certificate is surrendered for exchange as provided in the Merger Agreement. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the holder of certificates representing shares of Prime Common Stock issued in exchange therefore (i) at the time of such surrender, the amount of any dividends or other distributions with a record date after the Effective Date theretofore payable with respect to such shares of Prime Common Stock and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Date but prior to surrender thereof and a payment date subsequent to surrender thereof payable with respect to such whole shares of Prime Common Stock, less the amount of any withholding taxes which may be required thereon. On or after the Effective Date, there will be no transfers on the transfer books of Homegate of shares of Homegate Common Stock which were outstanding immediately prior to the Effective Date. Any portion of the monies from which cash payments in lieu of fractional interests in shares of Prime Common Stock will be made (including the proceeds of any investments thereof) and any shares of Prime Common Stock that are unclaimed by the former stockholders of Homegate one year after the Effective Date will be delivered to Prime. Any former stockholders of Homegate who have not theretofore complied with the exchange procedures in the Merger Agreement may thereafter look to Prime only as general creditors for payment of their shares of Prime Common Stock, cash in lieu of fractional shares, and any unpaid dividends and distributions on shares of Prime Common Stock, deliverable in respect of each share of Homegate Common Stock such stockholder holds. Notwithstanding the foregoing, none of Homegate, Prime, the Exchange Agent or any other person will be liable to any former holder of shares of Homegate Common Stock 37 46 for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. No interest will be paid or accrued on cash in lieu of fractional shares and unpaid dividends and distributions, if any, which will be paid upon surrender of Certificates. In the event that any Certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Prime, the posting by such person of a bond in such reasonable amount as Prime may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Prime Common Stock, cash in lieu of fractional shares, and any unpaid dividends and distributions on shares of Prime Common Stock, as described above. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various representations and warranties relating to, among other things: (a) the due organization, power and standing of Homegate and Prime and similar corporate matters; (b) the capital structure of Homegate and Prime; (c) subsidiaries of Homegate and Prime; (d) the authorization, execution, delivery and enforceability of the Merger Agreement; (e) conflicts under charters or bylaws, violations of any instruments or law and required consents or approvals; (f) certain documents filed by each of Homegate and Prime with the Commission and the accuracy of information contained therein; (g) the absence of certain changes; (h) litigation; (i) retirement and other employee benefit plans of Homegate; (j) labor matters involving Homegate; (k) corporate action approving the Merger Agreement; (l) brokers' and finders' fees with respect to the Merger; (m) compliance with applicable laws; (n) material liabilities; (o) taxes and tax returns of Homegate; (p) material agreements and contracts; (q) absence of material adverse changes; (r) accounting matters; (s) Homegate real property matters; (t) Homegate hotel zoning and improvement matters; (v) Homegate environmental matters; and (v) Homegate insurance matters. CERTAIN COVENANTS Homegate has agreed (and has agreed to cause its subsidiaries), among other things, prior to the consummation of the Merger, unless Prime agrees in writing or as otherwise required or permitted by the Merger Agreement, (i) to conduct its operations according to its usual, regular and ordinary course in substantially the same manner as theretofore conducted, (ii) promptly to notify Prime of any change or event that has had, or could reasonably be expected to have, a material adverse effect on the business, properties, assets, prospects, condition (financial or otherwise), liabilities or results of operations of Homegate and its subsidiaries taken as a whole and (iii) promptly to deliver to Prime true and correct copies of any filings with the Commission or any other governmental entity in connection with the Merger Agreement and the transactions contemplated thereby. In addition, Homegate has agreed that, among other things, prior to the consummation of the Merger, unless Prime agrees in writing or as otherwise required or permitted by the Merger Agreement, it shall not (and shall cause its subsidiaries not to) (i) amend its certificate of incorporation or bylaws, (ii) except pursuant to the exercise of certain options, warrants, conversion and certain other contractual rights, issue any shares of capital stock, effect any stock split or otherwise change its capitalization, (iii) grant, confer or award any option, warrant, conversion right or other right to acquire shares of its capital stock, (iv) increase any compensation or enter into or amend any employment agreement with any of its present or future officers, directors or employees, except in accordance with pre-existing contractual provisions and except for annual increases consistent with past practice, (v) adopt any new employee benefit plan or amend any existing employee benefit plan, (vi) declare or pay any dividend to its stockholders or make any other payment on its capital stock, (vii) incur additional indebtedness in excess of $250,000 in the aggregate or (viii) acquire or dispose of any of its assets, subject to certain exceptions. Prime has agreed (and has agreed to cause its subsidiaries), among other things, prior to the consummation of the Merger, unless Homegate agrees in writing or as otherwise required or permitted by the Merger Agreement, (i) to conduct its operations in the usual, regular and ordinary course in substantially the same manner as theretofore conducted, (ii) promptly to notify Homegate of any change or event that has had, or could reasonably be expected to have, a material adverse effect on the business, properties, assets, prospects, 38 47 condition (financial or otherwise), liabilities or results of operations of Prime and its subsidiaries taken as a whole and (iii) promptly to deliver to Homegate true and correct copies of any filings with the Commission or any other governmental entity in connection with the Merger Agreement and the transactions contemplated thereby. Each of Homegate and Prime has agreed that, among other things, unless the other party agrees in writing or as otherwise required or permitted by the Merger Agreement, it shall not nor shall it permit any of its subsidiaries to take or cause to be taken any action, whether before or after the Effective Date, which would disqualify the Merger as a pooling of interests for accounting purposes or as a tax-free reorganization. NO SOLICITATION Homegate has agreed that it will not, and will direct and use its best efforts to cause its officers and directors, employees, agents and representatives not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, Homegate or any of its subsidiaries (any such proposal or offer being hereinafter referred to as an "Alternative Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Alternative Proposal, or release any third party from any obligations under any existing standstill agreement or arrangement relating to any Alternative Proposal, or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal. Homegate has agreed to cease immediately and cause to be terminated any existing activities, discussions or negotiations with any parties conducted prior to the date of the Merger Agreement with respect to any of the foregoing and to take the necessary steps to inform the appropriate individuals or entities of these obligations. Homegate has also agreed to notify Prime immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with it, provided that the Board of Directors of Homegate may (i) furnish information to, or enter into discussions or negotiations with, any person or entity that makes or proposes to make an unsolicited bona fide proposal to acquire Homegate pursuant to a merger, consolidation, share exchange, business combination, purchase of a substantial portion of its assets or other similar transaction, if, and only to the extent that, (a) the Board of Directors of Homegate determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to stockholders imposed by law, (b) prior to furnishing such information to, or entering into discussions or negotiations with, the other person or entity, Homegate provides written notice to Prime to the effect that it is furnishing information to, or entering into discussions or negotiations with, the other person or entity and (c) Homegate keeps Prime promptly informed of the status and all material terms and conditions of any such discussions or negotiations (including identities of parties) and (ii) to the extent applicable, comply with Rule 14c-2 promulgated under the Exchange Act with regard to an Alternative Proposal. INDEMNIFICATION AND INSURANCE As provided in the Merger Agreement, Prime is required to indemnify, defend and hold harmless the officers, directors and employees of Homegate and its subsidiaries (the "Indemnified Parties") from and against all losses, expenses, claims, damages or liabilities arising out of the transactions contemplated by the Merger Agreement to the fullest extent permitted or required under applicable law, including without limitation the advancement of expenses. Prime has agreed that all rights to indemnification existing in favor of the directors, officers or employees of Homegate as provided in Homegate's Certificate of Incorporation or Bylaws, with respect to matters occurring through the Effective Date, shall survive the Merger and continue in full force and effect for a period of not less than six years from the Effective Date. For a period of three years after the Effective Date, Prime is obligated to cause the Surviving Corporation to maintain in effect policies of directors' and officers' liability insurance covering certain Indemnified Parties presently covered by Homegate insurance policies that are equivalent to those maintained by Homegate with respect to matters occurring prior to the Effective Date, provided that Prime shall not be required in order to maintain such coverage to pay an annual premium in excess of two times the current annual premium paid by 39 48 Homegate for its existing coverage, but in such case shall purchase as much coverage as possible for such amount. CONDITIONS The respective obligations of Homegate and Prime to consummate the Merger are subject to the fulfillment of the following conditions: (a) the Merger Agreement and the transactions contemplated thereby shall have been approved and adopted by the requisite vote of the holders of the issued and outstanding shares of capital stock of Homegate entitled to vote thereon; (b) the Registration Statement shall have become effective under the Securities Act and no stop order with respect thereto shall be in effect; (c) none of the parties to the Merger Agreement shall be subject to any order or injunction against the consummation of the transactions contemplated by the Merger Agreement; (d) all consents, authorizations, orders and approvals of (or filings or registrations with) any governmental commission, board or other regulatory body required in connection with the execution, delivery and performance of the Merger Agreement shall have been obtained or made (except where the failure to obtain or make any such consent, authorization, order, approval, filing or registration would not have a material adverse effect on the business of Prime and Homegate (and their respective subsidiaries), taken as a whole, following the Effective Date); and (e) the Prime Common Stock to be issued to Homegate stockholders in connection with the Merger shall have been approved for listing on the NYSE, subject to official notice of issuance. The obligations of each of Homegate and Prime to effect the Merger are also subject to the satisfaction or waiver by the other party prior to the Effective Date of the following conditions: (a) the other party shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement and the representations and warranties of the other party and its subsidiaries set forth in the Merger Agreement shall be true in all material respects as of the Effective Date; (b) Homegate shall have received the opinion of Vinson & Elkins L.L.P. that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code; (c) Prime shall have received the opinion of Willkie Farr & Gallagher that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code; (d) Homegate and Prime shall have each received a "comfort" letter from the other party's independent public accountants covering matters customarily included in such comfort letters relating to transactions similar to the Merger and (e) from the date of the Merger Agreement through the Effective Date, there shall not have occurred any change, individually or together with other changes, that has had, or would reasonably be expected to have, a material adverse change in the financial condition, business, results of operations or prospects of either Homegate or Prime and its subsidiaries, taken as a whole. TERMINATION; FEES AND EXPENSES The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Date, before or after the approval by the stockholders of Homegate: (a) by the mutual consent of Homegate and Prime by action of their respective Boards of Directors; (b) by action of the Board of Directors of either Homegate or Prime if (i) the Merger shall not have been consummated by December 31, 1997, (ii) the adoption of the Merger Agreement and the approval of the transactions contemplated thereby by Homegate's stockholders shall not have been obtained at a meeting duly convened for such purpose (or at any adjournment or postponement thereof), or (iii) a United States federal or state court of competent jurisdiction or a United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order, decree, ruling or other action shall have become final and non-appealable; provided, that the party seeking to terminate the Merger Agreement pursuant to this clause (iii) shall have used all reasonable efforts to remove such injunction, order or decree; (c) by action of the Board of Directors of Homegate, if (i) in the exercise of its good faith judgment as to its fiduciary duties to its stockholders imposed by law, the Board of Directors of Homegate determines that such termination is required by reason of an Alternative Proposal being made for Homegate, (ii) there has been a breach by Prime or Sub of any representation or warranty contained in the Merger Agreement which would have or would be reasonably likely to have a material adverse effect on the business, 40 49 properties, assets, prospects, condition (financial or otherwise), liabilities or results of operations of Prime and its subsidiaries taken as a whole or (iii) there has been a material breach by Prime of any covenant or agreement contained in the Merger Agreement which is not curable or, if curable, is not cured within 30 days after written notice of such breach; or (d) by action of the Board of Directors of Prime, if (i) the Board of Directors of Homegate shall have withdrawn or modified in a manner adverse to Prime its approval or recommendation of the Merger Agreement or the Merger, or shall have recommended an Alternative Proposal to Homegate stockholders, (ii) there has been a breach by Homegate of any representation or warranty contained in the Merger Agreement which would have or would be reasonably likely to have a material adverse effect on the business, properties, assets, prospects, condition (financial or otherwise), liabilities or results of operations of Homegate and its subsidiaries taken as a whole or (iii) there has been a material breach by Homegate of any covenant or agreement contained in the Merger Agreement which is not curable or, if curable, is not cured within 30 days after written notice of such breach. In the event of the termination of the Merger Agreement pursuant to (b), (c) or (d) above, nothing in the Merger Agreement shall prejudice the ability of the non-breaching party to seek damages from any other party for any breach of the Merger Agreement, including without limitation, attorneys' fees and the right to pursue any remedy at law or in equity; provided, that in the event Prime has received the Termination Fee, it shall not (i) have any rights whatsoever in respect of or in connection with the representations, warranties, covenants and agreements of Homegate, (ii) assert or pursue in any manner, directly or indirectly, any claim or cause of action based in whole or in part upon alleged tortious or other interference with rights under the Merger Agreement against any entity or person submitting an Alternative Proposal or (iii) assert or pursue in any manner, directly or indirectly, any claim or cause of action against Homegate or any of its officers or directors based in whole or in part upon its or their receipt, consideration, recommendation or approval of an Alternative Proposal; provided, further, that Prime may, in the circumstances set forth in clause (z) of the next paragraph, waive its right to receive the Termination Fee, in which case the foregoing proviso shall not be applicable. If (x) Homegate terminates the Merger Agreement because its Board of Directors, in the exercise of its good faith judgment as to its fiduciary duties to its stockholders imposed by law, determines that such termination is required by reason of an Alternative Proposal being made for Homegate, (y) Prime terminates the Merger Agreement because the Board of Directors of Homegate shall have withdrawn or modified in a manner adverse to Prime its approval or recommendation of the Merger Agreement or the Merger or shall have recommended an Alternative Proposal to Homegate stockholders or (z) any person shall have made an Alternative Proposal and thereafter the Merger Agreement is terminated by either party as a result of the requisite approval of the holders of Homegate Common Stock having not been obtained, or by Prime as a result of Homegate's intentional failure to perform one of its agreements contained in the Merger Agreement or intentional breach of one of its representations or warranties contained in the Merger Agreement, and within 12 months thereafter such Alternative Proposal shall have been consummated, then Homegate (or the successor thereto) is required to pay in cash to Prime the Termination Fee of $3,325,000, within two days after such termination (in the case of (x) or (y)) or consummation (in the case of (z)). Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby shall be paid by the party incurring such expenses, except as otherwise provided in the Merger Agreement. The Merger Agreement provides that the following expenses will be shared equally by Prime and Homegate: (a) the filing fee in connection with the filing of the Registration Statement with the Commission and (b) the expenses incurred in connection with printing and mailing this Proxy Statement-Prospectus. AMENDMENT; WAIVER The parties may modify or amend the Merger Agreement by written agreement at any time before the Effective Date, provided that following approval of the Merger by holders of the Homegate Common Stock, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. The conditions to each party's obligation to consummate the Merger may be waived by the other party in whole or in part to the extent permitted by applicable law. 41 50 THE INTERIM FINANCING Prime agreed to provide, pending consummation of the Merger, up to $65.0 million of interim secured financing (the "Interim Loans") to Homegate to enable Homegate to acquire and develop certain hotel properties. The Interim Loans will not exceed a borrowing base, which will restrict availability to no greater than 75% of the cost basis of Homegate in the properties. No Interim Loans will be made after the earlier of November 30, 1997 and the date of any termination of the Merger Agreement (other than a termination solely as a result of a breach by Prime). All Interim Loans will mature on the earliest of (a) April 1, 1998, (b) the date Homegate enters into any agreement with a third party (other than the Merger Agreement) involving the merger or sale of substantially all the assets of Homegate and (c) four months after the termination of the Merger Agreement. The Interim Loans bear interest at a rate per annum equal to the one month London Interbank Offered Rate plus 3.50% (increasing to 5.00% upon the earlier of November 30, 1997 and the date of any termination of the Merger Agreement). Homegate is obligated to pay to Prime a facility fee of $650,000 upon the closing of the initial Interim Loan. The Interim Loans are secured by 18 properties currently under development and by any future development properties. The loan documentation for the Interim Loans contains various affirmative and negative covenants concerning the operation of Homegate as well as events of default (including failure to pay amounts due under the loan documents or to comply with such covenants or a breach of the Merger Agreement by Homegate). The loan documents require Homegate to comply with the covenants contained in the Merger Agreement. See "The Merger Agreement -- Certain Covenants." As of October 27, 1997, an aggregate of $32.6 million in Interim Loans was outstanding. 42 51 RECENT SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PRIME The table below presents recent selected consolidated financial and other data derived from Prime's historical consolidated financial statements as of and for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997. This data should be read in conjunction with "Prime Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Consolidated Financial Data of Prime and its Predecessor" and the Consolidated Financial Statements, related notes and other financial information included and incorporated by reference in this Proxy Statement- Prospectus.
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31,(2) 30, ---------------------------------- ---------------------- 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA(1): Revenues: Lodging.......................... $ 88,753 $146,184 $198,947 $ 94,248 $124,606 Food and beverage................ 18,090 37,955 41,437 19,479 20,706 Management and other fees........ 10,021 8,115 6,729 3,484 3,136 Interest on mortgages and notes receivable.................... 15,867 11,895 6,090 3,704 3,303 Business interruption insurance..................... -- -- 13,562 6,629 6,366 Rental and other................. 1,572 1,479 2,103 962 1,370 -------- -------- -------- -------- -------- Total revenues........... 134,303 205,628 268,868 128,506 159,487 -------- -------- -------- -------- -------- Costs and expenses: Direct hotel operating expenses: Lodging....................... 25,490 38,383 51,577 24,150 30,476 Food and beverage............. 13,886 28,429 32,053 15,589 15,656 Selling and general........... 27,244 49,753 61,789 29,743 32,593 Occupancy and other operating.... 9,799 11,763 16,833 7,584 11,256 General and administrative....... 15,089 15,515 17,813 8,757 10,105 Depreciation and amortization.... 9,384 15,227 23,632 11,102 15,101 Other expense.................... -- 2,200 -- -- -- -------- -------- -------- -------- -------- Total costs and expenses............... 100,892 161,270 203,697 96,925 115,187 -------- -------- -------- -------- -------- Operating income................... 33,411 44,358 65,171 31,581 44,300 Investment income.................. 1,966 4,861 4,610 2,121 1,627 Interest expense................... (14,036) (22,350) (22,564) (12,209) (11,760) Other income....................... 9,089 2,239 4,306 3,432 1,858 -------- -------- -------- -------- -------- Income before income taxes and extraordinary items.............. 30,430 29,108 51,523 24,925 36,025 Provision for income taxes......... 12,172 11,643 20,609 9,970 14,410 -------- -------- -------- -------- -------- Income before extraordinary items............................ 18,258 17,465 30,914 14,955 21,615 Extraordinary items(3)............. 172 104 202 176 75 -------- -------- -------- -------- -------- Net income......................... $ 18,430 $ 17,569 $ 31,116 $ 15,131 $ 21,690 ======== ======== ======== ======== ======== Earnings per common share(4): Primary: Income before extraordinary items....................... $ 0.57 $ 0.54 $ 0.85 $ 0.45 $ 0.52 Extraordinary items........... 0.01 -- -- 0.01 -- -------- -------- -------- -------- -------- Earnings per common share........ $ 0.58 $ 0.54 $ 0.85 $ 0.46 $ 0.52 -------- -------- -------- -------- -------- Fully diluted: Income before extraordinary items....................... $ 0.57 $ 0.54 $ 0.80 $ 0.42 $ 0.48 Extraordinary items........... 0.01 -- -- -- -- -------- -------- -------- -------- -------- Earnings per common share........ $ 0.58 $ 0.54 $ 0.80 $ 0.42 $ 0.48 -------- -------- -------- -------- --------
43 52
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30, ----------------------------------- ------------------------ 1994 1995 1996 1996 1997 -------- -------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT HOTEL DATA) OTHER DATA: EBITDA(5)....................... $ 42,795 $ 59,585 $ 88,803 $ 42,683 $ 59,401 Net cash provided by operating activities.................... 28,334 38,628 65,936 24,850 32,192 Net cash used in investing activities.................... (33,910) (88,704) (240,957) (111,946) (121,375) Net cash provided by (used in) financing activities.......... (23,469) 87,085 141,485 78,208 151,948 HOTEL DATA(6): All-suites: Number of locations........... 12 19 35 25 46 Number of rooms............... 1,494 2,319 4,348 3,024 5,776 REVPAR........................ $ 39.50 $ 43.98 $ 47.28 $ 47.65 $ 49.51 Full-service(6): Number of locations........... 29 30 30 30 31 Number of rooms............... 5,672 5,821 5,821 5,821 5,971 REVPAR........................ $ 52.52 $ 53.89 $ 61.85 $ 58.14 $ 65.88 Limited-service: Number of locations........... 32 32 32 32 32 Number of rooms............... 3,359 3,359 3,359 3,359 3,359 REVPAR........................ $ 36.37 $ 38.37 $ 39.80 $ 41.96 $ 43.73
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30, ---------------------------------- ---------------------- 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents and marketable securities............ $ 13,641 $ 61,462 $ 16,235 $ 43,045 $ 79,000 Property, equipment and leasehold improvements, net................ 299,291 398,201 695,253 561,908 812,367 Mortgages and notes receivable, net of current portion............... 81,260 64,962 24,195 25,053 19,858 Total assets....................... 434,932 573,241 786,098 683,185 972,400 Current portion of debt............ 5,284 5,731 3,419 4,097 3,083 Long-term debt, net of current portion.......................... 178,545 276,920 298,875 363,132 457,912 Total stockholders' equity......... 204,065 232,916 419,895 252,629 444,153
- --------------- (1) In December 1994, Prime acquired ownership of the Frenchman's Reef as a result of the restructuring of a mortgage note receivable, which was secured by the hotel. This transaction has not had a material impact on operating income but has affected revenue and operating margins significantly. For the year ended December 31, 1994, Prime recorded revenues related to the Frenchman's Reef in the form of interest income and management fees with no corresponding operating expenses. For the years ended December 31, 1995 and 1996 and for the six months ended June 30, 1996 and 1997, Prime recorded the operating revenues and operating expenses related to this hotel. (2) Certain reclassifications have been made to the December 31, 1994, 1995 and 1996 financial information to conform them to the six months ended June 30, 1996 and 1997 presentations. (3) Extraordinary items consist of gains on discharges of indebtedness, net of income taxes of $120,000 in 1994, $70,000 in 1995 and $135,000 in 1996 and $117,000 and $50,000 for the six months ended June 30, 1996 and 1997. (4) Primary earnings per common share was computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each period. The weighted average number of common shares used in computing primary earnings per 44 53 common share was 32,022,000, 32,461,000 and 36,501,000 for the years ended December 31, 1994, 1995 and 1996, respectively and 33,003,000 and 41,756,000 for the six months ended June 30, 1996 and 1997, respectively. Fully diluted earnings per common share, in addition to the adjustments for primary earnings per common share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes due 2002 from their issuance in April 1995. The weighted average number of common shares used in computing fully diluted earnings per common share was 37,423,000 and 43,794,000 for the years ended December 31, 1995 and 1996, respectively and 40,460,000 and 49,130,000 for the six months ended June 30, 1996 and 1997, respectively. (5) EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by Prime for the purpose of analyzing its operating performance, leverage and liquidity. Such data are not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of Prime's operating performance or as an alternative to cash flows as a measure of liquidity. (6) Hotel data represents operating data for the hotels in the Portfolio at June 30, 1997. For purposes of showing operating trends, the results of the Frenchman's Reef have been excluded from Hotel data due to the effect of hurricane damage on the hotel's operations. For a discussion of the Frenchman's Reef, see "Business of Prime -- Prime's Lodging Operations." 45 54 PRIME MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Prime is a national hotel owner/operator which, as of October 1, 1997, owned or leased 105 hotels and managed 12 hotels for third parties. Prime has a financial interest in the form of mortgages or profit participations (primarily incentive management fees) in seven of the Managed Hotels. Prime consolidates the results of operations of its Owned Hotels and records management fees (including incentive management fees) and interest income, where applicable, on the Managed Hotels. Prime's strategy is to capitalize on two lodging industry trends: (i) favorable industry fundamentals, which are producing strong earnings growth due to the operating leverage inherent in hotel ownership and (ii) growing consumer preferences for newer all-suite accommodations with strong brand identities. Through its focus on hotel equity ownership, Prime is benefiting from the operating leverage inherent in the lodging industry. Through its development of its proprietary brands, Prime is positioning itself to generate additional revenue not dependent on investment in real estate. Prime seeks to achieve internal growth through the use of sophisticated operating, marketing and financial systems at its hotels. Prime's external growth has focused on the accelerated expansion of its AmeriSuites brands through new construction. Although future results of operations may be adversely affected in the short term by the costs associated with the construction and acquisition of new hotels, it is expected that this impact will be offset, after an initial period, by revenues generated by such new hotels. On July 25, 1997, Prime entered into an agreement to merge with Homegate, a provider of mid-price extended-stay hotels. Under this agreement, Prime will issue approximately 6.5 million shares of Prime Common Stock based upon a fixed exchange ratio of 0.6073 share of Prime Common Stock for each of the approximately 10.7 million outstanding shares of Homegate Common Stock. The transaction is expected to be accounted for as a pooling of interests. The Merger Agreement is subject to the approval of the shareholders of Homegate and other customary terms and conditions and the Merger is expected to be completed in the fourth quarter of 1997. Under pooling of interests accounting, all transaction costs are expensed as incurred and the historical consolidated statements of operations of the companies are restated on a combined basis without giving effect to operating synergies. Homegate, which commenced operations in 1996, is expected to generate 1997 results reflecting losses consistent with start-up operations. Therefore, the merger is expected to have a dilutive effect on earnings for 1997. Although there can be no assurance, assuming that pooling of interests accounting treatment is available, Prime expects the impact of the merger to be accretive to earnings in 1998. For the three and six months ended June 30, 1997, earnings from recurring operations increased by 65.1% and 76.2%, respectively, over the same periods in 1996. The earnings gains were the result of strong growth in REVPAR and profit margins at comparable Owned Hotels and significant new AmeriSuites unit growth. For the comparable Owned Hotels, REVPAR increased by 12.1% and 11.2% for the three and six month periods. The combination of strong REVPAR increases and effective expense controls resulted in increases in gross operating profits of 19.8% and 17.7% for the three and six month periods and improvements in gross operating margins from 44.8% to 48.0% for the three month period and from 41.8% to 44.8% for the six month period. The earnings growth was also favorably affected by the net addition of 38 hotels since January 1, 1996 primarily through the development of new AmeriSuites hotels. EBITDA increased by 43.7% to $33.5 million for the three months ended June 30, 1997 and by 39.2% to $59.4 million for the six months ended June 30, 1997. Hotel EBITDA increased by 43.9% to $34.3 million for the three month period and by 44.9% to $61.8 million for the six month period. Hotel EBITDA represents EBITDA generated from the operations of Owned Hotels. Hotel EBITDA excludes management fee income, interest income from mortgages and notes receivable, general and administrative expenses and other revenues and expenses which do not directly relate to the operations of Owned Hotels. 46 55 Prime's hotels operate in three segments of the industry: the all-suites segment, under Prime's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the mid-price limited-service segment, primarily under Prime's proprietary Wellesley Inns brand. Prime's Hotel EBITDA reflects the shifting mix in Prime's portfolio toward its proprietary brand AmeriSuites and the sale of certain limited-service hotels operated under franchise agreements. The Hotel EBITDA contribution from AmeriSuites hotels is expected to increase in future years as a result of Prime's AmeriSuites expansion plans. The following table illustrates the Hotel EBITDA contribution from each segment (in thousands): HOTEL EBITDA
THREE MONTHS ENDED JUNE 30, ------------------------------------------------- 1996 1997 ---------------------- ---------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------- ---------- ------- ---------- All-suites........................ $ 7,150 30.1% $14,286 41.7% Full-service...................... 11,056 46.5 14,727 43.0 Limited-service................... 5,587 23.4 5,235 15.3 ------- ----- ------- ----- Total................... $23,793 100.0% $34,248 100.0% ======= ===== ======= =====
SIX MONTHS ENDED JUNE 30, ------------------------------------------------- 1996 1997 ---------------------- ---------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------- ---------- ------- ---------- All-suites........................ $11,739 27.5% $22,964 37.2% Full-service...................... 19,909 46.7 26,779 43.3 Limited-service................... 10,994 25.8 12,061 19.5 ------- ----- ------- ----- Total................... $42,642 100.0% $61,804 100.0% ======= ===== ======= =====
47 56 RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 The following table presents the components of operating income, operating expense margins and other data for Prime and Prime's comparable Owned Hotels for the three and six months ended June 30, 1996 and 1997. The results of the ten hotels divested during 1996 and 1997 are not material to an understanding of the results of Prime's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) ------------------- ------------------- THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1996 1997 1996 1997 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging........................................... $52,274 $66,485 $44,737 $50,185 Food and Beverage................................. 11,456 11,257 9,001 10,020 Management and Other Fees......................... 1,791 1,975 Interest on Mortgages and Notes Receivable........ 1,023 1,574 Business Interruption Insurance................... 2,891 1,376 Rental and Other.................................. 458 740 ------- ------- Total Revenues............................ 69,893 83,407 Direct Hotel Operating Expenses: Lodging........................................... 13,526 15,746 11,198 11,997 Food and Beverage................................. 8,675 7,691 6,486 6,880 Selling and General............................... 15,734 15,604 11,920 12,421 Occupancy and Other Operating....................... 4,102 5,712 General and Administrative.......................... 4,538 5,130 Depreciation and Amortization....................... 6,228 7,681 Operating Income.................................... 17,090 25,843 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue....... 25.9% 23.7% 25.0% 23.9% Food and Beverage, as a percentage of food and beverage revenue............................... 75.7% 68.3% 72.1% 68.7% Selling and General, as a percentage of lodging and food and beverage revenue.................. 24.6% 20.1% 22.2% 20.6% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue............. 6.4% 7.3% General and Administrative, as a percentage of total revenue........................................... 6.5% 6.2% OTHER DATA(1): Occupancy........................................... 73.6% 74.5% 74.5% 77.5% Average Daily Rate ("ADR").......................... $ 68.58 $ 76.23 $ 70.16 $ 75.62 Revenue per Available Room ("REVPAR")............... $ 50.48 $ 56.81 $ 52.30 $ 58.62 Gross Operating Profit.............................. $26,266 $37,834 $24,134 $28,907
48 57
COMPARABLE OWNED TOTAL HOTELS(1) -------------------- ------------------- SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------- 1996 1997 1996 1997 ------- -------- ------- ------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging.......................................... $94,248 $124,606 $69,412 $76,776 Food and Beverage................................ 19,479 20,706 14,190 15,265 Management and Other Fees........................ 3,484 3,136 Interest on Mortgages and Notes Receivable....... 3,704 3,303 Business Interruption Insurance.................. 6,629 6,366 Rental and Other................................. 962 1,370 ------- ------- Total Revenues........................... 128,506 159,487 Direct Hotel Operating Expenses: Lodging.......................................... 24,150 30,476 17,501 18,774 Food and Beverage................................ 15,589 15,656 10,858 11,299 Selling and General.............................. 29,743 32,593 20,196 20,732 Occupancy and Other Operating...................... 7,584 11,256 General and Administrative......................... 8,757 10,105 Depreciation and Amortization...................... 11,102 15,101 Operating Income................................... 31,581 44,300 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue...... 25.6% 24.5% 25.2% 24.5% Food and Beverage, as a percentage of food and beverage revenue.............................. 80.0% 75.6% 76.5% 74.0% Selling and General, as a percentage of lodging and food and beverage revenue................. 26.2% 22.4% 24.2% 22.5% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue............ 6.7% 7.7% General and Administrative, as a percentage of total revenue.................................... 6.8% 6.3% OTHER DATA(1): Occupancy.......................................... 70.1% 68.4% 70.4% 72.3% ADR................................................ $ 69.04 $ 78.33 $ 72.42 $ 78.37 REVPAR............................................. $ 48.36 $ 53.58 $ 50.97 $ 56.68 Gross Operating Profit............................. $43,466 $ 64,413 $35,047 $41,236
- --------------- (1) For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, and ten hotels disposed in 1996 and 1997 have been excluded from the Other Data section of the table. Comparable Owned Hotels refers to the 69 Owned Hotels that were owned or leased by Prime during all of the three months ended June 30, 1996 and 1997 (excluding the Frenchman's Reef) and the 51 Owned Hotels that were owned or leased by Prime during all of the six months ended June 30, 1996 and 1997. Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $14.2 and $30.4 million, or 27.2% and 32.2%, respectively, for the three and six months ended June 30, 1997 as compared to the same periods in 1996. Lodging revenues for the three months ended June 30, 1997 increased due to incremental revenues of $14.8 million from new hotels and higher revenues for comparable Owned Hotels, which increased by $5.5 million, or 12.2%. Lodging revenues for the six months 49 58 ended June 30, 1997 increased due to incremental revenues of $31.2 million from new hotels and higher revenues for comparable Owned Hotels, which increased $7.4 million or 10.6%. The revenue gains during the three and six month periods were partially offset by decreases of $2.8 million and $4.2 million at the Frenchman's Reef attributable to hurricane-related damage and decreases of $3.2 million and $4.2 million related to the revenue from disposed hotels. The following table sets forth hotel operating data for the comparable Owned Hotels for the three and six months ended June 30, 1997 as compared to the same periods in 1996, by product type:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------- % ----------------- % 1996 1997 CHANGE 1996 1997 CHANGE ------ ------ ------ ------ ------ ------ AMERISUITES Occupancy.......................... 72.3% 77.0% 76.1% 72.0% ADR................................ $73.59 $76.47 $70.06 $73.85 REVPAR............................. $53.23 $58.91 10.7% $49.80 $53.19 6.8% FULL-SERVICE Occupancy.......................... 74.5% 78.6% 66.2% 70.3% ADR................................ $84.28 $92.15 $82.30 $90.41 REVPAR............................. $62.78 $72.41 15.3% $54.52 $63.52 16.5% WELLESLEY INNS Occupancy.......................... 77.1% 77.1% 79.3% 78.0% ADR................................ $50.81 $54.67 $58.52 $62.46 REVPAR............................. $39.20 $42.13 7.5% $46.40 $48.71 5.0% TOTAL Occupancy.......................... 74.5% 77.5% 70.4% 72.3% ADR................................ $70.16 $75.62 $72.42 $78.37 REVPAR............................. $52.30 $58.62 12.1% $50.97 $56.68 11.2%
Prime achieved solid revenue growth in all three of its industry segments. The REVPAR increases reflect the results of several repositionings and continued favorable industry trends in the full-service segment, growing recognition of AmeriSuites as a leading brand in the fast-growing all-suites segment and the reimaging program at the Wellesley Inns. The improvements in REVPAR at comparable Owned Hotels were generated by increases in ADR, which rose by 7.8% and 8.2%, and occupancy gains of 2.9 and 2.1 percentage points, respectively, for the three and six months periods. Food and beverage revenues decreased by $198,000 or 1.7% for the three months ended June 30, 1997 primarily due to a decrease of $1.4 million at the Frenchman's Reef, which was closed during the quarter for renovations attributed to hurricane damage. Food and beverage revenues increased by $1.2 million, or 6.3%, for the six months ended June 30, 1997 as compared to the same period in 1996. The increase was primarily due to the additional revenues from three full-service hotels added in the past year and strong growth at comparable Owned Hotels. The revenue gains for the six month period were offset by a $1.3 million decrease related to the Frenchman's Reef. Food and beverage revenues for comparable Owned Hotels increased by $1.0 million and $1.1 million, or 11.3% and 7.6%, respectively for the three and six month periods, due to increased banquet business. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by Prime's national sales group, Market Segments, Inc. ("MSI"). Management and other fees increased by $184,000, or 10.3%, for the three months ended June 30, 1997 as compared to the same period in 1996 due to increased base and incentive management fees associated with the remaining Managed Hotels. Management and other fees decreased by $348,000, or 9.9%, for the six months ended June 30, 1997 as compared to the same period in 1996 primarily due to the conversions of Managed Hotels into Owned Hotels. 50 59 Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgage and notes receivable increased by $551,000, or 53.9%, for the three months ended June 30, 1997 as compared to the same period in 1996 due to interest recognized on subordinated or junior mortgages which remit payments based on hotel cash flow. Interest on mortgages and notes receivable decreased by $401,000, or 10.8%, for the six months ended June 30, 1997 as compared to the same period in 1996 primarily due to conversions of notes receivable into operating hotel assets or cash in 1996. Business interruption insurance revenue is based on the settlement of Prime's claim related to the hurricane damage at the Frenchmen's Reef caused by Hurricane Marilyn in September 1995 and an estimate of lost profits attributed to damage caused by Hurricane Bertha in July 1996. Prime is currently reviewing its claim under its business interruption insurance with its insurance carrier with respect to Hurricane Bertha. Business interruption insurance revenue decreased by $1.5 million and $263,000, for the three and six months ended June 30, 1997 as compared to the same periods in 1996 due to operating losses in 1996. Direct lodging expenses increased by $2.2 million and $6.3 million, or 16.4% and 26.2%, for the three and six months ended June 30, 1997, as compared to the same periods in 1996 due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 25.9% to 23.7% for the three month period and from 25.6% to 24.5% for the six month period due to increases in ADR which had lower corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 25.0% to 23.9% for the three month period and from 25.2% to 24.5% for the six month period primarily due to the ADR increases. Direct food and beverage expenses for the three months ended June 30, 1997 decreased by $984,000, or 11.3%, as compared to the same period in 1996, primarily due to the Frenchman's Reef which decreased by $1.4 million. This decrease was primarily offset by an increase of $874,000 due to the addition of two full-service hotels. Direct food and beverage expenses increased by $67,000, or 0.4%, for the six months ended June 30, 1997 as compared to the same period in 1996 primarily due to the addition of three full-service hotels in the past year offset by a decrease at the Frenchman's Reef. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 75.7% to 68.3% for the three month period and from 80.0% to 75.6% for the six month period. For comparable Owned Hotels, food and beverage expenses as a percentage of food and beverage revenues decreased from 72.1% to 68.7% for the three month period and from 76.5% to 74.0% for the six month period. The decreases were primarily due to the higher margins associated with increased banquet business. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general decreased by $130,000, or 0.8%, for the three months ended June 30, 1997 due primarily to a decrease of $2.4 million at the Frenchman's Reef. This is offset by increases due to the addition of new hotels. Direct hotel selling and general expenses increased by $2.9 million, or 9.6%, for the six months ended June 30, 1997 as compared to the same period in 1996 due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses decreased from 24.6% to 20.1% for the three month period and from 26.2% to 22.4% for the six month period. For the comparable Owned Hotels, direct hotel selling and general as a percentage of hotel revenues decreased from 22.2% to 20.6% for the three month period and from 24.2% to 22.5% for the six month period. The decreases were primarily due to the ADR improvements, effective expense controls and decreases in snow removal and other weather-related costs in the first quarter. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $1.6 million and $3.6 million, or 39.2% and 48.4%, as compared to the same period in 1996 due to the addition of new hotels, including several leased hotels. Occupancy and other operating expenses as a percentage of hotel revenues increased from 6.4% to 7.3% for the three month period and from 6.7% to 7.7% for the six month period due to rent expense associated with the new leased hotels. 51 60 General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $592,000 and $1.4 million, or 13.1% and 15.4%, for the three and six months ended June 30, 1997 as compared to the same periods in 1996 due to increased advertising, personnel and training costs associated with opening the new AmeriSuites hotels. As a percentage of total revenues, general and administrative expenses decreased from 6.5% to 6.2% for the three month period and from 6.8% to 6.3% for the six month period due to increased operating leverage. Depreciation and amortization expense increased by $1.5 million and $4.0 million, or 23.3% and 36.0%, for the three and six months ended June 30, 1997 as compared to the same periods in 1996 due to the impact of new hotel properties and refurbishment efforts at several hotels. Investment income increased by $540,000, or 63.1%, for the three months ended June 30, 1997 and decreased by 494,000, or 23.3% for the six months ended June 30, 1997 as compared to the same periods in 1996 due to changes in the weighted average cash balances. Interest expense increased by $1.8 million and $213,000, for the three and six months ended June 30, 1997 as compared to the same periods in 1996 primarily due to the issuance of $200 million of Senior Subordinated Notes in March 1997 offset by capitalized interest related to new AmeriSuites construction. Prime capitalized interest of $1.7 million and $3.7 million for the three months ended June 30, 1996 and 1997, and $3.0 million and $7.4 million for the six months ended June 30, 1996 and 1997. Other income consists of items which are not part of Prime's recurring operations. For 1996, other income consisted of a gain on the settlement of a note receivable of $1.8 million and a gain on the sale of a hotel of $1.6 million. For the six months ended June 30, 1997, other income consisted of net gains on property transactions of $1.9 million. Pretax extraordinary gains of approximately $27,000 and $88,000 for the three and six months ended June 30, 1996 and 1997 and $176,000 and $125,000 for the six months ended June 30, 1996 and 1997 relate to the retirement of debt. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 The following table presents the components of operating income, operating expense margins and other data for Prime and Prime's comparable Owned Hotels for the years ended December 31, 1995 and 1996. The results of the four hotels divested during 1995 and 1996 are not material to an understanding of the results of Prime's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) --------------------- --------------------- 1995 1996 1995 1996 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging....................................... $146,184 $198,947 $110,565 $124,164 Food and Beverage............................. 37,955 41,437 25,867 28,636 Management and Other Fees..................... 8,115 6,729 Interest on Mortgages and Notes Receivable.... 11,895 6,090 Business Interruption Insurance............... -- 13,562 Rental and Other.............................. 1,479 2,103 -------- -------- Total Revenues........................ 205,628 268,868
52 61
COMPARABLE OWNED TOTAL HOTELS(1) 1995 1996 1995 1996 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) Direct Hotel Operating Expenses: Lodging....................................... 38,383 51,577 29,877 31,731 Food and Beverage............................. 28,429 32,053 19,296 21,090 Selling and General........................... 49,753 61,789 34,938 37,352 Occupancy and Other Operating................... 11,763 16,833 General and Administrative...................... 15,515 17,813 Depreciation and Amortization................... 15,227 23,632 Other Expense................................... 2,200 -- Operating Income................................ 44,358 65,171 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue... 26.3% 25.9% 27.0% 25.6% Food and Beverage, as a percentage of food and beverage revenue........................... 74.9% 77.4% 74.6% 73.6% Selling and General, as a percentage of lodging and food and beverage revenue...... 27.0% 25.7% 25.6% 24.4% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue... 6.4% 7.0% General and Administrative, as a percentage of total revenue.............................. 7.5% 6.6% OTHER DATA(1): Occupancy....................................... 69.0% 69.7% 69.9% 71.9% ADR............................................. $ 65.77 $ 70.22 $ 65.40 $ 71.14 REVPAR.......................................... $ 45.41 $ 48.95 $ 45.68 $ 51.16 Gross Operating Profit.......................... $ 67,574 $ 94,965 $ 52,321 $ 62,627
- --------------- (1) For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, and four hotels disposed of in 1995 and 1996 have been excluded from the Other Data section of the table. Comparable Owned Hotels refers to 46 Owned Hotels that were owned or leased by Prime during all of 1995 and 1996 (excluding the Frenchman's Reef). Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $52.7 million, or 36.1%, from $146.2 million in 1995 to $198.9 million in 1996. Lodging revenues increased due to incremental revenues of $52.6 million from the 44 new hotels added during 1995 and 1996 and higher revenues for comparable Owned Hotels, which increased by $13.6 million, or 12.3%, in 1996 as compared to 1995. The revenue gains were offset by a decrease of $13.8 million at the Frenchman's Reef attributable to hurricane-related damage. Prime operates in three major segments of the industry: all-suites, full-service and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for 1996, as compared to 1995, by industry segment:
YEAR ENDED DECEMBER 31, 1996 ------------ All-suites...................................... 11.7% Full-service.................................... 15.8% Limited-service................................. 5.2% Total................................. 12.0%
53 62 The REVPAR growth at comparable Owned Hotels reflects strong results in each of Prime's industry segments. The REVPAR increases reflect the results of several repositionings and continued favorable industry trends in the full-service segment, and growing recognition of the AmeriSuites brand in the fast-growing all-suites segment. The improvements in REVPAR were generated by increases in ADR, which rose by 8.8% and gains in occupancy of 2.9%. Food and beverage revenues increased by $3.4 million, or 9.2%, from $38.0 million in 1995 to $41.4 million in 1996. The increase was primarily due to the strong growth at comparable hotels and additional revenues from four new hotels in 1996. The increases were partially offset by lower food and beverage revenues at the Frenchman's Reef, which declined by $5.1 million due to the hurricane damage. Food and beverage revenues for comparable Owned Hotels increased by $2.8 million, or 10.7%, due to increased banquet business. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by Prime's national sales group, Market Segments, Inc. ("MSI"). Management and other fees decreased by $1.4 million, or 17.1%, from $8.1 million in 1995 to $6.7 million in 1996, primarily due to the conversions of Managed Hotels into Owned Hotels. Partially offsetting these decreased management fees were increased base and incentive management fees associated with the remaining Managed Hotels and increased revenues generated by MSI. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $5.8 million, or 48.8%, from $11.9 million in 1995 to $6.1 million in 1996, primarily due to conversions of notes receivable into operating hotel assets or cash in 1995 and 1996. Business interruption insurance revenue of $13.6 million in 1996 is based on the settlement of Prime's claim related to the hurricane damage caused by Hurricane Marilyn in September 1995 at the Frenchman's Reef. Prime is currently preparing a claim under its business interruption insurance with respect to Hurricane Bertha, which caused damage to the hotel in July 1996. Direct lodging expenses increased by $13.2 million, or 34.4%, from $38.4 million in 1995 to $51.6 million in 1996, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 26.3% in 1995 to 25.9% in 1996. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.0% in 1995 to 25.6% in 1996. Direct food and beverage expenses increased by $3.7 million, or 12.7%, from $28.4 million in 1995 to $32.1 million in 1996, due to the increased revenues at comparable hotels and the addition of four full-service hotels in 1996. As a percentage of food and beverage revenues, direct food and beverage expenses increased from 74.9% in 1995 to 77.4% in 1996, due to lower margins at the Frenchman's Reef attributable to the hurricane damage. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue decreased from 74.6% in 1995 to 73.6% in 1996, primarily due to the higher margins associated with the increased banquet business. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $12.0 million, or 24.2%, from $49.8 million in 1995 to $61.8 million in 1996, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses decreased from 27.0% in 1995 to 25.7% in 1996 due primarily to the impact of the increases in ADR. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased from 25.6% in 1995 to 24.4% in 1996 due primarily to the ADR increases. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $5.0 million, or 43.1%, from $11.8 million in 1995 to $16.8 million in 1996 due to the addition of new hotels, including several leased hotels. Occupancy 54 63 and other operating expenses as a percentage of hotel revenues increased from 6.4% in 1995 to 7.0% in 1996 due to rent expense associated with the new leased hotels. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $2.3 million, or 14.8%, from $15.5 million in 1995 to $17.8 million in 1996, due to increased advertising, personnel and training costs associated with opening the new AmeriSuites hotels. As a percentage of total revenues, general and administrative expenses decreased from 7.5% in 1995 to 6.6% in 1996 due to operating leverage. Depreciation and amortization expense increased by $8.4 million, or 55.2%, from $15.2 million in 1995 to $23.6 million in 1996, due to the impact of new hotel properties and refurbishment efforts at several hotels. Other expense of $2.2 million for 1995 consisted of a reserve for insurance deductibles related to hurricane damage caused by Hurricane Marilyn at the Frenchman's Reef hotel in St. Thomas, U.S. Virgin Islands. Investment income decreased by $251,000, or 5.2%, from $4.9 million in 1995 to $4.6 million in 1996, due to lower weighted average cash balances in 1996. Interest expense increased slightly by $214,000, from $22.4 million in 1995 to $22.6 million in 1996, due to increases in the amortization of deferred loan fees offset by capitalized interest related to new AmeriSuites construction. Capitalized interest increased by $4.9 million from $2.6 million in 1995 to $7.5 million in 1996. The decrease in interest expense was partially offset by interest associated with higher average borrowings in 1996. Other income consists of items which are not part of Prime's recurring operations. For 1996, other income consisted of gains on the sales of land and hotel properties of $2.5 million and a gain on the settlement of a note receivable of $1.8 million. Other income for 1995 consisted of a gain on the settlement of a note receivable of $822,000 and gains on property sales of $1.4 million. Pretax extraordinary gains of approximately $174,000 and $337,000 for 1995 and 1996 relate to the retirement of debt. 55 64 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 The following table presents the components of operating income, operating expense margins and other data for Prime and Prime's comparable Owned Hotels for the years ended December 31, 1995 and 1994. The results of the four hotels divested during 1994 and 1995 are not material to an understanding of the results of Prime's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) --------------------- ------------------- 1994 1995 1994 1995 -------- -------- ------- ------- (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..................... 9,384 15,227 Other Expense..................................... -- 2,200 Operating Income.................................. 33,411 44,358 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue..... 28.7% 26.3% 27.1% 26.3% Food and Beverage, as a percentage of food and beverage revenue............................. 76.8% 74.9% 78.2% 78.7% Selling and General, as a percentage of lodging and food and beverage revenue................ 25.5% 27.0% 25.5% 25.2% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue........... 9.2% 6.4% General and Administrative, as a percentage of total revenue................................... 11.2% 7.5% OTHER DATA: Occupancy......................................... 68.0% 69.2% 70.4% 72.3% ADR............................................... $ 60.36 $ 73.28 $ 59.92 $ 63.97 REVPAR............................................ $ 41.04 $ 50.71 $ 42.21 $ 46.22 Gross Operating Profit............................ $ 40,223 $ 67,605 $35,824 $39,926
- --------------- (1) For purposes of this discussion of results of operations, comparable Owned Hotels refers to the 37 Owned Hotels that were owned or leased by Prime during all of 1994 and 1995. Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $57.4 million, or 64.7%, from $88.8 million in 1994 to $146.2 million in 1995. The increase was due to $52.1 million of lodging revenues generated by the conversion of Prime's interest in the Frenchman's Reef from a mortgage note receivable to a hotel asset and the 19 new hotels added during 1994 56 65 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. Prime operates in three major segments of the industry: all-suites, full-service and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for 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 Prime's industry segments. Repositioning efforts at both full-service and limited-service hotels also contributed to the REVPAR increases. The improvements in REVPAR were generated by increases in ADR, which rose by 6.8% and gains in occupancy of 2.7%. Food and beverage revenues increased by $19.9 million, or 109.8%, from $18.1 million in 1994 to $38.0 million in 1995. The increase was primarily due to the additional food and beverage operations related to the Frenchman's Reef and six other full-service hotels acquired since January 1, 1994. Food and beverage revenues for comparable Owned Hotels decreased by $302,000 in 1995 compared to 1994. The decrease was primarily due to decreased banquet business and lower beverage revenues at Prime's sports lounges. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by Prime's national sales group, MSI. Management and other fees decreased by $1.9 million, or 19.0%, from $10.0 million in 1994 to $8.1 million in 1995. The decrease was primarily due to the loss of management fees on five Managed Hotels acquired by Prime during 1994 and 1995 and six additional hotels which were sold by a third party hotel owner in 1994. Partially offsetting these decreased management fees were increased base and incentive management fees associated with the remaining Managed Hotels and increased revenues generated by MSI. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $4.0 million, or 25.0%, from $15.9 million in 1994 to $11.9 million in 1995, primarily due to Prime's conversion of a $50.0 million note receivable secured by the Frenchman's Reef into an operating hotel asset in December 1994. Partially offsetting the decrease was interest income related to the purchase of $17.4 million of first mortgages secured by two hotels for $12.7 million in June 1995. Direct lodging expenses increased by $12.9 million, or 50.6%, from $25.5 million in 1994 to $38.4 million in 1995, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 28.7% in 1994 to 26.3% in 1995. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.1% in 1994 to 26.3% in 1995. Direct food and beverage expenses increased by $14.5 million, or 104.7%, from $13.9 million in 1994 to $28.4 million in 1995, primarily due to the addition of seven new full-service hotels. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 76.8% in 1994 to 74.9% in 1995. The decrease was primarily due to increased revenues in higher margin areas such as banquet departments at the new hotels. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue increased slightly from 78.2% in 1994 to 78.7% in 1995. 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 57 66 $22.6 million, or 82.6%, from $27.2 million in 1994 to $49.8 million in 1995, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses increased from 25.5% in 1994 to 27.0% in 1995 due to the addition of new full- service properties which generally require higher levels of unallocated expenses. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased slightly from 25.5% in 1994 to 25.2% in 1995. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $2.0 million, or 20.0%, from $9.8 million in 1994 to $11.8 million in 1995 as the additional costs associated with the new hotels were offset by real estate tax refunds of approximately $600,000 during the year. As a percentage of hotel revenues, occupancy and other operating expenses decreased from 9.2% in 1994 to 6.4% in 1995, primarily due to operating leverage. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $426,000, or 2.8%, from $15.1 million in 1994 to $15.5 million in 1995, due to ordinary inflationary increases which were partially offset by central office payroll reductions. As a percentage of total revenues, general and administrative expenses decreased from 11.2% in 1994 to 7.5% in 1995 due to operating leverage. Other expense of $2.2 million for the year ended December 31, 1995 consists of a reserve for insurance deductibles related to damage caused by Hurricane Marilyn at the Frenchman's Reef. Depreciation and amortization expense increased by $5.8 million, or 62.3%, from $9.4 million in 1994 to $15.2 million in 1995, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels. Interest expense increased by $8.3 million, or 59.2%, from $14.0 million in 1994 to $22.4 million in 1995, primarily due to new mortgage borrowings of $39.0 million incurred in February 1995 and $86.3 million of 7% Convertible Subordinated Notes due 2002 (the "Convertible Notes") issued in April 1995. Investment income increased by $2.9 million from $2.0 million in 1994 to $4.9 million in 1995 primarily due to higher average cash balances generated by the new borrowings. Other income consists of items which are not part of Prime's recurring operations. For the year ended December 31, 1995, other income consisted of a gain on the settlement of a note receivable of $822,000 and gains on the sale of land parcels of $1.4 million. Other income for the year ended December 31, 1994 consisted primarily of a gain on the settlement of the Rose and Cohen note receivable of $6.4 million, gains on property sales of $1.1 million and rebates of prior years' insurance premiums of $1.6 million. Pretax extraordinary gains of approximately $174,000 for the year ended December 31, 1995 relate to the retirement of secured notes with a face value of $22.2 million. Pretax extraordinary gains of approximately $292,000 for the year ended December 31, 1994 relate to the retirement of debt with a face value of $8.3 million. LIQUIDITY AND CAPITAL RESOURCES Prime's external growth focuses on the accelerated expansion of its proprietary brands through new construction. As of October 1, 1997, Prime had 55 AmeriSuites in operation and plans to have 69 AmeriSuites hotels open by the end of 1997 and 100 AmeriSuites open by the end of 1998. Prime also intends to expand the Homegate brand following its proposed Merger with Homegate. As of October 1, 1997, there were 10 Homegate hotels in operation with plans to expand to approximately 20 Homegate hotels by the end of 1997 and approximately 50 Homegate hotels by the end of 1998. There can be no assurance that the Merger will be consummated as proposed or that the Homegate operations can be effectively integrated or expanded. 58 67 Prime believes that it has access to sufficient resources to implement its planned expansion of the AmeriSuites and Homegate brands, including capital from the following sources: (i) net proceeds of $92.4, after expenses and debt repayments, related to the issuance of $200.0 million of 9 3/4% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") in March 1997; (ii) borrowing availability under Prime's $100 million Revolving Credit Facility; (iii) internally generated free cash flow and (iv) proceeds from anticipated sale/leaseback transactions with respect to certain of its properties. Prime may also from time to time seek additional debt or equity financing. At June 30, 1997, Prime had cash, cash equivalents and current marketable securities of $79.0 million. In addition, at June 30, 1997, Prime had $100.0 million available under the Revolving Credit Facility. Prime's major sources of cash for the six months ended June 30, 1997 were net proceeds, after expenses, of approximately $193.5 million from the issuance of the Senior Subordinated Notes in March 1997, gross borrowings under the Revolving Credit Facility of $67.5 million, cash flow from operations of $31.0 million, and proceeds from sales of hotels of $25.6 million. Prime's major uses of cash during the period were capital expenditures of $153.3 million relating primarily to acquisitions and development and debt repayments of $108.8 million, including repayments of $80.0 million under the Revolving Credit Facility. Cash flow from operations was positively impacted by the utilization of net operating loss carryforwards ("NOLs") and other tax basis differences of $1.8 million in 1997 and $4.1 million in 1996, respectively. At June 30, 1997, Prime had federal NOLs relating primarily to its predecessor, Prime Motor Inns, Inc., of approximately $90.0 million which are subject to annual utilization limitations and expire beginning in 2005 and continuing through 2007. Sources of Capital. On September 22, 1997, Prime entered into a strategic alliance with Equity Inns, Inc. ("Equity Inns"), a real estate investment trust, for purposes of financing its brand development through the sale/leaseback of AmeriSuites hotels. Under the agreement, Equity Inns has certain rights to acquire AmeriSuites hotels developed by Prime over the next three years. As part of the alliance, Prime has entered into an initial agreement with Equity Inns for the sale of 10 AmeriSuites hotels for aggregate consideration of $86.3 million, consisting of $77.7 million in cash and $8.6 million in Equity Inns limited partnership operating units. Prime has also agreed to lease the hotels from Equity Inns for a term of 10 years, with certain renewal options. In order to finance the development of its proprietary brands, Prime has retained an investment bank as its advisor for the purpose of evaluating and entering into a sale/leaseback of nine of its full-service hotels. For the twelve months ended June 30, 1997, these nine hotels generated revenues and EBITDA of $54.6 million and $19.6 million, respectively. Prime intends to maintain a beneficial interest in the hotels as manager/lessee pursuant to the new lease structure. Prime is seeking to consummate the transaction by the end of 1997. Prime expects to pursue a second sale/leaseback transaction in 1998 involving certain of its remaining full-service hotels. There can be no assurance that these sale/leaseback transactions will be completed. In January 1996, Prime issued the Senior Subordinated Notes in reliance upon Rule 144A under the Securities Act. Interest on the Senior Subordinated Notes is payable semi-annually on April 1 and October 1 at the rate of 9 3/4% per year. The Notes are general unsecured obligations and contain certain covenants including limitations on the incurrence of debt, liens, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The Notes are redeemable, in whole or in part, at the option of Prime on or after January 15, 2001 at premiums to principal which decline on each anniversary date thereafter. Prime utilized a portion of the proceeds to pay down approximately $101.1 million of indebtedness, with the remainder of the proceeds used to finance the development of AmeriSuites hotels. Until used, the net proceeds will be invested in short-term investment grade marketable securities or money market funds. The indebtedness repaid with the proceeds from the Senior Subordinated Notes included $75.6 million of borrowings outstanding under the Revolving Credit Facility, $10.8 million of 10% Senior Secured Notes and $13.9 million of debt secured by the Frenchmen's Reef. Prime has signed a commitment letter with a commercial bank to provide up to $40.0 million of new financing in connection with the refurbishment plans at the Frenchman's Reef. Prime established a Revolving Credit Facility in 1996 with a group of financial institutions providing for availability of funds up to the lesser of $100.0 million or a borrowing base determined under the agreement. 59 68 The Revolving Credit Facility is secured by certain of Prime's hotels with recourse to Prime. Additional hotels may be added or substituted subject to the approval of the lenders. The Revolving Credit Facility bears interest at LIBOR plus 2.25% and is available through June 2001. The Revolving Credit Facility contains covenants requiring Prime to maintain certain financial ratios and also contains covenants which limit the incurrence and payment of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of Prime. The aggregate amount of the Revolving Credit Facility will be reduced to $87.0 million on June 28, 1999 and $75.0 million on June 28, 2000. During the three months ended March 31, 1997, Prime borrowed $67.5 million under the Revolving Credit Facility. The proceeds were used primarily for the development of AmeriSuites hotels. In March 1997, Prime repaid the total outstanding borrowings of $80.0 million under the Revolving Credit Facility primarily with the proceeds from the issuance of the Senior Subordinated Notes. Prime currently has $100.0 million available under the Revolving Credit Facility. In October 1996, Prime entered into a six-month interest rate contract with a major financial institution to hedge its interest rate exposure on the anticipated financing of its development program in 1997. Under the agreement, Prime effectively fixed interest rates for approximately seven years at a Treasury yield of 6.4% on a $98.4 million notional principal amount. In April 1997, Prime terminated the agreement for a gain of $500,000 which will be amortized as a reduction of interest expense over a seven year period. Capital Investments. Prime's capital spending in 1997 is focused primarily on the development of its AmeriSuites hotel chain. For the six months ended June 30, 1997, Prime spent $122.0 million on new construction funded primarily by existing cash balances, internally generated cash flow, proceeds from borrowings under the Revolving Credit Facility and the issuance of the Senior Subordinated Notes. Prime intends to rapidly expand its AmeriSuites chain through new construction. Prime has opened 18 new AmeriSuites hotels since January 1, 1997 bringing the total to 55 hotels as of October 1, 1997. Prime plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. As of October 1, 1997, Prime had 44 AmeriSuites hotels under development, including 22 under construction. Prime expects to spend a total of approximately $300 million on development of new AmeriSuites hotels in each of 1997 and 1998. Following the consummation of the Merger, Prime also intends to aggressively develop the Homegate brand through new construction. Prime plans to have approximately 20 Homegate hotels open by the end of 1997 and approximately 50 Homegate hotels open by the end of 1998. There are currently 10 Homegate hotels in operation with 37 Homegate hotels under development, including 27 hotels under construction. In order to facilitate uninterrupted development of the Homegate hotels, Prime has agreed to provide up to $65.0 million of Interim Loans to Homegate pending completion of the merger. All Interim Loans will mature on the earliest of (a) April 1, 1998, (b) the date Homegate enters into any agreement with a third party (other than the Merger Agreement) involving the merger or sale of substantially all the assets of Homegate and (c) four months after the termination of the Merger Agreement. The Interim Loans bear interest at a rate per annum equal to the one month London Interbank Offered Rate plus 3.50% (increasing to 5.00% upon the earlier of November 30, 1997 and the date of any termination of the Merger Agreement). As of October 27, 1997, an aggregate of $32.6 million in Interim Loans was outstanding. Prime expects to spend approximately $200 million in 1998 on development of new Homegate hotels. In March 1997, Prime completed a $9.0 million renovation of the 14 Wellesley Inns acquired in 1996. Prime believes that the renovations position the Wellesley Inns chain for strong growth in 1997, with a high degree of consistency and product quality. In February 1997, Prime acquired a Holiday Inn in Monroe Township, NJ for $11.2 million in cash. Prime intends to spend an additional $3.5 million relating to the refurbishing of the hotel. Prime may from time to time acquire full-service hotels having operating synergies with other Prime hotels, although no such acquisitions are currently pending. In September 1995, the Frenchman's Reef in St. Thomas U.S. Virgin Islands suffered damage when Hurricane Marilyn struck the island. Prime and its insurance carrier settled Prime's property and business 60 69 interruption insurance claim with respect to Hurricane Marilyn for $25.0 million. In July 1996, Prime received the final installment under its settlement, bringing the net proceeds to $22.8 million, net of deductibles, for which Prime provided a reserve of $2.2 million in 1995. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. Prime is currently reviewing its claim for property damage and business interruption insurance with its insurance carrier with regard to Hurricane Bertha. Prime is currently underway with plans to refurbish the Frenchman's Reef. Redevelopment plans provide for significant hurricane-related renovations and certain enhancements. Prime estimates that the cost of refurbishment will be approximately $35.0 million. Due to the extent of the renovations, Prime closed the hotel on April 1, 1997 and plans to reopen the hotel in December 1997, although there can be no assurance that the Frenchman's Reef will reopen at such time or that the cost of refurbishment will not exceed Prime's estimate. Prime does not believe the closing of the Frenchman's Reef will have a material impact on its cash flow due to the seasonality of the hotel's operations and its business interruption insurance coverage. For the six months ended June 30, 1997, Prime spent approximately $19.6 million on capital improvements at its Owned Hotels, of which approximately $12.6 million related to refurbishments and repositionings of hotels. In order to facilitate future tax-free exchanges of hotel properties, Prime from time to time enters into arrangements with an unaffiliated third party under Section 1031 of the Internal Revenue Code of 1986, as amended. As of June 30, 1997, Prime had advanced approximately $48.8 million to such third party which advances are classified as property, equipment and leasehold improvements. Asset Realizations. As part of Prime's brand development strategy, Prime has sold the majority of its limited-service hotels operated under franchise agreements. Through June 30, 1997, Prime received $25.6 million in cash on sales of seven hotel properties resulting in gains of $1.9 million. 61 70 SELECTED CONSOLIDATED FINANCIAL DATA OF PRIME AND ITS PREDECESSOR Prime is the successor in interest to Prime's predecessor, Prime Motor Inns, Inc. ("PMI"), which emerged from chapter 11 reorganization on July 31, 1992 (the "Reorganization Date"). PMI had filed for protection under chapter 11 of the United States Bankruptcy Code in September 1990. Prime implemented "fresh start" reporting pursuant to the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" of the American Institute of Certified Public Accountants, as of the Reorganization Date. Accordingly, the consolidated financial statements of Prime are not comparable in all material respects to any such financial statement as of any date or for any period prior to the Reorganization Date. Subsequent to the Reorganization Date, Prime changed its fiscal year end from June 30 to December 31. The table below presents selected consolidated financial data derived from: (i) Prime's historical financial statements for the years ended December 31, 1993, 1994, 1995 and 1996, and the six months ended June 30, 1996 and 1997 (ii) Prime's historical financial statements as of and for the five-month period ended December 31, 1992, (iii) Prime's "fresh start" balance sheet as of the Reorganization Date and (iv) the historical consolidated financial statements of PMI for the one month ended July 31, 1992 and for the year ended June 30, 1992. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included and incorporated by reference in this Proxy Statement-Prospectus.
POST-REORGANIZATION PRE-REORGANIZATION ---------------------------------------------------------------------------------- --------------------- AS OF AND AS OF AND FOR THE FOR THE AS OF AND FOR THE FOR THE ONE MONTH FIVE MONTHS AS OF AND FOR THE YEAR ENDED DECEMBER SIX MONTHS ENDED YEAR ENDED ENDED AS OF ENDED 31, JUNE 30, JUNE 30, JULY 31, JULY 31, DEC. 31, -------------------------------------- ------------------ 1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 1996 1996 1997 ---------- --------- -------- ------------ -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Statement of operations data: Total revenues...... $ 134,190 $ 8,793 -- $ 41,334 $108,860 $134,303 $205,628 $268,868 $128,506 $159,487 Valuation writedowns and reserves...... (62,123) (13,000) -- -- -- -- -- -- -- -- Reorganization items............... (23,194) 1,796 -- -- -- -- -- -- -- -- Other income.......... -- -- -- -- 3,809 9,089 2,239 4,306 3,432 1,858 Income (loss) from continuing operations before extraordinary items(2)............ (71,965) (10,274) -- 1,393 8,175 18,258 17,465 30,914 24,925 36,025 Extraordinary items-gains on discharge of indebtedness (net of income taxes)....... -- 249,600 -- -- 3,989 172 104 202 176 75 Net income (loss)..... (71,965) 239,326 -- 1,393 12,164 18,430 17,569 31,116 15,131 21,690 Balance sheet data: Total assets.......... $ 554,118 -- $468,650 $403,314 $410,685 $434,932 $573,241 $786,098 $683,185 $972,400 Long-term debt, net of current portion..... 8,921 -- 204,438 192,913 168,618 178,545 276,920 298,875 363,132 457,912 Stockholders' equity (deficiency).... (229,292) -- 135,600 137,782 171,364 204,065 232,916 419,895 252,629 444,153
- --------------- (1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at which time it owned or managed 141 hotels. During its approximately two-year reorganization, PMI restructured its assets, operations and capital structure. On the Reorganization Date, Prime emerged from chapter 11 reorganization with 75 Owned Hotels or Managed Hotels, $135.6 million of stockholders' equity and $266.4 million of total debt. (2) Approximately $2.3 million and $28.0 million of contractual interest expense during the one month ended July 31, 1992 and for the fiscal year ended June 30, 1992, respectively, was not accrued and was not paid due to the chapter 11 proceeding. 62 71 BUSINESS OF PRIME PRIME Prime is a national hotel company, with a portfolio of 117 hotels containing 16,631 rooms located in 28 states and the U.S. Virgin Islands (the "Portfolio"). Prime controls two high-quality hotel brands -- AmeriSuites(R) and Wellesley Inns(R) -- as well as a portfolio of upscale full-service hotels. One of the country's largest hotel owner/operators, Prime has positioned itself to benefit significantly from favorable lodging industry fundamentals that have prevailed in recent years. From 1994 to 1996, Prime's EBITDA has grown at a compound annual rate of 44.0%, from $42.8 million in 1994 to $88.8 million in 1996, while recurring net income has grown at a compound annual rate of 48.7%, from $12.8 million to $28.3 million over the same period. The positive trends continued in the first half of 1997. For the six months ended June 30, 1997, EBITDA increased by 39.2% to $59.4 million and recurring net income increased by 76.2% to $20.5 million over the same period in 1996. Prime's strategy is to capitalize on two lodging industry trends perceived by management: (i) favorable industry fundamentals, which are producing strong earnings growth due to the operating leverage inherent in hotel ownership and (ii) growing consumer preferences for newer all-suite accommodations with strong brand identities. Reflecting this strategy, Prime owns and operates 105 of the 117 hotels in the Portfolio and holds financial or equity interests in 7 of the remaining 12 hotels managed by Prime for third parties. Furthermore, more than 85% of Prime's capital spending in 1995 and 1996 was dedicated to the growth of Prime's proprietary AmeriSuites and Wellesley Inns brands. Through its focus on hotel equity ownership, Prime is benefiting from the operating leverage inherent in the lodging industry. Through its development of proprietary brands, Prime is positioning itself to generate additional revenue not dependent on investment in real estate. Prime's Portfolio is modern and well-maintained, with an average hotel age of approximately nine years. Over the past three years, Prime has achieved rapid growth in the Portfolio, from 5,092 owned rooms at January 1, 1994 to 14,093 owned rooms at October 1, 1997. At the same time, Prime has focused on brand development, with the number of Owned Hotels operated under Prime's proprietary AmeriSuites and Wellesley Inns brands increasing from 19 of the 41 Owned Hotels at January 1, 1994 to 83 of the 105 Owned Hotels at October 1, 1997. Prime's hotels serve three major lodging industry segments: the all-suites segment, under Prime's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the limited-service segment, primarily under Prime's proprietary Wellesley Inns brand. All-Suites: Prime owns and operates 55 all-suite hotels under the AmeriSuites brand name, and currently has another 44 AmeriSuites under development, including 22 under construction. AmeriSuites are upper mid-price, all-suite hotels containing approximately 128 suites and located primarily near suburban commercial centers, corporate office parks and other travel destinations, with close proximity to dining, shopping and entertainment amenities. Since January 1, 1995, AmeriSuites has been one of the fastest growing domestic hotel chains, expanding from 13 hotels to 55 hotels at October 1, 1997, an increase of 323%. In 1996, AmeriSuites contributed approximately $26.0 million, or 28.6%, of Prime's Hotel EBITDA. For the six months ended June 30, 1997, AmeriSuites contributed approximately $23.0 million, or 37.2%, of Prime's Hotel EBITDA, a percentage which Prime believes will continue to increase significantly during the second half of 1997 and in 1998. Full-Service: Prime operates 29 upscale full-service hotels with food service and banquet facilities under franchise agreements with national hotel brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. In 1996, Prime's full-service hotels contributed approximately $44.5 million, or 48.9%, of Prime's Hotel EBITDA. For the six months ended June 30, 1997, Prime's full-service hotels contributed approximately $26.8 million, or 43.3%, of Prime's Hotel EBITDA. Limited-Service: Prime operates 33 limited-service hotels, 28 of which are Wellesley Inns. Prime owns all of the Wellesley Inns, which compete primarily in the mid-price segment with hotels such as Hampton Inns and La Quinta Inns. The remaining five limited-service hotels, four of which are managed for third 63 72 parties, are operated under franchise agreements with well-known national chains. In 1996, Prime's limited-service hotels contributed approximately $20.5 million, or 22.5%, of Prime's Hotel EBITDA. For the six months ended June 30, 1997, Prime's limited-service hotels contributed approximately $12.1 million, or 19.5%, of Prime's Hotel EBITDA. OPERATING PERFORMANCE AND INTERNAL GROWTH Prime seeks to achieve internal growth through the use of sophisticated operating, marketing and financial systems at its hotels. Prime has demonstrated its ability to operate its hotels effectively in each of its three segments, achieving REVPAR increases in 1996 at its comparable AmeriSuites, full-service and limited-service hotels of 11.7%, 15.8% and 5.2%, respectively, versus 1995 results. These trends continued in 1997, as Prime achieved REVPAR increases in the second quarter of 1997 at its comparable AmeriSuites, full-service and limited-service hotels of 10.7%, 15.3% and 7.5%, respectively, versus 1996 results. Management believes that: (i) the AmeriSuites chain is positioned to benefit from increased critical mass and name recognition resulting from the chain's rapid growth, expanded marketing initiatives and product improvements; (ii) the upscale full-service segment, located principally in the Northeast, is positioned to benefit from strong regional and segment fundamentals, including significant barriers to entry; and (iii) Prime's Wellesley Inns are positioned to benefit from a $9.0 million renovation and reimaging program completed in March 1997. Prime's emphasis on efficient operations has increased operating margins, thus translating its top-line REVPAR growth into increased earnings for each of its three industry segments. In 1996, gross operating profit increased by 17.0%, 25.9% and 10.4%, respectively, for comparable AmeriSuites, full-service and limited-service hotels, versus 1995 results. These trends continued in 1997, as gross operating profit in the second quarter of 1997 increased by 13.5%, 26.2% and 12.7%, respectively, for comparable AmeriSuites, full-service and limited-service hotels. Prime expects to further improve its operating performance through the implementation of a new proprietary yield management system, an enhanced central reservations system serving the AmeriSuites and Wellesley Inns chains, digital telecommunications conversions, improved telephone call accounting systems and significant increases in employee training programs. AMERISUITES EXPANSION Prime's external growth focuses on the accelerated expansion of its AmeriSuites brand through the construction of new AmeriSuites hotels. Prime believes that AmeriSuites, which offers an excellent guest experience and desirable suite accommodations at mid-scale prices, is well-positioned to become a preeminent brand in the rapidly growing all-suites segment. Prime plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. At present, 53 AmeriSuites are open, with an additional 44 hotels under development, including 22 under construction. At these levels, Prime believes that it is approaching the critical mass necessary to begin development of franchising programs, which would further leverage the value of its proprietary brands. Prime's AmeriSuites franchise initiatives will initially include forming strategic alliances with regional and national developers and REITs and developing franchise marketing, training and quality assurance programs. AmeriSuites are positioned in the upper mid-price segment of the lodging industry, competing predominantly with other mid-price and upscale brands such as Courtyard by Marriott and Holiday Inn. Prime markets AmeriSuites as "America's All-Suite Hotel," emphasizing superior price/value relative to traditional mid-price hotels by focusing on the chain's spacious suites, upscale facilities and attractive amenity package. Prime is committed to the expansion of the AmeriSuites brand due to its attractive investment returns, rapid stabilization, broad customer appeal and positioning in the fast growing all-suites segment. Prime believes that it will have access to sufficient resources to implement its planned expansion of the AmeriSuites brand, including capital from the following sources: (i) borrowings under Prime's $100 million Revolving Credit Facility; (ii) internally generated free cash flow from hotel operations; and (iii) proceeds from anticipated sale/leaseback transactions with respect to certain of its properties. Prime may also from time to time seek additional debt or equity financing. 64 73 INDUSTRY OVERVIEW The lodging industry as a whole has experienced five consecutive years in which the growth in room demand has exceeded the growth in supply. In 1996, industry-wide percentage growth in demand for hotel rooms exceeded industry-wide percentage growth in supply of hotel rooms by 34.8% (3.1% versus 2.3%). The excess of demand growth over supply growth in the past several years has led to industry-wide increases in occupancy percentages and ADR, with occupancy rising to 65.7% in 1996 from 65.1% in 1995, and ADR increasing 6.7% in 1996 over 1995 levels. For the six months ended June 30, 1997, room supply exceeded demand (3.0% vs. 2.3%). However, due to the relatively high levels of occupancy (64.1% for the six month period), the industry as a whole has been able to increase ADR by 6.6%, resulting in a 5.8% REVPAR increase. Historical industry performance, however, may not be indicative of future results. The following table was compiled from industry operating data as reported by Smith Travel Research and highlights industry data for the United States and the regions in which most of Prime's hotels are located: the Middle Atlantic region, which is comprised of New Jersey, New York and Pennsylvania; and the South Atlantic region, which is comprised of Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware. The table also includes operating data concerning the two price levels (of the five price levels classified by Smith Travel Research) in which Prime competes: upscale and mid-price. REVPAR data was calculated by Prime based on occupancy and ADR data supplied by Smith Travel Research.
% CHANGE IN: ------------------------------------------------------------------------------------------------ ROOM SUPPLY ROOM DEMAND REVPAR ------------------------------ ------------------------------ ------------------------------ SIX MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, 1997 V. 1997 V. 1997 V. SIX MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED 1995 V. 1996 V. JUNE 30, 1995 V. 1996 V. JUNE 30, 1995 V. 1996 V. JUNE 30, 1994 1995 1996 1994 1995 1996 1994 1995 1996 ------- ------- ---------- ------- ------- ---------- ------- ------- ---------- United States.................. 1.6% 2.3% 3.0% 3.0% 3.1% 2.3% 6.1% 7.8% 5.8% BY REGION: Middle Atlantic.............. 1.1 1.0 1.1 1.2 3.3 2.7 5.8 10.1 10.8 South Atlantic............... 1.3 2.0 3.1 3.6 3.3 2.1 6.9 7.9 5.8 BY SERVICE (PRICE LEVEL): Upscale...................... 1.9 3.4 4.4 2.6 3.4 4.4 4.7 5.4 5.2 Mid-Price.................... 2.4 3.3 4.0 3.8 3.3 3.2 5.9 6.7 5.8
65 74 PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Owned Hotels and Managed Hotels as of October 1, 1997:
MANAGED WITH FINANCIAL OWNED(1) INTEREST(2) OTHER MANAGED TOTAL --------------- -------------- -------------- --------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ------ All-Suites: AmeriSuites........................ 55 6,928 0 0 0 0 55 6,928 Full-Service: Marriott........................... 1 517 0 0 1 525 2 1,042 Radisson........................... 3 627 0 0 0 0 3 627 Sheraton........................... 3 589 0 0 0 0 3 589 Crowne Plaza....................... 3 717 0 0 0 0 3 717 Holiday Inn........................ 2 390 2 552 0 0 4 942 Ramada............................. 8 1,256 3 671 1 125 12 2,052 Howard Johnson..................... 0 0 1 116 0 0 1 116 Independent........................ 1 149 0 0 0 0 1 149 --- ------ ----- ----- --- ------ - - Total Full-Service......... 21 4,245 1,339 650 29 6,234 6 2 Limited-Service: Wellesley Inn...................... 28 2,812 0 0 0 0 28 2,812 Howard Johnson..................... 1 108 1 149 3 400 5 657 --- ------ ----- ----- --- ------ - - Total Limited Service........... 29 2,920 149 400 33 3,469 1 3 --- ------ ----- ----- --- ------ - - Total...................... 105 14,093 1,488 1,050 117 16,631 7 5 === ====== ===== ===== === ====== = =
- --------------- (1) Of the 105 Owned Hotels, 12 are operated under lease agreements. The leases covering Prime's leased hotels provide for fixed lease rents and, in most instances, additional percentage rents based on a percentage of room revenues. The leases also generally require Prime to pay the cost of repairs, insurance and real estate taxes. In addition, some of Prime's Owned Hotels are located on land subject to long-term leases, generally for terms in excess of the depreciable lives of the improvements. (2) Seven Managed Hotels in which Prime holds a mortgage or profit participation on the property. 66 75 The following table sets forth the location of Prime's hotels as of October 1, 1997:
MANAGED WITH FINANCIAL OWNED INTEREST OTHER MANAGED TOTAL --------------- -------------- -------------- --------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ------ Alabama.............................. 2 256 -- -- -- -- 2 256 Arizona.............................. 1 118 -- -- -- -- 1 118 Arkansas............................. 1 130 -- -- -- -- 1 130 California........................... -- -- -- -- 1 96 1 96 Connecticut.......................... 4 589 -- -- -- -- 4 589 Florida.............................. 21 2,228 -- -- 1 115 22 2,343 Georgia.............................. 7 927 -- -- 1 189 8 1,116 Illinois............................. 4 497 -- -- -- -- 4 497 Indiana.............................. 1 126 -- -- -- -- 1 126 Kansas............................... 2 254 -- -- -- -- 2 254 Kentucky............................. 1 123 -- -- -- -- 1 123 Louisiana............................ 1 128 -- -- -- -- 1 128 Maryland............................. 1 128 -- -- 1 525 2 653 Michigan............................. 1 128 -- -- -- -- 1 128 Minnesota............................ 2 256 -- -- -- -- 2 256 Nevada............................... 2 350 -- -- -- -- 2 350 New Jersey........................... 15 2,505 7 1,488 1 125 23 4,118 New Mexico........................... 1 128 -- -- -- -- 1 128 New York............................. 8 938 -- -- -- -- 8 938 North Carolina....................... 2 254 -- -- -- -- 2 254 Ohio................................. 4 508 -- -- -- -- 4 508 Oklahoma............................. 2 256 -- -- -- -- 2 256 Oregon............................... 1 161 -- -- -- -- 1 161 Pennsylvania......................... 2 376 -- -- -- -- 2 376 South Carolina....................... 2 239 -- -- -- -- 2 239 Tennessee............................ 5 635 -- -- -- -- 5 635 Texas................................ 6 768 -- -- -- -- 6 768 U.S. Virgin Islands.................. 1 517 -- -- -- -- 1 517 Virginia............................. 5 570 -- -- -- -- 5 570 --- ------ ----- ----- --- ------ -- -- Total...................... 105 14,093 1,488 1,050 117 16,631 7 5 === ====== ===== ===== === ====== == ==
67 76 The following table sets forth for the five years ended December 31, 1996 and the six months ended June 30, 1996 and 1997 operating data for the hotels in Prime's portfolio as of June 30, 1997. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, have been excluded from the table. For purposes of showing operating trends, the results of 24 Owned Hotels that were managed by Prime prior to their acquisition by Prime are presented as if they had been Owned Hotels from the dates Prime began managing the hotels.
MANAGED WITH FINANCIAL OWNED INTEREST OTHER MANAGED TOTAL ----------------- ---------------- ---------------- ----------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ------ 1992..... 49 6,433 8 1,627 2 650 59 8,710 1993..... 52 6,782 8 1,627 3 765 63 9,174 1994..... 59 7,848 8 1,627 5 1,050 72 10,525 1995..... 67 8,822 8 1,627 5 1,050 80 11,499 1996..... 81 10,551 8 1,627 5 1,050 94 13,228 1996*.... 73 9,527 8 1,627 5 1,050 86 12,204 1997*.... 95 12,429 8 1,627 5 1,050 108 15,106
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY --------- ------ ------ --------- ------ ------ --------- ------ ------ --------- 1992...... 69.6% $55.68 $38.73 71.7% $58.20 $41.73 64.9% $87.81 $56.96 69.6% 1993...... 72.1 57.63 41.56 74.1 61.50 45.57 64.9 86.91 56.41 71.9 1994...... 70.8 61.55 43.59 74.6 67.46 50.32 68.2 73.66 50.27 71.2 1995...... 69.3 65.71 45.51 74.2 70.64 52.39 70.5 77.58 54.71 70.1 1996...... 69.6 71.85 49.97 76.9 75.44 57.56 76.9 83.06 63.83 71.8 1996*..... 69.4 71.03 49.32 78.1 72.90 54.81 69.4 79.25 61.89 71.0 1997*..... 69.2 77.00 53.25 74.1 80.33 59.51 69.2 89.34 66.18 70.1 ADR REVPAR ------ ------ 1992...... $58.42 $40.66 1993...... 60.32 43.39 1994...... 63.83 45.43 1995...... 67.64 47.43 1996...... 73.40 52.17 1996*..... 72.10 51.18 1997*..... 78.35 54.90
- --------------- * Through June 30. All-Suite Hotels Prime currently owns 55 AmeriSuites hotels and has 44 AmeriSuites hotels under development, including 22 under construction. Prime plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. AmeriSuites are all-suites, upper mid-price hotels which offer guests an attractively designed suite with a complimentary continental breakfast in a spacious lobby cafe, remote-control cable television, fully-equipped business centers, fitness centers and pool facilities. The hotels provide group meeting space, but do not include restaurant or lounge facilities. AmeriSuites attract customers principally because of the quality of the guest suites, which offer distinct living, sleeping and kitchen areas and the consistency of product quality. AmeriSuites hotels also offer business suites marketed under the name "TCB (Taking Care of Business) Suites." TCB Suites were developed specifically for the business traveler and feature a well-equipped in-suite office including an oversized desk with executive chair, dual phone lines, easy chair and ottoman, in addition to voice mail, data ports and other amenities. Each AmeriSuites contains approximately 128 suites, including 24 TCB Suites, and two to four meeting rooms. AmeriSuites are primarily located near suburban commercial centers, corporate office parks and other travel destinations, with close proximity to dining, shopping and entertainment amenities. The target customer is primarily the business traveler, with an average length of stay of two to three nights, and leisure or weekend travelers. AmeriSuites are marketed primarily through direct sales, national marketing programs and a central reservation system. On January 31, 1997, Prime converted its central reservation system for its AmeriSuites and Wellesley Inns brands to a new system developed and operated by Anasazi Travel Resources, Inc. The new reservation system will broaden access to travel agents through additional global distribution systems and immediately increased the number of agent terminals by 23%. Through a real-time interface connecting the hotels with the central reservation system and global distribution systems, Prime will be able to swiftly implement marketing and yield management strategies. Additionally, the system will provide Prime with detailed guest history data 68 77 for new marketing initiatives such as frequent traveler programs. The system also has the capability to provide automatic linkage with other reservation systems which may facilitate new marketing alliances with strategic partners. Through June 30, 1997, the REVPAR contribution from the central reservations system for the AmeriSuites hotels has increased by 46.1% over prior year levels. Prime believes it has outlined a comprehensive strategy for the rapid development of the AmeriSuites brand while maintaining control of the development process. Detailed Site Selection. Prime undertakes an extensive review process in selecting sites for new AmeriSuites. Key factors in the selection of sites include close proximity to demand generators, superior visibility, ease of access and nearby guest amenities. Sites are initially identified with the assistance of a nationwide network of brokers. Once identified, Prime qualifies the sites before entering into a letter of intent. After a letter of intent is signed, Prime assesses the feasibility of the sites, which includes extensive reconnaissance by Prime's operations and sales and marketing staffs as well as independent consultants. Upon satisfactory completion of economic feasibility, Prime will enter into a contract for the site and commence legal, engineering and environmental due diligence. The entire process, from site selection to completion of construction and opening, takes approximately 18 months. Suburban Market Focus. Prime believes that suburban markets offer a number of features which permit the rapid expansion of AmeriSuites. As opposed to major metropolitan markets, suburban markets offer ample land to construct new hotels. More importantly, Prime believes that suburban locations appeal to multiple demand generators. In addition to the business traveler, who is the target customer for AmeriSuites, the weekend/leisure traveler is attracted by the close proximity to nearby dining, shopping and entertainment amenities. Cluster Strategy. Prime intends to expand into new regions by first developing hotels in cities which it has targeted as "key" cities. Prime will then add additional hotels in that region in cities which are logical destinations from the "key" cities. This strategy permits Prime to quickly build brand recognition of AmeriSuites in a particular region. Key cities where AmeriSuites are open or under development include Atlanta (8), Dallas/Ft. Worth (7), Chicago (6), Miami/Ft. Lauderdale (4) and Denver (3). Prime is approaching the critical mass necessary to begin development of franchising programs. Prime's AmeriSuites franchising initiatives will initially include forming strategic alliances with regional and national developers and REITs and developing franchise marketing, training and quality assurance programs. 69 78 The following table sets forth for the five years ended December 31, 1996 and the six months ended June 30, 1996 and 1997 certain data with respect to AmeriSuites hotels, all of which are owned by Prime. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations. For purposes of showing operating trends, comparable data has also been presented for the AmeriSuites hotels which have been in operation for all of 1995 and 1996 and the six months ended June 30, 1996 and 1997.
COMPARABLE TOTAL ------------------------------- ------------------------------- HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ 1992........................... 6 749 6 749 1993........................... 8 993 8 993 1994........................... 12 1,494 12 1,494 1995........................... 19 1,494 19 2,319 1996........................... 19 1,494 35 4,348 1996*.......................... 19 2,319 25 3,024 1997*.......................... 19 2,319 46 5,776
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1992........................... 60.0% $54.99 $32.97 60.0% $54.99 $32.97 1993........................... 64.1 56.21 36.01 64.1 56.21 36.01 1994........................... 65.9 59.90 39.50 65.9 59.90 39.50 1995........................... 68.5 65.70 45.03 67.2 65.45 43.98 1996........................... 70.9 70.90 50.28 65.6 72.12 47.28 1996*.......................... 71.1 70.06 49.80 67.1 71.05 47.65 1997*.......................... 72.0 73.85 53.19 65.9 75.11 49.51
- --------------- * Through June 30. As of June 30, 1997, many of the Company's hotels were located in the Middle Atlantic and South Atlantic regions. The following table sets forth for the five years ended December 31, 1996 and the six months ended June 30, 1996 and 1997 certain data by significant geographic region for the AmeriSuites hotels owned by the Company as of June 30, 1997. Middle Atlantic There were no owned AmeriSuites hotels located in the Middle Atlantic region as of June 30, 1997. South Atlantic
HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- ------ ------ 1992....................................... 1 114 71.0% $48.80 $34.64 1993....................................... 1 114 78.3 52.70 41.29 1994....................................... 2 240 73.3 59.14 43.34 1995....................................... 8 952 67.4 65.96 44.42 1996....................................... 13 1,529 69.4 73.29 50.83 1996*...................................... 10 1,145 71.5 73.41 52.48 1997*...................................... 19 2,361 69.5 76.98 53.50
- --------------- * Through June 30. Prime believes that the all-suites segment will continue to be a high growth segment of the industry. During the 1992-1996 period, demand for all-suites rooms grew at more than triple the rate of demand growth experienced by the lodging industry as a whole, and exceeded all-suites supply growth by 17.7%. The operating performance of the AmeriSuites hotels is benefiting from this favorable trend. For the 12 owned AmeriSuites hotels which were open for all of 1996 and 1995, REVPAR increased by 11.7% during 1996. This trend 70 79 continued in 1997, with comparable AmeriSuites generating a 10.7% increase in REVPAR for the three months ended June 30, 1997. Prime plans to develop the AmeriSuites brand primarily through new construction to assure product consistency and quality. The average age of the AmeriSuites hotels as of October 1, 1997 was approximately three years. Prime believes that AmeriSuites provide attractive investment returns due to their reasonable cost and rapid stabilization rate. In 1996, AmeriSuites which were in operation for at least one year generated an average EBITDA of $1.26 million, representing an average unleveraged 18.1% return on total invested capital. Prime believes that returns from AmeriSuites development have generally equaled or exceeded those prevalent in the hotel acquisition markets. Since January 1, 1997 Prime has opened 20 new AmeriSuites hotels, bringing the number of AmeriSuites owned and operated by Prime to 55. Full-Service Hotels Prime operates 29 upscale full-service hotels with food service and banquet facilities under franchise agreements with Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson. The full-service hotels are concentrated in the Northeast. The hotels are generally positioned along major highways within close proximity to corporate headquarters, office parks, airports, convention or trade centers and other major facilities. The customer base for full-service hotels consists primarily of business travelers. Consequently, Prime's sales force markets to companies which have a significant number of employees traveling in Prime's operating regions who consistently produce a high volume demand for hotel room nights. In addition, Prime's sales force actively markets meeting and banquet services to groups and individuals for seminars, business meetings, holiday parties and weddings. The hotels are also marketed through national franchisor programs and central reservation systems. Prime's full-service hotels generally have between 150 and 300 rooms and pool, restaurant, lounge, banquet and meeting facilities. Other amenities include fitness rooms, room service, remote-control cable television and facsimile services. In order to enhance guest satisfaction, Prime also has theme concept lounges in a number of its hotels. In recent years, Prime has received recognition from various franchisors and associations for its hotel quality and service. Prime owns and operates one resort hotel, the Frenchman's Reef in St. Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 517-room resort hotel which includes a 421-room eight-story building and 96 rooms in the adjacent Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive convention facilities, complete sports and beach facilities and a self-contained total energy system. Certain of these facilities suffered hurricane damage as described in the following paragraph. The Frenchman's Reef is marketed directly through its own sales force in New York City and at the hotel, and through the Marriott reservation system. The Frenchman's Reef market includes tour groups, corporate meetings, conventions and individual vacationers. In September 1995, the Frenchman's Reef suffered hurricane damage when Hurricane Marilyn struck the U.S. Virgin Islands. In 1996, Prime and its insurance carrier settled Prime's property and business interruption insurance claim for $25.0 million. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the island. Prime is currently reviewing its claim for property damage with its insurance carrier. Prime is currently underway with plans to refurbish and upgrade the Frenchman's Reef. Redevelopment plans provide for significant hurricane-related renovations and certain enhancements. Prime estimates that the cost of refurbishment will be approximately $35.0 million. Prime has continued to operate the hotel. However, due to the extent of the renovations and the additional damage caused by Hurricane Bertha, Prime closed the hotel on April 1, 1997 and plans to reopen the hotel in December 1997, although there can be no assurance that the Frenchman's Reef will reopen at such time or that the cost of refurbishment will not exceed Prime's estimate. Prime does not believe that the closing of the Frenchman's Reef will have a material impact on its cash flow due to the seasonality of the hotel's operations and its business interruption insurance. 71 80 The following table sets forth for the five years ended December 31, 1996 and the six months ended June 30, 1996 and 1997, operating data for the full-service hotels in Prime's portfolio as of June 30, 1997. For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, have been excluded from the table. Operating data for the hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of eight Owned Hotels that were managed by Prime prior to their acquisition by Prime during the five-year period are presented as if they had been Owned Hotels from the dates Prime began managing the hotels.
OWNED TOTAL ------------------------------- ------------------------------- HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ 1992........................... 17 3,074 27 5,202 1993........................... 17 3,074 28 5,317 1994........................... 18 3,429 29 5,672 1995........................... 19 3,578 30 5,821 1996........................... 19 3,578 30 5,821 1996*.......................... 20 3,578 30 5,821 1997*.......................... 21 3,728 31 5,971
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1992........................... 65.6% $67.02 $43.97 67.6% $67.34 $45.49 1993........................... 68.0 69.64 47.37 69.7 69.65 48.55 1994........................... 67.0 76.05 50.93 69.6 75.21 52.52 1995........................... 65.6 78.93 51.79 68.7 78.46 53.89 1996........................... 69.9 86.88 60.71 72.7 85.13 61.85 1996*.......................... 67.1 83.99 56.32 70.5 82.43 58.14 1997*.......................... 70.7 92.29 65.29 72.8 90.48 65.88
- --------------- * Through June 30. As of June 30, 1997, many of the Company's hotels were located in the Middle Atlantic and South Atlantic regions. The following table sets forth for the five years ended December 31, 1996 and the six months ended June 30, 1996 and 1997 certain data by significant geographic region for the full-service hotels owned by the Company as of June 30, 1997. Middle Atlantic
HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- ------ ------ 1992......................................... 12 2,226 64.5% $68.60 $44.27 1993......................................... 12 2,226 67.2 70.47 47.37 1994......................................... 13 2,581 66.6 76.29 50.80 1995......................................... 13 2,581 63.5 78.24 49.68 1996......................................... 13 2,581 68.5 85.91 58.82 1996*........................................ 13 2,581 64.4 81.63 52.57 1997*........................................ 14 2,731 70.3 91.39 64.26
- --------------- * Through June 30. South Atlantic There were no owned full-service hotels located in the South Atlantic region as of June 30, 1997. Prime has taken advantage of opportunities for acquisitions of full-service hotels at attractive multiples of cash flow or at significant discounts to replacement values. In 1996, Prime acquired the 151 room Ramada 72 81 Plaza Suites in Secaucus, NJ and repositioned the hotel as a Radisson Suite hotel. In February 1997, Prime acquired the 150-room Holiday Inn in Monroe Township, NJ. The majority of Prime's repositioning efforts have been performed at the full-service hotels. Since 1994, Prime successfully completed the repositioning of 13 of its full-service hotels which included changing the franchise affiliations of 6 such hotels. Prime recently completed the repositioning of the Hasbrouck Heights, NJ Sheraton Hotel to a Crowne Plaza and the Secaucus Ramada Plaza Suites to a Radisson Suites hotel. Limited-Service Hotels Prime's limited-service hotels consist of 28 Wellesley Inns and 5 other hotels operated under franchise agreements, primarily with Howard Johnson. On March 6, 1996, Prime acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The acquisition enabled Prime to establish full control over its proprietary Wellesley Inns brand with all 28 Wellesley Inns owned and operated by Prime. The acquisition provides Prime with significant new opportunities to maximize the value of its brand. Of Prime's 28 Wellesley Inns, 18 are located in Florida and the remainder in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has 105 rooms and is distinguished by its classic stucco exterior, spacious lobby and amenities such as pool facilities, complimentary continental breakfast, remote control cable television and facsimile services. In connection with the acquisition of the 16 Wellesley Inns, Prime has refurbished five of these hotels and completed renovations on nine other hotels in March 1997 to ensure consistent product quality throughout the chain. Marketing efforts for the Wellesley Inns chain will continue to rely heavily on direct marketing and billboard advertising. In addition, the Wellesley Inns, along with Prime's AmeriSuites, are marketed under the new reservation system developed by Anasazi Travel Resources, Inc. Through June 30, 1997, the REVPAR contribution from the central reservations system for Wellesley Inns has increased by 24.5% over prior year levels. In Florida, where the population has grown rapidly and development opportunities continue to exist, Prime has built a geographically concentrated group of Wellesley Inns, thereby developing regional brand name recognition in Florida. The majority of the Florida Wellesley Inns were constructed within the past eight years. Prime's other limited-service hotels have an average of between 100 and 120 rooms and offer complimentary continental breakfast, remote control cable television, pool facilities and facsimile services, generally with restaurant facilities within a short distance of the hotel. They are designed to appeal primarily to business travelers. In accordance with its strategy, Prime has divested a number of these hotels. Of the five other limited-service hotels, four are managed for third parties. The following table sets forth for the five years ended December 31, 1996 and six months ended June 30, 1996 and 1997 operating data for the limited-service hotels as of December 31, 1996. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of 16 Owned Hotels that were managed by Prime prior to their acquisition by Prime are presented as if they had been Owned Hotels from the dates Prime began managing the hotels.
OWNED TOTAL ------------------------------- ------------------------------- HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ 1992........................... 26 2,610 27 2,759 1993........................... 27 2,715 28 2,864 1994........................... 29 2,925 32 3,359 1995........................... 29 2,925 32 3,359 1996........................... 29 2,925 32 3,359 1996*.......................... 29 2,925 32 3,359 1997*.......................... 29 2,925 32 3,359
73 82
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1992........................... 76.7% $44.36 $34.01 75.8% $44.06 $33.41 1993........................... 79.6 45.94 36.57 78.6 45.83 36.03 1994........................... 77.1 48.29 37.24 75.7 47.89 36.27 1995........................... 74.8 52.23 39.09 74.1 51.77 38.37 1996........................... 73.2 54.09 39.61 73.3 54.32 39.80 1996*.......................... 74.5 56.78 42.31 74.5 56.01 41.96 1997*.......................... 72.8 61.29 44.64 72.8 61.11 43.73
- --------------- * Through June 30. As of June 30, 1997, many of the Company's hotels were located in the Middle Atlantic and South Atlantic regions. The following table sets forth for the five years ended December 31, 1996 and the six months ended June 30, 1996 and 1997 certain data by significant geographic region for the limited-service hotels owned by the Company as of June 30, 1997. Middle Atlantic
HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- ------ ------ 1992....................................... 11 1,088 65.2% $44.66 $29.14 1993....................................... 11 1,088 71.0 43.12 30.61 1994....................................... 11 1,088 70.3 45.55 32.00 1995....................................... 11 1,088 69.4 48.37 33.57 1996....................................... 11 1,088 67.3 51.32 34.55 1996*...................................... 11 1,088 66.0 49.45 32.64 1997*...................................... 11 1,088 61.0 55.17 33.66
- --------------- * Through June 30. South Atlantic
HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- ------ ------ 1992....................................... 14 1,419 87.4% $44.31 $38.71 1993....................................... 15 1,524 87.7 47.97 42.09 1994....................................... 17 1,734 83.0 50.03 41.53 1995....................................... 17 1,734 79.3 54.61 43.32 1996....................................... 17 1,734 77.6 55.91 43.39 1996*...................................... 17 1,734 81.2 60.94 49.45 1997*...................................... 17 1,734 81.2 64.63 52.47
- --------------- * Through June 30. OPERATIONS As a national hotel operating company, Prime enjoys a number of operating advantages over other lodging companies. With 117 hotels covering a number of price points and broad geographic regions, Prime possesses the critical mass to support sophisticated operating, marketing and financial systems. Prime believes that its broad array of central services permits on-site hotel general managers to effectively focus on providing guest services, results in economies of scale and leads to above-market hotel profit margins. As a result of these operating strategies, Prime's hotels generated average operating profit margins that exceeded comparable industry averages for 1995, the most current data available from industry sources, by approximately 3% for all-suites hotels, 16% for full-service hotels and 4% for limited-service hotels. Prime's operating strategy combines operating service and guidance from its central management team with decentralized decision-making authority delegated to each hotel's on-site management. The on-site hotel management teams consist of a general manager and, depending on the hotel's size and market positioning, managers of sales and marketing, food and beverage, front desk services, housekeeping and engineering. 74 83 Prime's operating objective is to exceed guest expectations by providing quality services and comfortable accommodations at a fair value. On-site hotel management is responsible for efficient expense controls and uses operating standards provided by Prime. Within parameters established in the operating and capital planning process, on-site management possesses broad decision-making authority on operating issues such as guest services, marketing strategies, hiring practices and incentive programs. Each hotel's management team is empowered to take all necessary steps to ensure guest satisfaction within established guidelines. Key on-site personnel participate in an incentive program based on hotel revenues and profits. The central management team is located in Fairfield, New Jersey, with an AmeriSuites office in Atlanta, Georgia. Central management provides four major categories of services: (i) operations management, (ii) sales and marketing management, (iii) financial reporting and control and (iv) hotel support services. Operations Management. Operations management consists of the development, implementation and monitoring of hotel operating standards and is provided by a network of regional operating officers who are each responsible for the operations of 10 to 30 hotels. They are supported by training, food and beverage and human resources departments, each staffed full-time by specialized professionals. The cornerstone of operations management is employee training, with a staff of professionals dedicated to training in sales, housekeeping, food service, front desk services and leadership. Prime believes these efforts increase employee effectiveness, reduce turnover and improve the level of guest services. Prime's cost-effective centralized management services benefit not only its existing operations but also provide additional opportunities for growth and development from acquisitions. In all of the recently acquired hotels, Prime's central management has assumed certain of the operational responsibilities which previously had been performed by the on-site hotel management. In addition, Prime believes it has improved operating efficiencies for each of the hotels that it has acquired. Sales and Marketing Management. Aggressive sales and marketing is a top operating priority. Sales and marketing management is directed by a corporate staff of 20 professionals, including regional marketing directors who are responsible for each hotel's sales and marketing strategies, and Prime's national sales group, Market Segments, Inc. ("MSI"). In cooperation with the regional marketing staff, on-site sales management develops and implements short and intermediate-term marketing plans. Prime focuses on yield management techniques, which optimize the relationship between hotel rates and occupancies and seek to maximize profitability. Prime is in the process of initiating a new internally developed proprietary yield management system which will be implemented in all of Prime's hotels. In addition, Prime assumes prominent roles in franchise marketing associations to obtain maximum benefit from franchise affiliations. Prime's in-house creative department develops hotel advertising materials and programs at cost-effective rates. Complementing regional and on-site marketing efforts, MSI's marketing team targets specific hotel room demand generators including tour operators, major national corporate accounts, athletic teams, religious groups and others with segment-specialized sales initiatives. MSI's primary objective is to book hotel rooms at Prime's hotels and its secondary objective is to market its services on a commission basis to hotels throughout the industry. Sales activities on behalf of non-affiliated hotels increase the number of hotels where bookings can be made to support marketing efforts and defray the costs of the marketing organization. Financial Reporting and Control. Prime's system of centralized financial reporting and control permits management to closely monitor decentralized hotel operations without the cost of financial personnel on site. Centralized accounting personnel produce detailed financial and operating reports for each hotel. Additionally, central management directs budgeting and analysis, processes payroll, handles accounts payable, manages each hotel's cash, oversees credit and collection activities and conducts on-site hotel audits. Hotel Support Services. Prime's hotel support services combine a number of technical functions in central, specialized management teams to attain economies of scale and minimize costs. Central management handles purchasing, directs construction and maintenance and provides design services. Technical staff teams support each hotel's information and communication systems needs. The technical support staff is currently implementing digital telecommunications conversions and call accounting system upgrades in all of Prime's hotels. Additionally, Prime directs safety/risk management activities and provides central legal services. 75 84 REFURBISHMENT PROGRAM Prime continuously refurbishes its Owned Hotels in order to maintain consistent quality standards. Prime generally spends approximately 4% to 6% of hotel revenue on capital improvements at its Owned Hotels and typically refurbishes each hotel approximately every five years. Prime believes that its Owned Hotels are in generally good physical condition, with over half of the Owned Hotels being five years old or less. Prime recommends the refurbishment and repair projects on its Managed Hotels although spending amounts vary based on the plans of such hotels' owners and the significance of Prime's interest as a mortgagee. In addition to making normal capital improvements, Prime reviews on an on-going basis each hotel's competitive position in the local market in order to decide the types of product that will best meet the market's demand characteristics. During the past three years, Prime has implemented a program of repositioning its Owned Hotels. Repositioning a hotel generally requires renovation and refurbishment of the exterior and interior of the building and may result in a change of brand name. In 1994, 1995 and 1996, Prime spent $8.9 million, $13.7 million and $16.8 million respectively, on the repositioning of 34 of its Owned Hotels, which included changing the franchise affiliation of 12 of such hotels. In 1996, Prime completed the repositioning of the Hasbrouck Heights Crowne Plaza and five of the recently acquired Wellesley Inns. In 1997, Prime completed the refurbishing of nine other recently acquired Wellesley Inns and began the renovation of the Monroe Township Holiday Inn. MORTGAGES AND NOTES RECEIVABLE As of June 30, 1997, mortgages and notes receivable totaled $22.5 million (including the current portion) and consisted primarily of an aggregate principal amount of $8.5 million of mortgages and notes secured by Managed Hotels and $10.9 million of mortgages secured by hotels that are leased by Prime from third parties. Prime has pursued a strategy of converting its mortgage and notes receivable into cash or operating hotel assets and has received $54.8 million in cash and added five operating hotel assets through note settlements over the past three years. MANAGEMENT AGREEMENTS As of June 30, 1997, Prime provided hotel management services to third party hotel owners of 13 Managed Hotels. Management fees are based on fixed percentages of the property's total revenues and incentive payments based on certain measures of hotel income. Additional fees are also generated from the rendering of specific services such as accounting services, construction services, design services and sales commissions. Prime's fixed management fee percentages range from 2.0% to 5.0% and average 3.5% of total revenues before giving consideration to performance related incentive payments. The base and incentive fees comprised 58.5% and 56.9%, or $3.9 million and $1.8 million, of the total management and other fees for 1996 and the first half of 1997. Terms of the management agreements vary but the majority are short-term and, therefore, there are risks associated with termination of these agreements. Although management agreements may be terminated in connection with a change in ownership of the underlying hotels, such risks may be limited due to Prime's other financial interests in these hotels. Prime holds financial interests in the form of mortgages or profit participations in 8 of the 13 Managed Hotels. FRANCHISE AGREEMENTS Prime enters into non-exclusive franchise licensing agreements with franchisors, which agreements typically have a ten year term and allow Prime to benefit from franchise brand recognition and loyalty. The nonexclusive nature of the franchise agreement allows Prime the flexibility to continue to develop properties with the brands that have shown success in the past or to develop in conjunction with other brand names. This flexibility also plays an important role in Prime's repositioning strategy, which emphasizes proper positioning of its properties within their respective markets to maximize their return on investment. Over the past three years, Prime has repositioned several hotels. These repositionings include the Portland, Oregon Crowne Plaza (formerly Howard Johnson), the Las Vegas, Nevada Crowne Plaza (formerly Howard Johnson), the Fairfield, New Jersey Radisson (formerly Sheraton), the Orlando, Florida Shoney's Inn (formerly Howard 76 85 Johnson), the Trevose, Pennsylvania Radisson (formerly Ramada), the Princeton, New Jersey Holiday Inn (formerly Ramada) and the Hasbrouck Heights Crowne Plaza (formerly Sheraton) and the Secaucus, New Jersey Radisson Suite hotel (formerly Ramada Plaza). Prime believes its relationships with numerous nationally recognized franchisors provides significant benefits for both its existing hotel portfolio and prospective hotel acquisitions. While Prime currently enjoys good relationships with its franchisors, there can be no assurance that a desirable replacement would be available if any of the franchise agreements were to be terminated. LITIGATION Prime currently and from time to time is involved in litigation arising in the ordinary course of its business. Prime does not believe that it is involved in any litigation that will, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations or cash flows. 77 86 MANAGEMENT OF PRIME DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of Prime:
NAME AGE POSITIONS - ------------------------------ --- -------------------------------------------------------- David A. Simon................ 45 President, Chief Executive Officer and Chairman of the Board of Directors John M. Elwood................ 43 Executive Vice President, Chief Financial Officer and Director Howard M. Lorber(1)........... 49 Director Herbert Lust, II(1)........... 70 Director Jack H. Nusbaum............... 57 Director Allen J. Ostroff(1)........... 61 Director A.F. Petrocelli(1)............ 54 Director Paul H. Hower................. 63 Executive Vice President Timothy E. Aho................ 54 Senior Vice President/Development Denis W. Driscoll............. 52 Senior Vice President/Human Resources John H. Leavitt............... 45 Senior Vice President/Sales and Marketing Joseph Bernadino.............. 50 Senior Vice President, Secretary and General Counsel Richard T. Szymanski.......... 40 Vice President and Corporate Controller Douglas W. Vicari............. 38 Vice President and Treasurer
- --------------- (1) Member of the Compensation and Audit Committee. The following is a biographical summary of the experience of the directors and executive officers of Prime: David A. Simon has been President, Chief Executive Officer and a Director since 1992 and Chairman of the Board of Directors of Prime since 1993. Mr. Simon was Chief Executive Officer and a director of PMI during 1992. John M. Elwood has been a Director and Executive Vice President of Prime since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the Director of Reorganization of PMI during 1992. Howard M. Lorber has been a Director and a member of the Compensation and Audit Committee since 1994. Mr. Lorber is Chairman of the Board of Directors of Nathan's Famous, Inc. and Hallman & Lorber Associates, Inc. and a director of New Valley Corporation, United Capital Corp. and Alpine Lace Brands, Inc. Mr. Lorber has been Chief Executive Officer of Hallman & Lorber Associates, Inc. for more than the past five years, President and Chief Operating Officer of New Valley Corporation since 1994 and Chief Executive Officer of Nathan's Famous, Inc. since 1993. Mr. Lorber has also been a general partner or shareholder of a corporate general partner of various limited partnerships organized to acquire and operate real estate properties. Herbert Lust, II has been a Director since 1992 and Chairman of the Compensation and Audit Committee of Prime since 1993. Mr. Lust was a member of the Committee of Unsecured Creditors of PMI through 1992. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust. Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman of the law firm of Willkie Farr & Gallagher, where he has been a partner for more than the past twenty-five years. He also is a director of Pioneer Companies, Inc., W.R. Berkley Corporation, Strategic Distribution, Inc., The Topps Company, Inc. and Fine Host Corporation. Allen J. Ostroff has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Ostroff has been a Managing Director of the Prudential Realty Group, a 78 87 subsidiary of The Prudential Insurance Company of America, since June 1994 and was a Senior Vice President of the Prudential Realty Group from 1992 to June 1994. A.F. Petrocelli has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Petrocelli has been the Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years. He is also a director of Nathan's Famous, Inc. Paul H. Hower has been an Executive Vice President of Prime since 1993. Mr. Hower was President of Integrity Hospitality Services from 1991 to 1993 and prior to such time was Vice President and Hotel Division Manager of B.F. Saul Co. Timothy E. Aho has been a Senior Vice President of Prime since 1994. Mr. Aho was a Senior Vice President of Development for Boykin Management Company from 1993 to 1994 and Vice President of Development for Interstate Hotels Corporation from 1992 to 1993. Denis W. Driscoll has been a Senior Vice President of Prime since 1993. Mr. Driscoll was President of Driscoll Associates, a human resources consulting organization, from 1992 to 1993. John H. Leavitt has been a Senior Vice President of Prime since 1992. Mr. Leavitt was a Senior Vice President of PMI during 1992 and a Senior Vice President of Medallion Hotel corporation prior to such time. Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of Prime since 1992. Mr. Bernadino was an Assistant Secretary and Assistant General Counsel of PMI during 1992. Richard T. Szymanski has been a Vice President and Corporate Controller of Prime since 1992. Mr. Szymanski was Corporate Controller of PMI during 1992. Douglas W. Vicari has been a Vice President and Treasurer of Prime since 1992 and was Vice President and Treasurer of PMI during 1992. 79 88 SELECTED CONSOLIDATED FINANCIAL DATA OF HOMEGATE The selected financial data set forth below has been derived from the historical consolidated financial statements of Homegate and from the historical financial statements of its predecessor Extended Stay Limited Partnership ("ESLP"). Homegate was incorporated on August 16, 1996, to succeed to the business of its predecessor, ESLP, and prior to its initial public offering in October 1996, had minimal assets and operations of its own. The financial statements of Homegate as of and for the period ended December 31, 1996 have been audited by Ernst & Young LLP, independent auditors, whose reports thereon appear elsewhere herein. The financial data for such period is not necessarily indicative of results for subsequent periods or the full year. The information for the six months ended June 30, 1996 is derived from the audited consolidated financial statements of ESLP and the information as of and for the six months ended June 30, 1997 is derived from the unaudited consolidated financial statements of Homegate. The unaudited financial information includes all adjustments that Homegate considers necessary for a fair presentation of the financial position and results of operations for such period. Results for the interim periods are not necessarily indicative of results for the full year. The following information should be read in conjunction with "Homegate Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Homegate, including the Notes thereto, included elsewhere in this Proxy Statement-Prospectus.
PERIOD FROM FEBRUARY 9, 1996 SIX MONTHS ENDED THROUGH JUNE 30, DECEMBER 31, ------------------------------- 1996 1996 1997 ----------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Total revenue............................................... $ 2,690 $ 27 $ 4,729 Property operating expenses................................. 1,676 30 2,710 Corporate operating expenses................................ 951 204 1,416 Depreciation and amortization............................... 344 10 623 Interest expense............................................ 585 22 881 -------- ------- -------- Net loss.................................................... $ (866) $ (239) $ (901) ======== ======= ======== Net loss per share.......................................... $ (.08) $ (.02) $ (.08) Weighted average number of shares of common stock outstanding............................................... 10,725 10,725 10,725 OTHER DATA: EBITDA(1)................................................... $ 63 $ (207) $ 603 ======== ======= ======== Cash flows provided by (used in): Operating activities...................................... $ (716) $ 313 $ 53 Investing activities...................................... (35,808) (8,264) (35,455) Financing activities...................................... 68,000 9,226 7,013
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 ----------------- ------------- ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 31,476 $ 1,274 $ 3,087 Property and equipment, net................................. 51,107 8,201 84,549 Total assets................................................ 88,533 9,725 94,336 Total debt.................................................. 21,387 2,869 28,550 Total stockholders equity................................... 64,688 6,156 63,788
- --------------- (1) EBITDA means operating income before mortgage and other interest, income taxes, depreciation and amortization. EBITDA does not represent cash generated from operating activities in accordance with GAAP, is not to be considered as an alternative to net income or any other GAAP measurement as a measure of operating performance and is not necessarily indicative of cash available to fund cash needs. Homegate has included EBITDA herein because Homegate believes that it is one measure used by certain investors to determine operating cash flow. EBITDA, as calculated above, may not be comparable to other similarly titled measures of other companies. 80 89 HOMEGATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Homegate was incorporated in August 1996, to succeed to the business of Extended Stay Limited Partnership ("ESLP"), which was organized in February 1996 to become a provider of high quality midprice extended-stay hotels. In October 1996, ESLP was merged into Homegate, in exchange for 6,386,087 shares of Homegate Common Stock. Hereinafter, Homegate, its predecessor, ESLP and its subsidiaries, are collectively referred to as "Homegate." On October 29, 1996, Homegate completed an initial public offering of 4,325,000 shares of Homegate Common Stock at $11.50 per share. Homegate, during the period from its inception through June 30, 1997, completed its concept and product design, market study and initial site selection activities, and acquired and/or constructed its first properties. As of June 30, 1997, Homegate had 23 employees. Homegate operated eight hotels during the second quarter of 1997. Three of the hotels were operated as extended-stay facilities and the remaining five hotels (the "Westar hotels") were operated as nightly stay hotels. Seven of the eight hotels have been reflagged as HOMEGATE Studio & Suites. As of June 30, 1997, Homegate had 22 hotels under construction and development, consisting of 2,791 units. The sites were located in the following metropolitan areas: Austin, Texas........................................... 2 Dallas, Texas........................................... 2 Denver, Colorado........................................ 1 Pompano Beach, Florida.................................. 1 Houston, Texas.......................................... 3 Indianapolis, Indiana................................... 2 Kansas City, Kansas..................................... 2 Las Vegas, Nevada....................................... 1 Orlando, Florida........................................ 1 Phoenix, Arizona........................................ 3 Portland, Oregon........................................ 2 Raleigh, North Carolina................................. 1 Webster, Texas.......................................... 1 -- 22 ==
The 22 sites currently under construction and development are due to be completed at various times during 1997 and 1998. As of June 30, 1997, Homegate had 11 sites subject to letters of intent, contracts or other purchase arrangements and was evaluating another 15 sites. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 Property Operations. Homegate's results of operations reflect the operation of eight hotels for the second quarter, with Phoenix's 44th and Oak property beginning operations on April 4, 1997. The Company's predecessor, ESLP, had limited operations in the second quarter of 1996 opening its first hotel (the Grand Prairie hotel) on June 17, 1996. The Company generated $2,106,000 in room revenue for the quarter ended June 30, 1997. This represented a $190,000 increase over the first quarter of 1997 or a 10% increase. The Phoenix 44th and Oak hotel opening contributed heavily towards this increase. Occupancy rose to 60% in the second quarter of 1997 from 59.3% in the first quarter of 1997; however, Company weekly REVPAR decreased to $155.12 from $165.62, or a 6% decrease, and the Average Weekly Rate dropped to $258.46 from $279.36, or a 7% decrease. These decreases are primarily due to the loss of 15% of available room nights due to the Westar renovations 81 90 (see below). After reducing the available room nights by the number of Westar rooms under renovation, REVPAR would have been $180.88 and $180.53 in the first quarter and second quarter of 1997, respectively. The three hotels being operated as extended-stay hotels increased their average occupancy to 77.2% in the second quarter of 1997 from 75.4% in the first quarter of 1997. However, weekly REVPAR decreased to $196.70 from $208.81 in the first quarter or a 6% decrease and the Average Weekly Rate dropped to $254.64 from $276.78 or an 8% decrease. The Phoenix 44th and Oak contributed heavily to these decreases during the start-up period, with weekly REVPAR of $119.49 and Average Weekly Rate of $212.49 for the second quarter of 1997. Four of the five Westar hotels have been reflagged as HOMEGATE Studios & Suites; however, the renovation and refurbishment program is still in process at all five hotels. During the second quarter of 1997, the Westar hotels lost 14,199 room nights out of a possible 56,602 room nights due to rooms being renovated. This represented a 25% loss of potential revenue from these hotels, with an additional loss of revenue due to guests not wanting to stay at hotels under construction. Occupancy dropped to 48.3% in the second quarter of 1997 from 51.8% in the first quarter. Average daily rates fell from $40.16 in the first quarter to $37.52 in the second quarter, or 7%, for the Westar hotels. The renovation and refurbishment programs is anticipated to be completed during the third quarter of 1997. At that time the properties will begin operations as extended-stay hotels. Property operating expenses rose from $1,288,000 in the first quarter to $1,422,000 in the second quarter, an increase of 10%, which reflects the addition of the Phoenix 44th and Oak property. Net operating margins for the Company stayed constant at 33% reflecting the daily operating nature of the five Westar hotels. Net operating margins for the three extended-stay hotels averaged 51.7% for the second quarter of 1997. Corporate Operations. Corporate operating expenses include all expenses related to the administration of the corporate offices and all expenses not directly related to individual developments and hotels. Corporate operating expenses were $628,000 for the quarter ended June 30, 1997. This was a decrease of $160,000 compared with the first quarter of 1997. The decrease was primarily due to expenses of $131,000 incurred in the first quarter of 1997 to relocate employees and the Homegate offices from Dallas and Houston to Austin. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 Property Operations. Homegate's results of operations for the year (the period from inception, February 9, 1996 through December 31, 1996) include ESLP from February 1996, through October 1996, along with the operations of the five Westar hotels from the date of acquisition (September 6, 1996). The Studio Suites hotel in Grand Prairie began operations on June 17, 1996. During 1996, the Westar hotels had not been, nor were they being, operated as extended-stay facilities. In 1996, renovation and refurbishment began on the Westar hotels, which will be operated as extended-stay facilities when such renovations are completed. Annual "REVPAR" for Homegate in 1996 was $23.05 computed on a daily basis. Occupancy in 1996 was 56.4% with an average daily rate ("ADR") of $40.90. The 1996 fourth quarter REVPAR dropped to $22.55 from $25.84 in the third quarter of 1996. Occupancy was down from 60.3% in the third quarter of 1996 to 55.3% in the fourth quarter of 1996. ADR was also down from the third quarter of 1996 from $42.87 to $40.79 in the fourth quarter of 1996. Homegate believes that the downward movement of Homegate's operating statistics in the fourth quarter of 1996 resulted from a decrease in demand over the holiday season, as well as disruptions for potential guests resulting from the refurbishment program for the Westar hotels. The fourth quarter of 1996 was also the first full quarter for the Westar hotels to be operated by Homegate. None of the six operating hotels had been designated as HOMEGATE Studio & Suites at December 31, 1996. The five Westar hotels were also not operated as extended stay hotels for the fourth quarter of 1996. The operating properties generated $1,582,689 of revenue in the fourth quarter of 1996. This represents an increase of $947,794 over the third quarter of 1996. Revenues were $2,240,161 for the year. Property operating expenses were $1,184,384 for the fourth quarter of 1996 and $1,675,936 for the year. Fourth quarter 82 91 operating expenses were 75% of revenues compared with 73% in the third quarter of 1996. Property operating expenses were also 75% of revenues for the period. The Westar hotels reflect their operation as daily night-stay accommodations as opposed to extended-stay accommodations. Property operating expenses include salaries and wages, administration, advertising, repairs and maintenance, energy, property taxes, insurance and property management fees. Interest income of approximately $450,000 for the fourth quarter of 1996 and year was the result of investing the proceeds of the initial public offering. Interest. Interest expense reflects the interest on the Studio Suites mortgage from May 31, 1996, through December 31, 1996, as well as interest from September 6, 1996 through December 31, 1996 on the mortgage secured by the Westar hotels. Corporate Operations. Corporate operating expenses include all expenses related to the administration of the corporate offices and all expenses not directly related to individual developments and hotels. Corporate operating expenses for the fourth quarter of 1996 and for the year were $436,608 and $951,261, respectively. Increased corporate operating expenses relate to the increase in corporate personnel needed to effectuate Homegate's growth plans. Homegate anticipates increased operating expenses as Homegate continues to expand. Homegate incurred a $.08 loss on a pro forma basis for the year (as if the shares of Homegate Common Stock issued in Homegate's initial public offering and other formation transactions had been outstanding since inception). LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, Homegate had cash and cash equivalents of $3,087,000. Cash proceeds are currently deposited in a money market account invested in Treasury obligations and in short-term investment grade interest-bearing securities. Homegate owes approximately $17.9 million on a 9.71% secured promissory note for the purchase of the Westar hotels. This debt is payable on a fixed 25-year amortization schedule in monthly installments through January 11, 2021. Homegate has a $30 million mortgage loan facility (the "Existing Mortgage Facility") with Bank One, Texas, N.A. ("BOA"), which provides Homegate with construction financing for eight extended-stay hotels. Homegate is permitted to borrow under the Existing Mortgage Facility through November 30, 1997. Each project may be funded under the Existing Mortgage Facility through a separate loan, with all loans being cross-collateralized and cross-defaulted. Initially, such loans will be advanced as construction loans, payable over twenty-four months (the "Construction Term") with interest at either the BOA prime rate plus 0.5% or LIBOR plus 2.25%. Homegate must make interest payments on each construction loan for the first twelve months of the loan, followed by principal and interest payments based upon a fifteen-year amortization schedule for the remaining twelve months of the loan. Homegate may elect to extend each loan for three additional years (the "Mini-perm Term") if certain conditions are met and upon payment of a specified extension fee. If Homegate elects to extend the loan as a mini-permanent financing, Homegate will be obligated to make principal and interest payments on a fifteen-year amortization schedule during each year of the three-year extension period, and the interest rate may, in certain circumstances, be reduced. During the Construction Term, the amount of any loan may not exceed 55% of the total project costs of the related project. During the Mini-perm Term, the loan amount to costs-of-project ratio may be increased to 65% if certain conditions are met. BOA will have full recourse against Homegate for the loans, including environmental indemnities. As of June 30, 1997, Homegate had incurred indebtedness under the Existing Mortgage Facility of approximately $10.3 million, of which $4.9 million was attributed to the Town Lake hotel in Austin, $2.9 million was attributed to the Studio Suites hotel in Grand Prairie and $2.5 million was attributed to the 44th and Oak hotel in Phoenix. The Austin Town Lake hotel and Grand Prairie loans bear interest at LIBOR plus 2.25% and the Phoenix hotel loan bears interest at LIBOR plus 2.5%. The Austin debt is due on February 4, 83 92 2000; Grand Prairie debt is due on May 31, 1999. The Phoenix debt is due on August 15, 1998; however, the debt may be extended for an additional three years as described above. On July 25, 1997, Homegate entered into a definitive Merger Agreement with Prime pursuant to which Homegate will merge with a wholly-owned subsidiary of Prime. Under the Merger Agreement, Prime will issue 0.6703 shares of its common stock for each of the 10,725,000 outstanding shares of Homegate Common Stock. In connection with the Merger Agreement, Prime agreed to provide, pending consummation of the Merger, up to $65.0 million of interim secured financing (the "Interim Loans") to Homegate to enable Homegate to acquire and develop certain hotel properties. The Interim Loans will not exceed a borrowing base, which will restrict availability to no greater than 75% of the cost basis of Homegate in the properties. No Interim Loans will be made after the earlier of November 30, 1997 and the date of any termination of the Merger Agreement (other than a termination solely as a result of a breach by Prime). All Interim Loans will mature on the earliest of (a) April 1, 1998, (b) the date Homegate enters into any agreement with a third party (other than the Merger Agreement) involving the merger or sale of substantially all the assets of Homegate and (c) four months after the termination of the Merger Agreement. The Interim Loans bear interest at a rate per annum equal to the one month London Interbank Offered Rate plus 3.50% (increasing to 5.00% upon the earlier of November 30, 1997 and the date of any termination of the Merger Agreement). Homegate is obligated to pay to Prime a facility fee of $650,000 upon the closing of the initial Interim Loan. Monthly interest payments commence December 15, 1997 at a rate of the one month LIBOR plus 3.5%; provided that the interest rate will increase to the one month LIBOR plus 5% on the date that is the earlier of (a) November 30, 1997 and (b) the date of the termination of the Merger Agreement (other than a termination as a result of a breach by Prime). The Interim Loans are secured by 18 properties currently under development and by any future development properties. The amount of any Interim Loan may not exceed 75% of the total project costs of the related project. The loan documentation for the Interim Loans contains various affirmative and negative covenants concerning the operation of Homegate as well as events of default (including failure to pay amounts due under the loan documents or to comply with such covenants or a breach of the Merger Agreement by Homegate). The loan documents require Homegate to comply with the covenants contained in the Merger Agreement. See "The Merger Agreement -- Certain Covenants." As of October 27, 1997, an aggregate of $32.6 million in Interim Loans was outstanding. Although Homegate has access to financing under the Existing Mortgage Facility and the Interim Loan Facility, Homegate may need to procure substantial additional financing over time to complete its Initial Hotel Program, which calls for 65 hotels to be opened or under construction by December 31, 1998. The exact amount of financing will depend upon a number of factors including the number of properties Homegate constructs or acquires and the cash flow generated by its properties. In particular, Homegate anticipates spending an aggregate of approximately $6.6 million to renovate the Westar facilities, of which $3.7 million had been spent through June 30, 1997, to conform to the HOMEGATE Studios & Suites prototype, and expects that it will spend between $4 million and $9 million on each development or acquired hotel. If the Merger is not consummated, Homegate will face an immediate working capital shortage that will require it to seek additional financing and take measures to preserve cash. Homegate would also be required to seek replacement financing for the Interim Loans, which will mature on April 30, 1998. There can be no assurance that the required additional financing would be available or that it would be available on acceptable terms. Measures taken to preserve cash would most likely include the interruption of construction activity on some or all projects under development. Interruption of construction activity would preclude Homegate from meeting its growth plans, which would most likely have at least a temporary material adverse effect on the market price of Homegate Common Stock. The Existing Mortgage Facility, Interim Loan facility and any future debt financings or issuances of preferred stock by Homegate will be senior to the rights of the holders of common stock, and any future issuances of common stock will result in the dilution of the then-existing stockholders' proportionate equity interests in Homegate. In addition, future debt facilities may materially impair Homegate's ability to pay dividends. 84 93 Homegate generated $53,171 in cash flow from operating activities for the six months ended June 30, 1997. This compares to $312,653 generated for the inception period through June 30, 1996. The Company invested $35,454,669 for the six months ended June 30, 1997. The majority of this investment was used to fund the Company's growth plan in land acquisition, construction in progress, property and equipment and earnest money deposits for its hotel development. For the same period in 1996, the Company invested $8,264,381. The majority was comprised of $2,911,123 for land acquisition and $4,991,486 for a hotel purchase. Financing activities raised $7,013,243 for the six months ending June 30, 1997 comprised primarily of mortgage proceeds. For the same period ending June 30, 1996, the Company financed $9,225,610 comprised principally of mortgage proceeds and contributions from partners. For the period ending December 31, 1996, the Company invested $35,808,400 primarily for its hotel development and raised financing of $68,000,691 consisting primarily of capital contributions from ESLP partners and issuance of common stock. There was no comparable period to December 31, 1996. WYNDHAM SETTLEMENT AGREEMENT In connection with the execution of the Merger Agreement, Homegate, Prime, CHRI, and Wyndham Hotel Corporation and certain of its affiliates entered into an Agreement Regarding Termination of Management Agreements pursuant to which, upon completion of the Merger, either Homegate or Wyndham will have the right to terminate all management agreements providing for Wyndham's management of Homegate's properties, thereby obligating Homegate to pay to Wyndham $8 million and CHRI to deliver to Wyndham a $4 million, six-month, secured promissory note, which payment and delivery will be in full satisfaction of any and all claims Wyndham may have against Homegate relating to termination of the management agreements. SEASONALITY The lodging industry is seasonal in nature. Quarterly earnings may be adversely affected by events beyond Homegate's control, such as poor weather conditions, economic factors and other considerations affecting travel. In addition, occupancy rates and room revenues typically decline during the fourth calendar quarter as business travel decreases during the holiday season. The timing of openings of new properties could also lead to fluctuations in Homegate's quarterly earnings. INFLATION The rate of inflation as measured by changes in the consumer price index has not had a material effect on the revenue or operating results of Homegate. There can be no assurance, however, that inflation will not affect future operating or construction costs. FACTORS AFFECTING FUTURE RESULTS OF OPERATIONS Homegate's future results of operations may be impacted by a number of factors. Among such factors are local, regional and national economic conditions, competition from other lodging properties, changes in real property tax rates and in the availability, cost and terms of financing, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, changes in operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes and other natural disasters (which may result in uninsured losses), acts of war and adverse changes in zoning laws. 85 94 BUSINESS OF HOMEGATE Homegate's goal is to become a national provider of high quality extended-stay hotels in strategically selected markets located throughout North America. Homegate is rapidly developing a chain of mid-price extended-stay hotels under the HOMEGATE Studios & Suites(R) brand name to capitalize on what management believes is a large and underserved market for extended-stay accommodations. This market includes business travelers, professionals on temporary work assignments, persons between domestic situations, and persons relocating or purchasing a home, who often desire accommodations for an extended duration. As of June 30, 1997, Homegate owned 8 hotels and had 34 more under development, including 17 under construction. Additionally, Homegate has 11 sites under contract with letters of intent and other arrangements. Homegate's objective is to have approximately 65 extended-stay hotels open or under construction by December 31, 1998. Homegate was founded by management and by affiliates of the following three entities: Trammell Crow Residential Company ("TCR"), one of the nation's leading developers of multi-family housing units with 22 regional offices; Greystar Capital Partners, L.P. ("Greystar"), a private investment company with substantial multi-family housing development and construction expertise; and Crow Realty Investors d/b/a Crow Investment Trust ("Crow"), the real estate investment arm of the various descendants of Mr. and Mrs. Trammell Crow and various corporations, partnership trusts and other entities beneficially owned or controlled by such persons known collectively as "Crow Family." In TCR, Greystar, and Crow, Homegate brings together extensive experience in developing, constructing and managing properties on a national scale and in structuring, financing and executing national real estate investment programs. TCR, Greystar, Crow and their affiliates own approximately 60% of the outstanding Homegate Common Stock. See "Security Ownership of Homegate." Homegate has entered into a master development agreement with a partnership (the "Developer Partnership"), comprised of TCR and Greystar (the "Developer Affiliates"), to provide site selection, construction and development services for Homegate's objective to open or begin construction on approximately 65 hotels by December 31, 1998 (the "Initial Hotel Program"). Management believes the Developer Affiliates' expertise and local market presence will significantly enhance Homegate's ability to execute its Initial Hotel Program, while minimizing Homegate's development costs and administrative overhead. Homegate also has entered into a master management assistance agreement (the "Management Agreement") with a subsidiary of Wyndham Hotel Corporation (together with its predecessors and affiliates "Wyndham"), which owns, operates or franchises more than 70 hotels in North America, to manage Homegate's hotels pursuant to 10-year management contracts. Wyndham has agreed to be acquired by Patriot American Hospitality Corp. ("Patriot"). The Crow Family currently owns over 48% of Wyndham's common stock, which will be converted into an ownership interest in Patriot as a result of the acquisition. If the Merger is consummated, Homegate, Prime and Wyndham have agreed to terminate the Management Agreement (and each of the underlying contracts). Homegate's product strategy is to develop a well-recognized national brand under the HOMEGATE Studios & Suites name by offering consistent, high quality accommodations in a standard format, providing much of the value offered by limited service hotels with many of the added features and comforts of apartment living. HOMEGATE Studios & Suites hotels features three functional room configurations, each with a fully-equipped kitchen, upscale residential-quality furnishings and accessories, and separated cooking, living, as well as sleeping areas. In addition, other amenities, such as weekly maid service, twice-weekly linen service, resident laundry facilities, direct telephone service with voice mail messaging and dataport capabilities, cable T.V., a business center and an exercise facility are also offered. See "-- Product Concept." Homegate was incorporated in August 1996 as a Delaware corporation to succeed to the business of a predecessor partnership. Homegate's executive offices are at 111 Congress Avenue, Suite 2600, Austin, Texas 78701, and its telephone number is (512) 477-6400. 86 95 GROWTH STRATEGY Homegate's growth strategy is to develop rapidly a chain of high quality, mid-price extended-stay hotels. Although Homegate expects that the construction and development of new extended-stay hotels will be its primary means of expansion, Homegate may consider, as part of its growth strategy, franchising opportunities or acquisitions of existing extended-stay hotels or other properties that are suitable for conversion to Homegate's extended-stay concept. Homegate regularly pursues and evaluates acquisition opportunities of extended-stay lodging facilities or facilities that may be converted to Homegate's extended-stay lodging concept, and at any given time may be in various stages of evaluating such opportunities. Pursuant to the master development agreement, the Developer Partnership has agreed to develop up to 60 HOMEGATE Studios & Suites hotels, and that neither it, its partners, nor their respective affiliates will own, operate or develop a competing extended-stay facility, subject to certain exceptions, within the continental United States during the duration of such agreement. This agreement will terminate upon the earlier of the commencement of the 60th facility or December 31, 1998. Pursuant to this agreement, the Developer Affiliates' regional offices will, under Homegate's direction, provide site sourcing, obtain entitlements and building permits, and provide construction, architectural and engineering oversight. In addition, individual affiliates of the Developer Affiliates will provide business asset guaranties for construction cost overruns on each project. Homegate believes its utilization of the regional office network will produce competitive advantages and cost efficiencies in Homegate's site selection, development and construction operations, by providing local expertise and minimizing Homegate's development and administrative overhead costs during its Initial Hotel Program. Homegate's developmental plan calls for identification of multiple markets in which construction can occur within Homegate's targeted time frame and budget. Homegate has developed a list of target markets and submarkets based upon local hotel market conditions, the availability of development sites and local construction capabilities, the existence of developmental barriers to entry, the overall health and growth trends of the local economies, and the presence of multiple corporate, residential and leisure travel demand generators. Having identified its target markets, Homegate reviews each market to determine if operational efficiencies can be achieved by either locating its hotels close to existing hotels or by clustering two or more hotels within the market. In selecting sites within Homegate's targeted markets, Homegate considers demographics analysis, including surrounding population and employment data. The prototypical site includes the following attributes: - located close to an employment center (Fortune 500 companies and corporate headquarters preferred) and to a freeway or major traffic thoroughfare with good visibility; - located in a clean, accessible area that provides some buffer from noise generators and is close to restaurants and retail services; - located in an area with residential density; and - site size of approximately 2.5 to 3.0 acres that allows for the construction of 80 to 150 units. 87 96 As of June 30, 1997, Homegate had 22 hotels under construction and development, consisting of 2,791 units. The sites were located in the following metropolitan areas: Austin, Texas........................................... 2 Dallas, Texas........................................... 2 Denver, Colorado........................................ 1 Houston, Texas.......................................... 3 Indianapolis, Indiana................................... 2 Kansas City, Kansas..................................... 2 Las Vegas, Nevada....................................... 1 Orlando, Florida........................................ 1 Phoenix, Arizona........................................ 3 Pompano Beach, Florida.................................. 1 Portland, Oregon........................................ 2 Raleigh, North Carolina................................. 1 Webster, Texas.......................................... 1 -- 22 ==
As of June 30, 1997, Homegate had contracted for 11 sites (the "Planned Hotels Sites") in 9 different states illustrated in the following schedule:
NUMBER LOCATION OF SITES ---------------------------------------------------- -------- Tampa, Florida...................................... 1 Denver, Colorado.................................... 1 Austin, Texas....................................... 1 Orlando, Florida.................................... 1 Albuquerque, New Mexico............................. 1 Atlanta, Georgia.................................... 1 Columbus, Ohio...................................... 1 Indianapolis, Indiana............................... 1 Columbia, Maryland.................................. 1 Miami, Florida...................................... 1 Salt Lake City, Utah................................ 1 -- 11 ==
The purchase prices for these Planned Hotel Sites range from $600,000 to $2,200,000. The arrangements that Homegate enters into for the purchase of potential hotel sites provide for numerous investigations and other due diligence, including environmental studies and title reports, prior to the acquisition of the real property. Homegate reserves the right to terminate each contract if the results of its investigations and due diligence are not satisfactory. There can be no assurance that Homegate will be successful in purchasing or developing any of the sites that are under contract or are subject to a letter of intent or other arrangement. However, Homegate is currently evaluating a variety of sites for construction of HOMEGATE Studios & Suites hotels, and does not believe that the failure to acquire any or all of these sites currently under some form of purchase arrangement would have a material adverse effect upon its ability to complete its Initial Hotel Program. 88 97 Homegate currently operates a total of eight hotels located in the following areas: Austin, Texas on Towne Lake, Grand Prairie, Texas near Dallas/Fort Worth International Airport and Six Flags Amusement Park, Irving, Texas also near Dallas/Fort Worth International Airport, two in San Antonio, Texas located near the airport and Fiesta Park Amusement Center, El Paso, Texas, Amarillo, Texas and Phoenix, Arizona near Phoenix Sky Harbor Airport. The Austin and Grand Prairie hotels were purchased on December 31, 1996, and May 31, 1996, respectively. Five hotels, referred to as the "Westar" hotels, were purchased on September 6, 1996. The Phoenix hotel was developed and built using the TCR Phoenix office. The Westar hotels contain an aggregate of 622 units, all of which are studio units similar to the studio units in the HOMEGATE Studios & Suites prototype. The Westar hotels are being renovated at an aggregate anticipated cost of $6.6 million, of which $3.7 million has been spent through June 30, 1997, to conform to the quality standards of Homegate's prototype, and will be operated under the HOMEGATE Studios & Suites brand name. The Grand Prairie property contains 139 units. The Austin Towne Lake property contains 149 units which enjoy views of the lake and downtown Austin. The Towne Lake property had been operated as an extended-stay property by the previous owner. Homegate plans to "reflag" the property. Homegate does not plan to renovate this property as it currently conforms to Homegate's quality standards. The Phoenix property contains 139 units and is prototypical of the Homegate brand and standard. PRODUCT CONCEPT Homegate's hotels are designed to compete primarily in the mid-price segment of the extended-stay industry segment, but Homegate believes, based on the quality of its interior design elements and furnishings, the separation between cooking, sleeping and living areas, and the available amenities that HOMEGATE Studios & Suites hotels will offer a superior price/value relationship and appeal to extended-stay guests of both upscale and economy facilities and contain a variety of features that are attractive to the extended-stay guest, such as fully equipped kitchens, resident laundry facilities, twice-weekly linen service, weekly maid service, business centers and exercise facilities. The facilities consist of an apartment-style complex with two or three story buildings containing, on average, approximately 136 guest rooms. Homegate utilizes both interior and exterior corridor building designs, depending primarily on local market standards, building codes and weather factors. The hotels typically feature three functional room configurations: studio, deluxe, and one bedroom. Management believes that the price/value relationship of its guest rooms is enhanced by offering the following features: - a fully equipped kitchen with full-size refrigerator, stove, microwave, coffee maker, dishwasher and cooking utensils; - separate cooking, living and sleeping areas; - residential-quality interior design elements; - upscale furnishings and accessories; - an oversized work desk; - two telephone jacks with dataports; - direct dial telephone with voice mail messaging; - fax and copy services available to guests; - cable TV; and - a sleeper sofa. OPERATIONS Homegate's operating objective is to establish a well-organized national brand of extended-stay hotels, while maximizing operating performance. Homegate intends to achieve its goals by (i) developing and 89 98 offering consistent, high quality accommodations; (ii) capitalizing on the attractive operating characteristics of the extended-stay segment of the lodging industry; and (iii) leveraging Wyndham's (or, following the Merger, Prime's) significant hotel management expertise. Extended-stay hotels typically experience longer average guest stays than traditional hotels, resulting in higher average occupancies and a more stable revenue stream. Homegate requires minimum stays of one week at its hotels (after conversion to extended-stay facilities, if necessary, in the case of acquired hotels), and provides daily rates only after the minimum stay requirement has been satisfied. In addition, the staffing levels of extended-stay hotels are much lower than those of traditional hotels, because many labor intensive services offered by full-service hotels are de-emphasized or excluded entirely, resulting in lower labor costs. At Homegate's hotels, there is no food and beverage service and limited common area amenities. The front desk typically offers a limited operating schedule (7:00 a.m. to 9:00 p.m. Monday through Friday plus 9:00 a.m. to 1:00 p.m. Saturday and 1:00 p.m. to 5:00 p.m. Sunday). Voice mail messaging eliminates the need for a telephone switchboard. Homegate has developed a system to allow for after-hours check-in, eliminating the need for 24-hour front desk operations. Housekeeping services are offered weekly, and linen service is available twice weekly. Several common area amenities that do not substantially increase operating expenses are included, such as an exercise room, resident laundry, and a business center. Wyndham Hotel Management. Pursuant to the Management Agreement, Wyndham has agreed to manage up to 60 Company hotels, each pursuant to a 10-year management contract. Each Company hotel has a Wyndham hotel manager, who shares administrative responsibilities with and oversees a Wyndham-employed and - -trained staff generally consisting of approximately 10 employees. In addition, Wyndham provides Homegate with market research, a preferred vendor program, a proprietary property management software system, and national and local marketing efforts. If the Merger is consummated, Homegate, Prime and Wyndham have agreed to terminate the Management Agreement (and each of the underlying contracts). See "The Merger -- Interests of Certain Persons in the Merger -- Management Agreement. COMPETITION The U.S. lodging industry is highly competitive. Competition in the U.S. lodging industry is based generally on convenience of location, price, range of services and guest amenities offered, and quality of customer service. Each of Homegate's facilities will be located in a developed area that includes competing lodging facilities. Homegate believes the location of its hotels, the high quality of its accommodations, the reasonableness of its room rates, and its services and guest amenities will be among the most important factors in its business. Demographics or other changes in one or more of Homegate's markets could impact the convenience or desirability of the sites of certain hotels, which would adversely affect their operations. Homegate anticipates that competition within the extended-stay industry segment will increase substantially in the foreseeable future. In the mid-price category of the extended-stay industry segment, several other lodging chains and developers have recently announced plans to develop or are currently developing extended-stay hotels which may compete with Homegate's hotels. Homegate may compete for guests and for development sites with certain of these entities and other entities which have greater financial resources and brand awareness than Homegate and better relationships with lenders and real estate sellers. Further, there can be no assurance that new or existing competitors, including traditional hotels with nationally recognized brand names, will not significantly lower rates or offer greater convenience, services, or amenities or significantly expand or improve facilities in a market in which Homegate's facilities compete, thereby adversely affecting Homegate's operations. ENVIRONMENTAL MATTERS Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal of or transports for disposal 90 99 or treatment of a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances or the failure to remediate properly such substances, may adversely affect the owner's ability to sell real estate or to borrow using such real estate as collateral. In connection with the ownership of its properties, Homegate may be potentially liable for any such costs. Homegate has obtained recent Phase I Surveys on its existing properties and intends to obtain Phase I Surveys prior to the purchase of any future properties. The Phase I Surveys are intended to identify potential environmental contamination and regulatory compliance concerns. Phase I Surveys generally include historical reviews of the properties, reviews of certain public records, preliminary investigations of the sites and surrounding properties and the preparation and issuance of written reports. Phase I Surveys generally do not include invasive procedures, such as soil sampling or ground water analysis. The Phase I Surveys have not revealed any environmental liability or compliance concern that Homegate believes would have a material adverse effect on Homegate's business, assets, results of operations, or liquidity, nor is Homegate aware of any such liability or concern. Nevertheless, it is possible that Phase I Surveys will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns of which Homegate will not be aware. Moreover, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, or (ii) the current environmental condition of Homegate's existing and future properties will not be affected by the condition of the neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to Homegate. GOVERNMENTAL REGULATION The lodging industry is subject to numerous federal, state and local government regulations including those relating to building and zoning requirements. Many states also regulate the licensing of hotels by requiring registration, disclosure statements, and compliance with specific standards of conduct. In addition, Homegate is subject to employment laws, including minimum wage requirements, overtime, working conditions and work permit requirements. Recent amendments to the minimum wage laws went into effect in October 1996 which increased Homegate's labor costs. Homegate believes that all of its hotels have the necessary permits, approvals and licenses to operate their respective business and that collectively they comply with the applicable employment laws, and Homegate intends to continue to comply with such laws and regulations. A change in such building, zoning, or licensing requirements or a further increase in the minimum wage rate, employee benefit costs or other costs associated with employees could materially and adversely affect Homegate. Under the Americans With Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While Homegate believes that all of its hotels are substantially in compliance with these requirements, a determination that Homegate is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies affecting the use and operation of the facilities, including changes to building codes and fire and life-safety codes, may occur. If Homegate were required to make substantial modifications at its hotels to comply with the ADA or other governmental rules and regulations, Homegate's financial condition and ability to develop or acquire new hotels could be materially and adversely affected. TRADEMARKS Homegate has registered its name and service mark as "HOMEGATE Studios & Suites" with the United States Patent and Trademark office. In addition, Homegate may have certain common law rights to the Westar Suites and InnHome America trade names. 91 100 LIABILITY INSURANCE Homegate currently has the types and amounts of insurance coverage that it considers appropriate for a company in its business. While management believes that its insurance coverage is adequate, if Homegate were held liable for amounts exceeding limits of its insurance coverage or for claims beyond the scope of its insurance coverage, Homegate's business, results of operations, and financial condition could be materially and adversely affected. EMPLOYEES As of June 30, 1997, Homegate employed approximately 22 people. Homegate expects that it will add additional employees as it expands its business. Homegate's employees are not subject to any collective bargaining agreements, and management believes that its relationship with its employees is good. PROPERTIES On May 31, 1996, Homegate purchased Studio Suites, a 139-unit extended-stay facility located in Grand Prairie, Texas. The property opened for business on June 17, 1996. On September 6, 1996, Homegate acquired beneficial ownership of five hotels (the "Westar hotels"). The Westar hotels are located in San Antonio (two), El Paso, Amarillo, and Irving, Texas. These hotels contain a total of 622 units and are being renovated to conform to the quality standards of the HOMEGATE Studio & Suites prototype. Homegate is currently operating four of these hotels under the HOMEGATE Studio & Suites as extended-stay facilities and intends to convert the remaining hotel. Homegate purchased the existing InnHome America extended-stay hotel in Austin, Texas on December 31, 1996. The property consists of 149 rooms with 37 enjoying lakeside views. The property was renovated in early 1995 and flagged as a dedicated extended-stay hotel. As of June 30, 1997, Homegate had commenced development of extended-stay hotels in the following locations:
HOTEL SUITES UNITS ------------ ----- Phoenix, Arizona........................... 3 396 Denver, Colorado........................... 1 143 Kansas City, Kansas........................ 2 250 Dallas, Texas.............................. 2 267 Houston, Texas............................. 3 358 Austin, Texas.............................. 2 254 Indianapolis, Indiana...................... 2 255 Orlando, Florida........................... 1 134 Pompano Beach, Florida..................... 1 129 Raleigh, North Carolina.................... 1 138 Portland, Oregon........................... 2 258 Las Vegas, Nevada.......................... 1 127 Webster, Texas............................. 1 82 -- ----- 22 2,791 == =====
As of June 30, 1997, Homegate had entered into contracts, letters of intent or other arrangements with respect to the acquisition of 11 additional sites and is evaluating 15 other sites for potential acquisitions. The 22 sites currently under development are expected to be completed at various dates in 1997 and 1998. Homegate also intends to commence development on additional sites in 1997. LEGAL PROCEEDINGS Homegate is not a party to any litigation or claims, other than routine matters incidental to the operation of the business of Homegate. To date, no claims have had a material adverse effect on Homegate nor does Homegate expect that the outcome of any pending claims will have such an effect. 92 101 MANAGEMENT OF HOMEGATE The following table sets forth certain information regarding Homegate's directors and executive officers, including their respective ages, at June 30, 1997.
NAME AGE POSITION - --------------------------------------- --- ----------------------------------------------------- Robert A. Faith........................ 33 Chairman of the Board, Chief Executive Officer and President John C. Kratzer........................ 34 Chief Operating Officer and Executive Vice President Tim V. Keith........................... 44 Chief Financial Officer and Treasurer Anthony W. Dona........................ 38 Senior Vice President and Director Joel Kinzie Oldham IV.................. 35 Senior Vice President and Secretary William B. Buchanan, Jr. .............. 38 Director Harlan R. Crow......................... 47 Director John R. Huff........................... 51 Director John J. Moores......................... 53 Director Charles E. Noell....................... 45 Director Leonard W. Wood........................ 50 Director
Robert A. Faith joined Homegate in February 1996 as its Chairman of the Board, Chief Executive Officer and President. Since August 1991, Mr. Faith has served as the Chairman of the Board of Faith Holdings, Inc., a private holding and management company with various business interests. Mr. Faith also currently serves as the Chairman of the Board of the corporate general partner of Greystar Capital Partners, L.P., a private holding company with investments in real estate, apartment buildings and apartment management firms, a position which he has held since May 1993. In August 1991, Mr. Faith co-founded Starwood Capital Partners, a private real estate investment firm, for which he served as Chief Executive Officer until May 1993. John C. Kratzer is the Chief Operating Officer and Executive Vice President of Homegate. Before joining Homegate in February 1996, Mr. Kratzer served as a Principal with Benton Resources, which invested over $100 million in land, notes and income producing assets. Mr. Kratzer served in this capacity from February 1994 to February 1996. From September 1993 to November 1994, Mr. Kratzer served as Vice President of Crow Family, Inc., a private investment company. From September 1993 to February 1994, Mr. Kratzer served as Vice President of Mill Spring Holdings, Inc., a private investment company, and in such capacity served as an asset manager of residential properties held in a limited partnership. During the period from September 1993 to February 1996, Mill Spring Holdings, Inc. was the general partner of a separate limited partnership related to commercial properties, which held interests in approximately 55 partnerships or corporations that filed for protection under federal bankruptcy laws. In addition, during the same period, Mr. Kratzer was a general partner, executive officer or director in approximately 15 partnerships or corporations, or affiliates of such partnerships or corporations, that were placed in receivership. As an asset manager for residential properties, Mr. Kratzer was not involved in the management of any commercial properties which filed for bankruptcy or were placed in receivership. From September 1990 to August 1993, Mr. Kratzer was with Trammell Crow Realty Advisors, an institutional real estate investment management company that acquired a multi-asset portfolio of apartments valued at over $250 million. At the time of his departure, Mr. Kratzer served as the director of Multi-Family Acquisitions for Trammell Crow Realty Advisors. Tim V. Keith joined Homegate in July 1996 as its Chief Financial Officer and Treasurer. Prior to joining Homegate, Mr. Keith served as the Controller/Treasurer of David Weekley Homes, a private single-family home builder, from June 1994 to July 1996. From March 1989 to June 1994, Mr. Keith served as Vice President of Finance for Coscan Florida Inc., a subsidiary of Coscan Development Corporation, a Canadian public real estate developer and builder. Mr. Keith has accumulated 17 years of experience in real estate accounting and finance, as well as three years in public accounting. 93 102 Anthony W. Dona is a Senior Vice President and director of Homegate. In addition, Mr. Dona is the Managing Director of Crow Realty Investors d/b/a Crow Investment Trust, a position which he has held since 1994, and is a director of Trammell Crow Company and TCR. Mr. Dona has served in these capacities since 1994 and 1996, respectively. In addition, Mr. Dona serves on the advisory board of Trammell Crow Interest Company. From 1985 until 1994, Mr. Dona served in various capacities with the Crow entities including Chief Financial Officer of the Texas region of Trammell Crow Company, a partner in the Dallas Office Building Division of Trammell Crow Company, Chief Executive Officer of the Asset Management Group of Trammell Crow Company and director of Crow Family Administration. As part of his asset management role, Mr. Dona managed a large portfolio of distressed real estate partnerships during the recent real estate down-cycle. In connection with the restructuring of that portfolio, Mr. Dona has served during the last five years as an officer or director in approximately 90 partnerships or corporations, or affiliates of such partnerships or corporations, that filed for protection under federal bankruptcy laws. In addition, in the past five years, Mr. Dona was an executive officer or director in approximately 15 partnerships or corporations, or affiliates of such partnerships or corporations, that were placed in receivership. Joel Kinzie Oldham IV joined Homegate in February 1996 as a Senior Vice President and Secretary of Homegate. Mr. Oldham is also the Senior Vice President of Greystar Capital Partners, L.P., a private holding company with investments in real estate, apartment buildings and apartment management firms. Mr. Oldham joined Greystar in May 1993. Prior to joining Greystar, Mr. Oldham was the Vice President of Starwood Capital Partners, a position he held from September 1992 to June 1993. Prior to joining Starwood, Mr. Oldham was a Marketing Director with Trammell Crow Company, which he joined in 1988. William B. Buchanan, Jr. is a director of Homegate. Mr. Buchanan is Deputy Head of the Equity Capital Markets Department of Smith Barney Inc. ("Smith Barney") and serves on the Issues and Valuation and Commitment Committees of Smith Barney. Prior to joining Smith Barney, Mr. Buchanan was Head of the Equity Capital Markets Group at Bear, Stearns & Co. Inc. and sat on the Equity Sub-Committee. Prior to that, Mr. Buchanan was a director at The First Boston Corporation responsible for originating and executing equity transactions in the media, telecommunications, health care, real estate and other high growth industries. At separate times during his career at First Boston, Mr. Buchanan was Head of New Issue Marketing and Head of Syndication. Harlan R. Crow is a director of Homegate. Mr. Crow is the Chief Executive Officer of Crow Family Holdings, a private investment company managing investments in a variety of real estate related and other businesses, a position he has held since 1986. Mr. Crow currently serves as a director of Trammell Crow Company and TCR. In addition, Mr. Crow serves as a director of Wyndham, a publicly-traded corporation. In any given year within the past five years, Mr. Crow has indirectly owned interests in over 1,000 partnerships (or affiliates of partnerships) or corporations. In the past five years, Mr. Crow was a general partner, officer or director in approximately 90 partnerships or corporations, or affiliates of such partnerships or corporations, that filed for protection under federal bankruptcy laws. In addition, in the past five years, Mr. Crow was a general partner, executive officer or director in approximately 15 partnerships or corporations, or affiliates of such partnerships or corporations, that were placed in receivership. John R. Huff is a director of Homegate. Mr. Huff has been a director, President and Chief Executive Officer of Oceaneering International, Inc. ("Oceaneering") since 1986. Mr. Huff was elected Chairman of the Board of Oceaneering in August 1990. Prior to joining Oceaneering, Mr. Huff served as Chairman and President of Western Oceanic, Inc., the offshore drilling subsidiary of The Western Company of North America. Mr. Huff is also a director of BJ Services Company, Triton Energy Limited an Production Operators Corp. John J. Moores is a director of Homegate. Mr. Moores founded BMC Software, Inc., a vendor of system software utilities for IBM mainframe computing environments in 1980. Prior to founding BMC Software, Mr. Moores was employed by International Business Machines, Inc. and Shell Oil Corporation in various of their technical divisions. Mr. Moores is Chairman of the Board of the San Diego Padres, L.P., JMI Services, Inc., a private investment company, Peregrine Systems, Inc., a computer software designer, and Neon Systems, Inc., a computer software designer, all of which are privately-held companies. 94 103 Charles E. Noell is a director of Homegate. Mr. Noell is President of JMI, Inc., a private investment company, which he joined in 1992 after 11 years in the corporate finance department of Alex. Brown & Sons Incorporated. Mr. Noell is the Managing Partner of JMI Equity Fund, L.P., a private equity investment fund, and is a director of two publicly-traded companies: Transactions Systems Architects, Inc. and Expert Software, Inc. Leonard W. Wood is a director of Homegate. Mr. Wood is currently a Group Managing Partner for TCR and oversees the activities of TCR throughout Northern Florida and the Southeastern and Midwestern United States. Mr. Wood joined TCR in 1982. 95 104 COMPARATIVE PER SHARE DATA MARKET AND MARKET PRICES Prime Prime Common Stock trades on the NYSE under the symbol "PDQ." The following table sets forth the high and low sale prices of Prime Common Stock as reported by the NYSE for each of the quarters in the two year period ended December 31, 1996 and for the first, second, third and fourth quarters (through October 23) of 1997.
HIGH LOW ---- --- 1995 First Quarter................................................ $10 3/8 $ 7 3/8 Second Quarter............................................... 10 5/8 9 1/4 Third Quarter................................................ 11 9 1/2 Fourth Quarter............................................... 10 1/4 9 3/8 1996 First Quarter................................................ $13 5/8 $ 9 5/8 Second Quarter............................................... 17 1/4 12 Third Quarter................................................ 19 7/8 16 3/8 Fourth Quarter............................................... 17 1/4 14 1997 First Quarter................................................ $18 1/8 $14 1/8 Second Quarter............................................... 20 7/8 14 3/4 Third Quarter................................................ 22 1/4 17 1/2 Fourth Quarter (through October 23).......................... 23 3/16 21 15/16
On October 23, the last sales price of Prime Common Stock on the NYSE was $22 3/16. The public announcement of the Merger Agreement occurred on July 25, 1997. Homegate Since October 25, 1996, Homegate Common Stock has traded on Nasdaq under the symbol "HMGT." The following table sets forth the high and low sale prices of Homegate Common Stock as reported by Nasdaq for the fourth quarter in the period ended December 31, 1996 and for the first, second, third and fourth quarters (through October 23) of 1997.
HIGH LOW ---- --- 1996 Fourth Quarter............................................... $12 1/4 $ 6 3/4 1997 First Quarter................................................ $ 9 1/4 $ 6 15/16 Second Quarter............................................... 10 3/8 6 Third Quarter................................................ 13 5/8 8 15/16 Fourth Quarter (through October 23).......................... 13 7/8 12 5/8
On October 23, the last sales price of Homegate Common Stock on Nasdaq was $13 3/8. The public announcement of the Merger Agreement occurred on July 25, 1997. 96 105 EQUIVALENT PER SHARE DATA The following tables set forth certain data concerning the historical book value per share, cash dividends declared per share and net income (loss) per fully diluted share for Prime and Homegate, respectively, on a pro forma basis after giving effect to the Merger, as if such transaction had occurred at the beginning of the period presented. The information should be read in conjunction with the unaudited Pro Forma Condensed Financial Information of Prime contained elsewhere in this Proxy Statement-Prospectus, the historical financial statements of Prime incorporated herein by reference and the historical financial statements of Homegate contained elsewhere herein. The unaudited pro forma equivalent per share data shows for each share of Prime Common Stock and Homegate Common Stock before the Merger and its equivalent position after giving effect to the Merger. Homegate stockholders will receive 0.6073 of a share of Prime Common Stock for each share of Homegate Common Stock outstanding. Historical
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------- ------------------- ------------------- ------------------- PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE PRIME HOMEGATE ------ -------- ------ -------- ------ -------- ------ -------- Book value per share................ $11.01 $ 5.95 $10.55 $ 6.03 $ 7.51 $ -- $ 6.71 $ -- Cash dividends per share............ -- -- -- -- -- -- -- -- Net income (loss) per fully diluted share.............................. $ .48 $ (.08) $ .80 $ (.08) $ .54 $ -- $ .58 $ --
Prime -- Pro Forma
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- ----------------- ----------------- Book value per share........................ $ 10.66 $ 10.46 $ -- $ -- Cash dividends per share.................... -- -- -- -- Net income per fully diluted share.......... $ .41 $ .69 $ .54 $ .58
Homegate -- Equivalent Pro Forma
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- ----------------- ----------------- Book value per share........................ $ 6.47 $ 6.35 $ -- $ -- Cash dividends per share.................... -- -- -- -- Net income per fully diluted share.......... $ .25 $ .42 $ .33 $ .35
97 106 PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED) The following pro forma condensed financial information for the combined companies gives effect to the Merger as a pooling of interests. All of the following selected pro forma financial information should be read in conjunction with the pro forma financial information, including the notes thereto, appearing elsewhere in this Proxy Statement-Prospectus. The pro forma financial information set forth in this Proxy Statement-Prospectus is not necessarily indicative of the results that actually would have occurred had the Merger been consummated on the inception date of Homegate's predecessor ESLP (February 9, 1996).
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenue.............................................. $134,303 $205,628 $271,100 Costs and expenses: Direct hotel operating expenses.......................... 66,620 116,565 146,857 Occupancy and other operating............................ 9,799 11,763 17,071 General and administrative............................... 15,089 15,515 18,764 Depreciation and amortization............................ 9,384 15,227 23,976 Other expenses........................................... -- 2,200 -- -------- -------- -------- Total costs and expenses................................... 100,892 161,270 206,668 -------- -------- -------- Operating income........................................... 33,411 44,358 64,432 Investment income.......................................... 1,966 4,861 5,061 Interest expense........................................... (14,036) (22,350) (23,149) Other income............................................... 9,089 2,239 4,313 -------- -------- -------- Income before income taxes and extraordinary items......... 30,430 29,108 50,657 Income tax expense......................................... 12,172 11,643 20,609 -------- -------- -------- Income before extraordinary items.......................... 18,258 17,465 30,048 Extraordinary items, net................................... 172 104 202 -------- -------- -------- Net income................................................. $ 18,430 $ 17,569 $ 30,250 ======== ======== ======== Fully diluted earnings per common share(1)................. $0.58 $0.54 $0.69 Number of shares used in fully diluted earnings per common share calculations(1)(2)................................. 32,022 37,423 49,764
98 107
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- --------------------- 1996 1997 1996 1997 ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenue..................................... $69,920 $85,512 $128,533 $163,510 Costs and expenses: Direct hotel operating expenses................. 37,960 40,298 69,507 81,082 Occupancy and other operating................... 4,107 5,877 7,589 11,609 General and administrative...................... 4,742 5,758 8,961 11,520 Depreciation and amortization................... 6,238 8,035 11,112 15,725 ------- ------- -------- -------- Total costs and expenses.......................... 53,047 59,968 97,169 119,936 ------- ------- -------- -------- Operating income.................................. 16,873 25,544 31,364 43,574 Investment income................................. 856 1,618 2,121 2,229 Interest expense.................................. (6,030) (7,926) (12,231) (12,640) Other income...................................... -- 1,904 3,432 1,961 ------- ------- -------- -------- Income before income taxes and extraordinary items........................................... 11,699 21,140 24,686 35,124 Income tax expense................................ 4,775 8,627 9,970 14,410 ------- ------- -------- -------- Income (loss) before extraordinary items.......... 6,924 12,513 14,716 20,714 Extraordinary items, net.......................... 27 53 176 75 ------- ------- -------- -------- Net income........................................ $ 6,951 $12,566 $ 14,892 $ 20,789 ======= ======= ======== ======== Fully diluted net earnings per common share(1).... $0.17 $0.24 $0.35 $0.41 Number of shares used in fully diluted earnings per common share calculations(1)(2)............. 47,004 55,675 45,888 55,643
JUNE 30, 1997 -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 81,849 Working capital................................................................ 60,767 Total assets................................................................... 1,066,737 Long-term debt, less current portion........................................... 485,679 Total stockholders' equity..................................................... 507,941
- --------------- (1) Pro forma earnings per share is computed by dividing net income by the number of common equivalent shares outstanding during the periods in accordance with the applicable rules of the Commission. All stock options and warrants issued have been considered as outstanding common share equivalents for all periods presented, unless anti-dilutive. (2) Number of shares used in pro forma earnings per share gives effect to the Merger by using the fixed Exchange Ratio of 0.6073 shares of Prime Common Stock for each share of Homegate Common Stock. 99 108 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) JUNE 30, 1997 (IN THOUSANDS)
HISTORICAL ---------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED -------- -------- ----------- ---------- ASSETS Current assets: Cash and cash equivalents............... $ 78,762 $ 3,087 -- $ 81,849 Accounts receivable, net of reserves.... 16,738 339 -- 17,077 Restricted cash......................... -- 824 -- 824 Current portion of mortgage notes receivable........................... 2,622 -- -- 2,622 Other current assets.................... 13,628 1,346 -- 14,974 -------- ------- --------- ---------- Total current assets............ 111,750 5,596 -- 117,346 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization........... 812,367 84,549 -- 896,916 Mortgages and notes receivable, net of current portion......................... 19,858 3,094 -- 22,952 Other assets.............................. 28,425 1,098 29,523 -------- ------- --------- ---------- Total assets.................... $972,400 $94,337 -- $1,066,737 ======== ======= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....... $ 3,083 $ 783 -- $ 3,866 Other current liabilities............... 50,714 1,999 -- 52,713 -------- ------- --------- ---------- Total current liabilities....... 53,797 2,782 -- 56,579 Long-term debt, net of current portion.... 457,912 27,767 -- 485,679 Other liabilities......................... 16,538 -- -- 16,538 -------- ------- --------- ---------- Total liabilities............... 528,247 30,549 -- 558,796 Stockholders' equity: Preferred stock......................... -- -- -- -- Common stock............................ 404 107 (42)(A) 469 Capital in excess of par value.......... 342,425 65,448 42(A) 407,915 Retained earnings....................... 102,362 (1,767) -- 100,595 Treasury stock.......................... (1,038) -- -- (1,038) -------- ------- --------- ---------- Total stockholders' equity........... 444,153 63,788 -- 507,941 -------- ------- --------- ---------- Total liabilities and stockholders equity........... $972,400 $94,337 -- $1,066,737 ======== ======= ========= ==========
100 109 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL -------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED ------- -------- ----------- --------- Total revenue................................... $83,407 $ 2,105 $ -- $85,512 Costs and expenses: Direct hotel operating expenses............... 39,041 1,257 -- 40,298 Occupancy and other operating................. 5,712 165 -- 5,877 General and administrative.................... 5,130 628 -- 5,758 Depreciation and amortization................. 7,681 354 -- 8,035 ------- ------- ------- ------- Total costs and expenses........................ 57,564 2,404 -- 59,968 Operating income (loss)......................... 25,843 (299) -- 25,544 Investment income............................... 1,396 222 -- 1,618 Interest expense................................ (7,530) (396) -- (7,926) Other income.................................... 1,858 46 -- 1,904 ------- ------- ------- ------- Income (loss) before income taxes and extraordinary items........................... 21,567 (427) -- 21,140 Income tax expense.............................. 8,627 -- -- 8,627 ------- ------- ------- ------- Income (loss) before extraordinary items........ 12,940 (427) -- 12,513 Extraordinary items, net........................ 53 -- -- 53 ------- Net income (loss)............................... $12,993 ($ 427) -- $12,566 ======= ======= ======= ======= Fully diluted earnings (loss) per common share......................................... $ 0.28 ($ 0.04) $ -- $ 0.24 Number of shares used in fully diluted earnings (loss) per common share calculations.......... 49,162 10,725 (4,212)(B) 55,675
101 110 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL -------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED ------- -------- ----------- --------- Total revenue................................... $69,893 $ 27 $ -- $69,920 Costs and expenses: Direct hotel operating expenses............... 37,935 25 -- 37,960 Occupancy and other operating................. 4,102 5 -- 4,107 General and administrative.................... 4,538 204 -- 4,742 Depreciation and amortization................. 6,228 10 -- 6,238 ------- ------- ------- ------- Total costs and expenses........................ 52,803 244 -- 53,047 Operating income (loss)......................... 17,090 (217) -- 16,873 Investment income............................... 856 -- -- 856 Interest expense................................ (6,008) (22) -- (6,030) ------- ------- ------- ------- Income (loss) before income taxes and extraordinary items........................... 11,938 (239) -- 11,699 Income tax expense.............................. 4,775 -- -- 4,775 ------- ------- ------- ------- Income (loss) before extraordinary items........ 7,163 (239) -- 6,924 Extraordinary items, net........................ 27 -- -- 27 ------- ------- ------- ------- Net income (loss)............................... $ 7,190 ($ 239) $ -- $ 6,951 ======= ======= ======= ======= Fully diluted earnings (loss) per common share......................................... $ 0.20 ($ 0.02) $ -- $ 0.17 Number of shares used in fully diluted earnings (loss) per common share calculations.......... 40,491 10,725 (4,212)(B) 47,004
102 111 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED -------- -------- ----------- --------- Total revenue.................................. $159,487 $ 4,023 $ -- $ 163,510 Costs and expenses: Direct hotel operating expenses.............. 78,725 2,357 -- 81,082 Occupancy and other operating................ 11,256 353 -- 11,609 General and administrative................... 10,105 1,415 -- 11,520 Depreciation and amortization................ 15,101 624 -- 15,725 ------- ------- ------- ------- Total costs and expenses....................... 115,187 4,749 -- 119,936 Operating income (loss)........................ 44,300 (726) -- 43,574 Investment income.............................. 1,627 602 -- 2,229 Interest expense............................... (11,760) (880) -- (12,640) Other income................................... 1,858 103 -- 1,961 ------- ------- ------- ------- Income (loss) before income taxes and extraordinary items.......................... 36,025 (901) -- 35,124 Income tax expense............................. 14,410 -- -- 14,410 ------- ------- ------- ------- Income (loss) before extraordinary items....... 21,615 (901) -- 20,714 Extraordinary items, net....................... 75 -- -- 75 ======= ------- ------- ------- Net income (loss).............................. $ 21,690 ($ 901) $ -- $ 20,789 ======= ======= ======= ======= Fully diluted earnings (loss) per common share........................................ $ 0.48 ($ 0.08) -- $ 0.41 Number of shares used in fully diluted earnings (loss) per common share calculations......... 49,130 10,725 (4,212)(B) 55,643
103 112 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED -------- -------- ----------- --------- Total revenue.................................. $128,506 $ 27 $ -- $ 128,533 Costs and expenses: Direct hotel operating expenses.............. 69,482 25 -- 69,507 Occupancy and other operating................ 7,584 5 -- 7,589 General and administrative................... 8,757 204 -- 8,961 Depreciation and amortization................ 11,102 10 -- 11,112 ------- ------- ------- ------- Total costs and expenses....................... 96,925 244 -- 97,169 Operating income (loss)........................ 31,581 (217) -- 31,364 Investment income.............................. 2,121 -- -- 2,121 Interest expense............................... (12,209) (22) -- (12,231) Other income................................... 3,432 -- -- 3,432 ------- ------- ------- ------- Income (loss) before income taxes and extraordinary items.......................... 24,925 (239) -- 24,686 Income tax expense............................. 9,970 -- -- 9,970 ------- ------- ------- ------- Income (loss) before extraordinary items....... 14,955 (239) -- 14,716 Extraordinary items, net....................... 176 -- -- 176 ------- ------- ------- ------- Net income (loss).............................. $ 15,131 ($ 239) $ -- $ 14,892 ======= ======= ======= ======= Fully diluted earnings (loss) per common share........................................ $ 0.42 ($ 0.02) $ -- $ 0.35 Number of shares used in fully diluted earnings (loss) per common share calculations......... 40,460 10,725 (5,297)(B) 45,888
104 113 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED -------- -------- ------------ --------- Total revenue................................. $268,868 $ 2,232 $ -- $ 271,100 Costs and expenses: Direct hotel operating expenses............. 145,419 1,438 -- 146,857 Occupancy and other operating............... 16,833 238 -- 17,071 General and administrative.................. 17,813 951 -- 18,764 Depreciation and amortization............... 23,632 344 -- 23,976 -------- -------- -------- -------- Total costs and expenses...................... 203,697 2,971 -- 206,668 -------- -------- -------- -------- Operating income (loss)....................... 65,171 (739) -- 64,432 Investment income............................. 4,610 451 -- 5,061 Interest expense.............................. (22,564) (585) -- (23,149) Other income.................................. 4,306 7 -- 4,313 -------- -------- -------- -------- Income (loss) before income taxes and extraordinary items......................... 51,523 (866) -- 50,657 Income tax expense............................ 20,609 -- -- 20,609 -------- -------- -------- -------- Income (loss) before extraordinary items...... 30,914 (866) -- 30,048 Extraordinary items, net...................... 202 -- -- 202 -------- -------- -------- -------- Net income (loss)............................. $ 31,116 ($ 866) -- $ 30,250 ======== ======== ======== ======== Fully diluted earnings (loss) per common share....................................... $ 0.80 ($ 0.08) $ -- $ 0.69 Number of shares used in fully diluted earnings (loss) per common share calculations................................ 43,794 10,725 (4,755)(B) 49,764
105 114 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL -------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED -------- -------- ------------ --------- Total revenue.................................... $205,628 $ -- $ -- $ 205,628 Costs and expenses: Direct hotel operating expenses................ 116,565 -- -- 116,565 Occupancy and other operating.................. 11,763 -- -- 11,763 General and administrative..................... 15,515 -- -- 15,515 Depreciation and amortization.................. 15,227 -- -- 15,227 Other expenses................................. 2,200 -- -- 2,200 -------- -------- -------- -------- Total costs and expenses......................... 161,270 -- -- 161,270 -------- -------- -------- -------- Operating income................................. 44,358 -- -- 44,358 Investment income................................ 4,861 -- -- 4,861 Interest expense................................. (22,350) -- -- (22,350) Other income..................................... 2,239 -- -- 2,239 -------- -------- -------- -------- Income before income taxes and extraordinary items.......................................... 29,108 -- -- 29,108 Income tax expense............................... 11,643 -- -- 11,643 -------- -------- -------- -------- Income before extraordinary items................ 17,465 -- -- 17,465 Extraordinary items, net......................... 104 -- -- 104 -------- -------- -------- -------- Net income....................................... $ 17,569 $ -- $ -- $ 17,569 ======== ======== ======== ======== Fully diluted earnings per common share.......... $ 0.54 $ -- $ -- $ 0.54 Number of shares used in fully diluted earnings per common share calculations.................. 37,423 -- -- 37,423
106 115 PRIME HOSPITALITY CORP. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------- PRO FORMA PRO FORMA PRIME HOMEGATE ADJUSTMENTS COMBINED -------- -------- ------------ --------- Total revenue................................. $134,303 $ -- $ -- $ 134,303 Costs and expenses: Direct hotel operating expenses............. 66,620 -- -- 66,620 Occupancy and other operating............... 9,799 -- -- 9,799 General and administrative.................. 15,089 -- -- 15,089 Depreciation and amortization............... 9,384 -- -- 9,384 -------- -------- -------- -------- Total costs and expenses...................... 100,892 -- -- 100,892 -------- -------- -------- -------- Operating income.............................. 33,411 -- -- 33,411 Investment income............................. 1,966 -- -- 1,966 Interest expense.............................. (14,036) -- -- (14,036) Other income.................................. 9,089 -- -- 9,089 -------- -------- -------- -------- Income before income taxes and extraordinary items....................................... 30,430 -- -- 30,430 Income tax expense............................ 12,172 -- -- 12,172 -------- -------- -------- -------- Income before extraordinary items............. 18,258 -- -- 18,258 Extraordinary items, net...................... 172 -- -- 172 -------- -------- -------- -------- Net income.................................... $ 18,430 $ -- $ -- $ 18,430 ======== ======== ======== ======== Fully diluted earnings per common share....... $0.58 $ -- $ -- $0.58 Number of shares used in fully diluted earnings per common share calculations...... 32,022 -- -- 32,022
107 116 NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION The proposed Merger between Prime and Homegate is intended to be accounted for as a pooling of interests. Accordingly, the pro forma financial statements have been prepared assuming the companies have been together for all periods presented. Shares issued by Prime for the acquisition of Homegate have been assumed to be outstanding from the inception date of Homegate's predecessor, ESLP (February 9, 1996). The pro forma financial information contains no adjustments to conform the accounting policies of the companies because any such adjustments have been determined to be immaterial. Certain reclassifications have been made to the December 31, 1994, 1995 and 1996 financial information to conform them to the six months ended June 30, 1996 and 1997 presentations. The following adjustments are necessary to reflect the Merger (in thousands): The pro forma combined statements of operations for the three and six months ended June 30, 1997, do not reflect nonrecurring costs and charges resulting directly from the Merger nor their related tax effect. These costs and charges are estimated as follows: Cost of terminating the management agreement............................... $12,000 Transaction related costs.................................................. 3,433 Transition costs........................................................... 325 ------ Total............................................................ $15,758 ======
Costs to terminate the management agreement represent amounts to be paid to Wyndham Hotel Corporation pursuant to the termination agreement. These amounts are to be funded: $8.0 million by Prime and $4.0 million by a shareholder of Homegate. The amount paid by the shareholder will be reflected as a contribution to capital and will be included as a Merger expense. Transaction related costs primarily represent management's best estimate of fees to be paid for investment banking, legal, accounting and other professional services. Transition costs represent management's best estimate of the costs to consolidate operations. This plan was formulated by Prime and Homegate management in order to more efficiently provide services in markets where multiple locations will exist as a result of the Merger. The plan of consolidation calls for affected operations to be merged over a period of three months. These costs include costs associated with the merging of Prime and Homegate operations, including the combining of systems, facilities and management resources as well as costs associated with the formation of a regional operating and reporting infrastructure. Included are $175,000 related to severance and related benefits. These costs represent anticipated payments to identified employees, as required by their respective employment agreements, who will be terminated after the Merger and certain other anticipated payments to be made to certain employees. A. To reflect the exchange of approximately 6.5 million shares of Prime Common Stock for all the issued and outstanding shares of Homegate Common Stock. Cash paid for fractional shares has been ignored, since the amounts are not expected to be material. B. To adjust pro forma amounts based on historical share amounts, converting each outstanding share of Homegate Common Stock into Prime Common Stock based on the fixed Exchange Ratio of 0.6073 per share. For the six months ended June 30, 1996 and the year ended December 31, 1996, the adjusted pro forma share amounts were prorated to reflect the inception date of Homegate's predecessor, ESLP, as of February 9, 1996. 108 117 DESCRIPTION OF PRIME CAPITAL STOCK The authorized capital stock of Prime consists of 75,000,000 shares of Common Stock and 20,000,000 shares of Preferred Stock. COMMON STOCK At June 30, 1997, 40,378,502 shares of Common Stock were issued and outstanding. Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of Prime's stockholders, including the election of directors. The Common Stock does not have cumulative voting rights. Subject to the preferential rights of any outstanding series of Preferred Stock, the holders of Common Stock will be entitled to such dividends as may be declared from time to time by the Board of Directors from funds legally available therefor, and will be entitled to receive pro rata all assets of Prime available for distribution to such holders upon liquidation. All shares of Common Stock are fully paid and non-assessable. PREFERRED STOCK The Board of Directors has authority to establish the designations, liquidation preferences, dividend rights, terms of redemption, conversion rights, sinking fund terms and all other preferences and rights (including voting rights) of any series of Preferred Stock. The ability of the Board of Directors to issue Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting powers of holders of Common Stock and, under certain circumstances, may discourage an attempt by others to gain control of Prime. WARRANTS Warrants to purchase 2,106,383 shares of Common Stock were issued to former shareholders of Prime's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share. The exercise price was determined from the average per share daily closing price of the Common Stock during the year following the effective date of the PMI reorganization. As of June 30, 1997, warrants to purchase 1,223,679 shares of Common Stock had been exercised. ANTI-TAKEOVER PROVISIONS Certain provisions of the Certificate of Incorporation and Bylaws of Prime summarized below may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including an attempt that might result in a premium over the market price for the shares held by stockholders. Staggered Board of Directors. The Certificate of Incorporation and the Bylaws provide that the Board of Directors will be divided into three classes of Directors, each class constituting approximately one-third of the total number of Directors and with the classes serving staggered three-year terms. The classification of Directors will have the effect of making it more difficult for shareholders to change the composition of the Board of Directors. Prime believes, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure continuity and stability of Prime's management and policies. The classification provisions could also have the effect of discouraging a third party from accumulating large blocks of Prime's stock or attempting to obtain control of Prime, even though such an attempt might be beneficial to Prime and its stockholders. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. Fair Price Provisions. Provisions of the Certificate of Incorporation (the "Fair Price Provisions") limit the ability of an Interested Stockholder (defined as the beneficial owner of 20% of outstanding voting shares) to effect certain transactions involving Prime. Unless the Fair Price Provisions are satisfied, an Interested Stockholder may not engage in a business combination involving Prime unless approved by 75% of Prime's outstanding voting shares or a majority of the Disinterested Directors (as defined therein). A business 109 118 combination includes a merger, consolidation, sale of assets valued at over $25.0 million or issuance or transfer of securities valued at over $25.0 million, or a similar transaction. In general, the Fair Price Provisions require that an Interested Stockholder pay shareholders at least the same amount of cash or the same amount and type of consideration paid by the Interested Stockholder when it initially acquired Prime's shares. The Fair Price Provisions are designed to discourage attempts to take over Prime in non-negotiated transactions utilizing two-tier pricing tactics, which typically involve the accumulation of a substantial block of the target corporation's stock followed by a merger or other reorganization of the acquired Prime on terms determined by the purchaser. Due to the difficulties of complying with the requirements of the Fair Price Provisions, the Fair Price Provisions generally discourage attempts to obtain control of Prime. LIMITATIONS ON DIRECTORS' LIABILITY Prime's Certificate of Incorporation provides that no director of Prime shall be liable to Prime or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Prime or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or redemptions or repurchases pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions is to eliminate the rights of Prime and its stockholders (through stockholders' derivative suits on behalf of Prime) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors under Federal securities laws. CERTAIN PROVISIONS OF DELAWARE LAW REGARDING AN INTERESTED STOCKHOLDER Section 203 of the Delaware General Corporation Law prohibits certain transactions between a Delaware corporation and an "interested stockholder," which is defined as a person who, together with any affiliates or associates of such person, beneficially owns, directly or indirectly, 15% or more of the outstanding voting shares of a Delaware corporation. This provision prohibits certain business combinations (defined broadly to include mergers, consolidations, sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation) between an interested stockholder and a corporation for a period of three years after the date the interested stockholder becomes an interested stockholder, unless (i) the business combination is approved by the corporation's board of directors prior to the date the interested stockholder becomes an interested stockholder; (ii) the interested stockholder acquired at least 85% of the voting stock of the corporation (other than stock held by directors who are also officers or by certain employee stock plans) in the transaction in which it becomes an interested stockholder; or (iii) the business combination is approved by a majority of the board of directors and by the affirmative vote of 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for Prime Common Stock is Continental Stock Transfer & Trust Company in New York, New York. 110 119 COMPARISON OF STOCKHOLDER RIGHTS The following is a summary of material differences between the rights of holders of Prime Common Stock and the rights of holders of Homegate Common Stock. Each of Prime and Homegate is organized under the laws of the State of Delaware. Any material differences in the rights of their respective stockholders would arise from various provisions of the Certificate of Incorporation and By-laws of each of Prime and Homegate. Among the differences between the rights of the holders of Prime Common Stock and Homegate Common Stock are the following: (i) the total number of authorized shares of capital stock of Prime is 95,000,000 shares, consisting of 75,000,000 shares of Prime Common Stock and 20,000,000 shares of Prime preferred stock, par value $.10 per share, while the total number of authorized shares of capital stock of Homegate is 25,000,000 shares, consisting of 20,000,000 shares of Homegate Common Stock and 5,000,000 shares of Homegate preferred stock, par value $.01 per share; (ii) the Certificate of Incorporation of Prime includes a fair price provision that limits the ability of an interested stockholder (defined as the beneficial owner of 20% of the outstanding voting shares) to effect certain transactions involving Prime without the approval of 75% of Prime's outstanding voting shares or a majority of the disinterested directors, while the Certificate of Incorporation of Homegate requires the approval of two-thirds of the Homegate voting shares for the adoption of an agreement of merger or consolidation or a sale or lease of substantially all of Homegate's assets; (iii) the By-laws of Prime provide that special meetings of the stockholders may be called by the Board of Directors, the President or by the President at the request of the holders of a majority of the outstanding shares of capital stock entitled to vote, while the Certificate of Incorporation of Homegate provides that only the Board of Directors or the Chairman of the Board of Directors, unless otherwise required by law, may call such meeting; (iv) the By-laws of Prime provide that to propose business to be transacted at a meeting, a stockholder's timely notice must be received by Prime not less than 50 days nor more than 75 days prior to such meeting, while the Certificate of Incorporation of Homegate provides that a stockholder's notice is timely if received by Homegate not less than 60 days nor more than 90 days prior to the scheduled date of the meeting regardless of any postponement, deferral or adjournment of that meeting to a later date; (v) the Certificate of Incorporation of Prime provides that the By-laws of Prime may be amended or repealed by the Board of Directors or by the affirmative vote of 75% of the voting power of all shares of Prime entitled to vote generally in the election of the directors, voting together as a single class, while the Certificate of Incorporation of Homegate requires the affirmative vote of the holders of at least 66 2/3% of the voting power of all shares of Homegate entitled to vote generally in the election of directors, voting together as a single class, to amend the By-laws of Homegate; (vi) the Certificate of Incorporation of Homegate provides that the Board of Directors, each committee and each individual director, in discharging their respective duties, may consider the effects of any action taken or proposed to be taken on employees, franchisees, associates, customers, suppliers and/or creditors and the communities in which Homegate owns or leases properties or conducts business; and (vii) the Certificate of Incorporation of Prime may be amended by the affirmative vote of a majority of the holders or of: (a) at least 75% of the voting power of all shares of Prime entitled to vote generally in the election of the directors, voting together as a single class, regarding the provision of the Certificate of Incorporation relating to the amendment of the By-Laws, (b) at least 75% of the outstanding shares of Prime capital stock entitled to vote on such amendment regarding the provision of the Certificate of Incorporation relating to the approval of a compromise or arrangement to be entered into by Prime and its creditors, and (c) at least 75% of the votes entitled to be cast by the holders of all the then outstanding shares of voting stock, excluding voting stock owned by any interested stockholder, regarding the provision of the Certificate of Incorporation relating to the fair price provision regarding transactions with an interested stockholder, while the Certificate of Incorporation of Homegate requires the affirmative vote of the holders of at least 66 2/3% of the voting power of all Homegate securities entitled to vote generally in the election of directors to amend the Certificate of Incorporation regarding the number, classes, vacancies, removal and election of directors, annual and special meetings of stockholders, adoption of an agreement of merger or consolidation or a sale or lease of substantially all of Homegate's assets, amendment of the By-Laws, factors to be considered by the Board of Directors when taking a decision, approval of an agreement to be entered into by Homegate and its creditors or its stockholders, liability of directors, and indemnification. 111 120 Both the Certificate of Incorporation of Prime and the Certificate of Incorporation of Homegate provide for a staggered board of directors divided into three classes, with the classes serving staggered three-year terms, and for action to be taken at an annual or special meeting only upon the vote of the stockholders and not by written consent. Neither the Certificate of Incorporation nor the By-laws of either Prime or Homegate contain any other provisions designed to delay or impede a change of control or supermajority voting provisions. Nor are there other material differences in the rights of holders of Prime Common Stock and Homegate Common Stock. 112 121 SECURITY OWNERSHIP OF HOMEGATE The following table sets forth certain information regarding the beneficial ownership of the Homegate Common Stock as of June 30, 1997 by (i) each person known by Homegate to own beneficially more than 5% of any class of Homegate's outstanding voting securities, (ii) each of Homegate's directors, (iii) each named executive officer of Homegate and (iv) all current directors and executive officers of Homegate as a group. Unless otherwise indicated, Homegate believes that each person or entity named below has sole voting and investment power with respect to all shares shown as beneficially owned by such person or entity, subject to community property laws where applicable and the information set forth in the footnotes to the table below.
NUMBER OF SHARES NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS - ----------------------------------------------------------- --------------------- ---------------- JMI/Greystar Extended Stay Partners, L.P................... 2,274,992 21.2% Two Riverway, Suite 850 Houston, TX 77056 Developer Extended Stay Partners, L.P.(1).................. 1,055,759 9.8% Two Riverway, Suite 850 Houston, TX 77056 CRI/ESH Partners, L.P.(2).................................. 2,033,424 18.9% 3200 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201 Robert A. Faith(3)......................................... 3,720,923 34.6% Two Riverway, Suite 850 Houston, TX 77056 William B. Buchanan, Jr.................................... 5,000 * James D. Carreker(4)....................................... 5,000 * Harlan R. Crow(5).......................................... 3,206,739 29.8% Anthony W. Dona............................................ 45,903 * John R. Huff............................................... 5,000 * John J. Moores(6).......................................... 390,172 3.6% Charles E. Noell(4)........................................ 0 * Leonard W. Wood(7)......................................... 126,777 1.2% John C. Kratzer............................................ 229,513 2.1% Tim V. Keith............................................... 4,348 * Joel Kinzie Oldham IV...................................... 4,348 * Directors and named executive officers of Homegate as a group.................................................... 6,309,356 58.7%
- --------------- * Less than 1%. (1) Shares owned by Developer Extended Stay Partners, L.P. will be voted by its general partner, DESP General Partner, L.L.C., until such time as such shares are distributed by such partnership to its partners, TCR Extended Stay I Limited Partnership and Greystar Realty Services, L.P. (2) Crow indirectly owns an approximate 74% limited partner interest in such partnership. (3) Includes 2,274,992 shares owned by JMI/Greystar Extended Stay Partners, L.P. which may be deemed to be beneficially owned by Mr. Faith, who is the sole stockholder of Greystar Holdings, Inc., the sole general partner of such partnership. Mr. Faith disclaims beneficial ownership of all such shares held by such partnership beyond his percentage ownership therein. Includes 1,055,759 shares owned by Developer Extended Stay Partners, L.P. as to which Mr. Faith has shared voting power as a result of his indirect ownership of a percentage interest in DESP General Partner, L.L.C., the sole general partner of such partnership. Mr. Faith disclaims beneficial ownership of all such shares beyond his percentage ownership therein. Includes 390,172 shares owned by JMI/Greystar Realty Partners, L.P. as to which Mr. Faith has shared voting power as a result of his being the sole stockholder of Greystar Holdings, Inc., 113 122 one of the two general partners of such partnership. Mr. Faith disclaims beneficial ownership of all such shares held by such partnership beyond his percentage ownership therein. (4) Includes fully vested options granted under the Homegate Hospitality, Inc. 1996 Long-Term Incentive Plan (the "1996 Plan") to non-employee directors to acquire 5,000 shares of Homegate Common Stock. (5) Includes 13,865 shares owned by Crow Family, Inc., of which Mr. Crow is the sole director. Includes 2,033,424 shares owned by CRI/ESH Partners, L.P. and 98,691 shares owned by Crow Hotel Realty Investors, L.P., as Crow Family, Inc. is the sole general partner of each such partnership. Also includes 1,055,759 shares owned by Developer Extended Stay Partners, L.P., as to which Mr. Crow has shared voting power as a result of Crow Family, Inc.'s ownership of a percentage interest in DESP General Partner, L.L.C., the sole general partner of such partnership and fully vested options granted under the 1996 Plan to non-employee directors. Mr. Crow disclaims beneficial ownership of all shares other than the shares subject to an option to acquire 5,000 shares of Homegate Common Stock. (6) Includes 390,172 shares owned by JMI/Greystar Realty Partners, L.P., as to which Mr. Moores has shared voting power as a result of his ownership of JMI Realty, Inc., one of the two general partners of such partnership. Mr. Moores disclaims beneficial ownership of all such shares held by such partnership beyond his percentage ownership therein. Also includes fully vested options granted under the 1996 Plan to non-employee directors to acquire 5,000 shares of Homegate Common Stock. Excludes 574,436 shares owned by JMI/Greystar Extended Stay Partners, L.P. attributable to Mr. Moores' percentage interest in such partnership. (7) Includes 121,777 shares of Homegate Common Stock held directly and fully vested options granted under the 1996 Plan to non-employee directors to acquire 5,000 shares of Homegate Common Stock. 114 123 OTHER MATTERS It is not expected that any matters other than those described in this Proxy Statement -- Prospectus will be brought before the Homegate Special Meeting. If any other matters are presented, however, it is the intention of the persons named in the Homegate proxy to vote the proxy in accordance with the discretion of the persons named in such proxy. LEGAL MATTERS Certain legal matters with respect to the validity of the securities offered hereby will be passed upon for Prime by Willkie Farr & Gallagher, New York, New York. Jack H. Nusbaum, a director of Prime who beneficially owns 10,000 shares of Prime Common Stock and an additional 55,000 shares of Prime Common Stock underlying stock options, is a partner in the law firm of Willkie Farr & Gallagher. EXPERTS The Consolidated Financial Statements of Prime Hospitality Corp. included and incorporated by reference in this Proxy Statement-Prospectus, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, and are included and incorporated by reference herein in reliance upon the authority of said firm as experts in giving said report. The Consolidated Financial Statements of Homegate Hospitality, Inc. at December 31, 1996 and for the period from inception (February 9, 1996) through December 31, 1996, included in this Proxy Statement-Prospectus, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given the authority of said firm as experts in accounting and auditing. HOMEGATE STOCKHOLDER PROPOSALS If the Merger is not consummated, Homegate will hold a 1998 Annual Meeting of Stockholders. As noted in Homegate's proxy statement relating to the 1997 Annual Meeting of Stockholders, any stockholder proposals intended to be presented at Homegate's 1998 Annual Meeting of Stockholders, if the Merger is not consummated prior thereto, must have been received by Homegate on or before December 1, 1997 to be eligible for inclusion in the Proxy Statement and form of proxy to be distributed by the Homegate Board of Directors in connection with such meeting. 115 124 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- PRIME HOSPITALITY CORP. AND SUBSIDIARIES Consolidated Financial Statements: Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited)................... F-2 Statements of Income (Unaudited) for the Six Months Ended June 30, 1996 and June 30, 1997............................................................................. F-3 Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1996 and June 30, 1997......................................................................... F-4 Notes to Interim Consolidated Financial Statements.................................. F-5 Report of Independent Public Accountants.............................................. F-8 Balance Sheets at December 31, 1995 and 1996........................................ F-9 Statements of Income for the Years Ended December 31, 1994, 1995 and 1996........... F-10 Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996............................................................................. F-11 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... F-12 Notes to Consolidated Financial Statements.......................................... F-13
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.
PAGE ----- HOMEGATE HOSPITALITY, INC. Financial Statements and Schedule: Consolidated Balance Sheets at June 30, 1997 (Unaudited) and December 31, 1996...... F-28 Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 1997 and June 30, 1996.................................................. F-29 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1997 and June 30, 1996........................................................... F-30 Notes to Consolidated Financial Statements.......................................... F-31 Report of Independent Auditors........................................................ F-34 Consolidated Balance Sheet at December 31, 1996..................................... F-35 Consolidated Statement of Operations for the Period from Inception (February 9, 1996) through December 31, 1996.................................................. F-36 Consolidated Statement of Changes in Stockholders' Equity for the Period from Inception (February 9, 1996) through December 31, 1996........................... F-37 Consolidated Statement of Cash Flows for the Period from Inception (February 9, 1996) through December 31, 1996.................................................. F-38 Notes to Financial Statements....................................................... F-39 Schedule III -- Real Estate Investments and Accumulated Depreciation -- December 31, 1996................................................................................ F-46
F-1 125 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND JUNE 30, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30, 1996 1997 ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................ $ 15,997 $ 78,762 Marketable securities available for sale......................... 238 238 Restricted cash.................................................. 2,637 -- Accounts receivable, net of reserves............................. 12,653 16,738 Current portion of mortgages and notes receivable................ 1,338 2,622 Other current assets............................................. 11,228 13,390 -------- -------- Total current assets..................................... 44,091 111,750 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization.................................... 695,253 812,367 Mortgages and notes receivable, net of current portion............. 24,195 19,858 Other assets....................................................... 22,559 28,425 -------- -------- Total Assets............................................. $786,098 $ 972,400 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt.......................................... $ 3,419 $ 3,083 Other current liabilities........................................ 45,887 50,714 -------- -------- Total current liabilities................................ 49,306 53,797 Long-term debt, net of current portion............................. 298,875 457,912 Other liabilities.................................................. 18,022 16,538 -------- -------- Total liabilities........................................ 366,203 528,247 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued..................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized; 39,804,917 and 40,378,502 shares issued and outstanding at December 31, 1996 and June 30, 1997, respectively.................................................. 398 404 Capital in excess of par value................................... 338,825 342,425 Retained earnings................................................ 80,672 102,362 Treasury stock................................................... -- (1,038) -------- -------- Total stockholders' equity.................................... 419,895 444,153 -------- -------- Total Liabilities and Stockholders' Equity............... $786,098 $ 972,400 ======== ========
See Accompanying Notes to Interim Consolidated Financial Statements. F-2 126 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- -------------------- 1996 1997 1996 1997 ------- ------- ------- -------- Revenues: Lodging.......................................... $52,274 $66,485 $94,248 $124,606 Food and beverage................................ 11,456 11,257 19,479 20,706 Management and other fees........................ 1,791 1,975 3,484 3,136 Interest on mortgages and notes receivable....... 1,023 1,574 3,704 3,303 Business interruption insurance.................. 2,891 1,376 6,629 6,366 Rental and other................................. 458 740 962 1,370 ------- ------- ------- -------- Total revenues........................... 69,893 83,407 128,506 159,487 ------- ------- ------- -------- Costs and expenses: Direct hotel operating expenses: Lodging....................................... 13,526 15,746 24,150 30,476 Food and beverage............................. 8,675 7,691 15,589 15,656 Selling and general........................... 15,734 15,604 29,743 32,593 Occupancy and other operating.................... 4,102 5,712 7,584 11,256 General and administrative....................... 4,538 5,130 8,757 10,105 Depreciation and amortization.................... 6,228 7,681 11,102 15,101 ------- ------- ------- -------- Total costs and expenses................. 52,803 57,564 96,925 115,187 ------- ------- ------- -------- Operating income................................... 17,090 25,843 31,581 44,300 Investment income.................................. 856 1,396 2,121 1,627 Interest expense................................... (6,008) (7,530) (12,209) (11,760) Other income....................................... -- 1,858 3,432 1,858 ------- ------- ------- -------- Income before income taxes and extraordinary 11,938 21,567 24,925 36,025 items............................................ Provision for income taxes......................... 4,775 8,627 9,970 14,410 ------- ------- ------- -------- Income before extraordinary items.................. 7,163 12,940 14,955 21,615 Extraordinary items -- Gains on discharges of 27 53 176 75 indebtedness (net of income taxes)............... ------- ------- ------- -------- Net income......................................... $ 7,190 $12,993 $15,131 $ 21,690 ======= ======= ======= ======== Earnings per common share: Primary: Income before extraordinary items................ $ .22 $ .31 $ .45 $ .52 Extraordinary items.............................. -- -- .01 -- ------- ------- ------- -------- Net earnings....................................... $ .22 $ .31 $ .46 $ .52 ======= ======= ======= ======== Fully diluted: Income before extraordinary items................ $ .20 $ .28 $ .42 $ .48 Extraordinary items.............................. -- -- -- -- ------- ------- ------- -------- Net earnings....................................... $ .20 $ .28 $ .42 $ .48 ======= ======= ======= ========
See Accompanying Notes to Interim Consolidated Financial Statements. F-3 127 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------------- 1996 1997 --------- --------- Cash flows from operating activities: Net income......................................................... $ 15,131 $ 21,690 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 11,102 15,101 Amortization of deferred financing costs........................ 685 1,319 Business interruption insurance revenue......................... (6,629) (6,366) Utilization of net operating loss carryforwards................. 4,131 1,824 Gain on settlement of a note receivable......................... (1,771) -- Gains on discharges of indebtedness............................. (293) (125) Gain on disposal of assets...................................... (2,879) (1,858) Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable........................................... (1,571) (4,084) Other current assets.......................................... 1,901 (2,883) Other liabilities............................................. 5,043 7,574 --------- --------- Net cash provided by operating activities.................. 24,850 32,192 --------- --------- Cash flows from investing activities: Net proceeds from mortgages and notes receivable................... 8,407 509 Disbursements for mortgages and notes receivable................... (800) -- Proceeds from sales of property, equipment and leasehold improvements.................................................... 3,706 25,614 Purchases of property, equipment and leasehold improvements........ (142,256) (153,020) Proceeds from insurance settlement................................. -- 2,500 Decrease in restricted cash........................................ 5,875 2,637 Proceeds from sales of marketable securities....................... 10,752 -- Proceeds from retirement of debt securities........................ 1,068 800 Other.............................................................. 1,302 (415) --------- --------- Net cash used in investing activities...................... (111,946) (121,375) --------- --------- Cash flows from financing activities: Net proceeds from issuance of debt................................. 152,992 260,003 Payments of debt................................................... (75,233) (108,799) Proceeds from the exercise of stock options and warrants........... 449 744 --------- --------- Net cash provided by financing activities.................. 78,208 151,948 --------- --------- Net increase (decrease) in cash and cash equivalents............... (8,888) 62,765 Cash and cash equivalents at beginning of period................... 49,533 15,997 --------- --------- Cash and cash equivalents at end of period......................... $ 40,645 $ 78,762 ========= =========
See Accompanying Notes to Interim Consolidated Financial Statements. F-4 128 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION In the opinion of management, the accompanying interim unaudited consolidated financial statements of Prime Hospitality Corp. and subsidiaries (the "Company") contain all material adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 1997 and the results of its operations for the three and six months ended June 30, 1996 and 1997 and cash flows for the six months ended June 30, 1996 and 1997. The consolidated financial statements for the three and six months ended June 30, 1996 and 1997 were prepared on a consistent basis with the audited consolidated financial statements for the year ended December 31, 1996. Certain reclassifications have been made to the June 30, 1996 consolidated financial statements to conform them to the June 30, 1997 presentation. The consolidated results of operations for the three and six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. NOTE 2 -- ACQUISITIONS In February 1997, the Company acquired the Monroe Township, NJ Holiday Inn for approximately $11.2 million in cash. The acquisition was accounted for as a purchase and, accordingly, the revenues and expenses have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements since January 1, 1997, reported results would not have been materially different. NOTE 3 -- DEBT In March 1997, the Company issued $200.0 million of 9-3/4% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes") in reliance upon Rule 144A under the Securities Act of 1933, as amended. Interest on the notes is paid semi-annually on April 1 and October 1. The notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company on or after April 1, 2002 at premiums to principal which decline on each anniversary date. The Company utilized a portion of the proceeds to pay $101.1 million of debt and intends to utilize the remainder to finance its AmeriSuites expansion. The Company established a revolving credit facility (the "Revolving Credit Facility") in 1996 with a group of financial institutions providing for availability of funds up to the lesser of $100.0 million and a borrowing base determined under the agreement. The Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. The Revolving Credit Facility bears interest at LIBOR plus 2.25% and is available through June 2001. During the three months ended March 31, 1997, the Company borrowed $67.5 million under the Revolving Credit Facility and proceeds were used primarily for the development of AmeriSuites hotels. In March 1997, the Company repaid the outstanding borrowings under the Revolving Credit Facility with the proceeds from the issuance of the Senior Subordinated Notes. As of June 30, 1997, the Company has borrowing availability of $100.0 million under the Revolving Credit Facility. NOTE 4 -- EARNINGS PER COMMON SHARE Primary earnings per common share was computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each period. F-5 129 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average number of common shares used in computing primary earnings per share was 33.2 million and 41.8 million for the three months ended June 30, 1996 and 1997, respectively, and 33.0 million and 41.8 million for the six months ended June 30, 1996 and 1997, respectively. Fully diluted earnings per share, in addition to the adjustments for primary earnings per share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% convertible subordinated notes from their issuance in April 1995. The weighted average number of common shares used in computing fully diluted earnings per share was 40.5 million and 49.2 million for the three months ended June 30, 1996 and 1997, respectively, and 40.5 million and 49.1 million for the six months ended June 30, 1996 and 1997, respectively. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, primary earnings per share will be replaced by basic earnings per share which will exclude the dilutive effect of stock options and warrants. In addition, fully diluted earnings per share will be called diluted earnings per share and will include a change in applying the treasury stock method. The Company is required to adopt SFAS 128 for the year ended December 31, 1997 and to restate all prior periods. The Company believes that adoption of SFAS 128 will increase reported primary earnings per share and will have no impact on fully diluted earnings per share. NOTE 5 -- BUSINESS INTERRUPTION INSURANCE REVENUE In September 1995, the Company-owned Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands suffered damage when Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier settled the Company's property and business interruption insurance claim with respect to the Frenchman's Reef for $25.0 million. In July 1996, the Company received the final installment under its settlement, bringing the net proceeds to $22.8 million, net of deductibles, for which the Company provided a reserve of $2.2 million in 1995. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. The Company is currently reviewing its claim for property damage with its insurance carrier and is in the process of preparing a claim under its business interruption insurance with regard to Hurricane Bertha. Although the Company continued to operate the hotel through March 31, 1997, the impact of the hurricanes has caused operating profits to decline from prior years' levels. In addition to recording the operating revenues and expenses of the Frenchman's Reef, the Company also recorded business interruption insurance revenue of $2.9 million and $1.4 million for the three months ended June 30, 1996 and 1997, respectively, and $6.6 million and $6.4 million for the six months ended June 30, 1996 and 1997, respectively. The 1997 amount includes an estimated recovery of insurance proceeds arising out of Hurricane Bertha. The Company has begun the redevelopment of the Frenchman's Reef. Redevelopment plans provide for significant hurricane-related renovations and certain enhancements. Due to the extent of the renovations, the Company closed the hotel on April 1, 1997 and plans to reopen it in December 1997. NOTE 6 -- INTEREST EXPENSE The Company capitalized $1.7 million and $3.7 million, for the three months ended June 30, 1996 and 1997, respectively, and $3.0 million and $7.4 million for the six months ended June 30, 1996 and 1997 respectively, of interest related to borrowings used to finance hotel construction. Also included in interest expense is the amortization of deferred financing fees of $312,000 and $755,000, for the three months ended June 30, 1996 and 1997, respectively, and $685,000 and $1.3 million for the six months ended June 30, 1996 and 1997, respectively. F-6 130 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- OTHER INCOME Other income consists of items which are not considered part of the Company's recurring operations. For the six months ended June 30, 1996, other income consisted of a gain on the settlement of a note receivable of $1.8 million and a gain on the sale of a hotel of $1.6 million. For the six months ended June 30, 1997, other income consisted of a net gain on property transactions of $1.9 million. NOTE 8 -- TREASURY STOCK In connection with the exercise of certain stock options, the Company re-acquired 50,039 shares of its common stock. NOTE 9 -- SUBSEQUENT EVENT On July 25, 1997, the Company entered into an agreement to merge with Homegate Hospitality, Inc. ("Homegate"), a provider of mid-price extended-stay hotels. Under this agreement, the Company will issue approximately 6.5 million shares of common stock based upon a fixed exchange ratio of 0.6073 per share of the Company's common stock for each of the approximately 10.7 million outstanding shares of Homegate. The transaction is expected to be accounted for as a pooling of interests. The merger agreement is subject to the approval of the shareholders of Homegate and other customary terms and conditions and is expected to be completed in the fourth quarter of 1997. F-7 131 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Prime Hospitality Corp.: We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries ("the Company") as of December 31, 1995 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey January 28, 1997 F-8 132 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
1995 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................ $ 49,533 $ 15,997 Marketable securities available for sale............................. 11,929 238 Restricted cash...................................................... 8,973 2,637 Accounts receivable, net of reserves of $213 and $420 in 1995 and 1996, respectively.................................... 13,139 12,653 Current portion of mortgages and notes receivable.................... 1,533 1,338 Other current assets................................................. 8,070 11,228 -------- -------- Total current assets.............................................. 93,177 44,091 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization........................................ 398,201 695,253 Mortgages and notes receivable, net of current portion................. 64,962 24,195 Other assets........................................................... 16,901 22,559 -------- -------- Total Assets...................................................... $573,241 $786,098 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt.............................................. $ 5,731 $ 3,419 Other current liabilities............................................ 38,961 45,887 -------- -------- Total current liabilities......................................... 44,692 49,306 Long-term debt, net of current portion................................. 276,920 298,875 Other liabilities...................................................... 18,713 18,022 -------- -------- Total liabilities................................................. 340,325 366,203 -------- -------- Commitments and contingencies.......................................... -- -- Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued........................................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized 31,004,499 and 39,804,917 shares issued and outstanding in 1995 and 1996, respectively............................................ 310 398 Capital in excess of par value....................................... 183,050 338,825 Retained earnings.................................................... 49,556 80,672 -------- -------- Total stockholders' equity........................................ 232,916 419,895 -------- -------- Total Liabilities and Stockholders' Equity................... $573,241 $786,098 ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-9 133 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- Revenues: Lodging.................................................. $ 88,753 $146,184 $198,947 Food and beverage........................................ 18,090 37,955 41,437 Management and other fees................................ 10,021 8,115 6,729 Interest on mortgages and notes receivable............... 15,867 11,895 6,090 Business interruption insurance.......................... -- -- 13,562 Rental and other......................................... 1,572 1,479 2,103 -------- -------- -------- Total revenues................................... 134,303 205,628 268,868 -------- -------- -------- Costs and expenses: Direct hotel operating expenses: Lodging............................................... 25,490 38,383 51,577 Food and beverage..................................... 13,886 28,429 32,053 Selling and general................................... 27,244 49,753 61,789 Occupancy and other operating............................ 9,799 11,763 16,833 General and administrative............................... 15,089 15,515 17,813 Depreciation and amortization............................ 9,384 15,227 23,632 Other expense............................................ -- 2,200 -- -------- -------- -------- Total costs and expenses......................... 100,892 161,270 203,697 -------- -------- -------- Operating income........................................... 33,411 44,358 65,171 Investment income.......................................... 1,966 4,861 4,610 Interest expense........................................... (14,036) (22,350) (22,564) Other income............................................... 9,089 2,239 4,306 -------- -------- -------- Income before income taxes and extraordinary items......... 30,430 29,108 51,523 Provision for income taxes................................. 12,172 11,643 20,609 -------- -------- -------- Income before extraordinary items.......................... 18,258 17,465 30,914 Extraordinary items -- gains on discharges of indebtedness (net of income taxes of $120, $70 and $135 in 1994, 1995 and 1996, respectively).................................. 172 104 202 -------- -------- -------- Net income................................................. $ 18,430 $ 17,569 $ 31,116 ======== ======== ======== Earnings per common share: Primary: Income before extraordinary items........................ $ .57 $ .54 $ .85 Extraordinary items...................................... .01 -- -- -------- -------- -------- Earnings per common share.................................. $ .58 $ .54 $ .85 ======== ======== ======== Fully diluted: Income before extraordinary items........................ $ .57 $ .54 $ .80 Extraordinary items...................................... .01 -- -- -------- -------- -------- Earnings per common share.................................. $ .58 $ .54 $ .80 ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-10 134 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK CAPITAL IN ------------------- EXCESS OF RETAINED SHARES AMOUNT PAR VALUE EARNINGS TOTAL ---------- ------ ---------- -------- -------- Balance December 31, 1993..................... 29,988,674 $300 $ 157,507 $ 13,557 $171,364 Net income.................................... -- -- -- 18,430 18,430 Utilization of net operating loss carryforwards............................... -- -- 5,861 -- 5,861 Amortization of pre-fresh start tax basis differences................................. -- -- 6,954 -- 6,954 Federal income tax refund..................... -- -- 200 -- 200 Compensation expense related to stock option plan........................................ -- -- 60 -- 60 Proceeds and tax benefits from exercise of stock options............................... 216,080 2 640 -- 642 Proceeds from exercise of stock warrants...... 204,617 2 552 -- 554 ---------- ---- -------- ------- -------- Balance December 31, 1994..................... 30,409,371 304 171,774 31,987 204,065 Net income.................................... -- -- -- 17,569 17,569 Utilization of net operating loss carryforwards............................... -- -- 3,370 -- 3,370 Amortization of pre-fresh start tax basis differences................................. -- -- 6,167 -- 6,167 Compensation expense related to stock option plan........................................ -- -- 16 -- 16 Proceeds and tax benefits from exercise of stock options............................... 220,159 2 705 -- 707 Proceeds from exercise of stock warrants...... 374,969 4 1,018 -- 1,022 ---------- ---- -------- ------- -------- Balance December 31, 1995..................... 31,004,499 310 183,050 49,556 232,916 Net income.................................... -- -- -- 31,116 31,116 Utilization of net operating loss carryforwards............................... -- -- 10,590 -- 10,590 Amortization of pre-fresh start tax basis differences................................. -- -- 1,243 -- 1,243 Compensation expense related to stock option plan........................................ -- -- 5 -- 5 Proceeds from issuance of stock............... 8,250,000 83 141,337 -- 141,420 Proceeds and tax benefits from exercise of stock options............................... 148,492 1 1,516 -- 1,517 Proceeds from exercise of stock warrants...... 401,926 4 1,084 -- 1,088 ---------- ---- -------- ------- -------- Balance December 31, 1996..................... 39,804,917 $398 $ 338,825 $ 80,672 $419,895 ========== ==== ======== ======= ========
See Accompanying Notes to Consolidated Financial Statements. F-11 135 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- Cash flows from operating activities: Net income............................................... $ 18,430 $ 17,569 $ 31,116 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 9,427 15,974 25,884 Utilization of net operating loss carryforwards....... 5,861 3,370 10,590 Gains on settlements of notes receivable.............. (6,224) (822) (1,774) Gains on discharges of indebtedness................... (292) (174) (337) Gains on sales of assets.............................. (1,099) (1,957) (4,349) Amortization of pre-fresh start tax basis differences......................................... 6,954 6,167 1,243 Deferred income taxes................................. (205) 1,557 1,386 Compensation expense related to stock options......... 60 16 5 Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable................................... (1,945) (5,320) 486 Other current assets.................................. 127 (887) (3,158) Other liabilities..................................... (2,760) 3,135 4,844 ------- -------- --------- Net cash provided by operating activities............. 28,334 38,628 65,936 ------- -------- --------- Cash flows from investing activities: Net proceeds from mortgages and other notes receivable... 36,198 27,603 8,933 Disbursements for mortgages and notes receivable......... (1,100) (12,704) (800) Proceeds from sales of property, equipment and leasehold improvements.......................................... 1,480 8,167 12,962 Purchases of property, equipment and leasehold improvements.......................................... (48,473) (74,758) (101,891) Construction of new hotels............................... (14,549) (37,518) (184,566) Decrease in restricted cash.............................. 1,268 752 6,336 Proceeds from insurance settlement....................... -- 7,500 1,500 Proceeds from sales of marketable securities............. 1,116 2,928 15,023 Purchase of marketable securities........................ (5,885) (11,520) -- Other.................................................... (3,965) 846 1,546 ------- -------- --------- Net cash used in investing activities................. (33,910) (88,704) (240,957) ------- -------- --------- Cash flows from financing activities: Net proceeds from issuance of debt....................... 19,026 119,360 182,196 Payments of debt......................................... (43,771) (33,961) (184,740) Proceeds from the exercise of stock options and warrants.............................................. 1,196 1,729 2,605 Proceeds from issuance of common stock................... -- -- 141,420 Other.................................................... 80 (43) 4 ------- -------- --------- Net cash provided by (used in) financing activities... (23,469) 87,085 141,485 ------- -------- --------- Net increase (decrease) in cash and cash equivalents....... (29,045) 37,009 (33,536) Cash and cash equivalents at beginning of period........... 41,569 12,524 49,533 ------- -------- --------- Cash and cash equivalents at end of period................. $ 12,524 $ 49,533 $ 15,997 ======= ======== =========
See Accompanying Notes to Consolidated Financial Statements. F-12 136 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES Prime Hospitality Corp. (the "Company") is a hotel owner/operator with a portfolio of 108 hotels, as of February 28, 1997, located in 25 states and the U. S. Virgin Islands. The Company owns and operates 95 hotels and manages the remaining 13 hotels for third parties. The Company operates its hotels under its proprietary AmeriSuites and Wellesley Inns brand names and under franchise agreements with national hotel chains including Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson. BASIS OF PRESENTATION The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992. Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximate the present values of amounts to be paid determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents are highly liquid unrestricted investments with a maturity of three months or less when acquired. MARKETABLE SECURITIES Marketable securities consist primarily of commercial paper and other corporate debt and equity securities which mature or are available for sale within one year. Marketable securities are valued at current market value, which approximates cost. F-13 137 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RESTRICTED CASH Restricted cash consists primarily of highly liquid investments that serve as collateral for debt obligations due within one year. MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted for payments and other advances since that date. The amount of interest income recognized on mortgages and notes receivable is generally based on the stated interest rate and the carrying value of the notes. The Company has a number of subordinated or junior mortgages which remit payment based on hotel cash flow. Because there was substantial doubt that the Company would recover any value, these mortgages were assigned no value in the Company's consolidated financial statements when the Company adopted fresh-start reporting on July 31, 1992. Interest on cash flow mortgages and delinquent loans is generally recognized when cash is received. In 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan (SFAS 114)" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118)." Following these standards, the Company measures impairment of a loan based on the present value of expected future cash flows (net of estimated costs to sell) discounted at the loan's effective interest rate. Impairment can also be measured based on a loan's observable market price or the fair value of collateral, if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company will establish a valuation allowance, or adjust existing valuation allowances, with a corresponding charge or credit to operations. Based upon its evaluation, the Company determined that no impairment had occurred as of December 31, 1996. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Properties identified for disposal are stated at their estimated net realizable value. During 1995, the Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121)". Following this standard, the Company evaluates whether impairment has occurred at each of its properties based upon the future cash flows (undiscounted and before interest charges) as compared to the carrying value of the property. Based upon its evaluation as of December 31, 1996, the Company has determined that no impairment has occurred. OTHER ASSETS Other assets consist primarily of deferred issuance costs related to the Company's debt obligations. Deferred issuance costs are amortized over the respective terms of the loans using the effective interest method. SELF-INSURANCE PROGRAMS The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay. F-14 138 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company. Provisions have been made in the consolidated financial statements which represent the expected future payments based on the estimated ultimate cost for incidents incurred through the balance sheet date. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. For financial reporting purposes, the Company follows SFAS No. 109 "Accounting for Income Taxes". In accordance with SFAS 109, as well as SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized. EARNINGS PER COMMON SHARE Primary earnings per share is computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each year. The weighted average number of common shares used in computing primary earnings per share was 32,022,000, 32,461,000 and 36,501,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Fully diluted earnings per share, in addition to the adjustments for primary earnings per share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes from their issuance in April 1995. The weighted average number of common shares used in computing fully diluted earnings per share was 37,423,000 and 43,794,000 for the years ended December 31, 1995 and 1996, respectively. PRE-OPENING COSTS Non-capital expenditures incurred prior to opening new or renovated hotels such as payroll and operating supplies are deferred and expensed within one year after opening. Pre-opening costs charged to expense were $86,000, $364,000 and $1.3 million for the years ended December 31, 1994, 1995 and 1996. As of December 31, 1996, $2.1 million of pre-opening costs are included in other current assets. INTEREST RATE AGREEMENTS The Company has an interest rate swap agreement with a major financial institution which reduces the Company's exposure to interest rate fluctuations on its variable rate debt. The accounting treatment for this agreement is to accrue net interest to be received or to be paid as an adjustment to interest expense as incurred. The Company has an interest rate hedge agreement with a major financial institution which terminates in April 1997 to reduce its interest rate exposure on the anticipated financing of its development program in 1997. Gains or losses resulting from this hedge will be deferred and amortized to interest expense over the life of the anticipated obligation. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1994 and 1995 consolidated financial statements to conform them to the December 31, 1996 presentation. F-15 139 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- HOTEL ACQUISITIONS On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The acquisition enabled the Company to establish full control over its proprietary Wellesley Inns brand, with all 28 Wellesley Inns now owned and operated by the Company. The acquisition price was comprised of approximately $60.4 million to purchase the first mortgages on the 18 hotels, with a face value of approximately $70.5 million, and $4.7 million to purchase the interests of the three partnerships which owned the hotels. Approximately $1.9 million of the total purchase price was paid to a partnership in which a general partner is a related party. In connection with the transaction, the Company also terminated its management agreements and junior subordinated mortgages related to the 18 hotels. In September 1996, the Company acquired the Ramada Plaza Suite in Secaucus, NJ and repositioned the hotel as a Radisson Suite Hotel. The acquisition price was $16.5 million, which included the assumption of $12.2 million of debt. The 1996 acquisitions have been accounted for as purchases and, accordingly, the revenues and expenses of those hotels have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements since January 1, 1996, reported results would not have been materially different. In March 1995, the Company acquired the option of ShoLodge, Inc. ("ShoLodge") to purchase a 50% interest in eleven of the Company's AmeriSuites hotels and also acquired the remaining AmeriSuites hotel not already owned by the Company. In 1993, the Company and its wholly-owned subsidiary, Suites of America, Inc. ("SOA") entered into agreements with ShoLodge, a company controlled by a former director, designed to further the growth of its AmeriSuites hotels from the six hotels owned by the Company at that time. Pursuant to these agreements, (I) ShoLodge agreed to build and finance six additional AmeriSuites hotels and received an option to purchase a 50% interest in SOA and (ii) the Company received an option pursuant to which it could require ShoLodge to purchase a 50% interest in SOA. The exercise of the option by ShoLodge was scheduled to occur in January 1995, when the Company and ShoLodge began to negotiate the Company's buyout of ShoLodge's option. The consideration payable by the Company was based upon the fair market value of the properties. The consideration totaled $19.7 million and was comprised of (I) $16.1 million in cash, which was paid in 1995, plus (ii) $18.5 million in notes maturing in 1997, less (iii) $14.9 million of existing debt on five hotels, which was forgiven at face value. The transaction resulted in a net increase of approximately $3.6 million of long-term debt. No gain or loss was recorded on the forgiveness of debt. As a result of this transaction, the Company assumed management of these hotels. In August 1995, the Company entered into an agreement to purchase four Bradbury Suites hotels for $18.7 million. The hotels, comprising 447 rooms, were subsequently converted to the Company's proprietary AmeriSuites brand. In August 1995, the Company also purchased the 149 room all-suite St. Tropez Hotel and Shopping Center in Las Vegas for $15.2 million. Revenues and expenses from these transactions have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements for the full year, reported results would not have been materially different. NOTE 3 -- CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- ------- Cash..................................................... $ 4,312 $ 5,079 Commercial paper and other cash equivalents.............. 45,221 10,918 ------- ------- Totals......................................... $49,533 $15,997 ======= =======
F-16 140 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- MARKETABLE SECURITIES Marketable securities are comprised of the following (in thousands):
DECEMBER 31, ---------------- 1995 1996 ------- ---- Equity securities.......................................... $ 3,796 $238 Corporate debt securities.................................. 8,133 -- ------- ---- Totals........................................... $11,929 $238 ======= ====
During 1996, the Company realized $1.8 million in gains on sales of marketable securities which is included in investment income. NOTE 5 -- OTHER CURRENT ASSETS/LIABILITIES Other current assets consist of the following (in thousands):
DECEMBER 31, ------------------ 1995 1996 ------ ------- Hotel inventories......................................... $2,686 $ 4,762 Pre-opening expense....................................... 261 2,088 Accrued interest receivable............................... 2,803 2,082 Prepaid expense........................................... 1,616 1,868 Other..................................................... 704 428 ------ ------- Totals.......................................... $8,070 $11,228 ====== =======
Other current liabilities consist of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- ------- Accounts payable......................................... $ 4,717 $ 5,990 Construction payables.................................... 2,223 6,643 Interest................................................. 3,616 7,734 Accrued payroll and related benefits..................... 3,151 4,590 Accrued expenses......................................... 4,303 4,944 Insurance reserves....................................... 6,007 7,146 Hurricane damage reserve................................. 8,718 2,438 Other.................................................... 6,226 6,402 ------- ------- Totals......................................... $38,961 $45,887 ======= =======
F-17 141 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- ------- Properties operated by the Company(a).................... $57,171 $22,194 Other(b)................................................. 9,324 3,339 ------- ------- Total.......................................... 66,495 25,533 Less current portion..................................... (1,533) (1,338) ------- ------- Long-term portion........................................ $64,962 $24,195 ======= =======
- --------------- (a) At December 31, 1996, the Company is the holder of mortgage notes receivable with a book value of $8.6 million secured primarily by two hotel properties operated by the Company under management agreements and $13.6 million in mortgages secured primarily by four properties operated under lease agreements. These notes bear interest at rates ranging from 8.0% to 13.5% and mature through 2015. The mortgages were derived from the sales of hotel properties. The loans secured by hotel properties operated under management agreements pay interest and principal based upon available cash and include a participation in the future excess cash flow of such hotel properties. One of these mortgages has been structured to include a "senior portion" featuring defined payment terms, and a "junior portion" payable annually based on cash flow. In addition to the mortgage positions referred to above, the Company holds junior or cash flow mortgages and subordinated interests on six other hotel properties operated by the Company under management agreements. Pursuant to these mortgage agreements, the Company is entitled to receive the majority of excess cash flow generated by these hotel properties and to participate in any future sales proceeds. With regard to these properties, third parties hold significant senior mortgages. The junior mortgages mature on various dates from 1999 through 2002. In accordance with the adoption of fresh start reporting under SOP 90-7, no value was assigned to the junior portions of the notes or the junior mortgages and subordinated interests on the other hotels as there was substantial doubt at the time of valuation that the Company would recover any of their value. As a result, interest income on these junior or cash flow mortgages is recognized when cash is received. During 1994, 1995 and 1996, the Company recognized $2.0 million, $2.0 million and $2.9 million, respectively, of interest income related to these mortgages. Future recognition of interest income on these mortgages is dependent primarily upon the net cash flow of the underlying hotels after debt service, which is senior to the Company's junior positions. (b) Other notes receivable currently bear interest at effective rates ranging from 4.0% to 10.0%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company. F-18 142 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, --------------------- YEARS OF 1995 1996 USEFUL LIFE -------- -------- ----------- Land and land leased to others(a).................. $ 69,765 $119,654 Hotels............................................. 246,278 387,631 20 to 40 Furniture, fixtures and autos...................... 67,001 103,899 3 to 10 Leasehold improvements............................. 26,038 58,340 3 to 40 Construction in progress........................... 22,667 78,266 -------- -------- Sub-total..................................... 431,749 747,790 Less accumulated depreciation and amortization..... (33,548) (52,537) -------- -------- Totals................................... $398,201 $695,253 ======== ========
- --------------- (a) Included in land at December 31, 1995 and 1996 was $8.9 million and $32.7 million, respectively, of land associated with hotels under construction. At December 31, 1996, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $5.4 million pursuant to noncancelable operating leases expiring on various dates through 2013. Minimum future rentals under such leases are $7.4 million, of which $3.7 million is scheduled to be received in the aggregate during the five-year period ending December 31, 2001. Depreciation and amortization expense on property, equipment and leasehold improvements was $9.3 million, $14.8 million and $22.0 million for the years ended December 31, 1994, 1995 and 1996, respectively. During the years ended December 31, 1994, 1995 and 1996, the Company capitalized $.8 million, $2.6 million and $7.5 million, respectively, of interest related to borrowings used to finance hotel construction. NOTE 8 -- DEBT Debt consists of the following (in thousands):
DECEMBER 31, --------------------- 1995 1996 -------- -------- 9.25% First Mortgage Notes(a).......................... $ -- $120,000 Revolving Credit Facility(b)........................... -- 12,500 7% Convertible Subordinated Notes(c)................... 86,250 86,250 Mortgages and other notes payable(d)................... 158,904 71,414 10% Senior Secured Notes(e)............................ 30,374 10,867 Capitalized lease obligations(f)....................... 7,123 1,263 -------- -------- Total debt............................................. 282,651 302,294 Less current maturities................................ (5,731) (3,419) -------- -------- Long-Term debt, net of current portion................. $276,920 $298,875 ======== ========
- --------------- (a) On January 23, 1996, the Company issued $120 million of 9.25% First Mortgage Notes due 2006. Interest on the notes is payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain F-19 143 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after January 15, 2001 at premiums to principal which decline on each anniversary date. The Company utilized a portion of the proceeds to pay down $51.6 million of debt. (b) On June 28, 1996, the Company established a revolving credit facility (the "Revolving Credit Facility") with a group of financial institutions providing for availability of funds up to the lesser of $100 million or a borrowing base determined under the agreement. The Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. The Revolving Credit Facility bears interest at LIBOR plus 2.25% and is available for five years. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and also contains certain covenants which limit the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. The aggregate amount of the Revolving Credit Facility will be reduced to $87.0 million on June 28, 1999 and $75.0 million on June 28, 2000. On June 28, 1996, the Company borrowed $40 million under the Revolving Credit Facility and proceeds were used to retire $20 million of interim financing with the remainder utilized principally for development of AmeriSuites hotels. On August 5, 1996, the Company repaid the full amount of this borrowing under the Revolving Credit Facility with proceeds from the issuance of Common Stock (see Note 15). As of December 31, 1996, the Company had borrowed $12.5 million under this facility and had additional borrowing capacity of $87.5 million. (c) In 1995, the Company sold $86.3 million of 7% Convertible Subordinated Notes due 2002. The notes are convertible into common stock at a price of $12 per share at the option of the holder and mature on April 15, 2002. The notes are redeemable, in whole or in part, at the option of the Company after April 17, 1998 at premiums to principal which decline on each anniversary date. (d) The Company has mortgage and other notes payable of approximately $71.4 million that are secured by mortgage notes receivable and hotel properties with a book value of $137.7 million. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1996 these notes bear interest at rates ranging from 6.4% to 10.5%, with a weighted average interest rate of 8.4%, and mature from 1998 through 2008. The Company has $13.9 million of debt secured by the Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands which was originally scheduled to mature in December 1996. The Company and the lender have entered into an agreement to extend the maturity of the loan to January 1998. The loan continues to bear interest at the same rate and principal payments are waived until maturity. All other terms and conditions of the loan remain in effect. Additionally, the Company's debt related to the Frenchman's Reef is further secured by an assignment of property insurance proceeds related to the hurricane damage (See Note 11). The Company utilized the net insurance proceeds of $22.8 million to reduce the Frenchman's Reef mortgage loan to $13.9 million. The Company is currently in negotiation to obtain new financing in connection with the refurbishment plans at the Frenchman's Reef. On August 2, 1996, the Company prepaid in full $26.7 million of debt secured by 10 hotels with the proceeds from the issuance of Common Stock (See Note 15). The loans were due in February 2000 and bore interest at LIBOR plus 4.25%. The hotels formerly used as collateral for this loan are now part of the collateral securing the Revolving Credit Facility described in (b) above. (e) The 10% Senior Secured Notes were issued pursuant to the Plan, and mature on July 31, 1999. The collateral for the 10% Senior Secured Notes consists primarily of mortgages and notes receivable and real property, net of related liabilities (the "10% Senior Secured Note Collateral"), with a book value of $62.2 million as of December 31, 1996. F-20 144 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest on the 10% Senior Secured Notes is payable semi-annually. The 10% Senior Secured Notes require that 85% of the cash proceeds from the 10% Senior Secured Note Collateral be applied first to interest then to prepayment of principal. Aggregate principal payments on the 10% Senior Secured Notes are required in order that one-third of the principal balance outstanding on December 31, 1996 is paid by July 31, 1998 and all of the balance is paid by July 31, 1999. To the extent the cash proceeds from the 10% Senior Secured Note Collateral are insufficient to pay interest or required principal payments on the 10% Senior Secured Notes, the Company will be obligated to pay any deficiency out of its general corporate funds. The 10% Senior Secured Notes contain covenants which, among other things, require the Company to maintain a net worth of at least $100 million, and preclude cash distributions to stockholders, including dividends and redemptions, until the 10% Senior Secured Notes have been paid in full. As of December 31, 1996, the Company was in compliance with all covenants applicable to the 10% Senior Secured Notes. The Company has $1.4 million of its 10% Senior Secured Notes which it repurchased but did not retire due to certain restrictions under the note agreement. These notes are currently held by a third party agent and are recorded as investments on the Company's balance sheet. As of December 31, 1996, the Company had unrecognized holding gains of approximately $26,000 related to these securities. (f) At December 31, 1996, the Company had a capital lease obligation in the amount of $1.3 million. Principal and interest on this obligation is paid monthly. This lease matures in 2000 and bears interest at Prime plus 3%. In August 1995, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.18% and receives a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement commenced in October 1995 and expires in 1999. In October 1996, the Company entered into a six month interest rate hedge agreement with a major financial institution to reduce its interest rate exposure on the anticipated financing of its development program in 1997. Under the agreement, the Company effectively fixed interest rates at a Treasury yield of 6.4% for approximately seven years on a $98.4 million notional principal amount. Maturities of long-term debt for the next five years ending December 31 are as follows (in thousands): 1997...................................................... $ 3,419 1998...................................................... 17,645 1999...................................................... 25,052 2000...................................................... 12,289 2001...................................................... 14,138 Thereafter................................................ 229,751 -------- Total........................................... $302,294 ========
NOTE 9 -- LEASE COMMITMENTS AND CONTINGENCIES Leases The Company leases various hotels under lease agreements with initial terms expiring at various dates from 1998 through 2061. The Company has options to renew certain of the leases for periods ranging from 1 to 99 years. Rental payments are based on minimum rentals plus a percentage of the hotel properties' revenues in excess of stipulated amounts. F-21 145 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule, by year, of future minimum lease payments required under the remaining operating leases that have terms in excess of one year as of December 31, 1996 (in thousands): 1997............................................................... $ 4,833 1998............................................................... 4,787 1999............................................................... 4,828 2000............................................................... 4,717 2001............................................................... 4,326 Thereafter......................................................... 47,023 ------- Total......................................................... $ 70,514 =======
Rental expense for all operating leases, including those with terms of less than one year, consist of the following for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ---------------------------- 1994 1995 1996 ------ ------ ------ Rentals.......................................... $4,654 $4,630 $6,652 Contingent rentals............................... 823 745 1,250 ------ ------ ------ Rental expense.............................. $5,477 $5,375 $7,902 ====== ====== ======
Employee Benefits The Company does not provide any material post employment benefits to its current or former employees. NOTE 10 -- INCOME TAXES The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Current: Federal..................................... $ 970 $ 320 $ 5,147 State....................................... 28 299 563 ------- ------- ------- 998 619 5,710 Deferred: Federal..................................... 9,780 9,929 13,005 State....................................... 1,514 1,165 2,029 ------- ------- ------- 11,294 11,094 15,034 ------- ------- ------- Total............................... $12,292 $11,713 $20,744 ======= ======= =======
Income taxes are provided at the applicable federal and state statutory rates. F-22 146 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of the temporary differences in the areas listed below resulted in deferred income tax provisions for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Utilization of net operating loss............................. $ 5,861 $ 3,370 $11,714 Amortization of pre-fresh start basis differences -- properties and notes......................... 5,632 6,167 1,243 Depreciation.................................................. 200 1,400 830 Compensation expense.......................................... -- 604 691 Other......................................................... (399) (447) 556 ------- ------- ------- Total............................................... $11,294 $11,094 $15,034 ======= ======= =======
At December 31, 1996, the Company had available federal net operating loss carryforwards of approximately $90.7 million which will expire beginning in 2005 and continuing through 2007. Of this amount, $87.3 million is subject to an annual limitation of $8.7 million under the Internal Revenue Code due to a change in ownership of the Company upon consummation of the Plan. The Company also has potential state income tax benefits relating to net operating loss carryforwards of approximately $5.9 million which will expire during various periods from 1997 to 2006. Certain of these potential benefits are subject to annual limitations similar to federal requirements due to factors such as the level of business conducted in each state and the amount of income subject to tax within each state's carryforward period. In accordance with SFAS 109, the Company has not recognized the future tax benefits associated with the net operating loss carryforwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $31.7 million against the deferred tax asset as of December 31, 1996. To the extent any available carryforwards or other tax benefits are utilized, the amount of tax benefit realized will be treated as a contribution to stockholders' equity and will have no effect on the income tax provision for financial reporting purposes. For the years ended December 31, 1994, 1995 and 1996, the Company recognized $5.9 million, $3.4 million and $10.6 million, respectively, of such benefits as a contribution to stockholders' equity. Additionally, the Company recognized $7.0 million, $6.2 million and $1.2 million as a contribution to stockholders' equity for the years ended December 31, 1994, 1995 and 1996, respectively, which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable. As a result of reflecting substantially all of the deferred tax provisions as a contribution to stockholders' equity, the Company had no material deferred tax assets or liabilities as of December 31, 1995 and 1996. NOTE 11 -- BUSINESS INTERRUPTION INSURANCE In September 1995, the Frenchman's Reef suffered damages when Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier settled the Company's property and business interruption insurance claim with respect to the Frenchman's Reef for $25.0 million. In July 1996, the Company received the final installment under its settlement, bringing the net proceeds to $22.8 million, net of deductibles, for which the Company provided a reserve of $2.2 million in 1995. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. The Company is currently reviewing its claim for property damage with its insurance carrier and is in the process of preparing a claim under its business interruption insurance. Although the Company has continued to operate the hotel, the impact of the hurricanes has caused operating profits to decline from prior year levels. In 1996 and 1995, the Company continued to record the operating revenues and expenses of the Frenchman's Reef. In addition, the Company recorded business F-23 147 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interruption insurance revenue of $13.6 million in 1996 based on the claim settlement which is included in operating revenues. The Company is currently underway with plans to refurbish and upgrade the Frenchman's Reef. In addition to the hurricane-related renovations, the plan provides for structural enhancements, redesigned guestrooms, increased banquet and meeting space and new landscaping. Other expense of $2.2 million for the year ended December 31, 1995 consists of a reserve for insurance deductibles related to hurricane damage caused by Hurricane Marilyn at the Frenchman's Reef. NOTE 12 -- OTHER INCOME Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following as of December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ---------------------------- 1994 1995 1996 ------ ------ ------ Gains on settlements of notes receivable................. $6,355 $ 822 $1,774 Gains on sales of properties............................. 1,099 1,417 2,532 Rebates of prior years' insurance premiums............... 1,579 -- -- Other.................................................... 56 -- -- ------ ------ ------ Total.......................................... $9,089 $2,239 $4,306 ====== ====== ======
NOTE 13 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The fair values of non-current financial assets and liabilities and other financial instruments are shown below (in thousands). The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts.
DECEMBER 31, 1995 DECEMBER 31, 1996 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Mortgage and notes receivable........... $ 64,962 $ 76,058 $ 24,195 $ 38,928 Long-term debt.......................... 276,920 278,899 298,875 343,039 Interest rate swap agreement............ -- (15) -- (173) Interest rate hedge agreement........... -- -- -- (620)
The fair value for mortgages and notes receivable is based on the valuation of the underlying collateral utilizing discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or at current rates available to the Company for debt of the same maturities. The fair values of the interest rate swap and hedge agreements are based on the estimated amounts the Company would pay to terminate the agreements. The Company's mortgages and other notes receivable (See Note 6) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many of the same risks as the Company's operating hotel assets. A significant portion of the collateral is located in the Northeastern United States. F-24 148 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14 -- RELATED PARTY TRANSACTIONS The following summarizes significant financial information with respect to transactions with present and former officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ----------------------------- 1994 1995 1996 ------- ------- ------- Management and other fee income(a)....................... $ 1,165 $ 1,427 $ 1,040 Interest income(a)....................................... 1,283 518 582 Management fee expense(b)................................ 679 -- -- Interest expense(b)...................................... 461 -- -- Reservation fee expense(b)............................... 317 -- --
- --------------- (a) At December 31, 1996, the Company managed six hotels for partnerships in which related parties own various interests. The income amounts shown above primarily include transactions related to these hotel properties. On March 6, 1996, the Company acquired nine hotels owned by related parties. (See Note 2). (b) In 1991, the Company entered into an agreement with ShoLodge, a company controlled by a former director, whereby ShoLodge was appointed the exclusive agent to develop and manage certain hotel properties. In March 1995, the Company acquired ShoLodge's option to purchase the remaining 50% interest in all eleven hotels developed by ShoLodge and also acquired the ownership interest of the remaining AmeriSuites hotel not already owned by the Company (See Note 2). NOTE 15 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS COMMON STOCK On August 2, 1996, the Company sold 8.3 million shares of Common Stock at a price of $18 per share. The Company utilized the proceeds from the offering of approximately $141.4 million (net of underwriting discounts and expenses of $7.2 million) to fund AmeriSuites development, to reduce indebtedness of $40.0 million under the Revolving Credit Facility and to repay certain other indebtedness of $26.7 million, thereby increasing availability for further AmeriSuites development. STOCK OPTIONS The Company has adopted various stock option and performance incentive plans under which options to purchase shares of common stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. A total of 200,000 options were reserved under these plans (net of amounts granted to date) as of December 31, 1996. Under the 1995 Employee Stock Option Plan, options to purchase shares of common stock may be granted at the fair market value of the common stock at the date of grant. Options can generally be exercised during a participant's employment with the Company in equal annual installments over a three-year period and expire ten years from the date of grant. During 1995 and 1996, respectively, options to purchase 648,000 and 595,000 shares of common stock were granted under this plan. Under the 1995 Non-Employee Director Stock Option Plan, options to purchase 10,000 shares of common stock are automatically granted to each non-employee director at the fair market value of the common stock at the date of grant. All options will be fully vested and exercisable one year after the date of grant and will expire ten years after the date of grant, or earlier if the non-employee director ceases to be a director. Options to purchase 50,000 shares of common stock were granted under this plan in both 1995 and 1996. F-25 149 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the Company's 1992 Stock Option and Performance Incentive Plans, options to purchase 367,000 and 15,000 shares of common stock were issued to employees in 1994 and 1995, respectively. The options were granted at prices which approximate fair market value at the date of grant. Generally, these options can be exercised during a participant's employment in equal annual installments over a three year period and expire six years from the date of grant. Options to purchase 30,000 and 60,000 shares of common stock were issued to non-employee directors of the Company in 1994 and 1995, respectively, under the Company's 1992 Stock Option Plan. The options were granted at prices which approximate fair market value at the date of grant. Generally, one-third of these options were exercisable at the date of grant and the remaining options vest in equal annual installments over a two-year period. The options expire six years after the date of grant. During 1992, options to purchase 350,000 shares were granted to employee officers and directors under the Company's 1992 Stock Option Plan. All 350,000 shares are currently exercisable at December 31, 1996. In addition, options to purchase 330,000 shares were granted to a former officer in 1992, all of which were exercised. The exercise prices of the remaining exercisable options are based on the average market price one year from the date of grant which was determined to be $2.71 per share with respect to 330,000 shares and $3.81 per share with respect to the other 20,000 shares. Based on this exercise price, the amount of compensation expense attributable to these options was $60,000, $16,000 and $5,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Effective January 1, 1996, the Company adopted the provisions of SFAS 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards, which was not significant. Had the fair value method of accounting been applied to the Company's stock plans, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, net income would have been reduced by $1.3 million, or $.03 per share in 1995 and $2.3 million, or $.05 per share in 1996. This pro forma impact only takes into account options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1995 and 1996 was $4.46 and $7.33, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $9.59 in 1995 and $16.51 in 1996 and the following weighted average assumptions: risk-free interest rate of 6.22% for 1995 and 6.43% in 1996, volatility of 42.39% for 1995 and 38.64% for 1996, and dividend yield of 0.0% for 1995 and 1996. F-26 150 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the various stock option plans:
WEIGHTED AVERAGE NUMBER OPTION PRICE PRICE OF SHARES PER SHARE PER SHARE ---------- -------------- --------- Outstanding at December 31, 1994....................... 1,442,000 Granted................................................ 773,000 $ 9.25-$10.88 $ 9.57 Exercised.............................................. (222,000) $ 2.71-$ 7.63 $ 3.25 Canceled............................................... (165,000) $ 3.63-$ 9.63 $ 4.66 --------- Outstanding at December 31, 1995....................... 1,828,000 --------- Granted................................................ 646,000 $14.75-$18.00 $ 16.45 Exercised.............................................. (149,000) $ 3.63-$10.81 $ 5.35 Canceled............................................... (59,000) $ 3.63-$16.63 $ 8.28 --------- Outstanding at December 31, 1996....................... 2,266,000 ========= Exercisable at December 31, 1996....................... 1,101,000 $ 2.71-$10.88 $ 5.38 =========
WARRANTS Pursuant to the Plan, warrants to purchase 2,053,583 shares of the Company's common stock were issued to former shareholders of the Company's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share and expire five years after the date of grant. The exercise price was determined from the average per share daily closing price of the Company's common stock during the year following its reorganization on July 31, 1992. As of December 31, 1996 warrants to purchase 1,027,392 shares have been exercised and 1,026,191 remain outstanding. NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------------------- 1994 1995 1996 -------- ------- -------- Assumption of mortgages and notes payable in connection with the acquisitions of hotels................................... $ 18,718 $ 5,120 $ 12,222 Hotels received in settlements of mortgage notes receivable.... 54,521 2,702 35,306 Note receivable received in exchange for the sale of a hotel... $ 1,497 $ -- $ --
Cash paid for interest was $15.5 million, $22.4 million and $22.4 million for the years ended December 31, 1994, 1995 and 1996, respectively. Cash paid for income taxes was $1.9 million, $1.2 million and $8.0 million for the years ended December 31, 1994, 1995 and 1996, respectively. F-27 151 HOMEGATE HOSPITALITY, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents.................................... $ 3,087,424 $31,475,679 Restricted cash.............................................. 824,098 959,198 Accounts receivable Hotel..................................................... 339,148 241,403 Other..................................................... 194,307 256,939 Interest.................................................. 138,263 208,411 Earnest money deposits....................................... 501,000 546,000 Prepaid expenses............................................. 511,547 552,054 ----------- ----------- Total current assets................................. 5,595,787 34,239,684 Property and equipment, net (Note 2)........................... 84,549,655 51,106,541 Loans receivable (Note 3)...................................... 3,094,337 1,900,500 Deferred loan costs, net....................................... 358,783 335,547 Other assets, net.............................................. 737,960 951,136 ----------- ----------- Total assets................................................... $ 94,336,522 $88,533,408 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable............................................. $ 878,376 $ 1,101,225 Accrued expenses............................................. 399,842 224,694 Payables to affiliates....................................... 720,557 1,132,274 Current maturities of mortgage and other notes payable....... 782,614 425,738 ----------- ----------- Total current liabilities............................ 2,781,389 2,883,931 Mortgage and other notes payable (Note 4)...................... 27,767,199 20,961,009 Stockholders' equity (Note 5) Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued............................................... -- -- Common stock, $.01 par value; 20,000,000 shares authorized; 10,725,000 shares issued and outstanding.................. 107,250 107,250 Additional paid in capital................................... 65,447,625 65,447,625 Retained earnings (deficit).................................. (1,766,941) (866,407) ----------- ----------- Total stockholders' equity........................... 63,787,934 64,688,468 ----------- ----------- Total liabilities and stockholders' equity..................... $ 94,336,522 $88,533,408 =========== ===========
See accompanying notes. F-28 152 HOMEGATE HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- REVENUES Room revenue............................ $2,105,812 $ 24,803 $4,021,929 $ 24,803 Other revenue........................... 45,662 1,703 103,393 1,703 Interest income......................... 221,603 -- 603,218 -- ---------- ---------- ---------- ---------- Total revenues.................. 2,373,077 26,506 4,728,540 26,506 COSTS AND EXPENSES Property operating expenses............. 1,421,580 30,313 2,709,680 30,313 Corporate operating expenses............ 628,132 204,273 1,415,755 204,273 Depreciation and amortization........... 354,468 9,533 623,498 9,533 Interest................................ 395,628 21,457 880,145 21,457 ---------- ---------- ---------- ---------- Total costs and expenses........ 2,799,808 265,576 5,629,078 265,576 ---------- ---------- ---------- ---------- Net loss.................................. $ (426,731) $ (239,070) $ (900,538) $ (239,070) ========== ========== ========== ========== Net loss per share........................ $ (.04) $ (.02) $ (.08) $ (.02) ========== ========== ========== ========== Weighted average number of shares outstanding............................. 10,725,000 10,725,000 10,725,000 10,725,000 ========== ========== ========== ==========
See accompanying notes. F-29 153 HOMEGATE HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1997 1996 ------------ ----------- OPERATING ACTIVITIES Net loss......................................................... $ (900,538) $ (239,070) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization.................................. 623,498 9,533 Amortization of loan costs..................................... 15,833 -- Accrued interest added to mortgage note payable................ 40,319 21,457 Changes in operating assets and liabilities Restricted cash............................................. 135,100 -- Accounts receivable......................................... 35,035 (7,184) Prepaid expenses............................................ 40,507 (3,078) Accounts payable............................................ (65,392) 136,403 Accrued expenses............................................ 175,148 45,803 Payables to affiliates...................................... (46,339) 348,789 ------------ ---------- Net cash provided by operating activities........................ 53,171 312,653 ------------ ---------- INVESTING ACTIVITIES Acquisition of land.............................................. (14,347,211) (2,911,123) Acquisition of hotel facility.................................... -- (4,991,486) Construction in progress, net of development costs payable....... (14,546,258) -- Additions to property and equipment, net of payables............. (4,813,337) (133,038) Additions to loan receivable..................................... (793,837) -- Additions to earnest money deposits.............................. (371,000) (95,000) Additions to other assets........................................ (583,026) (133,734) ------------ ---------- Net cash used in investing activities............................ (35,454,669) (8,264,381) ------------ ---------- FINANCING ACTIVITIES Proceeds from mortgage and other notes payable................... 7,360,325 2,847,930 Principal payments on mortgage and other notes payable........... (237,578) -- Payment of deferred loan costs................................... (109,504) (17,240) Contributions from partners...................................... -- 6,394,920 ------------ ---------- Net cash provided by financing activities........................ 7,013,243 9,225,610 ------------ ---------- Net decrease in cash and cash equivalents........................ (28,388,255) 1,273,882 Cash and cash equivalents at beginning of period................. 31,475,679 -- ------------ ---------- Cash and cash equivalents at end of period....................... $ 3,087,424 $ 1,273,882 ============ ==========
See accompanying notes. F-30 154 HOMEGATE HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 1. ORGANIZATION AND BASIS OF PRESENTATION Homegate Hospitality, Inc. (the "Company") was organized in Delaware on August 16, 1996. The Company was capitalized with the issuance of 10 shares of common stock to Extended Stay Limited Partnership ("ESLP"). The Company was formed to continue the extended-stay lodging facility development, acquisition and management operations of ESLP, and to acquire, develop and maintain extended-stay lodging facilities throughout the United States. ESLP, a Delaware limited partnership, was formed on February 9, 1996, by ESH Partners, L.P. ("Crow") and JMI/Greystar Extended Stay Partners, L.P. ("Greystar"), as the general partners and various limited partners. On October 24, 1996, ESLP was merged with and into the Company. Accordingly, the financial results of ESLP, the predecessor to the Company, for the period from inception (February 9, 1996) through June 30, 1996, have been included herein. ESLP had no operations for the three month period ended March 31, 1996. The financial statements included herein have been prepared in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all disclosures required under generally accepted accounting principles for complete financial statements. In the opinion of management, the financial statements reflect all adjustments which consist only of normal recurring adjustments necessary for a fair presentation of the financial statements for the interim periods presented. Interim results of operations are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 2. PROPERTY AND EQUIPMENT At June 30, 1997 and December 31, 1996, property and equipment consisted of the following:
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- Land................................................... $ 31,236,509 $16,473,296 Buildings and improvements............................. 32,144,175 28,300,127 Construction in progress............................... 17,537,328 4,623,153 Furniture, fixtures, and equipment..................... 4,492,000 1,985,837 ----------- ----------- 85,410,012 51,382,413 Less accumulated depreciation.......................... 860,357 275,872 ----------- ----------- $ 84,549,655 $51,106,541
During the second quarter of 1997, the Company acquired one land parcel in Webster, Texas that is under development for hotel construction. Additionally, the Company acquired one land parcel in each of the following cities: Indianapolis; Phoenix; Portland; Pompano Beach, Florida; and Las Vegas for future development of hotel facilities. As of June 30, 1997, the Company had entered into agreements, letters of intent, contracts, or other arrangements for the future purchase of eleven additional land parcels. Trammell Crow Residential (TCR) and Greystar Realty Services (GRS) are developing the hotel facilities under an agreement that expires at the earlier of the completion of the sixtieth hotel or December 31, 1998. F-31 155 HOMEGATE HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LOANS RECEIVABLE During 1996, the Company advanced $1,900,500 under two promissory notes to an unrelated party for the purchase of two parcels of land in Austin, Texas (the "Rutherford and Jolleyville sites"), on which extended-stay hotel facilities are to be developed. During the first quarter and second quarters of 1997, the Company advanced an additional $400,000 and $793,837, respectively, under the notes for various development costs. These notes accrue interest at ten percent and mature on the sooner of November 2000 or five business days after demand. Monthly interest payments of $15,838 were to begin on February 1, 1997. The accrued interest of $107,167 was not paid during the second quarter. On June 30, 1997, the Company and the unrelated party entered an agreement whereby the Company would purchase the Rutherford and Jolleyville sites for a total purchase price of $508,713 and extinguishment of the debt and the related accrued interest (See Note 6). 4. MORTGAGE AND OTHER NOTES PAYABLE Mortgage Notes Payable The Company has entered into a Master Loan Agreement (the "Note") with Bank One, Arizona, N.A. ("BOA"). The Note provides up to $30 million in construction/mini-perm mortgage loans for the acquisition and development of land and hotel facilities for up to five years. A loan was committed under the Note in connection with the acquisition of Studio Suites. This loan, secured by Studio Suites, accrues interest at either LIBOR plus 2.25% or prime plus .5% based on the election of the Company (LIBOR plus 2.25%; 8.00% at June 30, 1997), and requires interest payments for the first ten months of the loan, followed by principal and interest payments based upon a fifteen year amortization until maturity, May 31, 1999. The outstanding balance at June 30, 1997 was $2,884,987. On March 7, 1997, the Company borrowed $5,070,000 under the Note, secured by the Austin Town Lake hotel facility. The funding of this loan by BOA occurred on May 12, 1997. This loan accrues interest at either LIBOR plus 2.25% or prime plus .5% based on the election of the Company (LIBOR plus 2.25%; 8.00% at June 30, 1997), and requires principal and interest payments based upon a fifteen year amortization until maturity, February 4, 2000. The outstanding balance at June 30, 1997 was $4,901,404. Another loan, in the amount of $3,509,885, was committed under the Note in connection with the construction of the hotel in Phoenix, Arizona. This loan, secured by the hotel at 44th and Oak, accrues interest at either LIBOR plus 2.5% or prime plus .5% based on the election of the Company (LIBOR plus 2.5%; 8.25% at June 30, 1997), and requires interest payments for the first twelve months of the loan, followed by principal and interest payments based upon a fifteen year amortization until maturity, August 15, 1998. The maturity date may be extended for thirty-six months with the payment of an extension fee of .25% of the loan amount. The outstanding balance at June 30, 1997 was $2,505,805. In connection with the acquisition of Westar, the Company assumed an $18,100,000 mortgage note due to Nomura Asset Capital Corporation ("Nomura"), with interest at 9.71% through January 11, 2011 and thereafter at the greater of 14.71% or the Treasury Rate plus 9%. The note is due in monthly installments of $160,789, including interest, from February 1996 through January 2021, and is secured by the Westar hotel properties and improvements. The outstanding balance at June 30, 1997 was $17,876,318. Restricted cash includes cash retained by Nomura's mortgage servicer for payment of taxes, insurance and debt service. The mortgage note payable to Nomura does not allow for prepayment of the debt until January 11, 2011, except by providing the lender with U.S. obligations that produce payments which replicate the payment obligations of the Company under the note. This restriction represents a substantial prepayment penalty. On or after January 11, 2011, the loan can be prepaid at any time with no prepayment penalty. F-32 156 HOMEGATE HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER NOTES PAYABLE The Company has two unsecured notes payable for the purchase of directors and officers insurance. The notes accrue interest at 6.98% and require monthly principal and interest payments of $16,497 through July 1999. The outstanding balance at June 30, 1997 was $381,299. 5. STOCKHOLDERS' EQUITY Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"), which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating earnings per share, the dilutive effect of stock options will be excluded. Management believes that adoption of SFAS No. 128 will not have a material effect on earnings per share. 6. SUBSEQUENT EVENTS On July 3, 1997, the Company purchased the Rutherford and Jolleyville sites from an unrelated party for a purchase price of $508,713 and extinguishment of debt owed by the unrelated party to the Company (See Note 3). On July 25, 1997, the Company entered a definitive agreement to merge with a wholly owned subsidiary of Prime Hospitality Corp. (Prime). Under the agreement, Prime will issue 0.6073 shares of its common stock for each of the 10,725,000 outstanding shares of the Company. The merger is expected to close in the fourth quarter of 1997. In conjunction with the merger agreement, Prime has executed a commitment letter with respect to its provision to the Company of a $65 million construction term loan facility to the Company to facilitate uninterrupted development of the Company's extended stay hotels. F-33 157 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Homegate Hospitality, Inc. We have audited the accompanying balance sheet of Homegate Hospitality, Inc. as of December 31, 1996, and the related statements of operations, changes in stockholders' equity and cash flows for the period from inception (February 9, 1996) through December 31, 1996. Our audit also included the financial statement schedule listed in the index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Homegate Hospitality, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the period from inception (February 9, 1996) through December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Dallas, Texas February 20, 1997 F-34 158 HOMEGATE HOSPITALITY, INC. BALANCE SHEET DECEMBER 31, 1996 ASSETS Current assets: Cash and cash equivalents..................................................... $31,475,679 Restricted cash............................................................... 959,198 Accounts receivable Hotel......................................................................... 241,403 Other......................................................................... 256,939 Interest...................................................................... 208,411 Prepaid insurance............................................................. 552,054 ----------- Total current assets.................................................. 33,693,684 Property and equipment, net (Note 2).......................................... 51,106,541 Loans receivable (Note 3)..................................................... 1,900,500 Deferred loan costs, net of accumulated amortization of $16,113............... 335,547 Other assets, net of accumulated amortization of $68,586...................... 1,497,136 ----------- Total assets.......................................................... $88,533,408 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 1,101,225 Accrued expenses.............................................................. 224,694 Payables to affiliates (Note 6)............................................... 1,132,274 Current maturities of mortgage and other notes payable........................ 425,738 ----------- Total current liabilities............................................. 2,883,931 Mortgage and other notes payable (Note 4)..................................... 20,961,009 Stockholders' equity (Note 7) Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued..... -- Common stock, $.01 par value; 20,000,000 shares authorized; 10,725,000 shares issued and outstanding........................................................ 107,250 Additional paid in capital.................................................... 65,447,625 Retained earnings (deficit)................................................... (866,407) ----------- Total stockholders' equity................................................. 64,688,468 ----------- Total liabilities and stockholders' equity............................ $88,533,408 ===========
See accompanying notes. F-35 159 HOMEGATE HOSPITALITY, INC. STATEMENT OF OPERATIONS PERIOD FROM INCEPTION (FEBRUARY 9, 1996) THROUGH DECEMBER 31, 1996 Revenues: Room revenue.................................................................. $ 2,233,391 6,770 Interest income............................................................... 450,536 ---------- 2,690,697 Costs and expenses: Property operating expenses................................................... 1,675,936 Corporate operating expenses.................................................. 951,261 Depreciation and amortization................................................. 344,459 Interest...................................................................... 585,448 ---------- 3,557,104 ---------- Net loss........................................................................ $ (866,407) ========== Pro forma net loss per share.................................................... $ (.08) ========== Pro forma weighted average number of shares outstanding......................... 10,725,000
See accompanying notes. F-36 160 HOMEGATE HOSPITALITY, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL NUMBER COMMON PAID IN RETAINED PARTNERS' OF SHARES STOCK CAPITAL EARNINGS CAPITAL TOTAL ---------- -------- ----------- --------- ------------ ----------- Capital contributed at inception (February 9, 1996)................. -- $ -- $ -- $ -- $ 20,000,000 $20,000,000 Net loss of ESLP (February 9, 1996 through October 23, 1996)................. -- -- -- -- (732,642) (732,642) Issuance of common stock to ESLP partners...... 6,386,087 63,861 19,936,139 (732,642) (19,267,358) -- Sale of common stock in initial public offering, net of offering costs........ 4,325,000 43,250 45,351,625 -- -- 45,394,875 Issuance of common stock to employees and others................ 13,913 139 159,861 -- -- 160,000 Net loss of the Company (October 24, 1996 through December 31, 1996)................. -- -- -- (133,765) -- (133,765) --------- ----------- Balance at December 31, 1996.................. 10,725,000 $107,250 $65,447,625 $(866,407) $ -- $64,688,468 ========== ======== =========== ========= ============ ===========
See accompanying notes. F-37 161 HOMEGATE HOSPITALITY, INC. STATEMENT OF CASH FLOWS PERIOD FROM INCEPTION (FEBRUARY 9, 1996) THROUGH DECEMBER 31, 1996 Operating activities Net loss..................................................................... $ (866,407) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization................................................ 344,459 Amortization of loan costs................................................... 16,113 Accrued interest added to mortgage note payable.............................. 70,000 Changes in operating assets and liabilities: Restricted cash.............................................................. (959,198) Accounts receivable.......................................................... (706,753) Prepaid insurance, net of financing.......................................... (67,368) Accounts payable............................................................. 1,101,225 Accrued expenses............................................................. 224,694 Payables to affiliates....................................................... 126,623 ------------ Net cash used in operating activities................................ (716,612) Investing activities Acquisition of hotel facilities, net of debt assumed......................... (19,501,988) Acquisition of land.......................................................... (8,835,000) Additions to property and equipment, net of development costs payable........ (4,037,851) Advances under loans receivable.............................................. (1,900,500) Additions to other assets.................................................... (1,533,061) ------------ Net cash used in investing activities........................................ (35,808,400) ------------ Financing activities Proceeds from mortgage note payable.......................................... 2,893,092 Principal payments on mortgage and other notes payable....................... (62,955) Payment of deferred loan costs............................................... (384,322) Capital contribution from ESLP partners...................................... 20,000,000 Payment of initial public offering costs..................................... (861,997) Proceeds from issuance of common stock....................................... 46,416,873 ------------ Net cash provided by financing activities............................ 68,000,691 ------------ Net increase in cash and cash equivalents.................................... 31,475,679 Cash and cash equivalents at beginning of period............................. -- Cash and cash equivalents at end of period................................... $ 31,475,679 ============
See accompanying notes. F-38 162 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION Homegate Hospitality, Inc. (the "Company") was organized in Delaware on August 16, 1996. The Company was capitalized with the issuance of 10 shares of common stock to Extended Stay Limited Partnership ("ESLP"). The Company was formed to continue the extended-stay lodging facility development, acquisition, and management operations of ESLP, and to acquire, develop and maintain extended-stay lodging facilities throughout the United States. ESLP, a Delaware limited partnership, was formed on February 9, 1996, by ESH Partners, L.P. ("Crow") and JMI/Greystar Extended Stay Partners, L.P. ("Greystar"), as the general partners and various limited partners. On October 24, 1996, ESLP was merged with and into the Company (see Note 7). Accordingly, the financial results of ESLP, the predecessor to the Company, for the period from inception (February 9, 1996) through October 23, 1996, have been included herein. CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, VPS I, L.P. All material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in financial statements and accompanying notes. Actual results could differ from these estimates. REVENUE RECOGNITION Room revenue and other income are recognized when earned, utilizing the accrual method of accounting. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. PROPERTY AND EQUIPMENT The Company capitalizes costs directly related to the acquisition, renovation or development of property and equipment while maintenance and repairs are charged to operating expense when incurred. Interest costs during construction periods are also capitalized. Property and equipment is recorded at cost. The building and improvements and furniture and fixtures are depreciated over their estimated useful lives, which are 40 years and 7 years, respectively, using the straight-line method. DEFERRED LOAN COSTS Costs incurred in obtaining financing have been deferred and are amortized over the life of the loan. F-39 163 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED OTHER ASSETS Other assets include site deposits, pursuit costs, pre-opening costs, and organization costs. Site deposits have been paid to escrow agents in conjunction with executed purchase agreements, whereby the Company is considering the purchase of certain land parcels. Costs related to the acquisition of property sites are capitalized when it is probable that a site will be acquired and are reclassified to property and equipment upon acquisition. In the event the acquisition is not consummated, the costs are expensed. Compensation, promotional and other costs relating to the opening of new properties are capitalized. Amortization is provided using the straight line method over a twelve-month period. Organization costs incurred in conjunction with the formation of the ESLP have been capitalized and are being amortized over sixty months using the straight-line method. PRO FORMA NET LOSS PER SHARE The pro forma net loss per share was calculated by dividing the net loss by the pro forma weighted average shares outstanding which assume the initial public offering occurred as of the beginning of the period. 2. PROPERTY AND EQUIPMENT At December 31, 1996, property and equipment consists of the following: Land............................................................ $ 16,473,296 Buildings and improvements...................................... 28,300,127 Construction in progress........................................ 4,623,153 Furniture, fixtures, and equipment.............................. 1,985,837 ----------- 51,382,413 Less accumulated depreciation................................... 275,872 ----------- $ 51,106,541 ===========
On May 31, 1996, ESLP acquired Studio Suites in Grand Prairie, Texas. Operations of the Studio Suites commenced during June 1996 and are included in the accompanying statement of operations since acquisition. During 1996, the Company acquired two land parcels in Phoenix, one parcel of land in Denver, two parcels of land in Kansas, and one parcel of land in Dallas, all of which are under development for hotel construction. Estimated costs to complete development on these projects total approximately $24.9 million. Additionally, the Company acquired one parcel in Indianapolis, for future development of a hotel facility. As of December 31, 1996, the Company has entered into agreements, letters of intent, contracts, or other arrangements to purchase eighteen additional land parcels. Long-lived assets are evaluated when indicators of impairment are present and provisions for possible losses are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. ACQUISITION OF WESTAR On September 6, 1996, ESLP acquired all the interests in VPS I, L.P. an unaffiliated Delaware limited partnership that owned five hotels in several Texas cities operating under the name Westar Suites ("Westar"). ESLP paid $7,738,696 and assumed debt of $18,001,924 (See Note 4). The acquisition was accounted for as a purchase with the excess of the purchase price over the net book value of the Westar assets acquired allocated F-40 164 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED to property and equipment. The Company's statement of operations includes the operations of Westar from the date of acquisition. Assuming that Westar had been acquired at the beginning of the period presented (February 9, 1996), operating results of the Company would have been as follows: Room revenue..................................................... $6,854,060 Net income (loss)................................................ (746,024) Proforma earnings (loss) per share (.07)
ACQUISITION OF INNHOME AMERICA -- TOWNE LAKE On December 31, 1996, the Company acquired, from an unrelated party, an extended-stay hotel in Austin, Texas operating under the name InnHome America -- Towne Lake ("InnHome") for a total purchase price of $7.7 million. The acquisition was accounted for as a purchase with the excess of the purchase price over the net book value of the InnHome assets acquired allocated to property and equipment. Assuming that InnHome had been acquired at the beginning of the period presented (February 9, 1996), operating results of the Company would have been as follows: Room revenue..................................................... $3,916,343 Net income (loss)................................................ (198,465) Proforma earnings (loss) per share............................... (.02)
3. LOANS RECEIVABLE The Company advanced $1,900,500 under two promissory notes to two unrelated parties for the purchase of two parcels of land in Austin, Texas, on which extended-stay hotel facilities will be developed. These notes accrue interest at ten percent and mature on the sooner of November 2000 or five business days after demand. Monthly interest payments of $15,838 begin on February 1, 1997. The Company has a letter agreement to purchase the hotels upon completion for a total price equal to the lesser of $14.1 million or actual costs. 4. MORTGAGE AND OTHER NOTES PAYABLE MORTGAGE NOTES PAYABLE The Company has entered into a Master Loan Agreement (the "Note") with Bank One, Arizona. The Note provides up to $30 million in construction/mini-perm mortgage loans for the acquisition and development of land and hotel facilities for up to five years. A loan was committed under the Note in connection with the acquisition of Studio Suites. This loan, secured by Studio Suites, accrues interest at either LIBOR plus 2.25% or prime plus .5% based on the election of the Company (7.75% at December 31, 1996), and requires interest payments for the first ten months of the loan, followed by principal and interest payments based upon a fifteen year amortization until maturity, May 31, 1999. The outstanding balance at December 31, 1996, includes $2,847,930 of original principal borrowed and $70,000 of accrued interest added from an interest reserve. Another loan, in the amount of $3,509,885, was committed under the Note in connection with the construction of the hotel in Phoenix, Arizona. This loan, secured by the hotel at 44th and Oak, accrues interest at either LIBOR plus 2.25% or prime plus .5% based on the election of the Company (7.75% at December 31, 1996), and requires interest payments for the first twelve months of the loan, followed by principal and interest payments based upon a fifteen year amortization until maturity, August 15, 1998. The maturity date may be extended for thirty-six months with the payment of an extension fee of .25% of the loan amount. The outstanding balance at December 31, 1996 was $45,162. F-41 165 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED In connection with the acquisition of Westar, the Company assumed an $18,100,000 mortgage note due to Nomura Asset Capital Corporation, with interest at 9.71% through January 11, 2011 and the greater of 14.71% or the Treasury Rate plus 9% thereafter. The note is due in monthly installments of $160,789, including interest, commencing February 1996 through January 2021, and is secured by the Westar hotel properties and improvements. The outstanding balance at December 31, 1996 was $17,961,075. Restricted cash includes cash retained by the mortgage servicer for payment of taxes, insurance and debt service. The mortgage note payable to Nomura Asset Capital Corporation does not allow for prepayment of the debt until January 11, 2011, except by providing the lender with U.S. obligations that produce payments which replicate the payment obligations of the Company under the note. This restriction represents a substantial prepayment penalty. On or after January 11, 2011, the loan can be prepaid at any time with no prepayment penalty. OTHER NOTES PAYABLE The Company has two unsecured notes payable for the purchase of directors and officers insurance. The notes accrue interest at 6.98% and require monthly principal and interest payments of $16,497 through July 1999. The outstanding balance at December 31, 1996 was $462,580. Principal maturities of the mortgages and other notes payable at December 31, 1996, are as follows:
MORTGAGE OTHER NOTES NOTES TOTAL ----------- --------- ------------ 1997.................................. $ 257,582 $ 168,156 $ 425,738 1998.................................. 300,549 183,089 483,638 1999.................................. 2,920,239 111,335 3,031,574 2000.................................. 221,514 -- 221,514 2001.................................. 249,377 -- 249,377 Thereafter............................ 16,974,906 -- 16,974,906 ----------- -------- ----------- $20,924,167 $ 462,580 $ 21,386,747 =========== ======== ===========
Interest incurred during 1996 was $718,298, of which $132,850 was capitalized. The Company paid interest totaling $532,596 during 1996. The carrying value of the mortgage and other notes payable as of December 31, 1996 approximates fair value as the interest rate approximates market rate for similar debt instruments. 5. INCOME TAXES The Company accounts for income taxes using the liability method. Deferred income taxes result from temporary differences between the carrying amounts of assets for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The portion of the loss included in the accompanying financial statements that was incurred by ESLP prior to its merger into the Company will be included in a separate partnership tax return. The loss incurred by the Company subsequent to the merger will be reflected in its corporate income tax return. F-42 166 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED The differences between the provision for income taxes ($0) and the amounts computed by applying the statutory federal income tax rates to loss before income taxes are: Statutory rate applied to loss before income taxes............... $(294,578) ESLP partnership loss............................................ 249,098 --------- (45,480) Provision for valuation allowance................................ 45,480 --------- $ -- ========= The components of the Company's deferred taxes at December 31, 1996, are: Deferred tax asset -- net operating loss carryforward............ $ 45,480 Valuation allowance.............................................. (45,480) --------- Net deferred tax asset (liability)............................... $ -- =========
At December 31, 1996, the Company has unused net operating loss carryforwards of approximately $134,000 for income tax purposes, that expire in the year 2011. No tax payments were made in 1996. 6. RELATED PARTY TRANSACTIONS Wyndham Management Corporation ("Wyndham") an affiliate of Crow, administered and funded payroll and insurance benefits for all employees of the Company through September 30, 1996 and continues to administer payroll for the employees of the Studio Suites and Westar hotels. Payables to affiliates includes $46,267 due to Wyndham at December 31, 1996, for reimbursement of payroll and insurance expenditures. Payroll and insurance expenditures reimbursed to Wyndham was $179,123 during 1996. Wyndham is entitled to receive a management fee equal to 3% of gross revenues, as defined, for management of the Company's hotels. Management fees were $69,265 in 1996. Payables to affiliates includes $51,710 due to Wyndham at December 31, 1996, for management fees and marketing fees. Trammell Crow Residential (TCR), an affiliate of Crow, and Greystar Realty Services (GRS), an affiliate of Greystar, have collectively agreed to develop up to 60 hotel facilities for the Company, under an agreement that expires at the earlier of the completion of the sixtieth hotel or December 31, 1998. Development fees paid to TCR and GRS were $460,175 and $50,000, respectively, during 1996. Payables to affiliates includes $879,523, $28,420 and $126,353 due to TCR, Wyndham, and Greystar, respectively, at December 31, 1996, for reimbursement of construction costs and out-of-pocket expenditures incurred in conjunction with the pursuit and acquisition of land and property. 7. STOCKHOLDERS' EQUITY COMMON STOCKHOLDERS VOTING RIGHTS Common stockholders are entitled to one vote for each share held on all matters presented for a vote of stockholders. Stockholders are entitled to receive pro rata, such dividends, if any, as may be declared by the Board of Directors in their discretion from funds legally available. Upon liquidation or dissolution, stockholders are entitled to receive pro rata, all of the remaining assets of the Company available for distribution to its stockholders. F-43 167 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED ISSUANCE OF COMMON STOCK TO ESLP PARTNERS On October 24, 1996, ESLP merged with and into the Company. The Company issued 6,386,087 shares of common stock to the partners of ESLP in exchange for their partnership interests. The cost basis of the partnership interests acquired for stock was $19,267,358. INITIAL PUBLIC OFFERING On October 24, 1996, the Company completed an initial public offering of 4,325,000 shares of its common stock at a public offering price of $11.50 per share (the "Offering"). The proceeds to the Company from the offering were $45,394,875, net of offering expenses. LONG-TERM INCENTIVE PLAN The Company has adopted the 1996 Long-Term Incentive Plan (the "1996 Plan") to attract and retain employees and consultants. Under the plan, options and stock awards may be granted with respect to a total of not more than 1,250,000 shares of common stock, subject to antidilution and other adjustment provisions. The options generally vest over a four-year period and may be exercised over a period of 10 years from the date of grant, subject to the vesting provisions. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. On October 24, 1996, the Company granted options to acquire an aggregate of 511,250 shares of common stock to certain employees and Company advisors. The exercise price for these options is the initial public offering price of $11.50. The stock option grants include 336,250 shares granted to Company officers and employees, 25,000 shares granted to advisors from Greystar, 55,000 shares granted to advisors from TCR, 45,000 shares granted to advisors from Crow Realty Investors, L.P., and 50,000 shares granted to advisors from Wyndham Hotel Company. The options granted to advisors from TCR vested immediately and the remaining stock options will vest ratably over a four-year period. No options were exercised, forfeited or expired in 1996. The effect of applying the fair value method prescribed by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" to the Company's stock based awards to employees would have increased net loss by $146,000 or $.01 per share. The fair value was estimated using the Black- Scholes option-pricing model based on the weighted average market price at grant date of $11.50 and the following weighted average assumptions: risk-free interest rate of 6.12%, volatility of 10% and dividend yield of 0%. COMMON STOCK AWARDS In connection with the Offering, the Company granted 13,913 shares of common stock under the Plan to certain employees and consultants of the Company. As a result, $64,998 has been recorded to compensation expense and $34,995 has been capitalized to property and equipment for stock granted to employees. In addition, $60,007 has been recorded to offering costs for services provided by consultants in connection with the Offering. 8. PROFIT SHARING AND SAVINGS PLAN The Company has a 401(k) plan for all full-time employees. Employees may contribute up to 15% of their gross pay, subject to certain limitations. The Company's 401(k) plan was effective December 1, 1996. F-44 168 HOMEGATE HOSPITALITY, INC. NOTES TO FINANCIAL STATEMENTS -- CONTINUED The Company matches 50% of the amount contributed by each employee, up to 6% of the employee's gross pay. In 1996, expenses included $2,298 representing the employer's matching contribution to the plan. 9. SUBSEQUENT EVENTS Subsequent to December 31, 1996, the Company purchased three land sites for an aggregate purchase price of $3,224,066. Additionally, the Company began development on two more hotel facilities. Total expected development costs for the two facilities are approximately $8,077,374. 10. QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited summarized financial data by quarter for 1996 is as follows:
QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- --------- ------------ ----------- Total revenues.................. $-- $ 24,803 $ 634,895 $ 2,029,296 Net loss........................ -- (239,070) (412,723) (214,614) Pro forma loss per share........ -- (.02) (.04) (.02)
F-45 169 HOMEGATE HOSPITALITY, INC. SCHEDULE III -- REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
COSTS CAPITALIZED INITIAL COSTS SUBSEQUENT TO ACQUISITION ------------------------------------- ------------------------------------ BUILDINGS FURNITURE, BUILDINGS FURNITURE, RELATED AND FIXTURES & AND FIXTURES & CONSTRUCTION DESCRIPTION ENCUMBRANCES LAND IMPROV. EQUIPMENT IMPROV. EQUIPMENT IN PROGRESS - ------------------------------------- ------------ ----------- ----------- ----------- --------- ----------- ------------ Studio Suites-Arlington, TX.......... $2,917,930 $ 825,000 $ 3,911,029 $ 191,090 $ 76,119 $ 244,106 $ 0 44th and Oak-Phoenix, AZ............. 45,162 1,310,000 0 0 0 0 2,340,741 Denver Tech.-Denver, CO.............. 750,000 0 0 0 0 881,210 Metro Center-Phoeniz, AZ............. 850,000 0 0 0 0 0 Overland Park-Kansas................. 1,200,000 0 0 0 0 353,701 Lenexa-Kansas City................... 800,000 0 0 0 0 225,173 Park Central-Dallas, TX.............. 1,075,000 0 0 0 0 358,551 I-10 and Chandler- Phoenix, AZ....... 1,550,000 0 0 0 0 197,056 Indianapolis Airport/Marion- Indianapolis, IN................... 1,300,000 0 0 0 0 33,959 InnHome Towne Lake- Austin, TX....... 1,896,000 4,567,845 1,106,430 0 0 0 Westar-Irving........................ (a) 757,234 3,028,937 29,955 17,252 34,143 59,026 Westar-San Antonio Airport........... (a) 1,189,940 4,759,759 47,071 15,071 23,849 56,306 Westar-San Antonio Fiesta............ (a) 860,464 3,441,974 34,039 14,640 19,546 50,083 Westar-El Paso....................... (a) 1,249,135 4,995,780 49,406 15,026 26,569 30,051 Westar-Amarillo...................... (a) 864,963 3,441,974 34,039 14,720 22,107 37,296 ----------- ----------- ---------- -------- -------- ---------- $16,473,296 $28,147,298 $1,492,030 $152,829 $ 370,320 $4,623,153 =========== =========== ========== ======== ======== ==========
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
BUILDINGS FURNITURE, AND FIXTURES & CONSTRUCTION ACCUM. DATE OF DESCRIPTION LAND IMPROV. EQUIPMENT IN PROGRESS TOTAL(C) DEPRES. CONSTRUC. - --------------------------------------- ----------- ----------- ----------- ------------ ----------- -------- ----------- Studio Suites-Arlington, TX............ $ 825,000 $ 3,987,148 $ 435,196 $ 0 $ 5,247,344 $ 88,831 1996 44th and Oak-Phoenix, AZ............... 1,310,000 0 0 2,340,741 3,650,741 0 06/96-12/96 Denver Tech.-Denver, CO................ 750,000 0 0 881,210 1,631,210 0 06/96-12/96 Metro Center-Phoeniz, AZ............... 850,000 0 0 0 850,000 0 Overland Park-Kansas................... 1,200,000 0 0 353,701 1,553,701 0 08/96-12/96 Lenexa-Kansas City..................... 800,000 0 0 225,173 1,025,173 0 08/96-12/96 Park Central-Dallas, TX................ 1,075,000 0 0 358,551 1,433,551 0 10/96-12/96 I-10 and Chandler- Phoenix, AZ......... 1,550,000 0 0 197,056 1,747,056 0 11/96-12/96 Indianapolis Airport/Marion- Indianapolis, IN..................... 1,300,000 0 0 33,959 1,333,959 0 1/97 InnHome Towne Lake- Austin, TX......... 1,986,000 4,567,845 1,106,430 0 7,570,275 0 (b) Westar-Irving.......................... 757,234 3,046,189 64,098 59,026 3,926,547 27,710 1985 Westar-San Antonio Airport............. 1,189,940 4,774,830 70,920 56,306 6,091,996 42,676 1986 Westar-San Antonio Fiesta.............. 860,494 3,456,614 53,585 50,083 4,420,776 30,908 1985 Westar-El Paso......................... 1,249,135 5,010,506 75,975 30,051 6,365,967 44,835 1986 Westar-Amarillo........................ 860,493 3,456,695 56,146 37,296 4,410,630 30,988 1985 ----------- ----------- ---------- ---------- ---------- -------- ----------- $16,473,296 $28,300,127 $1,862,350 $4,623,153 $51,258,926 $265,948 =========== =========== ========== ========== ========== ========
F-46 170
DEPRECIABLE DATE LIVES IN DESCRIPTION ACQUIRED YEARS - -------------------------------------------------------------------------------------------- -------- ----------- Studio Suites-Arlington, TX................................................................. 05/31/96 7 to 40 44th and Oak-Phoenix, AZ.................................................................... 02/15/96 7 to 40 Denver Tech.-Denver, CO..................................................................... 05/24/96 7 to 40 Metro Center-Phoeniz, AZ.................................................................... 7 to 40 Overland Park-Kansas........................................................................ 08/09/96 7 to 40 Lenexa-Kansas City.......................................................................... 07/22/96 7 to 40 Park Central-Dallas, TX..................................................................... 09/30/96 7 to 40 I-10 and Chandler- Phoenix, AZ.............................................................. 11/05/96 7 to 40 Indianapolis Airport/Marion- Indianapolis, IN............................................... 12/31/96 7 to 40 InnHome Towne Lake- Austin, TX.............................................................. 12/31/96 7 to 40 Westar-Irving............................................................................... 09/06/96 7 to 40 Westar-San Antonio Airport.................................................................. 09/06/96 7 to 40 Westar-San Antonio Fiesta................................................................... 09/06/96 7 to 40 Westar-El Paso.............................................................................. 09/06/96 7 to 40 Westar-Amarillo............................................................................. 09/06/96 7 to 40
- --------------- (a) These properties are collateral for the $18,100,000 loan from Nomura Asset Capital Corporation dated 12/29/95. The outstanding balance of the loan at December 31, 1996 is $17,961,075. (b) This property was built in the 1960's as a dormitory for the University of Texas. This property was renovated in late 1994/early 1995 as an extended- stay hotel facility. (c) The aggregate cost for federal income tax purposes is approximately $51,259,000. NOTES TO SCHEDULE III -- REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
PERIOD ENDED DECEMBER 31, 1996 ----------------- Real Estate Investments: Balance, beginning of period............................................... $ -- Additions during period: Purchase of hotel properties............................................... 37,277,624 Purchase of land........................................................... 8,835,000 Improvements............................................................... 5,146,302 ----------- Balance, end of period..................................................... $ 51,258,926 -----------
PERIOD ENDED DECEMBER 31, 1996 ----------------- Accumulated Depreciation: Balance, beginning of period............................................... $ -- Additions during period: Depreciation............................................................... 265,948 -------- Balance, end of period..................................................... $ 265,948 --------
F-47 171 ANNEX A AGREEMENT AND PLAN OF MERGER DATED AS OF JULY 25, 1997 AMONG PRIME HOSPITALITY CORP. PH SUB CORPORATION AND HOMEGATE HOSPITALITY, INC. 172 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER................................................................... 1 Section 1.1 The Merger............................................................. 1 Section 1.2 Effective Date of the Merger........................................... 1 ARTICLE II THE SURVIVING CORPORATION................................................... 1 Section 2.1 Certificate of Incorporation........................................... 1 Section 2.2 By-Laws................................................................ 1 Section 2.3 Board of Directors; Officers........................................... 1 Section 2.4 Effects of Merger...................................................... 2 ARTICLE III CONVERSION OF SHARES....................................................... 2 Section 3.1 Exchange Ratio......................................................... 2 Section 3.2 Parent to Make Certificates Available.................................. 2 Section 3.3 Dividends; Stock Transfer Taxes........................................ 2 Section 3.4 No Fractional Shares................................................... 3 Section 3.5 Stock Options.......................................................... 3 Section 3.6 Stockholders' Meetings................................................. 3 Section 3.7 Closing of the Company's Transfer Books................................ 4 Section 3.8 Assistance in Consummation of the Merger............................... 4 Section 3.9 Closing................................................................ 4 Section 3.10 Transfer Taxes......................................................... 4 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT.................................... 4 Section 4.1 Organization and Qualification......................................... 4 Section 4.2 Capitalization......................................................... 4 Section 4.3 Subsidiaries........................................................... 5 Section 4.4 Authorization; Binding Agreement....................................... 5 Section 4.5 No Violations.......................................................... 5 Section 4.6 Governmental Approvals................................................. 5 Section 4.7 Reports and Financial Statements....................................... 5 Section 4.8 Absence of Certain Changes or Events................................... 6 Section 4.9 Litigation............................................................. 6 Section 4.10 Parent Action.......................................................... 6 Section 4.11 Financial Advisor...................................................... 6 Section 4.12 Compliance with Applicable Laws........................................ 7 Section 4.13 Liabilities............................................................ 7 Section 4.14 No Material Adverse Effect............................................. 7 Section 4.15 Accounting Matters..................................................... 7 Section 4.16 Disclosure............................................................. 7 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ 7 Section 5.1 Organization and Qualification......................................... 7 Section 5.2 Capitalization......................................................... 8 Section 5.3 Subsidiaries........................................................... 8 Section 5.4 Authorization; Binding Agreement....................................... 8 Section 5.5 No Violations.......................................................... 9 Section 5.6 Governmental Approvals................................................. 9 Section 5.7 Reports and Financial Statements....................................... 9 Section 5.8 Absence of Certain Changes or Events................................... 9 Section 5.9 Litigation............................................................. 10
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PAGE ---- Section 5.10 Employee Benefit Plans................................................. 10 Section 5.11 Labor Matters.......................................................... 12 Section 5.12 Company Action......................................................... 12 Section 5.13 Financial Advisor...................................................... 12 Section 5.14 Compliance with Applicable Laws........................................ 12 Section 5.15 Liabilities............................................................ 13 Section 5.16 Taxes.................................................................. 13 Section 5.17 Certain Agreements..................................................... 13 Section 5.18 Contracts.............................................................. 13 Section 5.19 Trademarks............................................................. 14 Section 5.20 No Material Adverse Effect............................................. 14 Section 5.21 Accounting Matters..................................................... 14 Section 5.22 Required Vote of Company Common Stock.................................. 14 Section 5.23 Real Property.......................................................... 14 Section 5.24 Hotel Zoning; Improvements............................................. 15 Section 5.25 Environmental Matters.................................................. 15 Section 5.26 Development Agreement.................................................. 16 Section 5.27 Insurance.............................................................. 16 Section 5.28 Disclosure............................................................. 16 ARTICLE VI REPRESENTATIONS AND WARRANTIES REGARDING SUB................................ 16 Section 6.1 Organization........................................................... 16 Section 6.2 Capitalization......................................................... 16 Section 6.3 Authority Relative to this Agreement................................... 16 ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER..................................... 17 Section 7.1 Conduct of Business by the Company Pending the Merger.................. 17 Section 7.2 Conduct of Business by Parent Pending the Merger....................... 18 Section 7.3 Conduct of Business of Sub............................................. 18 ARTICLE VIII ADDITIONAL AGREEMENTS..................................................... 19 Section 8.1 Access and Information................................................. 19 Section 8.2 Registration Statement/Proxy Statement................................. 19 Section 8.3 Affiliate and Pooling Agreements....................................... 19 Section 8.4 Stock Exchange Listing................................................. 20 Section 8.5 Employee Plans......................................................... 20 Section 8.6 Indemnification and Insurance.......................................... 20 Section 8.7 Board Representation................................................... 21 Section 8.8 Additional Agreements.................................................. 21 Section 8.9 Alternative Proposals.................................................. 21 Section 8.10 Advice of Changes; SEC Filings......................................... 22 Section 8.11 Letter of the Company's Accountants.................................... 22 Section 8.12 Letter of Parent and Sub's Accountants................................. 22 Section 8.13 Tax Certificate........................................................ 22 ARTICLE IX CONDITIONS PRECEDENT........................................................ 22 Section 9.1 Conditions to Each Party's Obligation to Effect the Merger............. 22 Section 9.2 Conditions to Obligation of the Company to Effect the Merger........... 23 Section 9.3 Conditions to Obligations of Parent and Sub to Effect the Merger....... 24 ARTICLE X TERMINATION, AMENDMENT AND WAIVER............................................ 24 Section 10.1 Termination by Mutual Consent.......................................... 24 Section 10.2 Termination by Either Parent or the Company............................ 24
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PAGE ---- Section 10.3 Termination by the Company............................................. 25 Section 10.4 Termination by Parent.................................................. 25 Section 10.5 Effect of Termination and Abandonment.................................. 25 ARTICLE XI GENERAL PROVISIONS.......................................................... 26 Section 11.1 Non-Survival of Representations, Warranties and Agreements............. 26 Section 11.2 Notices................................................................ 26 Section 11.3 Fees and Expenses...................................................... 27 Section 11.4 Publicity.............................................................. 27 Section 11.5 Specific Performance................................................... 27 Section 11.6 Assignment; Binding Effect............................................. 27 Section 11.7 Entire Agreement....................................................... 27 Section 11.8 Amendment.............................................................. 28 Section 11.9 Governing Law.......................................................... 28 Section 11.10 Counterparts........................................................... 28 Section 11.11 Headings and Table of Contents......................................... 28 Section 11.12 Interpretation......................................................... 28 Section 11.13 Waivers................................................................ 28 Section 11.14 Incorporation of Exhibits.............................................. 28 Section 11.15 Severability........................................................... 28 Section 11.16 Certain Definitions.................................................... 28 Section 11.17 Waiver of Jury Trial................................................... 29 Section 11.18 Jurisdiction; Service of Process....................................... 29 Schedules: 3.5(a) Stock Options 4.1 Organization and Qualification 5.1 Organization and Qualification 5.3 Subsidiaries 5.5 No Violations 5.8 Absence of Certain Changes or Events 5.9 Litigation 5.10 Employee Benefit Plans 5.13 Financial Advisor 5.16 Taxes 5.17 Certain Agreements 5.18 Contracts 5.19 Trademarks 5.23 Real Property 5.24 Hotel Zoning; Improvements 5.25 Environmental Matters 5.26 Development Agreement 7.1 Conduct of Business by the Company Pending the Merger 8.5 Employee Plans
iii 175 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of July 25, 1997, by and among Prime Hospitality Corp., a Delaware corporation ("Parent"), PH Sub Corporation, a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and Homegate Hospitality, Inc., a Delaware corporation (the "Company"): W I T N E S S E T H: WHEREAS, Parent and the Company desire to effect a business combination by means of the merger of Sub with and into the Company (the "Merger"); WHEREAS, the Boards of Directors of Parent, Sub and the Company have approved the Merger, upon the terms and subject to the conditions set forth herein; WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a "pooling of interests"; and WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties and agreements contained herein the parties hereto agree as follows: ARTICLE I THE MERGER Section 1.1 The Merger. Upon the terms and subject to the conditions hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged into the Company and the separate existence of Sub shall thereupon cease, and the Company, as the corporation surviving the Merger (the "Surviving Corporation"), shall by virtue of the Merger continue its corporate existence under the laws of the State of Delaware. Section 1.2 Effective Date of the Merger. The Merger shall become effective at the date and time (the "Effective Date") when a properly executed Certificate of Merger is duly filed with the Secretary of State of the State of Delaware, which filing shall be made as soon as practicable following fulfillment of the conditions set forth in Article IX hereof, or at such time thereafter as is provided in such Certificate of Merger. ARTICLE II THE SURVIVING CORPORATION Section 2.1 Certificate of Incorporation. The Certificate of Incorporation of the Company as in effect on the Effective Date shall be the Certificate of Incorporation of the Surviving Corporation, provided that such Certificate of Incorporation shall be amended and restated immediately following the Merger in a form satisfactory to Parent and the Surviving Corporation. Section 2.2 By-Laws. The By-laws of the Sub as in effect on the Effective Date shall be the By-laws of the Surviving Corporation, and thereafter may be amended in accordance with its terms and as provided by law and this Agreement. Section 2.3 Board of Directors; Officers. The directors of Sub immediately prior to the Effective Date shall be the directors of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Date shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected and qualified. A-1 176 Section 2.4 Effects of Merger. The Merger shall have the effects set forth in Section 259 of the Delaware General Corporation Law (the "DGCL"). ARTICLE III CONVERSION OF SHARES Section 3.1 Exchange Ratio. On the Effective Date, by virtue of the Merger and without any action on the part of any holder of any common stock, $.01 par value, of the Company ("Company Common Stock"): (a) All shares of Company Common Stock which are held by the Company or any Subsidiary (as defined in Section 11.16) of the Company, and any shares of Company Common Stock owned by Parent, Sub or any other Subsidiary of Parent, shall be canceled. (b) Subject to Section 3.4, each remaining outstanding share of Company Common Stock shall be converted into 0.6073 (the "Exchange Ratio") fully paid and nonassessable shares of the common stock, $.01 par value, of Parent ("Parent Common Stock"). (c) In the event of any stock dividend, stock split, reclassification, recapitalization, combination or exchange of shares with respect to, or rights issued in respect of, Parent Common Stock or Company Common Stock after the date hereof, the Exchange Ratio shall be adjusted accordingly. (d) Each issued and outstanding share of capital stock of Sub shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. Section 3.2 Parent to Make Certificates Available. (a) Prior to the Effective Date, Parent shall select an Exchange Agent, which shall be Parent's transfer agent or such other person or persons reasonably satisfactory to the Company, to act as Exchange Agent for the Merger (the "Exchange Agent"). As soon as practicable after the Effective Date, Parent shall make available, and each holder of Company Common Stock will be entitled to receive, upon surrender to the Exchange Agent of one or more certificates ("Certificates") representing such stock for cancellation, certificates representing the number of shares of Parent Common Stock into which such shares are converted in the Merger and cash in consideration of fractional shares as provided in Section 3.4 (the "Share Consideration"). Parent Common Stock into which Company Common Stock shall be converted in the Merger shall be deemed to have been issued on the Effective Date. (b) Any holder of shares of Company Common Stock who has not exchanged his Certificates for Parent Common Stock in accordance with subsection (a) within 12 months after the Effective Date shall have no further claim upon the Exchange Agent and shall thereafter look only to Parent and the Surviving Corporation for payment in respect of his shares of Company Common Stock. Until so surrendered, Certificates shall represent solely the right to receive the Share Consideration. Section 3.3 Dividends; Stock Transfer Taxes. No dividends or other distributions that are declared or made on Parent Common Stock will be paid to persons entitled to receive certificates representing Parent Common Stock pursuant to this Agreement until such persons surrender their Certificates representing Company Common Stock. Upon such surrender, there shall be paid to the person in whose name the certificates representing such Parent Common Stock shall be issued (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Date theretofore payable with respect to such whole shares of Parent Common Stock and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Date but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Parent Common Stock, less the amount of any withholding taxes which may be required thereon. In no event shall the person entitled to receive such dividends be entitled to receive interest on such dividends. In the event that any certificates representing shares of Parent Common Stock are to be issued in a name other than that in which the Certificates surrendered in exchange therefor are registered, it shall be a condition of such exchange that the Certificate or A-2 177 Certificates so surrendered shall be properly endorsed or be otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of the issuance of certificates for such shares of Parent Common Stock in a name other than that of the registered holder of the Certificate or Certificates surrendered, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to a holder of shares of Company Common Stock for any shares of Parent Common Stock or dividends thereon delivered to a public official pursuant to any applicable abandoned property, escheat or similar laws. In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock and cash in lieu of fractional shares, and unpaid dividends and distributions on shares of Parent Common Stock as provided in this Section 3.3, deliverable in respect thereof pursuant to this Agreement. Section 3.4 No Fractional Shares. No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Certificates pursuant to Section 3.2. Notwithstanding any other provision of this Agreement, each holder of Company Common Stock exchanged pursuant to the Merger who would otherwise be entitled to receive a fraction of a share of Parent Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash in an amount equal to such fractional part of a share of Parent Common Stock multiplied by the per-share value of the Parent Common Stock, with such per-share value being deemed equal to the average composite closing sale price for Parent Common Stock on the New York Stock Exchange (the "NYSE") for the 10 business days next preceding the Effective Date, as reported in each case in the following day's edition of The Wall Street Journal. Section 3.5 Stock Options. (a) Each of the Company's stock option plans (the "Option Plans"), and options to acquire shares of Company Common Stock outstanding on the date hereof, are set forth in Section 3.5(a) of the Company Disclosure Schedule (as defined in Section 5.1). Each Option Plan and all such options which are outstanding immediately prior to the Effective Date, whether vested or unvested (each, an "Option" and collectively, the "Options"), shall be assumed by Parent at the Effective Date, and each such Option shall become an option to purchase a number of shares of Parent Common Stock (a "Substitute Option") equal to the number of shares of Company Common Stock subject to such Option multiplied by the Exchange Ratio (rounded to the nearest whole share). The per share exercise price for each Substitute Option shall be the current exercise price per share of Company Common Stock divided by the Exchange Ratio (rounded up to the nearest full cent), and each Substitute Option otherwise shall be subject to all of the other terms and conditions of the original Option to which it relates. Prior to the Effective Date, the Company shall take such additional actions as are necessary under applicable law and the applicable agreements and Option Plans to ensure that each outstanding Option shall, from and after the Effective Date, represent only the right to purchase, upon exercise, shares of Parent Common Stock. There shall not occur as a result of the Merger any acceleration of vesting or exercisability with respect to any Option, or any lapse of vesting restrictions with respect to any share of restricted stock, other than pursuant to the terms of the original grant agreement, and any such acceleration shall occur without the exercise of discretion by any person or entity. (b) As soon as reasonably practicable after the Effective Date, Parent shall cause to be included under a registration statement on Form S-8 of Parent all shares of Parent Common Stock which are subject to Substitute Options, and shall maintain the effectiveness of such registration statement until all Substitute Options have been exercised, expired or forfeited. Section 3.6 Stockholders' Meetings. Subject to Section 8.9, the Company shall take all action necessary, in accordance with applicable law and its Certificate of Incorporation and By-laws, to convene a special meeting of the holders of Company Common Stock (the "Company Meeting") as promptly as practicable for the purpose of considering and taking action upon this Agreement. Subject to Section 8.9, the A-3 178 Board of Directors of the Company will recommend that holders of Company Common Stock vote in favor of and approve the Merger and the adoption of the Agreement at the Company Meeting. Section 3.7 Closing of the Company's Transfer Books. At the Effective Date, the stock transfer books of the Company shall be closed and no transfer of shares of Company Common Stock shall be made thereafter. In the event that, after the Effective Date, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for Parent Common Stock and/or cash as provided in Sections 3.1(b) and 3.4. Section 3.8 Assistance in Consummation of the Merger. Subject to Section 8.9, each of Parent, Sub and the Company shall provide all reasonable assistance to, and shall cooperate with, each other to bring about the consummation of the Merger as soon as possible in accordance with the terms and conditions of this Agreement. Parent shall cause Sub to perform all of its obligations in connection with this Agreement. Section 3.9 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place (i) at the offices of Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022, at 9:00 A.M. local time on the first business day following the day on which the last of the conditions set forth in Article IX (other than those that can only be fulfilled on the Effective Date) is fulfilled or waived or (ii) at such other time and place as Parent and the Company shall agree in writing. Section 3.10 Transfer Taxes. Parent and Company shall cooperate in the preparation, execution and filing of all returns, applications or other documents regarding any real property transfer, stamp, recording, documentary or other taxes and any other fees and similar taxes which become payable in connection with the Merger (other than transfer or stamp taxes payable in respect of transfers pursuant to Section 3.3) (collectively, "Transfer Taxes"). From and after the Effective Date, Parent shall pay or cause to be paid, without deduction or withholding from any amounts payable to the holders of Company Common Stock, all Transfer Taxes. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT Parent represents and warrants to the Company as follows: Section 4.1 Organization and Qualification. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power to carry on its business as it is now being conducted or currently proposed to be conducted. Parent is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities make such qualification necessary, except where the failure to be so qualified will not, individually or in the aggregate, have a material adverse effect on the business, properties, assets, prospects, condition (financial or otherwise), liabilities or results of operations of Parent and its Subsidiaries taken as a whole (a "Parent Material Adverse Effect"). Complete and correct copies as of the date hereof of the Certificate of Incorporation and By-laws of Parent have been delivered to the Company as Section 4.1 of the disclosure schedule delivered by Parent to the Company in connection with this Agreement (the "Parent Disclosure Schedule"). The Certificate of Incorporation and By-laws of Parent and each of its Subsidiaries are in full force and effect. Neither Parent nor any of its Subsidiaries is in violation of any provision of its respective Certificate of Incorporation or By-laws. Section 4.2 Capitalization. The authorized capital stock of Parent consists of 75,000,000 shares of Parent Common Stock and 20,000,000 shares of preferred stock, $.10 par value. As of March 31, 1997, 39,926,662 shares of Parent Common Stock were issued and outstanding, and no shares of preferred stock were issued and outstanding. All of the shares of Parent Common Stock issuable in accordance with this Agreement in exchange for Company Common Stock at the Effective Date in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable and shall be delivered free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever. As of July 23, 1997, except for (i) options to acquire an aggregate of 1,979,499 shares of Parent Common Stock A-4 179 pursuant to the 1995 Employee Stock Option Plan, the 1995 Non-Employee Director Stock Option Plan and the 1992 Stock Option and Performance Incentive Plans, (ii) warrants to acquire an aggregate of 854,713 shares of Parent Common Stock and (iii) $75,000,000 aggregate principal amount of Convertible Subordinated Notes due 2002, agreements or commitments presently outstanding obligating Parent to issue, deliver or sell shares of its capital stock or debt securities, or obligating Parent to grant, extend or enter into any such option, warrant, call or other such right, agreement or commitment. Section 4.3 Subsidiaries. Each Subsidiary of Parent is a corporation, limited partnership or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation and has the corporate, partnership or other power to carry on its business as it is now being conducted or currently proposed to be conducted. Each Subsidiary of Parent is duly qualified as a foreign corporation, partnership or limited liability company to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified, when taken together with all such failures, has not had, or would not reasonably be expected to have, a Parent Material Adverse Effect. Section 4.4 Authorization; Binding Agreement. Parent has the corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by Parent's Board of Directors. No other corporate proceedings on the part of Parent (or its stockholders) are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement constitutes a valid and binding obligation of Parent enforceable against Parent in accordance with its terms. Section 4.5 No Violations. Parent is not subject to or obligated under (i) any charter, by-law, indenture or other loan document provision or (ii) any other contract, license, franchise, permit, order, decree, concession, lease, instrument, judgment, statute, law, ordinance, rule or regulation applicable to Parent or any of its Subsidiaries or their respective properties or assets, which would be breached or violated, or under which there would be a default (with or without notice or lapse of time, or both), or under which there would arise a right of termination, cancellation, modification or acceleration of any obligation or the loss of a material benefit, by its entering into and performing this Agreement, other than, in the case of clause (ii) only, any breaches, violations, defaults, terminations, cancellations, modifications, accelerations or losses which, either singly or in the aggregate, have not had, or would not reasonably be expected to have, a Parent Material Adverse Effect or prevent or unreasonably delay the consummation of the transactions contemplated hereby. Section 4.6 Governmental Approvals. Except in connection or in compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the corporation, securities or blue sky laws or regulations of the various states, no filing or registration with, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Parent of the Merger or the other transactions contemplated by this Agreement other than filings, registrations, authorizations, consents or approvals the failure of which to make or obtain have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Parent Material Adverse Effect or prevent the consummation of the transactions contemplated hereby or thereby. Section 4.7 Reports and Financial Statements. Parent has previously furnished the Company with true and complete copies of its (i) Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission (the "Commission"), (ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, as filed with the Commission, (iii) proxy statements related to all meetings of its stockholders (whether annual or special) since January 1, 1996, and (iv) all other reports or registration statements filed by Parent with the Commission since January 1, 1996 (except for preliminary material in the case of clauses (iii) and (iv) above) (clauses (i) through (iv) being referred to herein collectively as the "Parent SEC Reports"). As of their respective dates, the Parent SEC Reports complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the Commission thereunder applicable to such Parent SEC Reports. As of their respective dates, the Parent SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the A-5 180 circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements of Parent included in the Parent SEC Reports comply in all material respects with applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto. The consolidated financial statements included in the Parent SEC Reports: have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto); present fairly, in all material respects, the consolidated financial position of Parent and its Subsidiaries as at the dates thereof and the consolidated results of their operations and consolidated cash flows for the periods then ended subject, in the case of the unaudited interim consolidated financial statements, to normal year-end audit adjustments, any other adjustments described therein and the fact that certain information and notes have been condensed or omitted in accordance with the Exchange Act and the rules promulgated thereunder; and are in accordance with the books of account and records of the Parent and its Subsidiaries. Section 4.8 Absence of Certain Changes or Events. Except as disclosed in the Parent SEC Reports and as contemplated by this Agreement, since December 31, 1996 through the date hereof, Parent and its Subsidiaries have conducted their business only in the ordinary and usual course, and there has not been (i) any transaction, commitment, dispute or other event or condition (financial or otherwise) of any character (whether or not in the ordinary course of business) individually or in the aggregate that has had, or would reasonably be expected to have, a Parent Material Adverse Effect; (ii) any material damage, destruction or loss, whether or not covered by insurance; (iii) any investment by Parent or any of its Subsidiaries in any corporation, partnership or other entity in excess of $25,000,000 in the aggregate; (iv) any sale, disposition or other transfer of assets or properties of Parent or any of its Subsidiaries (other than in the ordinary course of business consistent with past practice) in excess of $15,000,000 in the aggregate; (v) the incurrence or guarantee of any indebtedness (other than in the ordinary course of business consistent with past practice) in excess of $5,000,000 in the aggregate; (vi) any entry into any other commitment or transaction material to Parent and its Subsidiaries taken as a whole (other than in the ordinary course of business consistent with past practice); (vii) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) with respect to its capital stock; (viii) any change in its accounting principles, practices or methods; (ix) any split, combination or reclassification of any of Parent's capital stock or the issuance or authorization of any issuance of any other securities in respect of, in lieu of or in substitution for, shares of Parent's capital stock; (x) any repurchase or redemption with respect to its capital stock; (xi) any revaluation by Parent of any of its assets (including, without limitation, the write-off of notes or accounts receivable) in excess of $500,000 in the aggregate; or (xii) any agreement (whether or not in writing), arrangement or understanding to do any of the foregoing. Section 4.9 Litigation. Except as disclosed in Parent's Annual Report on Form 10-K for the year ended December 31, 1996, or the Parent's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, there is no suit, action or proceeding pending or, to the knowledge of Parent, threatened against Parent or any of its Subsidiaries which, either alone or in the aggregate, would reasonably be expected to have a Parent Material Adverse Effect, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against Parent or any of its Subsidiaries having, or which would reasonably be expected to have, either alone or in the aggregate, a Parent Material Adverse Effect. Section 4.10 Parent Action. The Board of Directors of Parent (at a meeting duly called and held) has by the requisite vote of all directors present (a) determined that this Agreement is advisable and in the best interests of Parent and its stockholders and (b) approved the Merger in accordance with the provisions of Section 251 of the DGCL. Section 4.11 Financial Advisor. Parent represents and warrants that, except for Montgomery Securities, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or any of its Subsidiaries. A-6 181 Section 4.12 Compliance with Applicable Laws. Parent and its Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all courts, administrative agencies or commissions or other governmental authorities or instrumentalities, domestic or foreign (each, a "Governmental Entity") necessary in connection with the conduct of their business (the "Parent Permits"), except for such permits, licenses, variances, exemptions, orders and approvals the failure of which to hold have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Parent Material Adverse Effect. The Parent and its Subsidiaries are in compliance with the terms of the Parent Permits, except for such failures to comply which, singly or in the aggregate, have not had, or would not reasonably be expected to have, a Parent Material Adverse Effect. The businesses of Parent and its Subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for violations which individually or in the aggregate have not had, or would not reasonably be expected to have, a Parent Material Adverse Effect. No investigation or review by any Governmental Entity with respect to Parent or any of its Subsidiaries is pending or, to the knowledge of Parent, threatened, nor has any Governmental Entity indicated an intention to conduct the same, other than those the outcome of which have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Parent Material Adverse Effect. Section 4.13 Liabilities. Since the date of the latest consolidated balance sheet of Parent contained in the Parent SEC Reports through the date hereof, neither Parent nor any of its Subsidiaries has incurred any material liabilities or obligations (absolute, accrued, contingent or otherwise) of the type that is required to be reflected or reserved against in a consolidated balance sheet of Parent and its Subsidiaries, or in the notes thereto, prepared in accordance with generally accepted accounting principles, other than liabilities incurred in the ordinary course of business and liabilities which are fully disclosed or provided for in the most recent Parent SEC Reports. To the knowledge of Parent, there is no basis for any contingent or unknown liability of any nature against Parent or its Subsidiaries, which has had, or would reasonably be expected to have, either singly or in the aggregate, a Parent Material Adverse Effect, other than as reflected in the Parent SEC Reports. Section 4.14 No Material Adverse Effect. Except as disclosed in the Parent SEC Reports, Parent is not aware of any fact or facts which has or have had, or would reasonably be expected to have, either singly or in the aggregate, a Parent Material Adverse Effect. Section 4.15 Accounting Matters. Neither Parent nor, to its knowledge, any of its affiliates, has through the date hereof, taken or agreed to take any action that would prevent the Company from accounting for the business combination to be effected by the Merger as a "pooling of interests" in accordance with Accounting Principles Board Opinion No. 16, the interpretive releases issued pursuant thereto and the pronouncements of the Commission. To the knowledge of Parent, Parent has not taken any action which would prevent the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. Section 4.16 Disclosure. No representation or warranty by Parent in this Agreement, and no schedule or certificate delivered by Parent and furnished to the Company pursuant hereto, or in connection with the transactions contemplated hereby, is false and misleading in any material respect or contains any material misstatement of fact or omits to state any material facts required to be stated to make such information not misleading. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: Section 5.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power to carry on its business as it is now being conducted or currently proposed to be conducted. The Company is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except A-7 182 where the failure to be so qualified will not, individually or in the aggregate, have a material adverse effect on the business, properties, assets, prospects, condition (financial or otherwise), liabilities or results of operations of the Company and its Subsidiaries taken as a whole (a "Company Material Adverse Effect"). Complete and correct copies of the Certificate of Incorporation and By-laws of the Company and each of its Subsidiaries have been delivered to Parent as Section 5.1 of the disclosure schedule delivered by the Company to Parent in connection with this Agreement (the "Company Disclosure Schedule"). The Certificate of Incorporation and By-laws of the Company and each of its Subsidiaries are in full force and effect. Neither the Company nor any of its Subsidiaries is in violation of any provision of its respective Certificate of Incorporation or By-laws. Section 5.2 Capitalization. The authorized capital stock of the Company consists of 20,000,000 shares of Company Common Stock and 5,000,000 shares of preferred stock, $.01 par value. As of the date hereof, 10,725,000 shares of Company Common Stock were issued and outstanding, and no shares of preferred stock were issued and outstanding. There are no bonds, debentures, notes or other indebtedness issued and outstanding having the right to vote, or which are convertible into or exercisable for securities having the right to vote, on any matters on which the Company's shareholders may vote. Except for options to acquire 641,250 shares of Company Common Stock pursuant to the Company's 1996 Long Term Incentive Plan (the "1996 Plan"), there are no options, warrants, calls or other rights, agreements or commitments presently outstanding obligating the Company to issue, deliver or sell shares of its capital stock or debt securities, or obligating the Company to grant, extend or enter into any such option, warrant, call or other such right, agreement or commitment. All of the shares of Company Common Stock outstanding at the Effective Date will be duly authorized, validly issued, fully paid and nonassessable. After the Effective Date, the Surviving Corporation will have no obligation to issue, transfer or sell any shares of capital stock of the Company or the Surviving Corporation pursuant to any Company Employee Benefit Plan (as defined in Section 5.10). Section 5.3 Subsidiaries. The only Subsidiaries of the Company are disclosed in Section 5.3 of the Company Disclosure Schedule. Each Significant Subsidiary (as such term is defined in Rule 1-02 of Regulation S-X under the Securities Act) ("Significant Subsidiary") of the Company has been named in the Company SEC Reports (as hereinafter defined). Each Subsidiary of the Company is a corporation or limited partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation and has the corporate or partnership power to carry on its business as it is now being conducted or currently proposed to be conducted. Each Subsidiary of the Company is duly qualified as a foreign corporation or partnership to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified, when taken together with all such failures, has not had, or would not reasonably be expected to have, a Company Material Adverse Effect. Section 5.3 of the Company Disclosure Schedule contains, with respect to each Subsidiary of the Company, its name and jurisdiction of incorporation and, with respect to each Subsidiary that is not wholly owned, the number of issued and outstanding shares of capital stock and the number of shares of capital stock owned by the Company or a Subsidiary. All the outstanding shares of capital stock of each Subsidiary of the Company are validly issued, fully paid and nonassessable, and those owned by the Company or by a Subsidiary of the Company are owned free and clear of any liens, claims or encumbrances. There are no existing options, warrants, calls or other rights, agreements or commitments of any character to which the Company or any of its Subsidiaries is a party relating to the issued or unissued capital stock or other securities of any of the Subsidiaries of the Company. Except as set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Company does not directly or indirectly own any interest in any other corporation, partnership, joint venture or other business association or entity. Section 5.4 Authorization; Binding Agreement. The Company has the corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Company's Board of Directors. Except for the approval of the holders of not less than two-thirds of the outstanding shares of Company Common Stock, no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms. A-8 183 Section 5.5 No Violations. Except as set forth in Section 5.5 of the Company Disclosure Schedule, the Company is not subject to or obligated under (i) any charter, by-law, indenture or other loan document provision or (ii) any other contract, license, franchise, permit, order, decree, concession, lease, instrument, judgment, statute, law, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries or their respective properties or assets, which would be breached or violated, or under which there would be a default (with or without notice or lapse of time, or both), or under which there would arise a right of termination, cancellation, modification or acceleration of any obligation or the loss of a material benefit, by its entering into and performing this Agreement, other than, in the case of clause (ii) only, any breaches, violations, defaults, terminations, cancellations, modifications, accelerations or losses which, either singly or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect or prevent or unreasonably delay the consummation of the transactions contemplated hereby. Section 5.6 Governmental Approvals. Except in connection or in compliance with the provisions of the Securities Act, the Exchange Act, and the corporation, securities or blue sky laws or regulations of the various states, no filing or registration with, or authorization, consent or approval of, any public body or authority is necessary for the consummation by the Company of the Merger or the other transactions contemplated hereby, other than filings, registrations, authorizations, consents or approvals the failure of which to make or obtain have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect or prevent the consummation of the transactions contemplated hereby or thereby. Section 5.7 Reports and Financial Statements. The Company has previously furnished Parent with true and complete copies of its (i) Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Commission, (ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, as filed with the Commission, (iii) proxy statements related to all meetings of its shareholders (whether annual or special) since October 24, 1996 and (iv) all other reports or registration statements filed by the Company with the Commission since October 24, 1996 (except for preliminary material in the case of clauses (iii) and (iv) above) (clauses (i) through (iv) being referred to herein collectively as the "Company SEC Reports"). As of their respective dates, the Company SEC Reports complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the Commission thereunder applicable to such Company SEC Reports. As of their respective dates, the Company SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements of the Company included in the Company SEC Reports comply in all material respects with applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto. The consolidated financial statements included in the Company SEC Reports: have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto); present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as at the dates thereof and the consolidated results of their operations and consolidated cash flow for the periods then ended subject, in the case of the unaudited interim consolidated financial statements, to normal year-end audit adjustments and any other adjustments described therein and the fact that certain information and notes have been condensed or omitted in accordance with the Exchange Act and the rules promulgated thereunder; and are in accordance with the books of account and records of the Company and its Subsidiaries. Section 5.8 Absence of Certain Changes or Events. Except as disclosed in the Company SEC Reports filed prior to the date hereof, as contemplated by this Agreement, for changes permitted by this Agreement or as set forth in Section 5.8 of the Company Disclosure Schedule, since December 31, 1996, the Company and its Subsidiaries have conducted their business only in the ordinary and usual course, and there has not been (i) any transaction, commitment, dispute or other event or condition (financial or otherwise) of any character (whether or not in the ordinary course of business) individually or in the aggregate that has had, or would reasonably be expected to have, a Company Material Adverse Effect; (ii) any material damage, destruction or loss, whether or not covered by insurance; (iii) any investment by the Company or any of its Subsidiaries in A-9 184 any corporation, partnership or other entity in excess of $250,000 in the aggregate; (iv) any sale, disposition or other transfer of assets or properties of the Company or any of its Subsidiaries (other than in the ordinary course of business consistent with past practice) in excess of $250,000 in the aggregate; (v) the incurrence or guarantee of any indebtedness (other than in the ordinary course of business consistent with past practice) in excess of $5,000,000 in the aggregate; (vi) any entry into any other commitment or transaction material to the Company and its Subsidiaries taken as a whole (other than in the ordinary course of business consistent with past practice); (vii) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) with respect to its capital stock; (viii) any change in its accounting principles, practices or methods; (ix) any split, combination or reclassification of any of the Company's capital stock or the issuance or authorization of any issuance of any other securities in respect of, in lieu of or in substitution for, shares of the Company's capital stock; (x) any repurchase or redemption with respect to its capital stock; (xi) any grant of or any amendment of the terms of any option to purchase shares of capital stock of the Company; (xii) any granting by the Company or any of its Subsidiaries to any director, officer or employee of the Company or any of its Subsidiaries of (A) any increase in compensation, except for annual increases in the base rates and bonuses of officers or employees in the ordinary course of business, or (B) any increase in severance or termination pay; (xiii) any entry by the Company or any of its Subsidiaries into any employment, severance, bonus or termination agreement with any director, officer or employee of the Company or any of its Subsidiaries; (xiv) any revaluation by the Company of any of its assets (including, without limitation, the write-off of notes or accounts receivable); or (xv) any agreement (whether or not in writing), arrangement or understanding to do any of the foregoing. Section 5.9 Litigation. Except as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, or the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, or on Section 5.9 of the Company Disclosure Schedule, there is no suit, action or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries which, either alone or in the aggregate, would reasonably be expected to have a Company Material Adverse Effect, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company or any of its Subsidiaries having, or which would reasonably be expected to have, either alone or in the aggregate, a Company Material Adverse Effect. Section 5.10 Employee Benefit Plans. (a) Section 5.10 of the Company Disclosure Schedule hereto sets forth a list of all "employee benefit plans", as defined in Section 3(3) of ERISA, and all other material employee benefit arrangements or payroll practices, including, without limitation, any such arrangements or payroll practices providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentive pay, stock options (including those held by directors, employees, and consultants), hospitalization insurance, medical insurance, life insurance, scholarships or tuition reimbursements, that are maintained by the Company, any Subsidiary of the Company or any Company ERISA Affiliate (as defined below), with respect to which the Company, any Subsidiary of the Company or any Company ERISA Affiliate has any present or contingent liability, or is obligated to contribute thereunder for current or former employees, independent contractors, consultants and leased employees of the Company, any Subsidiary of the Company or any Company ERISA Affiliate (the "Company Employee Benefit Plans"). Copies of Company Employee Benefit Plans have been provided to Parent. (b) None of the Company Employee Benefit Plans is a "multiemployer plan", as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and neither the Company nor any Company ERISA Affiliate presently maintains such a plan. None of the Company, any Subsidiary or Company ERISA Affiliate (subject to the knowledge of the Company, in the case of any Subsidiary or Company ERISA Affiliate acquired by the Company, for periods prior to such acquisition), has withdrawn in a complete or partial withdrawal from any Multiemployer Plan, nor has any of them incurred any material liability due to the termination or reorganization of such a Multiemployer Plan. (c) Neither the Company nor any Company Benefit Plan has incurred any material liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA. A-10 185 (d) Except as set forth in Section 5.10 of the Company Disclosure Schedule or as required by applicable law, the Company does not maintain or contribute to any plan or arrangement which provides or has any liability to provide life insurance or medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment, and the Company has never represented, promised or contracted (whether in oral or written form) to any employee or former employee that such benefits would be provided. (e) Except as set forth on Section 5.10 of the Company Disclosure Schedule, the execution of, and performance of the transactions contemplated by, this Agreement will not, either alone or upon the occurrence of subsequent events, result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. The only employment agreements, consulting agreements, severance agreements or severance policies applicable to the Company or its Subsidiaries are the agreements and policies specifically referred to in Section 5.10 of the Company Disclosure Schedule, copies of which have been provided to Parent. No compensation payable pursuant to any Company Employee Benefit Plan, severance agreements, employment agreements or otherwise will fail to be deductible for Federal income tax purposes by reason of Section 280G or Section 162(m) of the Code. (f) None of the Company Employee Benefit Plans is a "single employer plan", as defined in Section 4001(a)(15) of ERISA, that is subject to Title IV of ERISA, and neither the Company nor any Company ERISA Affiliate presently maintains such a plan. None of the Company, any of its Subsidiaries or any ERISA Affiliate has any material present or contingent liability under Section 4062 of ERISA to the Pension Benefit Guaranty Corporation or to a trustee appointed under Section 4042 of ERISA. None of the Company, any of its Subsidiaries or any Company ERISA Affiliate (subject to the knowledge of the Company, in the case of any Subsidiary of the Company or Company ERISA Affiliate acquired by the Company, for periods prior to such acquisition) has engaged in any transaction described in Section 4069 of ERISA. (g) Each Company Employee Benefit Plan that is intended to qualify under Section 401 of the Code, and each trust maintained pursuant thereto, has been determined to be exempt from federal income taxation under Section 501 of the Code by the IRS, and, to the Company's knowledge, nothing has occurred with respect to the operation or organization of any such Company Employee Benefit Plan and there have been no amendments to any such Company Employee Benefit Plan that would cause the loss of such qualification or exemption or the imposition of any material liability, penalty or tax under ERISA or the Code. (h) All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under any of the Company Employee Benefit Plans to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof and no contributions have been made to the Company Employee Benefit Plans that would be considered non-deductible under the Code. (i) There has been no material violation of ERISA or the Code or any other applicable law with respect to the filing of applicable reports, documents and notices regarding the Company Employee Benefit Plans or the furnishing of required reports, documents or notices to the participants or beneficiaries of the Company Employee Benefit Plans. (j) True, correct and complete copies of the following documents, with respect to each of the Company Benefit Plans, have been delivered or made available to Parent by the Company: (i) all plans and related trust documents and any other instruments or contracts under which the Company Employee Benefit Plans are operated, and amendments thereto; (ii) the Forms 5500 since inception; (iii) summary plan descriptions and (iv) IRS determination letters. (k) There are no pending actions, claims or lawsuits which have been asserted, instituted or, to the Company's knowledge, threatened, against the Company Employee Benefit Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or, to the Company's knowledge, against any fiduciary of the Company Employee Benefit Plans with respect to the operation of such plans (other than routine benefit claims). A-11 186 (l) The Company Employee Benefit Plans have been maintained, in all material respects, in accordance with their terms and with all provisions of ERISA and the Code (including rules and regulations thereunder) and other applicable federal and state laws and regulations. For purposes of this Agreement, "Company ERISA Affiliate" means any business or entity which is a member of the same "controlled group of corporations," under "common control" or an "affiliated service group" with the Company within the meanings of Sections 414(b), (c) or (m) of the Code, or required to be aggregated with the entity under Section 414(o) of the Code, or is under "common control" with the Company, within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections. Section 5.11 Labor Matters. Neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of the Company, threatened against the Company or its Subsidiaries relating to their business. There are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or, to the knowledge of the Company, threatened involving employees of the Company or any of its Subsidiaries. There is no labor strike, material slowdown or material work stoppage or lockout pending or, to the knowledge of the Company, threatened against or affecting the Company or its Subsidiaries and neither the Company nor any Subsidiary has experienced any strike, material slowdown or material work stoppage or lockout since January 1, 1996. Section 5.12 Company Action. The Board of Directors of the Company (at a meeting duly called and held) has by the requisite vote of its directors (a) determined that the Merger is fair to and in the best interests of the Company and its shareholders, (b) approved the Merger in accordance with the provisions of Section 251 of the DGCL and (c) resolved to recommend the approval of this Agreement and the Merger by the holders of the Company Common Stock and directed that the Merger be submitted for consideration by the Company's stockholders at the Company Meeting. Section 5.13 Financial Advisor. The Company has received the opinion of Bear, Stearns & Co. Inc. to the effect that, as of the date hereof, the Exchange Ratio is fair to the holders of Company Common Stock from a financial point of view. The Company represents and warrants that (i) except for Bear, Stearns & Co. Inc., no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any of its Subsidiaries and (ii) the fees and commissions payable to the Company's financial advisors, as contemplated by this Section, will not exceed the aggregate amount set forth in that certain letter, dated July 1, 1997, from Bear, Stearns & Co. Inc. to the Company, a copy of which is attached to Section 5.13 of the Company Disclosure Schedule. Section 5.14 Compliance with Applicable Laws. The Company and its Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary in connection with the conduct of their business (the "Company Permits"), except for such permits, licenses, variances, exemptions, orders and approvals the failure of which to hold have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. The Company and its Subsidiaries are in compliance with the terms of the Company Permits, except for such failures to comply which, singly or in the aggregate, have not had, or would not reasonably be expected to have, a Company Material Adverse Effect. The businesses of the Company and its Subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for violations which individually or in the aggregate have not had, or would not reasonably be expected to have, a Company Material Adverse Effect. No investigation or review by any Governmental Entity with respect to the Company or any of its Subsidiaries is pending or, to the knowledge of the Company, threatened, nor has any Governmental Entity indicated an intention to conduct the same, other than those the outcome of which have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. A-12 187 Section 5.15 Liabilities. Since the date of the latest balance sheet of the Company contained in the Company SEC Reports filed prior to the date hereof, neither the Company nor any of its Subsidiaries has incurred any material liabilities or obligations (absolute, accrued, contingent or otherwise) of the type that is required to be reflected or reserved against in a balance sheet of the Company and its Subsidiaries, or in the notes thereto, prepared in accordance with generally accepted accounting principles, other than liabilities incurred in the ordinary course of business and liabilities which are fully disclosed or provided for in the most recent Company SEC Reports filed prior to the date hereof. To the knowledge of the Company, there is no basis for any contingent or unknown liability of any nature against the Company or its Subsidiaries, which has had, or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect, other than as reflected in the Company SEC Reports. Section 5.16 Taxes. For the purposes of this Agreement, the term "Tax" shall include all Federal, state, local and foreign income, profits, franchise, gross receipts, payroll, sales, employment, use, real and personal property, withholding, excise and other taxes, duties and assessments of any nature whatsoever together with all interest, penalties and additions imposed with respect to such amounts. Except as set forth in Section 5.16 of the Company Disclosure Schedule, (i) each of the Company and its Subsidiaries has filed all material Tax returns required to be filed by any of them (taking into account all valid extensions of filing dates) and has paid (or the Company has paid on its behalf), or has set up an adequate reserve for the payment of, all material Taxes required to be paid in respect of the periods covered by such returns; (ii) the information contained in such Tax returns is true, complete and accurate in all material respects; (iii) neither the Company nor any Subsidiary of the Company is delinquent in the payment of any Tax, except where such delinquency has not had, or would not reasonably be expected to have, a Company Material Adverse Effect; (iv) no material deficiencies for any Taxes have been proposed, asserted or assessed against the Company or any of its Subsidiaries that have not been finally settled or paid in full, neither the Company nor any of its Subsidiaries are under audit (or has received any notification of such an audit) by any taxing authority, and no consents to extend the time to assess any Tax have been granted or requested; and (v) none of the Company and its Subsidiaries is obligated, or is reasonably expected to be obligated, to make any payments, or is a party to any agreement that under certain circumstances would obligate it, or reasonably be expected to obligate it, to make any payments that will not be deductible under Section 280G of the Code. Section 5.17 Certain Agreements. Except as set forth in Section 5.17 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party to (i) any agreement (oral or written) with any executive officer or other key employee of the Company or any of its Subsidiaries the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company of the nature contemplated by this Agreement; (ii) any agreement (oral or written) with respect to any executive officer or other key employee of the Company or any of its Subsidiaries providing any term of employment or compensation guarantee extending beyond the Effective Date; or (iii) any plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement, or the value of any of the benefits of which will be calculated on the basis of the transactions contemplated by this Agreement. Section 5.18 Contracts. All material contracts and agreements are listed in Section 5.18 of the Company Disclosure Schedule, and true, complete and correct copies of all such contracts and agreements (together with all amendments thereto) have been delivered to Parent prior to the date hereof. All such contracts and agreements are valid and binding and are in full force and effect and enforceable against the other parties thereto in accordance with their respective terms (except with respect to the real estate purchase contracts, which will be so valid and binding and in full force and effect and enforceable upon the incorporation of an adequate legal description of the property into such contracts), subject to applicable bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting the enforcement of creditors' rights generally. Except as set forth in Section 5.18 of the Company Disclosure Schedule, (i) no approval or consent of, or notice to, any person is needed in order that such contract or agreement (and the real estate purchase contracts to the extent set forth in the preceding sentence) shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early A-13 188 termination following consummation of the transactions contemplated by this Agreement, except for such penalties, accelerations or rights which have not had, and would not reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect and (ii) the Company is not in violation or breach of or default under any such contract or agreement which violation or breach or default has had, or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect, nor, to the Company's knowledge, is any other party to such contract or agreement. There is no contract or agreement required to be described in or filed as an exhibit to any Company SEC Report that is not described in or filed as required by the Securities Act or the Exchange Act, as the case may be. Section 5.19 Trademarks. The Company and its Subsidiaries own or have valid rights to use all trademarks, trade names, service marks, trade secrets, copyrights and licenses and other proprietary intellectual property rights and licenses as are material to the businesses of the Company and its Subsidiaries (the "Intellectual Property"), all of which are listed on Section 5.19 of the Company Disclosure Schedule, and there is no conflict with the rights of the Company and its Subsidiaries therein or any conflict with the rights of others therein which have had, or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. Neither the Merger nor the transactions contemplated hereby will adversely affect the rights of the Company or any of its Subsidiaries in respect of any of the Intellectual Property. Section 5.20 No Material Adverse Effect. Except as disclosed in the Company SEC Reports filed prior to the date hereof, the Company is not aware of any fact or facts which has or have had, or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. Section 5.21 Accounting Matters. Neither the Company nor, to its knowledge, any of its affiliates, has through the date hereof, taken or agreed to take any action that would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling of interests" in accordance with Accounting Principles Board Opinion No. 16, the interpretive releases issued pursuant thereto and the pronouncements of the Commission. To the knowledge of the Company, the Company has not taken any action which would prevent the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. Section 5.22 Required Vote of Company Common Stock. The approval of the holders of not less than two-thirds of the outstanding shares of Company Common Stock is required to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. No other vote of the stockholders of the Company is required by law, the Certificate of Incorporation or By-laws of the Company or otherwise to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. Section 5.23 Real Property. (a) The Company and its Subsidiaries have good and indefeasible title to (i) the real property reflected on the consolidated balance sheet of the Company and its Subsidiaries as at March 31, 1997 and own all of the improvements located thereon and the real property (and the improvements thereon) thereafter acquired, all of which (as of the date hereof) are listed in Section 5.23(a) of the Company Disclosure Schedule (collectively, the "Operating Real Property") and (ii) the real property under development (and the improvements thereon), all of which (as of the date hereof) are listed in Section 5.23(a) of the Company Disclosure Schedule (collectively, the "Development Properties"), in each case free and clear of any lien except Permitted Exceptions. "Permitted Exceptions" shall mean, with respect to the individual property comprising the Operating Real Property and the Development Properties, (a) liens set forth in Section 5.23(a) of the Company Disclosure Schedule; (b) any liens for real estate taxes and assessments not yet delinquent or which are being contested by the Company in good faith and for which the Company has taken appropriate reserves in accordance with generally accepted accounting principles consistently applied; (c) any imperfection of title that, individually or in the aggregate with other such liens, does not materially and adversely interfere with the current or intended use of the property subject thereto or detract from the indefeasibility and insurability (at standard rates by a title company of nationally recognized standing) of the property subject thereto or materially impair the operations of the Company; (d) mechanics' liens with respect to the Development Properties; (e) the rights of hotel guests; and (f) the encumbrances set forth on the owner's title insurance policy or commitments therefor issued to the Company for such property, delivered to Parent prior to the date hereof. A-14 189 (b) As of the date hereof, the Company has executed only the letters of intent or contracts for the acquisition and development of additional hotel sites (the sites which are the subject of such letters of intent or contracts being referred to as "Contract Properties") which are listed in Section 5.23(b) of the Company Disclosure Schedule. (c) All utilities and services necessary for the use and operation of the Operating Real Property (including road access, gas, water, electricity and telephone) are available thereto, and are of sufficient capacity to meet adequately all needs and requirements necessary for current use and operation of such respective Operating Real Property and for their respective intended purposes. (d) The Development and Construction Agreements, Development Plans, Completion Guaranties, Construction Contracts and Project Schedules entered into pursuant to the Master Development Assistance Agreement, dated as of February 9, 1996 (the "Master Development Agreement"), and the Management Agreements entered into pursuant to the Extended-Stay Management Assistance Agreement, dated as of August 26, 1996 (the "Master Management Agreement"), in each case delivered by the Company to Parent, are all agreements in existence as of the date hereof (other than architect's agreements and sub-contracts) with respect to the development, construction and management of the Development Properties as of the date hereof and are true, correct and complete copies thereof and, to the knowledge of the Company, are in full force and effect and enforceable in accordance with their terms and no party to any such document has committed a default thereunder or any act or thing which with the giving of notice or the passage of time may constitute such a default. The Company reasonably anticipates that substantial completion of the Development Properties will occur on or before the dates specified in Section 5.23(d) to the Company Disclosure Schedule, in accordance with the Development Budgets attached to the Company Disclosure Schedule and in accordance with all requirements of the Development Agreements and Development Plans. If constructed in accordance with the Development Plans, the Development Properties shall comply in all material respects with all applicable codes and zoning laws and resolutions. (e) None of the Operating Real Property, the Development Properties or, to the Company's knowledge, the Contract Properties is subject to any right or option of any other person to purchase or lease or otherwise obtain title to or an interest in such property. (f) There is no outstanding violation by the Company or its Subsidiaries of a condition or agreement contained in any easement, restrictive covenant or any similar instrument or agreement affecting any Operating Real Property or Development Properties, except to the extent the same would not individually or in the aggregate have a Company Material Adverse Effect. Section 5.24 Hotel Zoning; Improvements. Except as set forth in Section 5.24 of the Company Disclosure Schedule, each of the Operating Real Properties complies in all material respects with all applicable codes and zoning laws and resolutions, and there is no pending or, to the knowledge of the Company or its Subsidiaries, threatened condemnation, zoning change or other proceeding or action that will in any material respect affect the size of, use of, improvements on, construction on or access to the Operating Real Properties. The improvements comprising any portion of each Operating Real Property (the "Improvements") are free of physical, mechanical, structural, design or construction defects which would, singly or in the aggregate, have a Company Material Adverse Effect and the mechanical, electrical and utility systems servicing the Improvements (including, without limitation, all water, electric, sewer, plumbing, heating, ventilation, gas and air conditioning) are in good condition and proper working order and are free of defects (for which provision to repair has not been made) which have had or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. Section 5.25 Environmental Matters. The Company and its Subsidiaries have obtained and maintained in effect all licenses, permits and other authorizations required under all applicable laws, regulations and other requirements of governmental or regulatory authorities relating to pollution, public health and safety or the environment ("Environmental Laws") and are in compliance with all Environmental Laws and with all such licenses, permits and authorizations, except to the extent such failure to obtain, maintain or comply have not had, or would not reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. Neither the Company nor any of its Subsidiaries has performed or suffered any act which A-15 190 could give rise to, or has otherwise incurred, liability to any person (governmental or not) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or any other Environmental Laws, which has had, or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect; nor has the Company or any of its Subsidiaries received notice of any such liability or any claim therefor or submitted notice pursuant to CERCLA to any governmental agency with respect to any of their respective assets. Except as set forth in Section 5.25 of the Company Disclosure Schedule, no hazardous substance, hazardous waste, contaminant, petroleum product, chemical, pollutant or toxic substance (as such terms are defined in any applicable Environmental Law) has been released, placed, dumped, emitted or otherwise come to be located on, at or beneath any of the assets or properties of the Company or any of its Subsidiaries or any surface waters or groundwaters thereon or thereunder which has had, or would reasonably be expected to have, either singly or in the aggregate, a Company Material Adverse Effect. Neither the Company nor any of its Subsidiaries owns or operates, or has ever owned or operated, an underground storage tank containing a regulated substance, as such term is defined in the Resource Conservation and Recovery Act. There is no asbestos at or in any of the assets or properties of the Company or any of its Subsidiaries. Section 5.26 Development Agreement. The Master Development Agreement, filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, is in full force and effect and, except as set forth in Section 5.26 of the Company Disclosure Schedule, has not been amended or modified, and neither the Company nor its Subsidiaries has received any notice of default or termination, or have knowledge of any event that, with notice or lapse of time, or both, would constitute a default or termination, under such agreement. Section 5.27 Insurance. The Company and each of its Subsidiaries maintain insurance against losses and risks in accordance with customary industry practice in amounts that are adequate to protect the Company and each of its Subsidiaries and their respective businesses. Section 5.28 Disclosure. No representation or warranty by the Company in this Agreement and no schedule or certificate delivered by the Company and furnished or to be furnished to Parent pursuant hereto, or in connection with the transactions contemplated hereby, is false and misleading in any material respect or contains any material misstatement of fact or omits to state any material facts required to be stated to make such information not misleading. ARTICLE VI REPRESENTATIONS AND WARRANTIES REGARDING SUB Parent and Sub jointly and severally represent and warrant to the Company as follows: Section 6.1 Organization. Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Sub has not engaged in any business since it was incorporated other than in connection with its organization and the transactions contemplated by this Agreement. Section 6.2 Capitalization. The authorized capital stock of Sub consists of 1,000 shares of Common Stock, par value $.01 per share, 1,000 shares of which are validly issued and outstanding, fully paid and nonassessable and are owned by Parent free and clear of all liens, claims and encumbrances. Section 6.3 Authority Relative to this Agreement. Sub has the corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by its Board of Directors and sole stockholder, and no other corporate proceedings on the part of Sub are necessary to authorize this Agreement and the transactions contemplated hereby. Except as referred to herein or in connection or in compliance with the provisions of the Securities Act, the Exchange Act and the corporation, securities or blue sky laws or regulations of the various states, no filing or registration with, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Sub of the Merger or the transactions contemplated by this Agreement. A-16 191 ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER Section 7.1 Conduct of Business by the Company Pending the Merger. Prior to the Effective Date, unless Parent shall otherwise consent in writing: (i) the Company shall, and shall cause its Subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, and shall, and shall cause its Subsidiaries to, use their best efforts to preserve intact their present business organizations and preserve their relationships with customers, suppliers and others having business dealings with them with the intent that their goodwill and on-going businesses are unimpaired at the Effective Date, except as set forth in Section 7.1 of the Company Disclosure Schedule; (ii) except as required by this Agreement, the Company and its Subsidiaries shall not and shall not propose to (a) sell or pledge or agree to sell or pledge any capital stock owned by the Company in any of its Subsidiaries; (b) amend its Certificate of Incorporation or By-laws; (c) split, combine or reclassify its outstanding capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or declare, set aside or pay any dividend or other distribution payable in cash, stock or property; or (d) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any shares of its capital stock; (iii) the Company shall not, nor shall it permit any of its Subsidiaries to, (a) issue, deliver, sell, transfer or otherwise dispose of or agree to issue, deliver, sell, transfer or otherwise dispose of any additional shares of, or rights of any kind to acquire any shares of, its capital stock of any class, any indebtedness having the right to vote, or which are convertible into or exercisable for securities having the right to vote, with respect to matters on which the Company's shareholders may vote, or any option, rights or warrants to acquire, or securities convertible into, shares of capital stock other than pursuant to the exercise of vested Options outstanding on the date hereof under the Option Plans; (b) acquire (including by merger, consolidation or acquisition of stock or assets), lease, pledge, encumber or dispose or agree to acquire (including by merger, consolidation or acquisition of stock or assets), lease, pledge, encumber or dispose of any capital assets or any other assets other than in accordance with the Master Development Agreement (and with Parent's prior written consent with respect to proposed development sites); (c) incur additional indebtedness, assume, guarantee, endorse or otherwise become responsible for the obligations of any person, make loans or advances or encumber or grant a security interest in any asset or enter into any other material transaction in excess of $250,000 in the aggregate; (d) acquire or agree to acquire by merging or consolidating with, or by purchasing an equity interest in excess of $250,000 in the aggregate in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (e) enter into any contract, agreement, commitment or arrangement with respect to any of the foregoing; (f) with respect to the Contract Properties, enter into any material amendment to the agreement to acquire any Contract Property or modify in any material respect any letter of intent to acquire any Contract Property or waive any material diligence contingencies; (g) amend, modify or terminate any contracts or agreements with respect to the Operating Real Property or the Development Property, except if such amendment, modification or termination would not have a material adverse effect on the respective Operating Real Property or Development Property; or (h) enter into any new contracts or agreements, including any leases, with respect to the Operating Real Property or the Development Property, except if such contract or agreement would not have a material adverse effect on the respective Operating Real Property or Development Property; (iv) the Company shall not, nor shall it permit any of its Subsidiaries to, except as required to comply with applicable law and except as provided in Section 8.5 hereof, enter into any new (or amend any existing) Company Employee Benefit Plan or any new (or amend any existing) employment, severance, executive compensation (including without limitation stock option and restricted stock agreements between the Company and any employee or any other person or entity) or consulting agreement, grant any general increase in the compensation of directors, officers or employees (including any such increase pursuant to any bonus, pension, profit-sharing or other plan or commitment), grant any A-17 192 stock options or other stock-based awards or take any action to accelerate any stock options or other stock-based awards, or grant any increase in the compensation payable or to become payable to any director, officer or employee, except for annual increases in the base rates and bonuses of officers or employees consistent with past practices; (v) the Company shall not, nor shall it permit any of its Subsidiaries to, make any investments in non-investment grade securities; (vi) the Company shall not, nor shall it permit any of its Subsidiaries to, take any action to change accounting principles, policies or procedures (including, without limitation, procedures with respect to revenue recognition, payment of accounts payable and collection of accounts receivable); (vii) the Company shall not, nor shall it permit any of its Subsidiaries to, enter into any transaction or series of transactions with any Affiliate (as defined in Section 11.16) except pursuant to the Master Management Agreement and the Master Development Agreement and except for reasonable and customary brokerage commissions payable to Trammell Crow Company and its Affiliates on market terms for services rendered; (viii) the Company shall, and shall cause its Subsidiaries to, (a) maintain insurance coverages and its books, accounts and records in the usual manner consistent with prior practices; (b) comply with all laws, ordinances and regulations of Governmental Entities applicable to the Company and its Subsidiaries; (c) maintain and keep its properties and equipment in good repair, working order and condition; and (d) perform its obligations under all material contracts and commitments to which it is a party or by which it is bound; (ix) the Company shall not, nor shall it permit any of its Subsidiaries to, take, or agree in writing or otherwise to take, any action which would cause a breach of any of the representations or warranties of the Company contained in this Agreement or prevent the Company from performing or cause the Company not to perform its covenants hereunder; (x) except as set forth in this Agreement or with the prior written consent of Parent, the Company shall not submit any matters to its shareholders for approval; and (xi) the Company shall not, nor shall it permit any of its Subsidiaries to, take or cause to be taken any action which would disqualify the Merger as a "pooling of interests" for accounting purposes or as a "reorganization" within the meaning of Section 368(a) of the Code. Notwithstanding anything set forth in this Section 7.1, the Company and its Subsidiaries may enter into management agreements pursuant to the Master Management Agreement and (i) the hotel development transactions and (ii) the financing transactions with Parent (or its Affiliates) or Bank One, Texas, NA (or its Affiliates), in each case as set forth in Section 7.1 of the Company Disclosure Schedule and in accordance with the Master Development Agreement and the terms and conditions set forth therein, without the prior written consent of Parent. Section 7.2 Conduct of Business by Parent Pending the Merger. Prior to the Effective Date, unless the Company shall otherwise agree in writing or except as otherwise required by this Agreement, Parent shall, and shall cause its Subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted; provided that Parent may engage in acquisitions and dispositions in the hospitality business and related businesses and may engage in debt or equity financing or enter into sale/leaseback agreements or other financing arrangements with respect to properties. Section 7.3 Conduct of Business of Sub. During the period from the date of this Agreement to the Effective Date, Sub shall not engage in any activities of any nature except as provided in or contemplated by this Agreement. A-18 193 ARTICLE VIII ADDITIONAL AGREEMENTS Section 8.1 Access and Information. Each of the Company and Parent and their respective Subsidiaries shall afford to the other and to the other's accountants, counsel and other representatives reasonable access during normal business hours (and at such other times as the parties may mutually agree) throughout the period prior to the Effective Date to all of its properties, books, contracts, commitments, records and personnel and, during such period, each shall furnish promptly to the other (i) a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal or state securities laws, and (ii) all other information concerning its business, properties and personnel as the other may reasonably request. Each of the Company and Parent shall hold, and shall cause their respective employees and agents to hold, in confidence all such information in accordance with the terms of the Confidentiality Agreement dated February 11, 1997 between Parent and the Company. Section 8.2 Registration Statement/Proxy Statement. Parent and the Company shall cooperate and promptly prepare, and Parent shall file with the Commission as soon as practicable, a Registration Statement on Form S-4 (the "Form S-4") under the Securities Act, with respect to the Parent Common Stock issuable in the Merger, portions of which Registration Statement shall also serve as the proxy statement with respect to the Company Meeting (the "Proxy Statement/Prospectus"). The respective parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder. Parent shall use all reasonable efforts, and the Company will cooperate with Parent, to have the Form S-4 declared effective by the Commission as promptly as practicable and to keep the Form S-4 effective as long as is necessary to consummate the Merger. Parent shall, as promptly as practicable, provide copies of any written comments received from the Commission with respect to the Form S-4 to the Company and advise the Company of any oral comments with respect to the Form S-4 received from the Commission. Parent shall use its best efforts to obtain, prior to the effective date of the Form S-4, all necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by the Merger Agreement and will pay all expenses incident thereto. Parent agrees that none of the information supplied or to be supplied by Parent for inclusion or incorporation by reference in the Form S-4 or the Proxy Statement/Prospectus (i) in the case of the Proxy Statement/Prospectus and each amendment or supplement thereto, at the time of mailing thereof and at the time of the Company Meeting, or (ii) in the case of the Form S-4 and each amendment or supplement thereto, at the time it is filed or becomes effective, will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company agrees that none of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Form S-4 or the Proxy Statement/Prospectus (i) in the case of the Proxy Statement/Prospectus and each amendment or supplement thereto, at the time of mailing thereof and at the time of the Company Meeting, or, (ii) in the case of the Form S-4 or any amendment or supplement thereto, at the time it is filed or becomes effective, will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. For purposes of the foregoing, it is understood and agreed that information concerning or related to Parent will be deemed to have been supplied by Parent and information concerning or related to the Company and the Company Meeting shall be deemed to have been supplied by the Company. No amendment or supplement to the Proxy Statement/Prospectus will be made by Parent or the Company without the approval of the other party. Parent will advise the Company, promptly after it receives notice thereof, of the time when the Form S4 has become effective or any supplement or amendment has been filed, the issuance of any stop order, the suspension of the qualification of Parent Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the Commission for amendment of the Proxy Statement/Prospectus or the Form S-4 or comments thereon and responses thereto or requests by the Commission for additional information. Section 8.3 Affiliate and Pooling Agreements. As soon as practicable after the date hereof, the Company shall deliver to Parent a list of names and addresses of those persons who are "affiliates" (each such A-19 194 person, an "Affiliate") of the Company within the meaning of Rule 145 (or any successor rule, for so long as such rule is in effect) of the rules and regulations promulgated under the Securities Act (and shall keep such list current through the record date for the Company Meeting). The Company shall use all reasonable efforts to obtain and deliver or cause to be delivered to Parent, prior to the Effective Date, from each of the Affiliates of the Company identified in the foregoing list, an Affiliate Letter in form and substance satisfactory to Parent to the effect that such Affiliate will not offer to sell, sell or otherwise dispose of any shares of Parent Common Stock issued to such Affiliate in connection with the Merger, except pursuant to an effective registration statement or in compliance with Rule 145 or in a transaction that, in the opinion of counsel satisfactory to Parent, is exempt from the registration requirements of the Securities Act and otherwise in a manner consistent with applicable accounting requirements so that the Merger qualifies as a "pooling of interests" (an "Affiliate Letter"). Parent shall be entitled to place legends as specified in such Affiliate Letters on the certificates evidencing any Parent Common Stock to be received by such Affiliates pursuant to the terms of the Merger, and to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Stock, consistent with the terms of such Affiliate Letters. Section 8.4 Stock Exchange Listing. Parent shall use its best efforts to list on the NYSE, upon official notice of issuance, the Parent Common Stock to be issued pursuant to the Merger. Section 8.5 Employee Plans. (a) Parent agrees to honor all contracts and agreements of the Company or any of its Subsidiaries authorized by the Company or any of its Subsidiaries prior to the date hereof which apply to any current or former employee or current or former director of the Company or any of its Subsidiaries and which are set forth in Section 8.5 of the Company Disclosure Schedule. Parent agrees to provide the employment or severance arrangements as set forth on Schedule 8.5; and (b) Parent agrees to provide to officers and employees of the Company and its Subsidiaries who become or remain regular (full-time) employees of Parent or any of its Subsidiaries, employee benefits, other than salary, bonus and stock options, no less favorable than those provided by Parent and its Subsidiaries to their similarly situated officers and employees. Any employee of the Company or any of its Subsidiaries who becomes a participant in any employee benefit plan, program, policy or arrangement of Parent or any of its Subsidiaries after the Effective Date shall be given credit under such plan, program, policy or arrangement for all service with the Company or any of its Subsidiaries, and, if applicable, with Parent or any of its Subsidiaries, prior to becoming such a participant for purposes of eligibility and vesting. Section 8.6 Indemnification and Insurance. (a) From and after the Effective Date, Parent shall indemnify, defend and hold harmless the officers, directors and employees of the Company (the "Indemnified Parties") against all losses, expenses, claims, damages or liabilities arising out of the transactions contemplated by this Agreement to the fullest extent permitted or required under applicable law; provided, however, that the requirement to advance expenses shall be limited to those instances in which the Indemnified Party undertakes to repay such amount if it shall ultimately be determined that he is not required to be indemnified under Section 145(c) of the DGCL. Parent agrees that all rights to indemnification existing in favor of the directors, officers or employees of the Company as provided in the Company's Certificate of Incorporation or Bylaws, as in effect as of the date hereof, with respect to matters occurring through the Effective Date, shall survive the Merger and shall continue in full force and effect, and the obligations of the Surviving Corporation are hereby unconditionally guaranteed by Parent, for a period of not less than six years from the Effective Date; provided, that in the event any claim or claims are asserted or made within such six-year period, all rights to indemnification in respect of any such claim or claims shall continue until final disposition of any and all such claims. (b) Parent agrees to maintain or cause the Surviving Corporation to maintain in effect for not less than three years after the Effective Date policies of directors' and officers' liability insurance equivalent to those maintained by the Company with respect to matters occurring prior to the Effective Date; provided, however, that the Surviving Corporation shall not be required to pay an annual premium for such insurance in excess of 200% of the current annual premiums paid by the Company for such insurance, but in such case shall purchase as much coverage as possible for such amount. A-20 195 (c) In the event that any action, suit, proceeding or investigation relating hereto or to the transactions contemplated by this Agreement is commenced, whether before or after the Effective Date, the parties hereto agree to cooperate and use their respective reasonable efforts to vigorously defend against and respond thereto. Section 8.7 Board Representation. (a) Parent acknowledges its intent to discuss the potential nomination or appointment to its Board of Directors of a nominee of the Company and to that end will consider the potential nomination or appointment of such qualified persons as may be proposed by the Company; provided, however, that such acknowledgment shall not obligate Parent to nominate or appoint any such person to its Board of Directors. (b) On or prior to the Effective Date, the Company shall use all reasonable efforts to deliver to Parent evidence satisfactory to Parent of the resignations of the directors of the Company, such resignations to be effective immediately prior to the Closing. Section 8.8 Additional Agreements. (a) Subject to the terms and conditions herein provided (including without limitation Section 8.9), each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using all reasonable efforts to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings (including, but not limited to, filings with all applicable Governmental Entities) and to lift any injunction to the Merger (and, in such case, to proceed with the Merger as expeditiously as possible). (b) In case at any time after the Effective Date any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and/or directors of Parent, the Company and the Surviving Corporation shall take all such necessary action. (c) Following the Effective Date, Parent shall use its best efforts to conduct the business, and shall cause the Surviving Corporation to use its best efforts to conduct its business, except as otherwise contemplated by this Agreement, in a manner which would not jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. Section 8.9 Alternative Proposals. Prior to the Effective Date, the Company agrees (a) that neither it nor any of its Subsidiaries shall, and it and they shall direct and use its and their best efforts to cause its and their respective officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company or any of its Subsidiaries (any such proposal or offer made prior to the termination of this Agreement (and any subsequent amended proposal or offer made by the same or an affiliated party) being hereinafter referred to as an "Alternative Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Alternative Proposal, or release any third party from any obligations under any existing standstill agreement or arrangement relating to any Alternative Proposal, or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal; (b) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing, and it will take the necessary steps to inform the individuals or entities referred to above of the obligations undertaken in this Section 8.9; and (c) that it will notify Parent immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it; provided, however, that nothing contained in this Section 8.9 shall prohibit the Board of Directors of the Company from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes or proposes to make an unsolicited bona fide proposal to acquire the Company pursuant to a merger, consolidation, share exchange, purchase of a substantial portion of assets, business combination or other similar transaction, if, and only to the extent that, (A) the Board of Directors of the Company determines in good faith that such action is required for the Board A-21 196 of Directors to comply with its fiduciary duties to stockholders imposed by law, (B) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, the Company provides written notice to Parent to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or entity and (C) the Company keeps Parent promptly informed of the status and all material terms and conditions of any such discussions or negotiations (including identities of parties); and (ii) to the extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Alternative Proposal. Nothing in this Section 8.9 shall (x) permit the Company to terminate this Agreement (except as specifically provided in Article X hereof), (y) permit the Company to enter into any agreement with respect to an Alternative Proposal during the term of this Agreement (it being agreed that during the term of this Agreement, the Company shall not enter into any agreement with any person that provides for, or in any way facilitates, an Alternative Proposal), or (z) affect any other obligation of the Company under this Agreement. Section 8.10 Advice of Changes; SEC Filings. The Company shall confer on a regular basis with Parent on operational matters. Parent and the Company shall promptly advise each other orally and in writing of any change or event that has had, or could reasonably be expected to have, a Company Material Adverse Effect or a Parent Material Adverse Effect, as the case may be. The Company and Parent shall promptly provide each other (or their respective counsel) copies of all filings made by such party with the Commission or any other state or federal Governmental Entity in connection with this Agreement and the transactions contemplated hereby. Section 8.11 Letter of the Company's Accountants. The Company shall use its best efforts to cause to be delivered to Parent and Sub at the time of mailing of the Proxy Statement/Prospectus a "comfort" letter from Ernst & Young LLP of the kind contemplated by the Statement of Auditing Standards with respect to Letters to Underwriters promulgated by the American Institute of Certified Public Accountants (the "AICPA Statement"), dated the date of such mailing, in form and substance reasonably satisfactory to Parent and Sub, in connection with the procedures undertaken by them with respect to the financial statements of the Company contained or incorporated by reference in the Form S-4 and the other matters contemplated by the AICPA Statement and customarily included in comfort letters relating to transactions similar to the Merger. Section 8.12 Letter of Parent and Sub's Accountants. Parent and Sub shall use their respective best efforts to cause to be delivered to the Company at the time of mailing of the Proxy Statement/Prospectus a "comfort" letter from Arthur Andersen LLP, of the kind contemplated by the AICPA Statement, dated the date of such mailing, in form and substance reasonably satisfactory to the Company, in connection with the procedures undertaken by them with respect to the financial statements of Parent contained or incorporated by reference in the Form S-4 and the other matters contemplated by the AICPA Statement and customarily included in comfort letters relating to transactions similar to the Merger. Section 8.13 Tax Certificate. The Company shall use all reasonable efforts to provide Parent a certificate of non-foreign status in the manner provided in Treasury Regulation Sec. 1.1445-2 from each Company stockholder owning, actually or constructively, five percent (5%) or more of the Company Common Stock. ARTICLE IX CONDITIONS PRECEDENT Section 9.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Date of the following conditions: (a) This Agreement and the transactions contemplated hereby shall have been approved and adopted by the requisite vote of the holders of the Company Common Stock. (b) The Form S-4 shall have become effective in accordance with the provisions of the Securities Act. No stop order suspending the effectiveness of the Form S-4 shall have been issued by the A-22 197 Commission and remain in effect and all necessary approvals under state securities laws relating to the issuance or trading of the Parent Common Stock to be issued to stockholders of the Company in connection with the Merger shall have been obtained. (c) No preliminary or permanent injunction or other order by any federal or state court in the United States of competent jurisdiction which prevents the consummation of the Merger shall have been issued and remain in effect (each party agreeing to use its reasonable efforts to have any such injunction lifted). (d) All consents, authorizations, orders and approvals of (or filings or registrations with) any governmental commission, board or other regulatory body required in connection with the execution, delivery and performance of this Agreement shall have been obtained or made, except for filings in connection with the Merger and any other documents required to be filed after the Effective Date and except where the failure to have obtained or made any such consent, authorization, order, approval, filing or registration would not have a material adverse effect on the business, properties, assets, prospects, condition (financial or otherwise), liabilities or results of operations of Parent and the Company (and their respective Subsidiaries), taken as a whole, following the Effective Date. (e) The Parent Common Stock to be issued to Company stockholders in connection with the Merger shall have been approved for listing on the NYSE, subject only to official notice of issuance. Section 9.2 Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the fulfillment at or prior to the Effective Date of the additional following conditions, unless waived by the Company: (a) Parent and Sub shall have performed in all material respects their agreements contained in this Agreement required to be performed on or prior to the Effective Date, and the representations and warranties of Parent and Sub contained in this Agreement that are qualified as to materiality shall be true, and those that are not so qualified shall be true in all material respects, when made and on and as of the Effective Date as if made on and as of such date (except to the extent they relate to a particular date), except as expressly contemplated or permitted by this Agreement, and the Company shall have received a certificate of the President or Chief Executive Officer or a Vice President of Parent and Sub to that effect. (b) The Company shall have received an opinion from Vinson & Elkins L.L.P., based upon certificates and letters from the Company, Parent and Sub and certain stockholders of the Company (reasonably requested by such counsel), to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. In rendering such opinion, such counsel may receive and rely upon representations of fact contained in certificates and letters as specified in the preceding sentence. (c) The Company shall have received a "comfort" letter from Arthur Andersen LLP, of the kind contemplated by the AICPA Statement, dated the Effective Date, in form and substance reasonably satisfactory to the Company, in connection with the procedures undertaken by them with respect to the financial statements of Parent contained or incorporated by reference in the Form S-4 and the other matters contemplated by the AICPA Statement and customarily included in comfort letters relating to transactions similar to the Merger. (d) From the date of this Agreement through the Effective Date, there shall not have occurred any change, individually or together with other changes, that has had, or would reasonably be expected to have, a material adverse change in the financial condition, business, results of operations or prospects of Parent and its Subsidiaries, taken as a whole. A-23 198 Section 9.3 Conditions to Obligations of Parent and Sub to Effect the Merger. The obligations of Parent and Sub to effect the Merger shall be subject to the fulfillment at or prior to the Effective Date of the additional following conditions, unless waived by Parent: (a) The Company shall have performed in all material respects its agreements contained in this Agreement required to be performed on or prior to the Effective Date, and the representations and warranties of the Company contained in this Agreement that are qualified as to materiality shall be true, and those that are not so qualified shall be true in all material respects, when made and on and as of the Effective Date as if made on and as of such date (except to the extent they relate to a particular date), except as expressly contemplated or permitted by this Agreement, and Parent and Sub shall have received a certificate of the President or Chief Executive Officer or a Vice President of the Company to that effect. (b) Parent and Sub shall have received an opinion from Willkie Farr & Gallagher, based upon certificates and letters from the Company, Parent and Sub and certain stockholders of the Company (reasonably requested by such counsel), to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. In rendering such opinion, such counsel may receive and rely upon representations of fact contained in certificates and letters as specified in the preceding sentence. (c) Parent and Sub shall have received a "comfort" letter from Ernst & Young LLP, of the kind contemplated by the AICPA Statement, dated the Effective Date, in form and substance reasonably satisfactory to Parent, in connection with the procedures undertaken by them with respect to the financial statements of the Company contained or incorporated by reference in the Form S-4 and the other matters contemplated by the AICPA Statement and customarily included in comfort letters relating to transactions similar to the Merger. (d) From the date of this Agreement through the Effective Date, there shall not have occurred any change, individually or together with other changes, that has had, or would reasonably be expected to have, a material adverse change in the financial condition, business, results of operations or prospects of the Company and its Subsidiaries, taken as a whole. (e) The Company shall have received estoppel certificates, in a form satisfactory to Parent, executed by the third parties to the Master Development Agreement. (f) The Agreement Regarding Termination of Management Agreements, dated the date hereof, between the Company and VPS I, L.P., Parent, Crow Hotel Realty Investors, L.P., Wyndham Management Corporation, Wyndham Hotel Corporation and Wyndham IP Corporation with respect to, among other things, termination of the Management Agreements under the Master Management Agreement shall be in full force and effect and shall not have been amended or modified, and the parties thereto shall have performed their respective obligations required to be performed thereunder at or prior to the Effective Date. (g) The Company shall have received the consent of each of Bank One, Texas, NA (or its Affiliates or agents) and Nomura Asset Capital Corporation, in a form satisfactory to Parent, with respect to this Agreement and the transactions contemplated hereby. ARTICLE X TERMINATION, AMENDMENT AND WAIVER Section 10.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Date, before or after the approval of this Agreement by the stockholders of the Company, by the mutual consent of Parent and the Company. Section 10.2 Termination by Either Parent or the Company. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of either Parent or the Company if (a) the A-24 199 Merger shall not have been consummated by December 31, 1997, or (b) the approval of the Company's stockholders required by Section 3.6 shall not have been obtained at a meeting duly convened therefor or at any adjournment or postponement thereof, or (c) a United States federal or state court of competent jurisdiction or United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable; provided, that the party seeking to terminate this Agreement pursuant to this clause (c) shall have used all reasonable efforts to remove such injunction, order or decree; and provided, in the case of a termination pursuant to clause (a) above, that the terminating party shall not have breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the failure to consummate the Merger. Section 10.3 Termination by the Company. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Date, before or after the adoption and approval by the stockholders of the Company referred to in Section 3.6, by action of the Board of Directors of the Company, if (a) in the exercise of its good faith judgment as to fiduciary duties to its stockholders imposed by law, the Board of Directors of the Company determines that such termination is required by reason of an Alternative Proposal being made, or (b) there has been a breach by Parent or Sub of any representation or warranty contained in this Agreement which would have or would be reasonably likely to have a Parent Material Adverse Effect, or (c) there has been a material breach of any of the covenants or agreements set forth in this Agreement on the part of Parent, which breach is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by the Company to Parent or (d) a change or changes having the effect specified in Section 9.2(d) shall have occurred. Section 10.4 Termination by Parent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Date, by action of the Board of Directors of Parent, if (a) the Board of Directors of the Company shall have withdrawn or modified in a manner adverse to Parent its approval or recommendation of this Agreement or the Merger or shall have recommended an Alternative Proposal to the Company stockholders, (b) there has been a breach by the Company of any representation or warranty contained in this Agreement which has had, or would be reasonably expected to have, a Company Material Adverse Effect, (c) there has been a material breach of any of the covenants or agreements set forth in this Agreement on the part of the Company, which breach is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Parent to the Company or (d) a change or changes having the effect specified in Section 9.3(d) shall have occurred. Section 10.5 Effect of Termination and Abandonment. (a) In the event that (x) any person shall have made an Alternative Proposal and thereafter this Agreement is terminated by the Company pursuant to Section 10.3(a), (y) the Board of Directors of the Company shall have withdrawn or modified in a manner adverse to Parent its approval or recommendation of this Agreement or the Merger or shall have recommended an Alternative Proposal to the Company stockholders and Parent shall have terminated this Agreement pursuant to Section 10.4(a) or (z) any person shall have made an Alternative Proposal and thereafter this Agreement is terminated by either party pursuant to Section 10.2(b), or by Parent pursuant to Section 9.3(a) as a result of the Company's intentional failure to perform one of its agreements contained in this Agreement or intentional breach of one of its representations and warranties contained in this Agreement and within 12 months thereafter such Alternative Proposal shall have been consummated, then in the case of either (x), (y) or (z) above, the Company shall promptly, but in no event later than two days after such termination (in the case of (x) or (y)) or consummation (in the case of (z)), pay Parent a fee of $3,325,000, which amount shall be payable by wire transfer of same day funds. The Company acknowledges that the agreements contained in this Section 10.5(a) are an integral part of the transactions contemplated in this Agreement, and that, without these agreements, Parent and Sub would not enter into this Agreement; accordingly, if the Company fails to promptly pay the amount due pursuant to this Section 10.5(a), and, in order to obtain such payment, Parent or Sub commences a suit which results in a judgment against the Company for the fee set forth in this Section 10.5(a), the Company shall pay to Parent its costs and expenses A-25 200 (including attorneys' fees) in connection with such suit, together with interest on the amount of the fee at the rate of 12% per annum. (b) In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article X, all obligations of the parties hereto shall terminate, except the obligations of the parties pursuant to this Section 10.5 and Section 11.3 and except for the provisions of Sections 8.1, 11.6, 11.7, 11.9, 11.11, 11.12 and 11.15. Moreover, in the event of termination of this Agreement pursuant to Section 10.2, 10.3 or 10.4, nothing herein shall prejudice the ability of the non-breaching party from seeking damages from any other party for any breach of this Agreement, including without limitation, attorneys' fees and the right to pursue any remedy at law or in equity; provided, that following termination of this Agreement upon the occurrence of any of the events described in clauses (x), (y) or (z) of Section 10.5, and provided that the fee payable pursuant to Section 10.5 shall after such termination (in the case of (x) or (y)) or consummation (in the case of (z)) be paid, neither Parent nor Sub shall (i) have any rights whatsoever in respect of or in connection with the representation, and warranties, covenants and agreements of the Company, (ii) assert or pursue in any manner, directly or indirectly, any claim or cause of action based in whole or in part upon alleged tortious or other interference with rights under this Agreement against any entity or person submitting an Alternative Proposal or (iii) assert or pursue in any manner, directly or indirectly, any claim or cause of action against the Company or any of its officers or directors based in whole or in part upon its or their receipt, consideration, recommendation, or approval of an Alternative Proposal, the payment of the fee therein described being Parent's sole and exclusive remedy; provided, further, that Parent may waive its right to receive the fee following termination of this Agreement upon the occurrence of any of the events described in clause (z) of Section 10.5 by written notice to the Company in which case the foregoing proviso shall not be applicable. ARTICLE XI GENERAL PROVISIONS Section 11.1 Non-Survival of Representations, Warranties and Agreements. All representations and warranties set forth in this Agreement shall terminate at the Effective Date. All covenants and agreements set forth in this Agreement shall survive the Effective Date or the termination of this Agreement, as applicable, in accordance with their terms or as set forth in Section 10.5(b) hereof, respectively. Section 11.2 Notices. All notices or other communications under this Agreement shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Parent or Sub: Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, New Jersey 07007 Attention: President and Chief Executive Officer Telecopy No.: (201) 808-8577 With a copy to: Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, New York 10022 Attention: Jack H. Nusbaum, Esq. Telecopy No.: (212) 821-8111 If to the Company: A-26 201 Homegate Hospitality, Inc. 111 Congress Avenue Suite 2600 Austin, Texas 78701 Attention: Chief Operating Officer Telecopy No.: (512) 477-6800 With a copy to: Vinson & Elkins L.L.P. 3700 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201 Attention: Derek R. McClain, Esq. Telecopy No.: (214) 220-7716 or to such other address as any party may have furnished to the other parties in writing in accordance with this Section. Section 11.3 Fees and Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such expenses, except as expressly provided herein and except that (a) the filing fee in connection with the filing of the Form S-4 or Proxy Statement/Prospectus with the Commission and (b) the expenses incurred in connection with printing and mailing the Form S-4 and the Proxy Statement/Prospectus, shall be shared equally by the Company and Parent. Section 11.4 Publicity. So long as this Agreement is in effect, Parent, Sub and the Company agree to consult with each other in issuing any press release or otherwise making any public statement with respect to the transactions contemplated by this Agreement, and none of them shall issue any press release or make any public statement prior to such consultation, except as may be required by law or by obligations pursuant to any listing agreement with any national securities exchange. The commencement of litigation relating to this Agreement or the transactions contemplated hereby or any proceedings in connection therewith shall not be deemed a violation of this Section 11.4. Section 11.5 Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. Section 11.6 Assignment; Binding Effect. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, with the exception of Section 8.5 of the Parent Disclosure Schedule and Section 8.6 hereof, which are intended to have third party beneficiary effect with respect to the individuals described or named therein. Section 11.7 Entire Agreement. This Agreement, the Exhibits, the Company Disclosure Schedule, the Parent Disclosure Schedule, the Confidentiality Agreement dated February 11, 1997, between the Company and Parent, the letter described in Section 8.5(a) and any documents delivered by the parties in connection herewith and therewith constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No A-27 202 addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto. Section 11.8 Amendment. This Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors, at any time before or after approval of matters presented in connection with the Mergers by the stockholders of the Company, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 11.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its rules of conflict of laws. Section 11.10 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Section 11.11 Headings and Table of Contents. Headings of the Articles and Sections of this Agreement and the Table of Contents are for the convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever. Section 11.12 Interpretation. In this Agreement, unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. Section 11.13 Waivers. At any time prior to the Effective Date, the parties hereto, by or pursuant to action taken by their respective Boards of Directors, may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any documents delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party. Except as provided in this Agreement, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder. Section 11.14 Incorporation of Exhibits. The Company Disclosure Schedule, the Parent Disclosure Schedule and all Exhibits attached hereto and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. Section 11.15 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. Section 11.16 Certain Definitions. As used in this Agreement, the word "Subsidiary" when used with respect to any party means any corporation or other organization, whether incorporated or unincorporated, of which such party directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which such party is a general partner. As used in this Agreement, an "Affiliate" of a person or entity is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such person or entity. A-28 203 Section 11.17 Waiver of Jury Trial. PARENT, SUB AND THE COMPANY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (A) UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (B) ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. Section 11.18 Jurisdiction; Service of Process. EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND OF ANY FEDERAL COURT SITTING IN THE STATE OF DELAWARE, AND AGREES THAT VENUE IN EACH OF SUCH COURTS IS PROPER IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED IN CONNECTION HEREWITH. IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunder duly authorized all as of the date first written above. PRIME HOSPITALITY CORP. By: /s/ JOHN M. ELWOOD ------------------------------------ Name: John M. Elwood Title: Executive Vice President and Chief Financial Officer PH SUB CORPORATION By: /s/ JOHN M. ELWOOD ------------------------------------ Name: John M. Elwood Title: President HOMEGATE HOSPITALITY, INC. By: /s/ ROBERT A. FAITH ------------------------------------ Name: Robert A. Faith Title: Chairman of the Board, Chief Executive Officer and President A-29 204 ANNEX B OPINION OF BEAR, STEARNS & CO. INC. JULY 24, 1997 Board of Directors Homegate Hospitality, Inc. 111 Congress Avenue Suite 2600 Austin, Texas 78701 Attention: Robert A. Faith Chairman and Chief Executive Officer Gentlemen: We understand that Homegate Hospitality, Inc. a Delaware corporation ("Homegate"), and Prime Hospitality,Inc., a Delaware corporation ("Prime"), intend to affect a business combination by means of the merger of PH Sub Corporation, a Delaware corporation ("Mergersub"), with and into Homegate ("Merger"). In the Merger, each outstanding share of Homegate common stock will be converted into .6073 of a share of Prime common stock. You have provided us with the Agreement and Plan of Merger among Homegate, Prime and Mergersub in substantially final form (the "Merger Agreement"). You have asked us to render our opinion as to whether the consideration to be received by the public stockholders of Homegate in the Merger is fair, from a financial point of view, to the public stockholders of Homegate. In the course of our analyses for rendering this opinion, we have: 1. reviewed the Merger Agreement; 2. reviewed Homegate's Annual Report to Stockholders and Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and its Quarterly Report on Form 10-Q for the period ended March 31, 1997; 3. reviewed certain operating and financial information, including projections, provided to us by management relating to Homegate's business and prospects; 4. met with certain members of Homegate's senior management to discuss its operations, historical financial statements, current situation and future prospects; 5. reviewed Prime's Annual Report to Stockholders and Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and its Quarterly Report on Form 10-Q for the period ended March 31, 1997; 6. reviewed certain operating and financial information, including projections, provided to us by management relating to Prime's business and prospects; 7. met with certain members of Prime's senior management to discuss its operations, historical financial statements, current situation and future prospects; 8. reviewed the historical prices and trading volumes of the common shares of Homegate and Prime; 9. reviewed publicly available financial data and stock market performance data of companies that we deemed generally comparable to Homegate and Prime; 10. reviewed the terms of recent acquisitions of companies that we deemed generally comparable to Homegate; and 11. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. B-1 205 In the course of our review, we have relied upon and assumed the accuracy and completeness of the financial and other information provided to us by Homegate and Prime. With respect to Homegate's and Prime's projected financial results and potential synergies that could be achieved upon consummation of the Merger, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Homegate and Prime as to the expected future performance of Homegate and Prime, respectively. We have not assumed any responsibility for the information or projections provided to us and we have further relied upon the assurances of the managements of Homegate and Prime that they are unaware of any facts that would make the information or projections provided to us incomplete or misleading, and we express no opinion with respect to such projections or to the assumptions upon which they are based. In arriving at our opinion, we have not performed or obtained any independent appraisal of the assets of Homegate and Prime. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as they exist and can be evaluated as of the date hereof. We have not been asked and do not intend to update our opinion. Our opinion as expressed below does not imply any conclusion as to the likely trading range for Prime common stock either before or following the consummation of the Merger, which may vary depending upon, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. Our opinion is directed solely to the fairness, from a financial point of view, of the consideration to be received by the public stockholders of Homegate in the Merger and does not address Homegate's underlying business decision to effect the Merger and is not a recommendation to the Board of Directors or stockholders of Homegate stockholders as to whether to approve or vote for the Merger. Based on the foregoing, it is our opinion that the consideration to be received by the public stockholders of Homegate in the Merger is fair, from a financial point of view, to the public stockholders of Homegate. We have acted as financial advisor to Homegate in connection with the Merger and will receive a fee for such services, payment of a significant portion of which is contingent upon the consummation of the Merger. In the ordinary course of business, we may actively trade the securities of Homegate and Prime for our own account and for the account of customers and, accordingly, may at any time hold a long or short position in such securities. We have previously rendered certain investment banking and financial advisory services to Homegate and Prime for which we received customary compensation. Very truly yours, BEAR, STEARNS & CO. INC. By: /s/ DAVID GLASER ------------------------------------ Managing Director B-2 206 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. 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 Prime's Restated Certificate of Incorporation (the "Restated Certificate") and Prime's By-Laws (the "By-Laws") provide that Prime 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 Prime, or is or was serving at the request of Prime 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 Prime, 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 Prime and any officer, director, employee or agent of Prime. 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 Prime) or may (in the case of any action, suit or proceeding against an officer, trustee, employee or agent) be paid by Prime in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors of Prime 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 Prime. 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 II-1 207 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 Prime shall not be personally liable to Prime or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Prime or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) 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 Prime shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------- 2 -- Reference is made to the Agreement and Plan of Merger, dated as of July 25, 1997, by and among Prime Hospitality Corp., PH Sub Corporation and Homegate Hospitality, Inc., attached to this Registration Statement as Annex A to the Proxy Statement-Prospectus, which is incorporated herein by reference. 3.1 -- Reference is made to the Restated Certificate of Incorporation of Prime, dated June 5, 1992, filed as an Exhibit to Prime's Form 10-K dated September 25, 1992, which is incorporated herein by reference. 3.2 -- Reference is made to the Restated Certificate of Incorporation, As Amended, filed as an Exhibit to Prime's Form 10-Q/A, dated April 30, 1996, which is incorporated herein by reference. 3.3 -- Reference is made to the Restated Bylaws of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.1 -- Reference is made to the form of 9.20% Junior Secured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.2 -- Reference is made to the Form of 8.20% Tax Note of Prime, filed as an Exhibit to Prime's Form 10-K , dated September 25, 1992, which is incorporated herein by reference. 4.3 -- Reference is made to the Form of 10.20% Secured UND Restructured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.4 -- Reference is made to the Form of 8% Secured UND Restructured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.5 -- Reference is made to the Form of 9.20% OVR Restructured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.6 -- Reference is made to the Collateral Agency Agreement among Prime, U.S. Trust and the Secured Parties, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.6 -- Reference is made to the Security Agreement between Prime and U.S. Trust, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.8 -- Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference.
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EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------- 4.9 -- Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.10 -- Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.11 -- Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.12 -- Reference is made to Form 8-A of Prime as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference. 4.13 -- Reference is made to an Indenture, dated April 26, 1995, between Prime and the Trustee related to the issuance of 7% Convertible Subordinated Notes due 2002, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 4.14 -- Reference is made to an Indenture, dated January 23, 1996, between Prime and the Trustee related to 9 1/4% First Mortgage Notes due 2006, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 4.15 -- (a) Reference is made to the Senior Secured Revolving Credit Agreement, dated as of June 26, 1996, among Prime and the Lenders Party hereto, and Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent, filed as an Exhibit to Prime's Amendment No. 1 to Form S-3, dated July 26, 1996, which is incorporated herein by reference. (b) Limited Waiver, dated as of March 19, 1997. (c) Limited Waiver, dated as of August 20, 1997. 4.16 -- Reference is made to the Master Repurchase Agreement, dated as of October 23, 1996, between BT Securities Corporation and Prime, filed as an Exhibit to Prime's Form 10-K, dated February 28, 1997, which is incorporated herein by reference. 4.17 -- Reference is made to an Indenture, dated as of March 26, 1997, between Prime and the Trustee relating to the issuance of a 9 3/4% Senior Subordinated Notes due 2007, filed as an Exhibit to Prime's Form S-4, dated April 2, 1997, which is incorporated herein by reference. 5 -- Opinion of Willkie Farr & Gallagher as to the legality of the shares of Prime Common Stock being registered. 8.1 -- Opinion of Wilkie Farr & Gallagher as to certain federal income tax consequences of the Merger. 8.2 -- Opinion of Vinson & Elkins, L.L.P. as to certain federal income tax consequences of the Merger. 10.1 -- Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc., dated June 3, 1985, and its related agreements, each of which was included as an Exhibit to the Form 8-K, dated August 14, 1985, of PMI, which are incorporated herein by reference. 10.2 -- Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q, dated February 12, 1988, of PMI, which is incorporated herein by reference. 10.3 -- Reference is made to the 1992 Performance Incentive Stock Option Plan of Prime, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference.
II-3 209
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------- 10.4 -- Reference is made to the 1992 Stock Option Plan of Prime filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 10.5 -- Reference is made to the 1992 Non-Qualified Stock Option Agreement between Prime and David A. Simon, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 10.6 -- Reference is made to the 1992 Non-Qualified Stock Option Agreement between Prime and John Elwood, filed as an Exhibit to Prime's Form 10-K, dated March 26, 1993, which is incorporated herein by reference. 10.7 -- Reference is made to the Employment Agreement, dated as of May 18, 1993, between Paul Hower and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. 10.8 -- Reference is made to the Consolidated and Amended Settlement Agreement, dated as of October 12, 1993, between Allan V. Rose and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. 10.9 -- Reference is made to the Consent and Amendment to Prime's 9.20% Junior Secured Notes, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.10 -- Reference is made to the Agreement, dated February 6, 1995, among Suites of America, Inc., ShoLodge, Inc. and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.11 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between David A. Simon and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.12 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between John M. Elwood and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.13 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Paul H. Hower and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.14 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between John H. Leavitt and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.15 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Denis W. Driscoll and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.16 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Timothy E. Aho and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.17 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Joseph Bernadino and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.18 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard T. Szymanski and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.19 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Douglas W. Vicari and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference.
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EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------- 10.20 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard Moskal and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.21 -- Reference is made to the Employment Agreement, dated May 15, 1995, between John Elwood and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 10.22 -- Reference is made to the Employment Agreement, dated August 1, 1995, between David Simon and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 10.23 -- Purchase And Sale Agreement, between Prime Hospitality Corp. and Equity Inns Partnership, L.P., dated as of September 22, 1997. 11 -- Reference is made to the Statement regarding computation of per share earnings, filed as an Exhibit to Prime's Form 10-Q, dated August 13, 1997, 1997, which is incorporated herein by reference. 21 -- Reference is made to the Subsidiaries of Prime, filed as an Exhibit to Prime's Form 10-K, dated February 28, 1997, which is incorporated herein by reference. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ernst & Young LLP. 23.3 -- Consent of Willkie Farr & Gallagher (included in their opinions filed as Exhibit 5 and 8.1). 23.4 -- Consent of Vinson & Elkins, L.L.P. (included in their opinion filed as Exhibit 8.2.) 23.5 -- Consent of Bear, Stearns & Co. Inc. 24 -- Power of Attorney (included on the signature page hereto). 99 -- Form of Proxy in connection with the Homegate Special Meeting.
- --------------- Certain instruments defining the rights of holders of long-term debt of Prime and its subsidiaries have not been filed in accordance with Item 601(b)(4)(iii) of Regulation S-K. Prime hereby agrees to furnish a copy of such instruments to the Commission upon request. (b) Financial Statement Schedules: Schedule III -- Real Estate Investments and Accumulated Depreciation. All other schedules have been omitted because they are not applicable or not required or the required information is included in the financial statements or notes thereto. (c) Opinion of Bear, Stearns & Co. Inc. The opinion of Bear, Stearns & Co. Inc. is included as Annex B to the Proxy Statement-Prospectus. ITEM 22. UNDERTAKINGS. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of registrants pursuant to the provisions described under Item 20 above, 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 II-5 211 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 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. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, 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 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, 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 the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) The undersigned Registrant hereby undertakes as follows: that prior to any public re-offering of the securities registered hereunder through use of a prospectus which is part of the registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such re-offering prospectus will contain the information called for by the applicable registration form with respect to re-offerings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (3) The Registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 212 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-4 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 24th day of October, 1997. 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. 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, October 24, 1997 - ------------------------------------------ President, Chief Executive David A. Simon Officer and Director (principal executive officer) /s/ JOHN M. ELWOOD Chief Financial Officer, October 24, 1997 - ------------------------------------------ Executive Vice President and John M. Elwood Director (principal financial and accounting officer) /s/ HERBERT LUST, II Director October 24, 1997 - ------------------------------------------ Herbert Lust, II /s/ JACK H. NUSBAUM Director October 24, 1997 - ------------------------------------------ Jack H. Nusbaum /s/ ALLEN J. OSTROFF Director October 24, 1997 - ------------------------------------------ Allen J. Ostroff /s/ A.F. PETROCELLI Director October 24, 1997 - ------------------------------------------ A.F. Petrocelli /s/ HOWARD M. LORBER Director October 24, 1997 - ------------------------------------------ Howard M. Lorber
II-7 213 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 2 -- Reference is made to the Agreement and Plan of Merger, dated as of July 25, 1997, by and among Prime Hospitality Corp., PH Sub Corporation and Homegate Hospitality, Inc., attached to this Registration Statement as Annex A to the Proxy Statement-Prospectus, which is incorporated herein by reference. 3.1 -- Reference is made to the Restated Certificate of Incorporation of Prime, dated June 5, 1992, filed as an Exhibit to Prime's Form 10-K dated September 25, 1992, which is incorporated herein by reference. 3.2 -- Reference is made to the Restated Certificate of Incorporation, As Amended, filed as an Exhibit to Prime's Form 10-Q/A, dated April 30, 1996, which is incorporated herein by reference. 3.3 -- Reference is made to the Restated Bylaws of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.1 -- Reference is made to the form of 9.20% Junior Secured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.2 -- Reference is made to the Form of 8.20% Tax Note of Prime, filed as an Exhibit to Prime's Form 10-K , dated September 25, 1992, which is incorporated herein by reference. 4.3 -- Reference is made to the Form of 10.20% Secured UND Restructured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.4 -- Reference is made to the Form of 8% Secured UND Restructured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.5 -- Reference is made to the Form of 9.20% OVR Restructured Note of Prime, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.6 -- Reference is made to the Collateral Agency Agreement among Prime, U.S. Trust and the Secured Parties, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.6 -- Reference is made to the Security Agreement between Prime and U.S. Trust, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.8 -- Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.9 -- Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference.
214
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 4.10 -- Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.11 -- Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4.12 -- Reference is made to Form 8-A of Prime as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference. 4.13 -- Reference is made to an Indenture, dated April 26, 1995, between Prime and the Trustee related to the issuance of 7% Convertible Subordinated Notes due 2002, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 4.14 -- Reference is made to an Indenture, dated January 23, 1996, between Prime and the Trustee related to 9 1/4% First Mortgage Notes due 2006, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 4.15 -- (a) Reference is made to the Senior Secured Revolving Credit Agreement, dated as of June 26, 1996, among Prime and the Lenders Party hereto, and Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent, filed as an Exhibit to Prime's Amendment No. 1 to Form S-3, dated July 26, 1996, which is incorporated herein by reference. (b) Limited Waiver, dated as of March 19, 1997. (c) Limited Waiver, dated as of August 20, 1997. 4.16 -- Reference is made to the Master Repurchase Agreement, dated as of October 23, 1996, between BT Securities Corporation and Prime, filed as an Exhibit to Prime's Form 10-K, dated February 28, 1997, which is incorporated herein by reference. 4.17 -- Reference is made to an Indenture, dated as of March 26, 1997, between Prime and the Trustee relating to the issuance of a 9 3/4% Senior Subordinated Notes due 2007, filed as an Exhibit to Prime's Form S-4, dated April 2, 1997, which is incorporated herein by reference. 5 -- Opinion of Willkie Farr & Gallagher as to the legality of the shares of Prime Common Stock being registered. 8.1 -- Opinion of Wilkie Farr & Gallagher as to certain federal income tax consequences of the Merger. 8.2 -- Opinion of Vinson & Elkins, L.L.P. as to certain federal income tax consequences of the Merger. 10.1 -- Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc., dated June 3, 1985, and its related agreements, each of which was included as an Exhibit to the Form 8-K, dated August 14, 1985, of PMI, which are incorporated herein by reference. 10.2 -- Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q, dated February 12, 1988, of PMI, which is incorporated herein by reference.
215
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 10.3 -- Reference is made to the 1992 Performance Incentive Stock Option Plan of Prime, dated as of July 31, 1992, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 10.4 -- Reference is made to the 1992 Stock Option Plan of Prime filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 10.5 -- Reference is made to the 1992 Non-Qualified Stock Option Agreement between Prime and David A. Simon, filed as an Exhibit to Prime's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 10.6 -- Reference is made to the 1992 Non-Qualified Stock Option Agreement between Prime and John Elwood, filed as an Exhibit to Prime's Form 10-K, dated March 26, 1993, which is incorporated herein by reference. 10.7 -- Reference is made to the Employment Agreement, dated as of May 18, 1993, between Paul Hower and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. 10.8 -- Reference is made to the Consolidated and Amended Settlement Agreement, dated as of October 12, 1993, between Allan V. Rose and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. 10.9 -- Reference is made to the Consent and Amendment to Prime's 9.20% Junior Secured Notes, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.10 -- Reference is made to the Agreement, dated February 6, 1995, among Suites of America, Inc., ShoLodge, Inc. and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.11 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between David A. Simon and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.12 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between John M. Elwood and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.13 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Paul H. Hower and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.14 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between John H. Leavitt and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.15 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Denis W. Driscoll and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.16 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Timothy E. Aho and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.17 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Joseph Bernadino and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference.
216
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------------------------------------- ------------ 10.18 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard T. Szymanski and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.19 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Douglas W. Vicari and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.20 -- Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard Moskal and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 10, 1995, which is incorporated herein by reference. 10.21 -- Reference is made to the Employment Agreement, dated May 15, 1995, between John Elwood and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 10.22 -- Reference is made to the Employment Agreement, dated August 1, 1995, between David Simon and Prime, filed as an Exhibit to Prime's Form 10-K, dated March 21, 1996, which is incorporated herein by reference. 10.23 -- Purchase And Sale Agreement, between Prime Hospitality Corp. and Equity Inns Partnership, L.P., dated as of September 22, 1997. 11 -- Reference is made to the Statement regarding computation of per share earnings, filed as an Exhibit to Prime's Form 10-Q, dated August 13, 1997, 1997, which is incorporated herein by reference. 21 -- Reference is made to the Subsidiaries of Prime, filed as an Exhibit to Prime's Form 10-K, dated February 28, 1997, which is incorporated herein by reference. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ernst & Young LLP. 23.3 -- Consent of Willkie Farr & Gallagher (included in their opinions filed as Exhibit 5 and 8.1). 23.4 -- Consent of Vinson & Elkins, L.L.P. (included in their opinion filed as Exhibit 8.2.) 23.5 -- Consent of Bear, Stearns & Co. Inc. 24 -- Power of Attorney (included on the signature page hereto). 99 -- Form of Proxy in connection with the Homegate Special Meeting.
EX-4.15B 2 LIMITED WAIVER DATED MARCH 19, 1997 1 Exhibit 4.15(b) PRIME HOSPITALITY CORP. LIMITED WAIVER REGARDING CERTAIN PROVISIONS OF SENIOR SUBORDINATED NOTES This LIMITED WAIVER (this "WAIVER") is dated as of March 19, 1997 and entered into by and among Prime Hospitality Corp., a Delaware corporation ("COMPANY"), and Bankers Trust Company, as agent for lenders party to the Credit Agreement referred to below ("AGENT"), and, for purposes of Section 6 hereof, the subsidiaries of Company listed on the signature pages hereto and is made with reference to that certain Senior Secured Revolving Credit Agreement dated as of June 26, 1996, (the "CREDIT AGREEMENT"), by and among Company, the financial institutions party thereto ("LENDERS"), Credit Lyonnais New York Branch, as documentation agent ("DOCUMENTATION AGENT") and Agent. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Company has told Agent and Lenders that: (i) Company wants to issue senior subordinated notes in an aggregate principal amount of $200,000,000 (the "UNREGISTERED SENIOR SUBORDINATED NOTES"); (ii) Company intends to exchange the Unregistered Senior Subordinated Notes for registered senior subordinated notes (the "REGISTERED SENIOR SUBORDINATED NOTES"; the Unregistered Senior Subordinated Notes and the Registered Senior Subordinated Notes are collectively referred to herein as the "SENIOR SUBORDINATED NOTES") in the same aggregate principal amount and with substantially identical terms; (iii) the indenture or indentures pursuant to which the Senior Subordinated Notes will be issued will contain provisions, among other things, substantially to the effect that (a) if Company sells assets and fails, within 365 days, to reinvest the net cash proceeds from such sale in the hospitality business or to use such net cash proceeds to repay senior indebtedness (including the Obligations), the Company will be required to make an offer to the holders of the Senior Subordinated Notes and holders of pari passu debt with similar asset sale provisions to repurchase the Senior 1 2 Subordinated Notes (at a price equal to 100% of the principal thereof plus accrued interest thereon plus specified liquidated damages, if any) and such other debt in an aggregate amount equal to the amount of such net cash proceeds, (b) if a change of control with respect to Company occurs, Company will be required to make an offer to the holders of the Senior Subordinated Notes to repurchase the Senior Subordinated Notes (at a price equal to 101% of the principal thereof plus accrued interest plus specified liquidated damages, if any) and (c) unless a specified fixed charge coverage ratio is satisfied, Company and its Subsidiaries will not incur any intercompany indebtedness except indebtedness incurred by Company and a restricted Subsidiary that is owed to Company and/or one or more of its wholly owned, restricted Subsidiaries (the provisions in clauses (a)-(c) being referred to herein as the "SPECIFIED PROVISIONS"); and (iv) certain debt Investments made by Company in connection with proposed like-kind exchanges under Section 1031 of the Internal Revenue Code are, contrary to the provisions of subsection 6.3(c) of the Credit Agreement, secured by real property. WHEREAS, Company has requested that Agent waive the provisions of subsections 6.1(a), 6.2D and 6.3(c) in order to permit Company to (i) issue the Senior Subordinated Notes pursuant to one or more indentures that contain provisions substantially to the effect of the Specified Provisions and (ii) make certain debt Investments secured by mortgages on real property and, subject to the terms and conditions hereof, Agent is willing to consent to such waiver. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. WAIVER Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of Company herein contained, Agent hereby waives compliance with the provisions of: (a) subsections 6.1(a) and 6.2D of the Credit Agreement to the extent, and only to the extent, necessary to permit Company to issue the Senior Subordinated Notes pursuant to an indenture that contains provisions substantially to the effect of the Specified Provisions; provided that any principal payment to holders of the Senior Subordinated Notes or any repurchase of the Senior Subordinated Notes or other Restricted Payment pursuant to the Specified Provisions shall constitute an Event of Default for all purposes of the Loan Documents; and 2 3 (b) subsection 6.3(c) of the Credit Agreement to the extent and only to the extent necessary to permit Company to make debt Investments in Brown Trout Investments, Ltd. ("BROWN TROUT"), or another entity approved by Lenders, secured by mortgages or deeds of trust on real property in order to facilitate like-kind exchanges under Section 1031 of the Internal Revenue Code; provided that (i) each such debt Investment shall be secured by a perfected mortgage or deed of trust (a "RELATED MORTGAGE") on the property (the "RELATED PROPERTY") acquired or financed with the proceeds of such debt Investment, (ii) each Related Property shall be leased to Company pursuant to a lease/option to purchase agreement (a "RELATED LEASE/PURCHASE AGREEMENT") that, among other things, shall give Company a valid and enforceable right to purchase, at Company's option, the Related Property for consideration in an aggregate amount not to exceed the amount of the applicable Investment by Company, (iii) each debt Investment shall be evidenced by a promissory note (a "RELATED NOTE") that provides for (1) a market rate of interest and (2) annual interest at least equal to the rent payable by Company during such period pursuant to the applicable Related Lease/Purchase Agreement, (iv) each Related Note, Related Mortgage, and Related Lease/Purchase Agreement shall be valid and enforceable and satisfactory in form and substance to Agent (provided, that any Related Note, Related Mortgage or Related Lease/Purchase Agreement that is delivered to Agent and is substantially in the form of the Related Notes, Related Mortgages and Related Lease/Purchase Agreements, as applicable, delivered to Agent prior to the date hereof shall be deemed satisfactory to Agent), (v) at all times during which any such Investment exists, Company shall have the right to appoint a member of the Board of Directors of Brown Trout (or such other entity) and such director's vote shall be necessary for Brown Trout (or such other entity) to incur indebtedness (except in the ordinary course), make loans or other advances of credit, declare or pay dividends, redeem or acquire any outstanding stock, issue additional stock or other securities, merge or consolidate Brown Trout (or such other entity) with any other Person, sell substantially all of the assets of Brown Trout (or such other entity), dissolve Brown Trout (or such other entity), commence a bankruptcy reorganization or liquidation proceeding or adopt, amend or repeal any bylaw or the certificate of incorporation of Brown Trout (or such other entity) (collectively, the "DESIGNATED ACTIONS"), (vi) Brown Trout (or such other entity) shall not have taken any Designated Action, and no Designated Action shall have occurred, (vii) Brown Trout (or such other entity) shall not engage in any business other than the ownership and development of hotels subject to Related Mortgages in favor of Company and shall not incur any indebtedness except indebtedness evidenced by Related Notes and (viii) all real property of Brown Trout shall be subject to liens in favor of Company pursuant to the Related Mortgages. SECTION 2. LIMITATION OF WAIVER Without limiting the generality of the provisions of subsection 8.6 of the Credit Agreement, the waiver set forth above shall be limited precisely as written and 3 4 relates solely to the noncompliance by Company with the provisions of subsections 6.1(a), 6.2D and 6.3(c) of the Credit Agreement in the manner and to the extent described above, and nothing in this Waiver shall be deemed to: (a) constitute a waiver of compliance by Company with respect to (i) subsections 6.1(a), 6.2D and 6.3(c) of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein; or (b) prejudice any right or remedy that Agent or any Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this Waiver) or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Except as expressly set forth herein, the terms, provisions and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and in all other respects are hereby ratified and confirmed. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Agent to enter into this Waiver, Company hereby represents and warrants to Agent and Lenders that after giving effect to this Waiver: (a) as of the date hereof, there exists no Event of Default or Potential Event of Default under the Credit Agreement; (b) all representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date; and (c) as of the date hereof, Company has performed all agreements to be performed on its part as set forth in the Credit Agreement. SECTION 4. COUNTERPARTS; EFFECTIVENESS This Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Waiver shall become effective as of the date hereof upon the execu- 4 5 tion of counterparts hereof by Company, Guarantors and Agent and acknowledgment by Lenders holding more than 50% of the Commitments and receipt by Company and Agent of written or telephonic notification of such execution and authorization of delivery thereof. SECTION 5. GOVERNING LAW THIS WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SECTION 6. ACKNOWLEDGEMENT AND CONSENT BY GUARANTORS Each Guarantor hereby acknowledges that it has read this Waiver and consents to the terms thereof and further hereby confirms and agrees that, notwithstanding the effectiveness of this Waiver, the obligations of such Guarantor under the Subsidiary Guaranty shall not be impaired or affected and the Subsidiary Guaranty is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all respects. [Remainder of page intentionally left blank] 5 6 IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: PRIME HOSPITALITY CORP. By: _________________________ Title: GUARANTORS: EACH OF THE GUARANTORS LISTED ON SCHEDULE I HERETO By: _________________________ Title: AGENT: BANKERS TRUST COMPANY By: _________________________ Title: S-1 7 ACKNOWLEDGED AND AGREED TO: CREDIT LYONNAIS NEW YORK BRANCH, individually and as Documentation Agent By: ____________________________ Title: MIDLANTIC BANK, NATIONAL ASSOCIATION By: ____________________________ Title: IMPERIAL BANK By: ____________________________ Title: SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION By: ____________________________ Title: SOCIETE GENERALE By: ____________________________ Title: S-2 8 SCHEDULE I GUARANTORS S-3 EX-4.15C 3 LIMITED WAIVER DATED AUGUST 20, 1997 1 Exhibit 4.15(c) PRIME HOSPITALITY CORP. LIMITED WAIVER TO CREDIT AGREEMENT This LIMITED WAIVER (this "WAIVER") is dated as of August 20, 1997 and entered into by and among Prime Hospitality Corp., a Delaware corporation ("COMPANY"), and Bankers Trust Company, as agent for lenders party to the Credit Agreement referred to below ("AGENT"), and, for purposes of Section 7 hereof, the subsidiaries of Company listed on the signature pages hereto and is made with reference to that certain Senior Secured Revolving Credit Agreement dated as of June 26, 1996, (the "CREDIT AGREEMENT"), by and among Company, the financial institutions party thereto ("LENDERS"), Credit Lyonnais New York Branch, as documentation agent ("DOCUMENTATION AGENT") and Agent. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Company has told Agent and Lenders that: (i) Company has made debt Investments in Brown Trout (as defined below) in excess of the dollar limit set forth in subsection 6.3 of the Credit Agreement and intends to continue to increase the dollar amount of its debt Investments in Brown Trout; (ii) Company has made loans to Homegate Hospitality, Inc. ("HOMEGATE") secured by mortgages on real property, contrary to subsection 6.3(c) of the Credit Agreement; (iii) Company intends to make bridge loans secured by mortgages on real property in an aggregate principal amount, including the loans already made to Homegate and referenced in (ii) above, not to exceed $65,000,000 plus capitalized interest at any time pursuant to the Interim Secured Construction Term Loan Agreement by and between Company, as lender, and Homegate, as borrower (said Interim Loan Agreement, as it may hereafter be amended from time to time, being the "INTERIM LOAN AGREEMENT"), contrary to subsection 6.3 of the Credit Agreement generally, as well as subsection (c) thereof; 1 2 (iv) Company intends to enter into a transaction, contrary to subsection 6.7 of the Credit Agreement, whereby Homegate will be merged into a wholly-owned Subsidiary of Company with Homegate being the surviving corporation in such merger and remaining as a Subsidiary of Company (the "HOMEGATE MERGER"); (v) Following the Homegate Merger, Company may elect to enter into a transaction, contrary to subsection 6.7 of the Credit Agreement, whereby Homegate will be merged directly into Company and any Subsidiaries of Homegate may be merged into Homegate or directly into Company (the "SECONDARY MERGER"); and (vi) If Company elects not to consummate the Secondary Merger then, under the terms of the Mortgage Note Indenture and the Senior Subordinated Note Indenture, Homegate will be required to guarantee Company's obligations with respect to its Mortgage Notes and its Senior Subordinated Notes (as hereinafter defined), contrary to subsection 6.1 of the Credit Agreement. WHEREAS, Company has requested that Agent waive the provisions of subsections 6.1, 6.3, 6.4, 6.7 and 6.14(i) of the Credit Agreement in order to permit Company to (i) expand its ability to make debt Investments in Brown Trout, (ii) make certain loans secured by mortgages on real property to Homegate, and (iii) consummate the Homegate Merger and the Secondary Merger and, subject to the terms and conditions hereof, Agent is willing to consent to such waiver. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. WAIVER REGARDING PRE-MERGER EVENTS Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of Company herein contained, Agent hereby waives compliance with the provisions of: (a) subsection 6.3 of the Credit Agreement to the extent and only to the extent necessary to permit Company, after the date hereof: (i) to make debt Investments in Brown Trout Investments, Ltd. ("BROWN TROUT"), or another entity approved by Lenders, secured by mortgages or deeds of trust on real property in order to facilitate like-kind exchanges under Section 1031 of the Internal Revenue Code ("BROWN TROUT INVESTMENTS") and to exclude the amount of such Brown Trout Investments from the dollar limit on Investments set 2 3 forth in subsection 6.3(ii) of the Credit Agreement; provided that at the time such Brown Trout Investments are made (A) Company would be able to incur $1 of additional Indebtedness pursuant to the Mortgage Note Indenture (as in effect on the Closing Date), (B) no Event of Default or Potential Event of Default has occurred and is continuing, (C) such Brown Trout Investments, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, and (D) Company shall not, and shall cause its Subsidiaries to not, pledge or permit a lien on, or any security interest in, any such Brown Trout Investment; provided further that (W) each promissory note evidencing such debt and each related mortgage, deed of trust and lease shall be valid and enforceable, (X) Company shall have a valid and enforceable right to purchase, at Company's option, each property subject to such mortgage or deed of trust for consideration in an aggregate amount not to exceed the amount of the related Investment by Company plus a nominal charge to exercise such option, (Y) at all times during which any such Investment exists, Company shall appoint and maintain a member of the Board of Directors of Brown Trout, or such other entity (the "COMPANY DIRECTOR"), and such Company Director's vote shall be necessary for Brown Trout, or such other entity, to incur indebtedness, dissolve, liquidate or commence bankruptcy proceedings, and (Z) Company Director shall not vote to permit Brown Trout, or such other entity, to incur any indebtedness other than indebtedness owed to Company or indebtedness incurred in the ordinary course, dissolve, liquidate, commence any bankruptcy proceedings, make loans or other advances of credit, declare or pay dividends, redeem or acquire any outstanding stock, issue additional stock or other securities (other than to Company), merge or consolidate Brown Trout (or such other entity) with any other Person, sell (other than directly or indirectly to Company) substantially all of the assets of Brown Trout (or such other entity), adopt, amend or repeal any bylaw or the certificate of incorporation of Brown Trout (or such other entity) without the prior consent of Agent, or engage in any business other than the ownership and development of hotels subject to mortgages or deeds of trust in favor of Company and the leasing of property to Company; provided further that together with each delivery of operating statements of Company and its Subsidiaries pursuant to subsection 5.1(i) of the Credit Agreement, Company shall deliver to Agent an Officer's Certificate certifying as to its compliance with all conditions set forth in (W)-(Z) above; provided further that the aggregate Potential Tax Effect (as hereinafter defined) of all such Brown Trout Investments shall at no time exceed $150,000,000, where Potential Tax Effect shall mean, with respect to each individual property (the 3 4 "RELINQUISHED PROPERTY") being exchanged for a property held by Brown Trout, the product of (1) the difference of the sale price of such Relinquished Property less the basis of such Relinquished Property immediately prior to the sale times (2) forty percent (40%); and (ii) to make Investments in Homegate secured by mortgages or deeds of trust on real property in an aggregate principal amount not to exceed at any time $65,000,000 plus capitalized interest pursuant to the Interim Loan Agreement (the "HOMEGATE LOANS") and to exclude the amount of such Homegate Loans from the dollar limit on Investments set forth in subsection 6.3(ii) of the Credit Agreement; provided that (A) notwithstanding the exclusion of the Homegate Loans from the dollar limit on Investments set forth in subsection 6.3(ii) of the Credit Agreement, Company shall not be permitted at any time to make loans to Homegate in amounts in excess of $65,000,000 plus capitalized interest, (B) all Homegate Loans must be evidenced by a note and secured by a mortgage or deed of trust on real property, however, Company shall be permitted to have up to $10,000,000 of such Homegate Loans outstanding at any one time on an unsecured basis; provided further that any such unsecured Homegate Loans must be evidenced by a note and secured by a mortgage or deed of trust on real property within 14 days, (C) at the time such Homegate Loans are made (1) Company would be able to incur $1 of additional Indebtedness pursuant to the Mortgage Note Indenture (as in effect on the Closing Date), (2) no Event of Default or Potential Event of Default has occurred or is continuing, and (3) such Investments, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, (D) Company shall not, and shall cause its Subsidiaries to not, pledge or permit a lien on, or any security interest in, the Homegate Loans or any Collateral securing the Homegate Loans (other than in favor of Company or Permitted Encumbrances); Permitted Encumbrances shall mean any exception to title shown in any title policy and/or marked-up commitment insuring the liens on the Collateral, any mechanics' and materialmen's liens, any liens arising in the ordinary course that do not materially impair the value or utility of the Collateral and any liens being contested in good faith, and (E) the Homegate Loans shall be comprised solely of loans advanced by Company under the Interim Loan Agreement; and (b) subsection 6.3 of the Credit Agreement to the extent and only to the extent necessary to permit (i) the loans made or to be made by Company to Homegate and evidenced by notes and secured by mortgages or 4 5 deeds of trust on real property; provided that the full amount of such loans shall be included as part of the Homegate Loans once the Interim Loan Agreement is effective and (ii) the debt Investments made in Brown Trout in excess of $25,000,000. SECTION 2. WAIVER REGARDING MERGER AND POST-MERGER EVENTS Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of Company herein contained, Agent hereby waives compliance with the provisions of: (a) subsection 6.7 of the Credit Agreement to the extent and only to the extent necessary to permit the consummation of: (i) the Homegate Merger; provided that prior to and immediately following the consummation of the Homegate Merger, (A) Company would be able to incur $1 of additional Indebtedness pursuant to the Mortgage Note Indenture (as in effect on the Closing Date), (B) no Event of Default or Potential Event of Default has occurred or is continuing, (C) the Homegate Merger could not reasonably be expected to have a Material Adverse Effect, and (D) Homegate shall not have incurred any material Indebtedness other than (i) to Company, (ii) under existing credit facilities as in effect on the date hereof but not in excess of the credit limits set forth therein on the date hereof, and (iii) in the ordinary course of business; provided further that immediately following the consummation of the Homegate Merger, Homegate shall be a Wholly Owned Subsidiary of Company; provided further that if any Indebtedness of Homegate (other than Indebtedness owed to Company) (A) is secured by a Lien on the assets or Capital Stock of Company or any of Company's Subsidiaries (other than Homegate and its Subsidiaries in existence as of the Homegate Merger) or (B) is recourse to Company or any of Company's Subsidiaries (other than Homegate and its Subsidiaries in existence as of the Homegate Merger), then Company shall provide evidence, satisfactory to Agent, as to the absence of any material liabilities of Homegate and/or any of Homegate's Subsidiaries whether direct or indirect, contingent or absolute, known or unknown other than those liabilities certified by Company to Agent as of the date of the Homegate Merger; and (ii) the Secondary Merger; provided that prior to and immediately following the consummation of the Secondary Merger, (A) Company would be able to incur $1 of additional Indebtedness pursuant to the 5 6 Mortgage Note Indenture (as in effect on the Closing Date), (B) no Event of Default or Potential Event of Default has occurred or is continuing, (C) the Secondary Merger could not reasonably be expected to have a Material Adverse Effect, and (D) Company shall provide evidence, satisfactory to Agent, as to the absence of any material liabilities of Homegate and/or any of Homegate's Subsidiaries whether direct or indirect, contingent or absolute, known or unknown other than those liabilities certified by Company to Agent as of the date of the Secondary Merger; (b) subsection 6.14(i) of the Credit Agreement to the extent and only to the extent necessary to permit the ownership, operation, management, renovation, disposition and development of mid-price, extended-stay hotels; provided that any such hotels to be developed in the future shall be similar to the type of hotels presently owned or being developed by Homegate or its Subsidiaries as of the date hereof; (c) subsections 6.1 and 6.4 of the Credit Agreement to the extent and only to the extent necessary to permit Homegate to guarantee (A) on a pari passu basis all of the obligations of Company with respect to the Mortgage Notes issued by Company pursuant to the Mortgage Note Indenture and (B) on an unsecured senior subordinated basis all of the obligations of Company with respect to the $200,000,000 of Senior Subordinated Notes issued by Company pursuant to the Indenture dated as of March 26, 1997 between Company and PNC Bank, as trustee (the "SENIOR SUBORDINATED NOTES"); provided that prior to entering into the guaranties set forth in (A) and (B) above, Homegate shall execute and deliver to Agent a Subsidiary Guaranty in the form attached hereto as Exhibit I, together with an opinion of counsel to the effect that such Subsidiary Guaranty has been duly executed and delivered by, and is valid and binding on, Homegate; and (d) subsection 6.3 of the Credit Agreement to the extent and only to the extent necessary to permit Company to make a capital contribution to Homegate following the consummation of the Homegate Merger, in an amount equal to the amount then outstanding under the Interim Loan Agreement but in no event to exceed $65,000,000 plus any capitalized and accrued interest. SECTION 3. LIMITATION OF WAIVER Without limiting the generality of the provisions of subsection 8.6 of the Credit Agreement, the waiver set forth above shall be limited precisely as written and relates solely to the noncompliance by Company with the provisions of subsections 6.1, 6.3, 6.4, 6.7 and 6.14(i) of the Credit Agreement in the manner and to the extent described above, and nothing in this Waiver shall be deemed to: 6 7 (a) constitute a waiver of compliance by Company with respect to (i) subsections 6.1, 6.3, 6.4, 6.7 and 6.14(i) of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein; or (b) prejudice any right or remedy that Agent or any Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this Waiver) or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. This Waiver shall constitute a Loan Document. Except as expressly set forth herein, the terms, provisions and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and in all other respects are hereby ratified and confirmed. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce Agent to enter into, and Lenders to approve, this Waiver, Company hereby represents and warrants to Agent and Lenders that after giving effect to this Waiver: (a) as of the date hereof, there exists no Event of Default or Potential Event of Default under the Credit Agreement; (b) all representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date; and (c) as of the date hereof, Company has performed all agreements to be performed on its part as set forth in the Credit Agreement. SECTION 5. COUNTERPARTS; EFFECTIVENESS This Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. 7 8 This Waiver shall become effective as of the date hereof upon (i) the execution of counterparts hereof by Company, Guarantors and Agent and acknowledgment by Lenders holding 100% of the Commitments, (ii) receipt by Agent of a waiver fee of $100,000 from Company for distribution to each Lender in proportion to that Lender's Pro Rata Share of the Commitments, and (iii) receipt by Company and Agent of written or telephonic notification of such execution and authorization of delivery thereof. SECTION 6. GOVERNING LAW THIS WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. [Remainder of page intentionally left blank] 8 9 IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: PRIME HOSPITALITY CORP. By: _________________________ Title: AGENT: BANKERS TRUST COMPANY By: _________________________ Title: S-1 10 ACKNOWLEDGED AND AGREED TO: CREDIT LYONNAIS NEW YORK BRANCH, individually and as Documentation Agent By: ____________________________ Title: MIDLANTIC BANK, NATIONAL ASSOCIATION By: ____________________________ Title: IMPERIAL BANK By: ____________________________ Title: SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION By: ____________________________ Title: SOCIETE GENERALE, SOUTHWEST AGENCY By: ____________________________ Title: S-2 EX-5 4 OPINION OF WILLKIE FARR & GALLAGHER RE: LEGALITY 1 Exhibit 5 October 24, 1997 Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07007 Ladies and Gentlemen: We have acted as counsel to Prime Hospitality Corp., a corporation organized under the laws of the State of Delaware (the "Company"), in connection with the preparation of a registration statement on Form S-4 (the "Registration Statement") relating to the issuance by the Company of 6,513,292 shares (the "Shares") of common stock, par value $0.01 per share, of the Company (the "Common Stock") in connection with the proposed merger of PH Sub Corporation, a wholly owned subsidiary of the Company, with and into Homegate Hospitality, Inc. ("Homegate"), a corporation organized under the laws of the State of Delaware. We have examined copies of the certificate of incorporation and by-laws of the Company, and the amendments thereto, the Registration Statement, all resolutions adopted by the Company's Board of Directors and other records and documents that we have deemed necessary for the purpose of this opinion. We have also examined such other documents, papers, statutes and authorities as we have deemed necessary to form a basis for the opinion hereinafter expressed. In our examination, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. As to various questions of fact material to our opinion, we have relied on statements and certificates of officers and representatives of the Company and public officials. Based on the foregoing, we are of the opinion that the Shares, when duly issued in exchange for the shares of common stock, par value $0.01 of Homegate as described in the Registration Statement, will be duly authorized, validly, issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us in the Proxy Statement-Prospectus included as part of the Registration Statement. Very truly yours, /s/ Willkie Farr & Gallagher EX-8.1 5 OPINION OF WILLKIE FARR & GALLAGHER RE: TAXES 1 EXHIBIT 8.1 [WILLKIE FARR & GALLAGHER LETTERHEAD] October 24, 1997 Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07007 Ladies and Gentlemen: You have requested our opinion with respect to certain federal income tax consequences of the planned merger (the "Merger") of PH Sub Corporation ("Sub"), a wholly-owned subsidiary of Prime Hospitality Corp. ("Prime"), with and into Homegate Hospitality, Inc. ("Homegate") pursuant to an Agreement and Plan of Merger, dated as of July 25, 1997 (the "Merger Agreement"). Defined terms used in the Merger Agreement have the same meaning when used herein, unless otherwise defined herein. In rendering this opinion, we have examined and are relying upon (without any independent investigation or review thereof) the truth and accuracy at all relevant times of the statements, covenants, and representations contained in (i) the Merger Agreement (including all disclosure schedules thereto), (ii) the Proxy Statement-Prospectus, which is included in the registration statement on Form S-4, filed by Prime with the Securities and Exchange Commission on the date hereof (the "Registration Statement") and (iii) the Officers' Certificates dated the date hereof, which were provided to us by each of Prime and Homegate. Any inaccuracy in any of the aforementioned statements, representations, and assumptions or breach of any of the aforementioned covenants could adversely affect our opinion. On the basis of and subject to the foregoing, and subject to the limitations set forth below, it is our opinion that, under presently applicable federal income tax law, the Merger will be treated as a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and Prime, Sub and Homegate will each be a party to that reorganization within the meaning of Section 368(b) of the Code. As a result, the following U.S. federal income tax consequences will occur. 2 Prime Hospitality Corp. October 24, 1997 Page 2 (a) no gain or loss will be recognized by Prime, Sub or Homegate in connection with the Merger; (b) no gain or loss will be recognized by Homegate stockholders upon their exchange of Homegate Common Stock for Prime Common Stock, except that a Homegate stockholder who receives cash proceeds in lieu of a fractional share interest in Prime Common Stock will recognize gain or loss equal to the difference between the amount of cash received and the tax basis allocated to the fractional share interest; (c) the tax basis of the shares of Prime Common Stock received by a Homegate stockholder will be equal to the tax basis of the Homegate Common Stock surrendered in exchange therefor, reduced by any tax basis allocated to a fractional share interest in Prime Common Stock for which cash is received; and (d) the holding period of the shares of Prime Common Stock received by a Homegate stockholder will include the holding period or periods during which the Homegate Common Stock surrendered in exchange therefor was held, provided that such Homegate Common Stock was held as a capital asset by such stockholder within the meaning of Section 1221 of the Code at the Effective Date. Our opinion is based on our interpretation of the Code, applicable Treasury regulations, judicial authority, and administrative rulings and practice, all as in effect as of the date hereof. There can be no assurance that future legislative, judicial or administrative changes or interpretations will not adversely affect the accuracy of the conclusions set forth herein. We do not undertake to advise you as to any such future changes or interpretations unless we are specifically retained to do so. Our opinion will not be binding upon the Internal Revenue Service (the "IRS"), and the IRS will not be precluded from adopting a contrary position. No opinion is expressed as to any matter not specifically addressed above, including, without limitation, the tax consequences of the Merger under any foreign, state or local tax law. Moreover, tax consequences which are different from or in addition to those described herein may apply to holders of Homegate Common Stock who are subject to special treatment 3 Prime Hospitality Corp. October 24, 1997 Page 3 under the U.S. federal income tax laws, such as persons who acquired their shares in compensatory transactions in exchange for services rendered. If the IRS successfully challenged the status of the Merger as a reorganization, a holder of Homegate Common Stock would recognize gain or loss in an amount equal to the difference between the stockholder's tax basis in his or her shares and the fair market value, as of the Effective Date, of Prime Common Stock received in exchange therefor. In such event, the stockholder's tax basis in Prime Common Stock so received would be equal to its fair market value as of the Effective Date and the holding period for such stock would begin on the day after the Effective Date. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. This opinion is being delivered to you solely for that purpose, and may be relied upon by Homegate as provided in the Registration Statement. It may not be relied upon or used for any other purpose and may not otherwise be distributed or made available to anyone without our prior written consent. Very truly yours, /s/ Willkie Farr & Gallagher EX-8.2 6 OPINION OF VINSON & ELKINS, L.L.P. RE: TAXES 1 Exhibit 8.2 [VINSON & ELKINS L.L.P.] October 24, 1997 Homegate Hospitality, Inc. 111 Congress Avenue, Suite 2600 Austin, Texas 78701 Gentlemen: You have requested our opinion with respect to certain federal income tax consequences of the planned merger (the "Merger") of PH Sub Corporation ("Sub"), a wholly-owned subsidiary of Prime Hospitality Corp. ("Prime"), with and into Homegate Hospitality, Inc. ("Homegate") pursuant to an Agreement and Plan of Merger dated July 25, 1997 (the "Merger Agreement"). Defined terms used in the Merger Agreement have the same meaning when used herein, unless otherwise defined herein. In rendering this opinion, we have examined and are relying upon (without any independent investigation or review thereof) the truth and accuracy at all relevant times of the statements, covenants, and representations contained in (i) the Merger Agreement (including all disclosure schedules thereto), (ii) the Proxy Statement/Prospectus (which was included in the Registration Statement filed by Prime with the Securities and Exchange Commission (the "Registration Statement) on the date hereof), and (iii) the Officers' Certificates dated the date hereof which were provided to us by Homegate and Prime. Any inaccuracy in any of the aforementioned statements, representations, and assumptions or breach of any of the aforementioned covenants could adversely affect our opinion. On the basis of and subject to the foregoing, and subject to the limitations set forth below, it is our opinion that, under presently applicable federal income tax law, the Merger will be treated as a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code") and Homegate, Sub and Prime will each be a party to that reorganization within the meaning of Section 368(b) of the Code. As a result, the following U.S. federal income tax consequences will occur: (a) no gain or loss will be recognized by Homegate, Sub or Prime in connection with the Merger; 2 (b) no gain or loss will be recognized by Homegate stockholders upon their exchange of Homegate Common Stock for Prime Common Stock, except that a Homegate stockholder who receives cash proceeds in lieu of a fractional share interest in Prime Common Stock will recognize gain or loss equal to the difference between the amount of cash received and the tax basis allocated to the fractional share interest; (c) the tax basis of the shares of Prime Common Stock received by a Homegate stockholder will be equal to the tax basis of the Homegate Common Stock surrendered in exchange therefor, reduced by any tax basis allocated to a fractional share interest in Prime Common Stock for which cash is received; and (d) the holding period of the shares of Prime Common Stock received by a Homegate stockholder will include the holding period or periods during which the Homegate Common Stock surrendered in exchange therefor was held, provided that such Homegate Common Stock was held as a capital asset by such stockholder within the meaning of Section 1221 of the Code at the Effective Date. Our opinion is based on our interpretation of the Code, applicable Treasury regulations, judicial authority, and administrative rulings and practice, all as in effect as of the date hereof. There can be no assurance that future legislative, judicial or administrative changes or interpretations will not adversely affect the accuracy of the conclusions set forth herein. We do not undertake to advise you as to any such future changes or interpretations unless we are specifically retained to do so. Our opinion will not be binding upon the Internal Revenue Service (the "IRS"), and the IRS will not be precluded from adopting a contrary position. No opinion is expressed as to any matter not specifically addressed above, including, without limitation, the tax consequences of the Merger under any foreign, state, or local tax law. Moreover, tax consequences which are different from or in addition to those described herein may apply to holders of Homegate Common Stock who are subject to special treatment under the U.S. federal income tax laws, such as persons who acquired their shares in compensatory transactions in exchange for services rendered. If the IRS successfully challenged the status of the Merger as a reorganization, a holder of Homegate Common Stock would recognize gain or loss in an amount equal to the difference between the stockholder's tax basis in his or her shares and the fair market value, as of the Effective Time, of Prime Common Stock received in exchange therefor. In such event, the stockholder's tax basis in Prime Common Stock so received would be equal to its fair market value as of the Effective Time and the holding period for such stock would begin on the day after the Effective Time. -2- 3 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. This opinion is being delivered to you solely for that purpose, and may be relied upon by Homegate as provided in the Registration Statement. It may not be relied upon or used for any other purpose and may not otherwise be distributed or made available to anyone without our prior written consent. Very truly yours, /s/ Vinson & Elkins L.L.P. -------------------------------- Vinson & Elkins L.L.P. -3- EX-10.23 7 PURCHASE AND SALE AGREEMENT 1 Exhibit 10.23 PURCHASE AND SALE AGREEMENT BETWEEN PRIME HOSPITALITY CORP., as Seller, and EQUITY INNS PARTNERSHIP, L.P., as Purchaser September 22, 1997 2 TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS............................................................................................1 1.2. Agreement................................................................................................1 1.3. Allocable Purchase Price.................................................................................1 1.4. Assets ..................................................................................................2 1.5. Business Day.............................................................................................2 1.6. Closing .................................................................................................2 1.7. Closing Date.............................................................................................2 1.8. Code ....................................................................................................2 1.9. Contracts................................................................................................2 1.10. Counter-Offer............................................................................................2 1.11. Defective Property.......................................................................................2 1.12. Deposit..................................................................................................2 1.13. Documents................................................................................................2 1.14. Encumbrance..............................................................................................2 1.15. Escrow Agent.............................................................................................2 1.16. Escrow Agreement.........................................................................................2 1.17. FF&E ....................................................................................................3 1.18. First Offer Hotels.......................................................................................3 1.19. First Offer Response Period..............................................................................3 1.20. Hotel ...................................................................................................3 1.21. Improvements.............................................................................................3 1.22. Intangible Property......................................................................................3 1.23. Inventory................................................................................................3 1.24. Lease ...................................................................................................3 1.25. LP Agreement.............................................................................................4 1.26. LP Units.................................................................................................4 1.27. Option Hotels............................................................................................4 1.28. Option Response Period...................................................................................4 1.29. Notice of Sale...........................................................................................4 1.30. Offer Period.............................................................................................4 1.31. Option Period............................................................................................4 1.32. Permitted Encumbrances...................................................................................4 1.33. Properties...............................................................................................4 1.34. Purchase Price...........................................................................................4 1.35. Purchaser................................................................................................4 1.36. Real Property............................................................................................4 1.37. Registration Rights Agreement............................................................................5 1.38. REIT ....................................................................................................5 1.39. Review Period............................................................................................5 1.40. Seller ..................................................................................................5 1.41. Seller Group.............................................................................................5 1.42. Seller's knowledge.......................................................................................5 1.43. Surveys..................................................................................................5 1.44. Tenant ..................................................................................................5 1.45. Title Commitments........................................................................................5 1.46. Title Company............................................................................................5
(i) 3
SECTION 2. PURCHASE AND SALE; DILIGENCE...........................................................................5 2.1. Purchase and Sale.........................................................................................5 2.2. Deposit...................................................................................................5 2.3. Diligence Inspections.....................................................................................6 2.4. Casualty; Condemnation....................................................................................7 2.5. Title Matters.............................................................................................8 2.6. Survey Matters............................................................................................9 2.7. Tax Free Exchange........................................................................................10 2.8. Allocations; Radius Restrictions.........................................................................10 SECTION 3. CLOSING; PURCHASE PRICE...............................................................................10 3.1. Closing .................................................................................................10 3.2. Purchase Price...........................................................................................10 SECTION 4. CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE.........................................................12 4.1. Closing Documents........................................................................................12 4.2. Condition of Properties..................................................................................13 4.3. Title Policies...........................................................................................14 4.4. Opinions of Counsel......................................................................................14 4.5. No PIP Requirement at Closing............................................................................14 4.6. Representations..........................................................................................14 SECTION 5. CONDITIONS TO SELLER'S OBLIGATION TO CLOSE............................................................14 5.1. Purchase Price...........................................................................................14 5.2. Closing Documents........................................................................................14 5.3. Opinion of Counsel.......................................................................................15 5.4. Representations..........................................................................................15 5.5. Amendment to LP Agreement................................................................................15 SECTION 6. REPRESENTATIONS AND WARRANTIES OF SELLER..............................................................15 6.1. Status and Authority of Seller...........................................................................15 6.2. Action of Seller.........................................................................................15 6.3. No Violations of Agreements..............................................................................15 6.4. Litigation...............................................................................................16 6.5. Existing Leases, Agreements, Etc.........................................................................16 6.6. Utilities, Etc...........................................................................................16 6.7. Compliance With Law......................................................................................16 6.8. Taxes ...................................................................................................17 6.9. Not A Foreign Person.....................................................................................17 6.10. Hazardous Substances....................................................................................17 6.11. Insurance...............................................................................................17 6.12. Ownership...............................................................................................17 SECTION 7. REPRESENTATIONS AND WARRANTIES OF PURCHASER...........................................................18 7.1. Status and Authority of Purchaser........................................................................18 7.2. Action of Purchaser......................................................................................18 7.3. No Violations of Agreements..............................................................................19 7.4. Litigation...............................................................................................19
(ii) 4
7.5. No Conflicts.............................................................................................19 7.6. REIT Status, Organization................................................................................19 7.7. REIT Filings.............................................................................................19 SECTION 8. COVENANTS OF SELLER AND PURCHASER.....................................................................20 8.1. Covenants of Seller......................................................................................20 8.2. Covenants of Purchaser...................................................................................20 SECTION 9. CLOSING COSTS.........................................................................................20 9.1. Closing Costs............................................................................................20 SECTION 10. DEFAULT .............................................................................................21 10.1. Default by Seller.......................................................................................21 10.2. Default by Purchaser....................................................................................21 SECTION 11. RIGHT OF FIRST OFFER; COMMITMENT TO SELL.............................................................21 11.1. Right of First Offer....................................................................................21 11.2. Commitment to Sell......................................................................................24 11.3. General Provisions......................................................................................25 SECTION 12. MISCELLANEOUS........................................................................................27 12.1. Agreement to Indemnify..................................................................................27 12.2. Brokerage Commissions...................................................................................27 12.3. Publicity...............................................................................................28 12.4. Notices.................................................................................................28 12.5. Waivers, Etc............................................................................................29 12.6. Assignment; Successors and Assigns......................................................................30 12.7. Severability............................................................................................30 12.8. Counterparts, Etc.......................................................................................30 12.9. Governing Law...........................................................................................31 12.10. Performance on Business Days...........................................................................31 12.11. Attorneys' Fees........................................................................................31 12.12. Section and Other Headings.............................................................................31 12.13. No Oral Modifications..................................................................................31
Exhibit A - The Properties Exhibits B-1-10 - Legal Descriptions Exhibit C - Form of Lease Exhibit D - Exceptions to Seller Representations and Warranties Exhibit E - Schedule of Agreements Exhibit F - Form of Redemption and Registration Rights Agreement
(iii) 5 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT is made as of the 22nd day of September, 1997, between PRIME HOSPITALITY CORP., a Delaware corporation ("Seller"), as seller, and Equity Inns Partnership, L.P., a Tennessee limited partnership ("Purchaser"), as purchaser. WITNESSETH: WHEREAS, Seller is the owner and holder of the Properties; and WHEREAS, Purchaser desires to purchase the Properties, as more fully set forth below; and WHEREAS, Seller is willing to sell the Properties to Purchaser, subject to and upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Seller and Purchaser hereby agree as follows: SECTION 1. DEFINITIONS. Capitalized terms used in this Agreement shall have the meanings set forth below or in the Section of this Agreement referred to below: 1.1. Affiliate: The term "Affiliate" of an entity shall mean (a) an entity that, directly or indirectly, controls or is controlled by or is under common control with such entity, (b) any other entity that owns, beneficially, directly or indirectly, more than fifty percent (50%) of the outstanding capital stock, shares or equity interests of such entity, or (c) any officer, director, employee, partner or trustee of such entity or any person or entity controlling, controlled by or under common control with such entity (excluding trustees and entities serving in similar capacities who are not otherwise an Affiliate of such entities). 1.2. "Agreement" shall mean this Purchase and Sale Agreement, together with Exhibits A through F attached hereto, as it and they may be amended from time to time as herein provided. 1.3. "Allocable Purchase Price" shall mean, with respect to any of the Properties, the applicable amount set forth on Exhibit A hereto, it being agreed that, prior to the expiration of the Review Period, Seller and Purchaser shall, on request of the other party, use good faith efforts to agree to a reasonable reallocation of such specified amounts. 6 1.4. "Assets" shall mean, with respect to any Hotel, collectively, all of the Real Property, the FF&E, the Contracts, the Documents, the Improvements and the Intangible Property owned by Seller in connection with or relating to such Hotel. 1.5. "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which banking institutions in the State of New York are authorized by law or executive action to close. 1.6. "Closing" shall have the meaning given such term in Section 3.1. 1.7. "Closing Date" shall have the meaning given such term in Section 3.1. 1.8. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the treasury regulations promulgated thereunder. 1.9. "Contracts" shall mean, with respect to any Property, all service contracts, equipment leases, booking agreements and other arrangements or agreements to which Seller is a party affecting the ownership, repair, maintenance, management, leasing or operation of such Property, to the extent Seller's interest therein is assignable or transferable. 1.10. "Counter-Offer" shall have the meaning given such term in Section 11.1. 1.11. "Defective Property" shall mean any Property which (i) has been condemned in whole or in part, or (ii) by reason of damage by fire, vandalism, acts of God or other casualty or cause, has suffered damage such that expenditures equal to or greater than $500,000 (as such cost is determined by an architect or engineer selected by Seller and reasonably satisfactory to Purchaser) shall be required in order to restore such Property into substantially the same condition as existing prior to such damage. 1.12. "Deposit" shall have the meaning given such term in Section 2.2. 1.13. "Documents" shall mean, with respect to any Property, all books, records and files relating to the leasing, maintenance, management or operation of such Property. 1.14. "Encumbrance" shall have the meaning given such term in Section 11.3. 1.15. "Escrow Agent" shall mean the Title Company. 1.16. "Escrow Agreement" shall mean the escrow agreement to be entered into among Purchaser, Seller and Escrow Agent simultaneously herewith. -2- 7 1.17. "FF&E " shall mean, with respect to any Property, all appliances, machinery, devices, fixtures, appurtenances, equipment, furniture, furnishings and articles of tangible personal property of every kind and nature whatsoever owned by Seller and located in or at, or used exclusively in connection with the ownership, operation or maintenance of such Property. 1.18. "First Offer Hotels" shall have the meaning given such term in Section 11.1. 1.19. "First Offer Response Period" shall have the meaning given such term in Section 11.1. 1.20. "Hotel" shall mean each hotel located at the properties identified on Exhibit A, the legal descriptions of which are set forth on Exhibits B-1 through B-10. 1.21. "Improvements" shall mean, with respect to any Property, all buildings, fixtures, walls, fences, landscaping and other structures and improvements situated on, affixed or appurtenant to the Real Property with respect to such Property. 1.22. "Intangible Property" shall mean, with respect to any Property, all transferable or assignable permits, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, the Contracts, telephone exchange numbers identified with such Property held by Seller and all other transferable intangible property, miscellaneous rights, benefits and privileges of any kind or character with respect to such Property held by Seller, except (a) to the extent held by or transferred to the Tenant under the Lease and (b) for all trademarks, trade names, copyrights, patents or technical processes, including, without limitation, any "AmeriSuites" brand name, logos and designs, owned or used by Seller with respect to such Property. 1.23. "Inventory " shall mean all inventory located at the Hotels, including, without limitation, all mattresses, pillows, bed linens, towels, powder goods, soaps, cleaning supplies and such other supplies, together with any food inventory such as cereal, breakfast rolls, coffee, which shall be more particularly described in the schedule of Inventory approved by Purchaser and delivered at Closing by Seller, and which shall be at a minimum in amounts sufficient to comply with the requirements of the applicable franchise agreement. 1.24. "Lease" shall mean, collectively, all of the leases to be entered into between Purchaser, as landlord, and the Tenant, as tenant, with respect to each of the Properties, each substantially in the form attached hereto as Exhibit C. -3- 8 1.25. "LP Agreement" shall have the meaning given such term in Section 3.2. 1.26. "LP Units" shall have the meaning given such term in Section 3.2. 1.27. "Option Hotels" shall have the meaning given such term in Section 11.2. 1.28. "Option Response Period" shall have the meaning given such term in Section 11.2. 1.29. "Notice of Sale" shall have the meaning given such term in Section 11.2. 1.30. "Offer Period" shall have the meaning given such term in Section 11.1. 1.31. "Option Period" shall have the meaning given such term in Section 11.3. 1.32. "Permitted Encumbrances" shall mean, with respect to any Property, (a) liens for taxes, assessments and governmental charges with respect to such Property not yet due and payable or due and payable but not yet delinquent or as to which adequate reserves are provided therefor; (b) applicable zoning regulations and ordinances provided the same do not prohibit or impair in any material respect the use of such Property as a hotel as currently operated and constructed; (c) such other nonmonetary encumbrances as do not, in Purchaser's reasonable opinion, impair marketability and do not materially interfere with the use of such Property as a functioning hotel as currently operated and constructed; (d) such other nonmonetary encumbrances with respect to such Property which are not objected to by Purchaser in accordance with Sections 2.5 and 2.6; and (e) such exceptions or matters, as the case may be, otherwise accepted by Purchaser pursuant to Sections 2.5 and/or 2.6. 1.33. "Properties" shall mean all of the Assets relating to the properties identified on Exhibit A, the legal descriptions of which are set forth in Exhibits B-1 through B-10. 1.34. "Purchase Price" shall have the meaning given such term in Section 3.2. 1.35. "Purchaser" shall have the meaning given such term in the preamble to this Agreement. 1.36. "Real Property" shall mean the real property described in the applicable Exhibit B-1 through B-10, together with all easements, rights of way, privileges, licenses and appurtenances which Seller may now own with respect thereto. -4- 9 1.37. "Registration Rights Agreement" shall mean that certain Redemption and Registration Rights Agreement, substantially in the form of Exhibit F, to be entered into by Purchaser, the REIT, the general partner of Purchaser and Seller, as of the Closing Date. 1.38. "REIT" shall have the meaning given such term in Section 3.2. 1.39. "Review Period" shall mean the period commencing on the date of this Agreement and expiring at 5 p.m., Eastern Standard Time, on November 7, 1997. 1.40. "Seller" shall have the meaning given such term in the preamble to this Agreement. 1.41. "Seller Group shall mean Seller and any Affiliate of Seller that is a parent or direct or indirect wholly-owned subsidiary of Seller. 1.42. "Seller's knowledge" shall mean the actual knowledge of Joseph Bernadino, John M. Elwood, David Simon and Richard Szymanski. 1.43. "Surveys" shall have the meaning given such term in Section 2.5. 1.44. "Tenant" shall mean a direct or indirect wholly-owned subsidiary of Seller to be formed prior to the Closing. 1.45. "Title Commitments" shall have the meaning given such term in Section 2.5. 1.46. "Title Company" shall mean Chicago Title Insurance Company or such other title insurance company or companies as shall have been reasonably approved by Purchaser and Seller. SECTION 2. PURCHASE AND SALE; DILIGENCE. 2.1. Purchase and Sale. In consideration of the mutual covenants herein contained, Purchaser hereby agrees to purchase from Seller, and Seller hereby agrees to sell to Purchaser, all of Seller's right, title and interest in and to the Properties for the Purchase Price, subject to and in accordance with the terms and conditions of this Agreement. 2.2. Deposit. Purchaser shall deposit the sum of $4,000,000 (the "Deposit") with the Escrow Agent, which amount shall be payable as follows: (i) $250,000 within three Business Days after execution and delivery of this Agreement, and (ii) $3,750,000 within three Business Days after expiration of the Review Period. The Deposit shall be held in an interest-bearing account pursuant to the terms of the Escrow Agreement, which agreement shall be duly executed and delivered by the parties -5- 10 hereto simultaneously herewith. If this Agreement shall terminate with respect to all of the Properties pursuant to Section 2.3 or 10.1, the Deposit, together with all interest accrued thereon, shall be returned to Purchaser. If this Agreement shall terminate pursuant to Section 10.2, the Deposit, together with all interest accrued thereon, shall be paid to Seller. If the Closing shall occur, the Deposit shall be credited toward the Purchase Price, pursuant to Section 3.2, and the interest earned on the Deposit shall be paid to Purchaser. 2.3. Diligence Inspections. (a) During the Review Period, Seller shall permit Purchaser and its representatives to inspect the Properties and the Improvements (including, without limitation, all roofs, electric, mechanical and structural elements, and HVAC systems therein), to perform due diligence, soil analysis and environmental investigations, to examine the books of account and records of Seller with respect to the Properties, including, without limitation, all leases and agreements affecting the Properties, and make copies thereof, at such reasonable times as Purchaser or its representatives may request by notice to Seller. Seller shall, in connection with Purchaser's due diligence, provide Purchaser with copies, to the extent available, of the form of franchise guidelines and franchise agreement for "AmeriSuites," which form of franchise agreement shall be substantially similar to (i) the form which Tenant shall enter into in connection with the Closing and (ii) (subject to any changes made by franchisor to such form on a non-discriminatory basis) the form to be employed with respect to any First Offer Hotels and Option Hotels. To the extent that, in connection with such investigation, Purchaser, its agents, representatives or contractors, damages or disturbs any of the Real Property or the Improvements located thereon, Purchaser shall return the same to substantially the same condition which existed immediately prior to such damage or disturbance. Neither Purchaser nor any of its agents, representatives or contractors shall have any right whatsoever to alter the condition of the Property or any portion thereof without the prior written consent of Seller. In no event shall any such inspection include any drilling into or under the surface of the Property, soil sampling, water sampling or similar activities commonly known as a "Phase II environmental study" without the prior written consent of Seller (but shall include such inspections customarily performed during a "Phase I environmental study"). In the event that the transactions contemplated by this Agreement are not closed and consummated for any reason, Purchaser shall, on request by Seller, deliver to Seller all tests, reports and inspections of the Property made and conducted by Purchaser or for its benefit or any other documents or information (including title commitments, UCC financing statement search reports, title documents, surveys, zoning reports, environmental audits, structural engineering reports, appraisals and the like), which Purchaser has received pursuant to this Agreement; provided, however, that Seller shall reimburse Purchaser's out-of-pocket expenses for any of the foregoing materials (other than materials -6- 11 delivered by Seller or its agents or representatives to Purchaser) which it requests that Purchaser so deliver. Purchaser shall indemnify, defend and hold harmless Seller from and against any and all expense, loss or damage which Seller may incur as a result of any act or omission of Purchaser or its representatives, agents or contractors in connection with such examinations and inspections, other than to the extent that any expense, loss or damage arises from any gross negligence or willful misconduct of Seller. The provisions of this Section 2.3 shall survive the termination of this Agreement and the Closing. (b) If Purchaser notifies Seller in writing prior to the expiration of the Review Period that Purchaser elects to terminate this Agreement (for any reason or for no reason in the sole discretion of Purchaser), then this Agreement shall automatically terminate, the Deposit (and all interest thereon) shall be returned to Purchaser, and, upon return of the Deposit (and all interest thereon), Purchaser and Seller shall have no further rights, liabilities or obligations hereunder (except those that expressly survive a termination of this Agreement). 2.4 Casualty; Condemnation.(b)If, prior to the Closing, (i) any Property suffers a casualty or partial condemnation which would cause such Property to become a Defective Property and (ii) such Property is not, prior to the Closing, restored to a condition substantially the same as the condition thereof immediately prior to such casualty or condemnation, either Purchaser or Seller may, on notice to the other given prior to the Closing Date, terminate this Agreement with respect to such Defective Property, in which event Purchaser shall acquire all of the Properties other than such Defective Property, and the Purchase Price shall be reduced by the Allocable Purchase Price of such Defective Property. Promptly upon learning of the same, Seller covenants and agrees to provide Purchaser with prompt written notice of any casualty or condemnation affecting any Property. (b) If, prior to the Closing, any Property shall be condemned in its entirety, this Agreement shall automatically terminate with respect to such Defective Property, in which event Purchaser shall acquire all of the Properties other than such Defective Property, and the Purchase Price shall be reduced by the Allocable Purchase Price of such Defective Property. (c) If neither Purchaser nor Seller shall elect to terminate this Agreement with respect to a Defective Property pursuant to Paragraph (a) of this Section 2.4, Seller agrees (i) in the case of a casualty loss, to assign to Purchaser at Closing its rights to any insurance proceeds with respect to such loss, pay over to Purchaser any such proceeds already received and give Purchaser a credit against the Purchase Price in the amount of any deductible or uninsured loss, or (ii) in the case of a condemnation, to assign to Purchaser at Closing its rights to any compensation in connection with such condemnation and pay over to -7- 12 Purchaser any such compensation already received, and, in either such event, Purchaser shall acquire such Defective Property as provided herein. (d) If any Property shall suffer a casualty loss which shall not render the Property a Defective Property, Seller shall assign to Purchaser at Closing its rights to any insurance proceeds with respect to such loss, pay over to Purchaser any such proceeds already received and give Purchaser a credit against the Purchase Price in the amount of any deductible or uninsured loss, and Purchaser shall acquire such Property as provided herein. 2.5. Title Matters. Prior to the date of this Agreement, Purchaser has ordered from the Title Company and directed the Title Company promptly to deliver to Purchaser a preliminary title commitment, having an effective date after the date of this Agreement, for an ALTA (or such other form reasonably approved by Purchaser) owner's policy of title insurance with respect to each of the Properties, together with complete and legible copies of all instruments and documents referred to as exceptions to title (collectively, the "Title Commitments"). As soon as reasonably practicable, but in no event later than the expiration of the Review Period, Purchaser shall give Seller notice of any title exceptions (other than Permitted Encumbrances) which adversely affect the present use or operation of any Property in any material respect and as to which Purchaser reasonably objects. If, for any reason, Seller is unable or unwilling to take such actions as may be required to cause such exceptions to be removed from the Title Commitments (provided, however, that (i) if such exceptions to title consist of mortgages, deeds of trust, mechanics' liens, tax liens, other liens or charges which are capable of computation as a fixed sum, Seller shall pay and discharge such exceptions at or prior to Closing from the cash proceeds of sale, or otherwise, or, with respect to tax liens, contest such liens in accordance with the provisions of the Lease, and (ii) if such exceptions to title may be removed at a cost to Seller of not more than $25,000 in the aggregate with respect to any single Property, and such removal may be reasonably effectuated by Seller no later than the Closing Date, Seller shall cause such exceptions to be removed), Seller shall give Purchaser notice thereof; it being understood and agreed that, provided that Purchaser shall have timely given notice of such objection to title, the failure of Seller to give such notice as to its inability or unwillingness to cause the removal of any exceptions shall be deemed an election by Seller to remedy such matters. If Seller shall be unable or unwilling to remove any such title defects to which Purchaser has reasonably objected, Purchaser may elect (i) to terminate this Agreement with respect to the affected Property, in which event, the Purchase Price shall be reduced by the Allocable Purchase Price of the affected Properties and this Agreement shall be of no further force and effect with respect to the affected -8- 13 Properties or (ii) to consummate the transactions contemplated hereby, notwithstanding such title defect, without any abatement or reduction in the Purchase Price on account thereof. Purchaser shall make any such election by written notice to Seller given on or prior to the fifth Business Day after Seller's notice of its unwillingness or inability to cure such defect, and time shall be of the essence with respect to the giving of such notice by Purchaser. Failure of Purchaser to give such notice shall be deemed an election by Purchaser to proceed in accordance with clause (ii) above, and such exception shall be a Permitted Encumbrance. 2.6. Survey Matters. Purchaser shall, promptly upon the execution hereof, arrange for the preparation of a survey with respect to each of the Properties (the "Surveys") by a licensed surveyor in the jurisdiction in which each such Property is located, which (i) contains an accurate legal description of the applicable Property, (ii) shows the location, dimension and description (including applicable recording information) of all utilities, easements, encroachments and other physical matters affecting such Property, the number of striped parking spaces located thereon and all applicable building set-back lines, (iii) states whether the applicable Property is located within a 100-year flood plain and (iv) is certified to Purchaser and the Title Company and such other persons as shall have been requested by Purchaser or Seller. As soon as reasonably practicable, but in no event later than the expiration of the Review Period, Purchaser shall give Seller notice of any matters shown thereon (other than Permitted Encumbrances) which adversely affect any such Property in any material respect and as to which Purchaser reasonably objects. If, for any reason, Seller is unwilling or unable to take such actions as may be required to remedy the objectionable matters, Seller shall give Purchaser prompt notice thereof. If Seller shall be unwilling or unable to remove any such survey defect to which Purchaser has reasonably objected, Purchaser may elect (i) to terminate this Agreement with respect to the affected Property, in which event, the Purchase Price shall be reduced by the Allocable Purchase Price of the affected Properties and this Agreement shall terminate and be of no further force or effect with respect to the affected Properties or (ii) to consummate the transactions contemplated hereby, notwithstanding such defect, without any abatement or reduction in the Purchase Price on account thereof. Purchaser shall make any such election by written notice to Seller given on or prior to the fifth Business Day after Seller's notice of its inability to cure such defect and time shall be of the essence with respect to the giving of such notice by Purchaser. Failure of Purchaser to give such notice shall be deemed an election by Purchaser to proceed in accordance with clause (ii) above and such matter shall be a Permitted Encumbrance. -9- 14 2.7. Tax Free Exchange. (a) Notwithstanding anything to the contrary set forth herein, Seller may take such steps as shall be necessary to qualify the sale of the Properties or any of them under Section 1031 of the Code, including the use and assignment of this Agreement to a "qualified intermediary" within the meaning of Treas. Regs. Section 1.1031(k)-1(g)(4), or the use of any other multiparty arrangement described in Treas. Regs. Section 1.1031(k)-1(g). Purchaser shall use commercially reasonable efforts to cooperate (which cooperation shall be at Seller's expense) in so structuring a Section 1031 exchange, if so desired by Seller, provided that such structuring shall not materially adversely affect Purchaser's rights hereunder. (b) Purchaser shall not be required to incur additional liability by reason of the provisions of this Section 2.7 (unless Seller shall first agree to indemnify Purchaser with respect thereto). (c) To effectuate the purposes of this Section 2.7, Purchaser hereby agrees, on the request of Seller, to enter into two separate purchase and sale agreements, each in the same form, mutatis mutandis, as this Agreement, which agreements shall amend and restate this Agreement so as to convey all of the Properties to be included in a Section 1031 exchange in one such agreement, and all of the other Properties in the other such agreement, which latter agreement shall include, as a portion of the purchase price thereunder, all of the LP Units. (d) Purchaser and its agents and attorneys do not guarantee any specific tax treatment by reason of the provisions of this Section 2.7. 2.8. Allocations; Radius Restrictions. Seller and Purchaser shall, during the Review Period, use good faith efforts to agree (i) to a reasonable allocation of the Purchase Price between the real property and personal property included in the Properties and (ii) to radius distances for non-compete restrictions with respect to each of the Properties, as set forth in Section 7.2(f) of the Lease. SECTION 3. CLOSING; PURCHASE PRICE. 3.1. Closing. The purchase and sale of the Properties shall be consummated at a closing (the "Closing") to be held at the offices of Hunton & Williams, 200 Park Avenue, 43rd Floor, New York, New York 10166-0136, or at such other location as Seller and Purchaser may agree, at 10:00 a.m. local time, on December 22, 1997 (the "Closing Date"). 3.2. Purchase Price. (a) At the Closing, Purchaser shall pay to Seller for the Properties a purchase price (the "Purchase Price") in the amount of Eighty-Six Million Three Hundred Ten Thousand Nine Hundred Thirty-Six ($86,310,936) -10- 15 Dollars (subject to customary prorations and adjustments), except that Purchaser shall receive a credit against the Purchase Price in the amount of the Deposit. (b) The Purchase Price shall be payable by wire transfer of immediately available funds on the Closing Date to an account or accounts to be designated by Seller prior to the Closing, subject to the terms of paragraph (c) of this Section 3.2. (c) Purchaser shall pay to Seller a portion of the Purchase Price equal to $8,600,000 in the form of units of limited partnership interest in Purchaser (the "LP Units"). The cash equivalent of an LP Unit, for which Purchaser shall receive a credit against the Purchase Price, shall be equal to the average of the last reported sale prices of the common stock of Equity Inns, Inc. (the "REIT"), the sole shareholder of the general partner of the Purchaser, as reported on the New York Stock Exchange on the ten (10) Business Days immediately preceding the date hereof. Seller may not distribute or otherwise assign, transfer or convey any LP Unit to any person or entity except in accordance with the terms of that certain Third Amended and Restated Agreement of Limited Partnership of Equity Inns Partnership, L.P., dated as of June 25, 1997 (the "LP Agreement"), without the prior written consent of the general partner of Purchaser. Any purported attempt to transfer, assign or convey the LP Units, other than in accordance with the preceding sentence, shall be null and void and of no effect. To effectuate this section, Seller and any proposed transferee of the LP Units will execute and deliver to Purchaser (i) promptly upon request by Purchaser, such investor response forms contained with any private placement memorandum delivered to Seller on behalf of Purchaser, (ii) at the closing of such proposed transfer, an executed counterpart of the LP Agreement and Registration Rights Agreement and (iii) any other document reasonably requested by Purchaser in connection therewith. Notwithstanding the foregoing, Seller shall have the right to redeem the LP Units for common stock of the REIT and to sell or otherwise transfer such common stock in accordance with the terms of the LP Agreement and the Registration Rights Agreement. Any purported attempt to sell, transfer, assign or convey such common stock other than in accordance with the preceding shall be null and void and of no effect. (d) Seller shall have the right, at any time and in its sole discretion, to allocate the portion of the Purchase Price which is to be paid in LP Units among the Allocable Purchase Prices with respect to any of the Properties. Notwithstanding the foregoing, in the event that, prior to the Closing, this Agreement shall be terminated with respect to a Defective Property pursuant to Section 2.4, if Seller shall elect to allocate any of the LP Units to such Defective Property, Purchaser shall have the right to terminate this Agreement, in which event the Deposit (and all -11- 16 interest thereon) shall be returned to Purchaser, and, upon return of the Deposit (and all interest thereon), Purchaser and Seller shall have no further rights, liabilities or obligations hereunder (except those that expressly survive a termination of this Agreement). (e) Without limiting the fiduciary duties of the general partner of Purchaser to the limited partners of Purchaser pursuant to the LP Agreement and under applicable law, the general partner of Purchaser shall not, without the prior written consent of Seller, permit any amendment to the LP Agreement set forth in Sections 11(a) through (d) thereof that would discriminate against Seller relative to the rights of the other holders of LP Units. (f) The provisions of Sections 3.2(c) and (e) shall survive the Closing. SECTION 4. CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE. The obligation of Purchaser to acquire the Properties on the Closing Date shall be subject to the satisfaction of the following conditions precedent on and as of the Closing Date, which Seller covenants to use commercially reasonable efforts to fulfill: 4.1. Closing Documents. Seller shall have delivered to Purchaser: (a) Good and sufficient special warranty deeds, with legal descriptions based on the deeds by which Seller received title to the Properties, and quitclaim deeds with legal descriptions based on the Surveys, if the Surveys indicate any differing legal descriptions, all in forms as shall be customary in the various jurisdictions in which the Properties are located, with respect to all of the Properties, in proper statutory form for recording, duly executed and acknowledged by Seller, conveying fee simple title to the applicable Properties, free from all liens and encumbrances other than the Permitted Encumbrances; (b) A bill of sale and assignment agreement, in form and substance reasonably satisfactory to Seller and Purchaser, duly executed and acknowledged by Seller, with respect to all of Seller's right, title and interest in, to and under the FF&E, the Documents and the Intangible Property with respect to the Properties; (c) A bill of sale and assignment agreement, in form and substance reasonably satisfactory to Seller, Purchaser and Tenant, duly executed and acknowledged by Seller, to Tenant, with respect to all of Seller's right, title and interest in, to and under the Inventory and the Contracts, with respect to the Properties; -12- 17 (d) Duly executed and acknowledged memoranda of lease, setting forth the material terms of each Lease, in form and substance reasonably satisfactory to Seller and Purchaser; (e) Duly executed transfer tax forms, as required by applicable law; (f) Duly executed environmental disclosure forms, as and to the extent required by applicable law; (g) To the extent the same are in Seller's possession, original, fully executed copies of all Contracts pertaining to the Properties; (h) A duly executed copy of the Lease and all other documents and sums required to be delivered by Seller and/or the Tenant pursuant thereto; (i) A duly executed copy of the franchise agreement between the Tenant and the franchisor with respect to each of the Properties; (j) A duly executed copy of the Registration Rights Agreement; (k) Certified copies of all charter documents, applicable corporate resolutions and certificates of incumbency with respect to Seller and the Tenant; (l) an affidavit of Seller in accordance with Section 1445 of the Code and such documentation as shall be required to comply with the reporting requirements of Section 1099-S of the Code; and (m) Such other conveyance documents, certificates, deeds, and other instruments as may be required by this Agreement or as Purchaser or the Title Company may reasonably require to effectuate the transactions contemplated hereunder. 4.2. Condition of Properties. (a) All of the Properties and all Improvements located thereon shall, except as otherwise provided in Section 2.3, be in substantially the same physical condition as on the date of this Agreement, ordinary wear and tear excepted; (b) No material default or event which with the giving of notice and/or lapse of time could constitute a material default shall have occurred and be continuing under any material agreement benefiting or affecting the Properties in any material respect; (c) No action shall be pending or threatened for the condemnation or taking by power of eminent domain of all or any -13- 18 material portion of the Properties which would render any Property a Defective Property; and (d) All material licenses, permits and other authorizations necessary for the current use, occupancy and operation of the Properties shall be in full force and effect in all material respects. 4.3. Title Policies. The Title Company shall be prepared, subject only to payment of the applicable premium, endorsement and related fees and delivery of all conveyance documents in recordable form, to issue title insurance policies to Purchaser, in accordance with Section 2.5, together with such affirmative coverages as Purchaser may reasonably require and shall have been determined by the Title Company as available prior to the expiration of the Review Period. 4.4. Opinions of Counsel. Purchaser shall have received a written opinion from counsel to Seller, in form and substance reasonably satisfactory to Purchaser and Seller's counsel, regarding the organization and authority of Seller and Tenant. 4.5. No PIP Requirement at Closing. There shall be no PIP requirement imposed by the franchisor in connection with the Closing. 4.6. Representations. All representations and warranties made herein by Seller shall be true and correct in all material respects. SECTION 5. CONDITIONS TO SELLER'S OBLIGATION TO CLOSE. The obligation of Seller to convey the Properties on the Closing Date to Purchaser is subject to the satisfaction of the following conditions precedent on and as of the Closing Date, which Purchaser covenants to use commercially reasonable efforts to fulfill: 5.1. Purchase Price. Purchaser shall deliver to Seller the Purchase Price, pursuant to Section 3.1. 5.2. Closing Documents. Purchaser shall have delivered to Seller: (a) Duly executed and acknowledged counterparts of the documents described in Section 4.1 (including, without limitation, the Registration Rights Agreement executed by Purchaser, the REIT and the general partner of Purchaser), where applicable; (b) Certified copies of all charter documents, partnership agreements, applicable resolutions and certificates of incumbency with respect to Purchaser and its general partner; and -14- 19 (c) Duly executed certificates of limited partnership representing the LP Units. 5.3. Opinion of Counsel. Seller shall have received a written opinion from counsel to Purchaser, in form and substance reasonably satisfactory to Seller and Purchaser's counsel, regarding the organization and authority of Purchaser and the REIT. 5.4. Representations. All representations and warranties made herein by Purchaser shall be true and correct in all material respects. 5.5. Amendment to LP Agreement. Purchaser shall have caused Exhibit A of the LP Agreement to be amended so as to add Seller as a limited partner listed thereon. SECTION 6. REPRESENTATIONS AND WARRANTIES OF SELLER. To induce Purchaser to enter into this Agreement, Seller represents and warrants to Purchaser as follows: 6.1. Status and Authority of Seller. Seller is a corporation duly organized, validly existing and in corporate good standing under the laws of its state of incorporation, and has all requisite power and authority under the laws of such state and its respective charter documents to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. Seller has duly qualified to transact business in each jurisdiction in which the nature of the business conducted by it requires such qualification, except where failure to do so could not reasonably be expected to have a material adverse effect. 6.2. Action of Seller . Seller has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and upon the execution and delivery of any document to be delivered by Seller or Tenant on or prior to the Closing Date, such document shall constitute the valid and binding obligation and agreement of Seller or Tenant, as the case may be, enforceable against Seller or Tenant in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 6.3. No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by Seller or of the Lease by Tenant, nor compliance with the terms and provisions hereof or thereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any Property pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of -15- 20 indebtedness or any other agreement or instrument by which Seller or Tenant is bound, except pursuant to the Lease or this Agreement. 6.4. Litigation. Neither Seller nor Tenant has received any written notice of and, to Seller's knowledge, no action or proceeding is pending or threatened and no investigation looking toward such an action or proceeding has begun, which (a) questions the validity of this Agreement or the Lease or any action taken or to be taken pursuant hereto, (b) will result in any material adverse change in the business, operation, affairs or condition of the Properties, taken as a whole, (c) will result in or subject the Properties to a material liability, or (d) involves condemnation or eminent domain proceedings against any part of the Properties, which would render such Property a Defective Property. 6.5. Existing Leases, Agreements, Etc. Other than any agreements provided to Purchaser prior to the execution of this Agreement and listed on the schedule attached hereto as Exhibit E, there are no other material agreements affecting the Properties which will be binding on Purchaser subsequent to the Closing Date, which Purchaser cannot terminate. 6.6. Utilities, Etc. To Seller's knowledge, all utilities and services necessary for the use and operation of the Properties (including, without limitation, road access, gas, water, electricity and telephone) are available thereto, are of sufficient capacity to meet adequately all needs and requirements necessary for the current use and operation of the Properties and for their respective intended purposes. To Seller's knowledge, no fact, condition or proceeding exists which would result in the termination or material impairment of the furnishing of such utilities to the Properties. 6.7. Compliance with Law. To Seller's knowledge, except as set forth on Exhibit D attached hereto, (i) the Properties and the current use and operation thereof do not violate any material federal, state, municipal and other governmental statutes, ordinances, by-laws, rules, regulations or any other legal requirements, including, without limitation, those relating to construction, occupancy, zoning, subdivision, land use, adequacy of parking, environmental protection, occupational health and safety and fire safety applicable thereto; and (ii) there are presently in effect all material licenses, permits and other authorizations necessary for the current use, occupancy and operation thereof (including liquor license, if required). Except as disclosed to Purchaser, Seller has not received written notice of any threatened request, application, proceeding, plan, study or effort which would materially adversely affect the current use or zoning of any of the Properties or which would materially adversely modify or realign any adjacent street or highway. -16- 21 6.8. Taxes. To Seller's knowledge, other than the amounts disclosed by tax bills (copies of which have been delivered by Seller to Purchaser prior to the execution of this Agreement), no taxes or special assessments of any kind (special, bond or otherwise) are or have been levied with respect to any of the Properties, or any portion thereof, which are outstanding or unpaid, other than amounts not yet due and payable or, if due and payable, not yet delinquent. 6.9. Not A Foreign Person. Seller is not a "foreign person" within the meaning of Section 1445 of the Code. 6.10. Hazardous Substances. Except as set forth on Exhibit D attached hereto or as described in any environmental report delivered to Purchaser (including, without limitation, the environmental site assessments set forth on Exhibit D), to Seller's knowledge, Seller has not stored or disposed of (or engaged in the business of storing or disposing of) or has released or caused the release of any hazardous waste, contaminants, oil, radioactive or other material on any of the Properties, or any portion thereof, the removal of which is required or the maintenance of which is prohibited or penalized by any applicable Federal, state or local statutes, laws, ordinances, rules or regulations, and, to Seller's knowledge, except as set forth on Exhibit D attached hereto or as described in any environmental report delivered to Purchaser (including, without limitation, the environmental site assessments set forth on Exhibit D), the Properties are free from any such hazardous waste, contaminants, oil, radioactive and other materials, except any such materials maintained in the ordinary course of a hotel business in accordance with applicable law. 6.11. Insurance. Seller has not received any written notice from any insurance carrier of defects or inadequacies in the Properties which, if uncorrected, would result in a termination of insurance coverage or a material increase in the premiums charged therefor. 6.12. Ownership. All Assets, Contracts, FF&E, Intangible Property and Real Property are owned by Seller and are assignable and transferable without the consent of any third party (or, if any such consent is required, such consent shall be obtained no later than the Closing), and there are no capital leases, except as set forth on Exhibit E. The representations and warranties made in this Agreement by Seller shall be deemed remade by Seller as of the Closing Date with the same force and effect as if made on, and as of, such date. Except as otherwise expressly provided in this Agreement or any documents to be delivered to Purchaser at the Closing, Seller disclaims the making of any representations or warranties, express or implied, regarding the Properties or matters affecting -17- 22 the Properties, whether made by Seller, on Seller's behalf or otherwise, including, without limitation, the physical condition of the Properties, title to or the boundaries of the Real Property, pest control matters, soil conditions, the presence, existence or absence of hazardous wastes, toxic substances or other environmental matters, compliance with building, health, safety, land use and zoning laws, regulations and orders, structural and other engineering characteristics, traffic patterns, market data, economic conditions or projections, and any other information pertaining to the Properties or the market and physical environments in which they are located. Without negating the covenants, representations and warranties of Seller under this Agreement, Purchaser acknowledges (i) that Purchaser has entered into this Agreement with the intention of making and relying upon its own investigation or that of third parties with respect to the physical, environmental, economic and legal condition of each Property and (ii) that Purchaser is not relying upon any statements, representations or warranties of any kind, other than those specifically set forth in this Agreement or in any document to be delivered to Purchaser at the Closing made by Seller. Without negating the covenants, representations and warranties of Seller under this Agreement, Purchaser further acknowledges that it has not received from or on behalf of Seller any accounting, tax, legal, architectural, engineering, property management or other advice with respect to this transaction and is relying solely upon the advice of third party accounting, tax, legal, architectural, engineering, property management and other advisors. Subject to the provisions of this Agreement, Purchaser shall purchase the Properties in their "as is" condition on the Closing Date. SECTION 7. REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce Seller to enter into this Agreement, Purchaser represents and warrants to Seller as follows: 7.1. Status and Authority of Purchaser. Purchaser is a Tennessee limited partnership duly organized, validly existing and in trust good standing under the laws of the State of Tennessee, and, prior to the expiration of the Review Period, will have all requisite power and authority under the laws of such state and under its charter documents to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. Purchaser has duly qualified and is in good standing as a foreign limited partnership in each jurisdiction in which the nature of the business conducted by it requires such qualification. 7.2. Action of Purchaser. Prior to the expiration of Review Period, Purchaser will take all necessary action to authorize the execution, delivery and performance of this Agreement and the Lease, and upon the execution and delivery of -18- 23 any document to be delivered by Purchaser on or prior to the Closing Date such document shall constitute the valid and binding obligation and agreement of Purchaser, enforceable against Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 7.3. No Violations of Agreements. Neither the execution, delivery or performance of this Agreement nor the Lease by Purchaser, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any property or assets of Purchaser pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which Purchaser is bound. 7.4. Litigation. No investigation, action or proceeding is pending and, to Purchaser's knowledge, no action or proceeding is threatened and no investigation looking toward such an action or proceeding has begun, which questions the validity of this Agreement or any action taken or to be taken pursuant hereto. 7.5. No Conflicts. Neither the issuance, sale and delivery by Purchaser of the LP Units, the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby by Purchaser, nor the redemption of LP Units for Redemption Shares (as defined in the LP Agreement) by Seller will conflict with or result in a material breach or violation of, or constitute a default under the charter, bylaws, certificate of limited partnership or LP Agreement, as the case may be, of the REIT or Purchaser; any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument to which the REIT or Purchaser is a party or to which they, either of them, any of their respective properties or other assets is subject; or any applicable material statute, judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to the REIT or Purchaser. 7.6. REIT Status . The REIT is a "qualified real estate investment trust" as defined in Section 856 of the Code. 7.7. REIT Filings. The private placement memorandum delivered by Purchaser to Seller on September 18, 1997 with respect to the REIT does not include, as of such date, any untrue statement of a material fact or omit to state any material fact required to be stated or necessary to make the statements made, in light of the circumstances under which they were made, not misleading. The representations and warranties made in this Agreement by Purchaser shall be deemed remade by Purchaser as of the Closing -19- 24 Date with the same force and effect as if made on, and as of, such date. SECTION 8. COVENANTS OF SELLER AND PURCHASER. 8.1. Covenants of Seller. Seller hereby covenants with Purchaser between the date of this Agreement and the Closing Date as follows: (a) Upon learning of any material change in any condition with respect to any of the Properties or of any event or circumstance which makes any representation or warranty of Seller to Purchaser under this Agreement untrue or misleading in any material respect, promptly to notify Purchaser thereof (Purchaser agreeing, on learning of any such fact or condition, promptly to notify Seller thereof). (b) To continue or cause to continue to operate each of the Properties as an "AmeriSuites" hotel, in a good and businesslike fashion consistent with its past practices and to cause each of the Properties to be maintained in good working order and condition in a manner consistent with its past practice. (c) To provide to Purchaser, promptly upon reasonable request, such unaudited financial and other information and certifications of Seller with respect to the Properties as Purchaser may from time to time reasonably request in order to comply with any applicable securities laws and/or any rules, regulations or requirements of the Securities and Exchange Commission and, if required or requested, to permit Purchaser to incorporate by reference any information included in filings made by Seller with the Securities and Exchange Commission. (d) To deliver to Purchaser the items set forth in Section 4.1 and Section 4.4. 8.2. Covenants of Purchaser. Purchaser hereby covenants with Seller on and as of the Closing Date as follows: (a) To deliver to Seller the items set forth in Section 5.2. SECTION 9. CLOSING COSTS. 9.1. Closing Costs. Each of the parties hereto shall pay its own expenses in connection with this Agreement and the transactions contemplated hereby, including, without limitation, any legal and accounting fees, the costs and expenses of preparing engineering and environment reports, market studies and appraisals, the cost of the Surveys, Title Commitments, zoning reports, UCC financing statement search reports, environmental audits, zoning reports, structural engineering reports, -20- 25 appraisals and the like, whether or not the transactions contemplated hereby are consummated (but subject, however, to the provisions of Section 2.3, with respect to items which Purchaser delivers to Seller at Seller's request). Seller and Purchaser shall each pay 50% of all state and local sales, transfer, excise, value-added or other similar taxes, and all recording and filing fees that may be imposed by reason of the sale, transfer, assignment, delivery and leasing (other than any tax imposed in connection with the recording of a memorandum of lease, which amounts shall be paid pursuant to the terms of the applicable Lease) of the Properties. SECTION 10. DEFAULT. 10.1. Default by Seller. If Seller shall have made any representation or warranty herein which shall be untrue or misleading in any material respect, or if Seller shall fail to perform any of the material covenants and agreements contained herein to be performed by Seller and such failure continues for a period of ten (10) days after notice thereof from Purchaser, Purchaser may, (i) sue for specific performance and damages, (ii) sue for damages without specific performance (with or without terminating this Agreement and receiving a refund of the Deposit, and all interest thereon) or (iii) exercise any other right or remedy at law or in equity; provided, however, that Purchaser shall in no event be entitled to monetary damages in excess of $4,000,000. 10.2. Default by Purchaser. If Purchaser shall have made any representation or warranty herein which shall be untrue or misleading in any material respect, or if Purchaser shall fail to perform any of the covenants and agreements contained herein to be performed by it and such failure shall continue for a period of ten (10) days after notice thereof from Seller, Seller may, as its sole and exclusive remedy at law and in equity, terminate this Agreement. In the event that Seller shall so terminate this Agreement, the Deposit, together with all interest accrued thereon, shall be retained by Seller, as liquidated damages and not as a penalty, whereupon Purchaser shall, except as expressly provided herein, have no further monetary or nonmonetary obligations hereunder, other than with respect to obligations which expressly survive the termination hereof (which obligations shall not include the obligation to purchase the Properties hereunder). SECTION 11. RIGHT OF FIRST OFFER; COMMITMENT TO SELL. 11.1. Right of First Offer. (a) If, during the Option Period, any member of the Seller Group desires to sell any five (5) or more "AmeriSuites" hotels as a group (such group of hotels being hereinafter collectively referred to as the "First Offer Hotels"), then before offering the First Offer Hotels for sale to third parties, Seller shall -21- 26 (i) deliver to Purchaser a notice (an "Offer") setting forth the price and all material terms and conditions upon which Seller would be willing to sell the First Offer Hotels, and (ii) shall provide copies of, or reasonable access to, all due diligence materials with respect to the First Offer Hotels in Seller's possession or control (including occupancy, ADR and Rev PAR information, financial statements, title policies, title documents, surveys, environmental audits, zoning reports, income and expense statements, appraisals, operating agreements, engineering reports, PIPs, Star reports, budgets, litigation reports and similar materials). Within 30 days following receipt of the Offer (such 30-day period, the "First Offer Response Period"), Purchaser shall by notice to Seller either (i) accept the Offer, (ii) deliver to Seller a counter-offer (a "Counter-Offer") setting forth a price and all of the material terms and conditions upon which Purchaser would be willing to purchase the First Offer Hotels, or (iii) elect not to accept the Offer or deliver a Counter-Offer. If Purchaser shall fail to deliver notice of its election pursuant to the foregoing sentence during the First Offer Response Period, Purchaser shall be deemed conclusively to have elected not to accept the Offer or deliver a Counter-Offer. (b) In the event that Purchaser delivers a Counter-Offer, within 10 days thereafter Seller may elect to accept the Counter-Offer by delivering notice to Purchaser of such election. (c) In the event that Purchaser does not elect to accept Seller's Offer or deliver a Counter-Offer, Seller shall be free to offer to sell the First Offer Hotels during the Offer Period to any and all third parties upon substantially the same terms and conditions as set forth in the Offer, but at a price not less than an amount equal to 95% of the purchase price set forth in the Offer. In the event that Purchaser delivers a Counter-Offer and Seller does not accept such Counter-Offer, Seller shall be free to offer to sell the First Offer Hotels during the Offer Period to any and all third parties upon substantially the same terms and conditions as set forth in the Offer, but at a price not less than an amount equal to 100% of the purchase price set forth in the Offer. The "Offer Period" shall mean the period of six months following the earlier of the date of delivery to Seller of a Counter-Offer or, if none shall be delivered, the expiration of the First Offer Response Period. (d) In the event that Purchaser accepts the Offer within the First Offer Response Period, or in the event that Seller accepts Purchaser's Counter-Offer within the 10-day period referred to in paragraph (a) of this Section 11.1, then Purchaser and Seller shall, within 10 days of Purchaser's acceptance of the Offer or Seller's acceptance of the Counter-Offer, as the case may be, execute and deliver to each other a contract of sale relating to the First Offer Hotels, which contract of sale shall, to the extent consistent with the terms and conditions as set forth in the Offer or the Counter-Offer, as the case may be, -22- 27 incorporate the terms of this Agreement, but which shall be modified as necessary to reflect the price and such terms and conditions set forth in the Offer or the Counter-Offer. Upon execution of a contract of sale pursuant to the immediately foregoing sentence, Purchaser shall, simultaneously therewith, pay the "Deposit" amount required thereunder, which amount shall be held in escrow pursuant to the terms thereof. Seller shall sell and Purchaser shall purchase (and, where applicable, Purchaser shall lease to Seller) the First Offer Hotels in accordance with said contract of sale. (e) If Purchaser and Seller shall be unable to agree on the terms of a contract of sale pursuant to, and within the time periods set forth in, paragraph (d) of this Section 11.1, the parties shall submit such issue to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or any successor organization thereto. (f) In the event that a sale of First Offer Hotels is consummated with a third party, provided that Seller shall have complied with the requirements hereof, then this Agreement automatically shall terminate and be of no further force or effect simultaneously therewith with respect to such First Offer Hotels. (g) Purchaser's rights hereunder shall not apply to any foreclosure sale of any First Offer Hotels, and upon the completion of any such foreclosure sale, this Agreement automatically shall terminate and be of no further force or effect simultaneously therewith with respect to such First Offer Hotels, unless the purchaser at such foreclosure sale is an Affiliate of Seller. No further instrument or confirmation shall be required with respect to such termination. (h) Purchaser's rights hereunder shall not apply (i) to any transfer of Seller's hotel properties, by operation of law, deed or otherwise, to any parent, affiliate or wholly-owned subsidiary of Seller or to any entity which is a successor to Seller by way of merger, consolidation or corporate reorganization or by the purchase of substantially all of the assets, partnership interests or shares of stock of Seller, but the obligations of this Section 11 shall apply to any successor and Seller shall cause such successor to assume such obligations. (i) Seller shall be obligated to offer no more than twenty (20) First Offer Hotels to Purchaser during each year of the Option Period; provided, however, that any First Offer Hotels with respect to which Seller shall have failed to enter into a sales contract (with a Person (as defined in the Lease) other than Purchaser) during each such year shall not count toward the aforementioned twenty-hotel minimum. (j) Seller agrees that it shall not deliberately and in bad faith structure sales so as to avoid the requirements of this -23- 28 Section 11.1 by selling five or more hotels to the same purchaser in any one-year period in quantities of fewer than five hotels per transaction. 11.2. Commitment to Sell. (a) During each successive 12-month period during the Option Period, Seller shall offer to sell to Purchaser not fewer than five (5) "AmeriSuites" hotels, or such lesser number of "AmeriSuites" hotels as shall then be owned by Seller (any such hotel or hotels being hereinafter collectively referred to as the "Option Hotels"), by issuance of a notice of sale to Purchaser (the "Notice of Sale"), pursuant to the terms of this Section 11.2. In connection with the issuance of a Notice of Sale, Seller shall provide copies of, or reasonable access to, all due diligence materials with respect to the First Offer Hotels in Seller's possession or control (including occupancy, ADR and Rev PAR information, financial statements, title policies, title documents, surveys, environmental audits, zoning reports, income and expense statements, appraisals, operating agreements, engineering reports, PIPs, Star reports, budgets, litigation reports and similar materials). (b) The Notice of Sale shall set forth the proposed purchase price and such other reasonable material terms and conditions upon which Seller would be willing to sell the Option Hotels. Within 30 days following receipt of the Notice of Sale (such 30-day period, the "Option Response Period"), Purchaser shall by notice to Seller either (i) agree to purchase the Option Hotels pursuant to the terms set forth in the Notice of Sale, or (ii) elect not to purchase the Option Hotels. If Purchaser shall fail to deliver notice of its election pursuant to the foregoing sentence during the Option Response Period, Purchaser shall be deemed conclusively to have elected not to purchase the Option Hotels. (c) In the event that Purchaser elects to purchase the Option Hotels pursuant to the foregoing paragraph (b) of this Section 11.2, then Purchaser and Seller shall, within 10 days of Purchaser's election, execute and deliver to each other a contract of sale relating to the Option Hotels, which contract of sale shall, to the extent consistent with the terms and conditions as set forth in the Notice of Sale, incorporate the terms of this Agreement, but which shall be modified as necessary to reflect the price and such terms and conditions set forth in the Notice of Sale. Upon execution of a contract of sale pursuant to the immediately foregoing sentence, Purchaser shall, simultaneously therewith, pay the "Deposit" amount required thereunder, which amount shall be held in escrow pursuant to the terms thereof. Seller shall sell and Purchaser shall purchase (and, where applicable, Purchaser shall lease to Seller) the Option Hotels in accordance with said contract of sale. -24- 29 (d) Seller and Purchaser shall use reasonable, good faith efforts to agree upon the terms of the contract of sale pursuant to the foregoing paragraph (c) of this Section 11.2. If Seller and Purchaser shall be unable to agree on the terms thereof within 10 days after Purchaser's election to purchase, Seller's offer and Purchaser's acceptance shall be deemed revoked and terminated, and Seller shall be deemed to have satisfied its obligations hereunder with respect to such Option Hotels. 11.3. General Provisions. (a) Time shall be of the essence as to all periods set forth in this Section 11. (b) Any First Offer Hotels offered pursuant to the provisions of Section 11.1 shall also be deemed Option Hotels for the purpose of satisfying Seller's obligation to offer hotel properties to Purchaser pursuant to Section 11.2. (c) Notwithstanding anything to the contrary contained herein, Purchaser's right of first offer and Seller's commitment to sell, as set forth in Section 11.1(a) and 11.1(b) hereof, shall only apply during the period commencing on the Closing Date and terminating on the date immediately preceding the third anniversary thereof (the "Option Period"), and Seller shall have no obligation to deliver Purchaser an Offer with respect to any hotels other than during such Option Period, unless Seller has failed to offer Purchaser an aggregate of 15 Option Hotels, in which event such period shall be extended until Seller fulfills such requirement (which extension shall not negate any other rights and remedies which Purchaser may have). (d) None of the rights created or granted pursuant to this Section 11 shall constitute a lien on any property, and all such rights are, and will at all times be, subject and subordinate to the lien of all mortgages and other financing arrangements, except where a member of the Seller Group is the lender/creditor (including, without limitation, any deed to secure debt, deed of trust, collateral assignment, or other similar instrument creating a lien or other encumbrance as security (an "Encumbrance")) which may now or hereafter encumber or affect Seller's interest in any hotels which it now or hereafter owns, or any portion thereof, and to all advances, increases, renewals, modifications, consolidations, extensions, participations and replacements thereof, irrespective of the time of recording or the priority of the lien of such mortgage or other Encumbrance, all without the necessity of any further instrument of subordination. (e) If Purchaser shall at any time breach its agreement to purchase any First Offer Hotel or Option Hotel or materially default under any contract of sale entered into with respect thereto (subject to any applicable notice and cure period), Purchaser shall thenceforward have no further rights to purchase -25- 30 hotel properties pursuant to Sections 11.1 or 11.2, and Seller shall have no further obligations under said Sections. The foregoing provision shall be in addition to any and all other remedies, including liquidated damages provisions, that Seller may have under said contracts of sale; provided, however, that Seller shall have no further remedies, other than as set forth in this Paragraph (e), with respect to such breach or default. (f) Where any offer to sell First Offer Hotels pursuant to Section 11.1 or Option Hotels pursuant to Section 11.2 includes, as a term thereof, the right of Seller to lease back the applicable hotel property from Purchaser, references to the sale thereof in this Section 11 shall be deemed also to include such an agreement to lease. Unless expressly required in the applicable Offer or Notice of Sale, Purchaser shall not be obligated to lease back any First Offer Hotel or Option Hotel purchased by Purchaser to Seller, Tenant or any other member of the Seller Group. Where a First Offer Hotel or Option Hotel purchased by Purchaser is not leased back to Seller or such leaseback or a Lease expires or is terminated, then, so long as Purchaser, an Affiliate of Purchaser or their purchaser is the owner of such hotel, Seller shall not unreasonably withhold, delay or condition the issuance of an "AmeriSuites" franchise agreement from Purchaser, Purchaser's tenant or other operator upon such franchise terms granted Tenant with respect to the Hotels. (g) Neither party hereto shall record this Agreement or any memorandum thereof without the written consent of the other party. (h) The obligations of Seller under this Section 11 shall apply to any "AmeriSuites" hotels which any member of the Seller Group owns or which any member has the right to sell, and Seller shall cause such members of the Seller Group desiring to sell any "AmeriSuites" or similar hotel to comply with this Section 11 on the same terms as Seller. Reference to "sell" in this Section 11 shall refer to sale of fee simple title, ground lease, joint venture or similar arrangements. (i) Use of the form of this Agreement in preparing any agreement of purchase and sale for a First Offer Hotel or Option Hotel shall include, without limitation, the terms regarding (i) the Review Period, (ii) a two-tiered Deposit in the maximum amount of 4.7% of the purchase price as liquidated damages and (iii) (if applicable) the same form of Lease (excluding economic and other material terms contained in the applicable Offer or Notice of Sale); provided, however, that use of the form of this Agreement shall not include (x) the provisions of Section 3.2 hereof with respect to the payment of a portion of the purchase price with LP Units (unless expressly agreed by the parties thereto) or (y) the provisions of Section 11 hereof. -26- 31 (j) Notwithstanding anything to the contrary contained herein, Seller shall in no event have any obligation to purchase additional "AmeriSuites" hotels in order to comply with the requirements to offer hotels to Purchaser pursuant to the provisions of this Section 11. (k) The provisions of this Section 11 shall survive the Closing. SECTION 12. MISCELLANEOUS. 12.1. Agreement to Indemnify. (a) Subject to any express provisions of this Agreement to the contrary, Seller shall indemnify and hold harmless Purchaser from and against any and all obligations, claims, losses, damages, liabilities, and expenses (including, without limitation, reasonable attorneys' and accountants' fees and disbursements) arising out of (x) any damage to property of others or injury to or death of any person or any claims for any debts or obligations occurring on or about or in connection with any Property or any portion thereof at any time or times prior to the Closing, (y) any liabilities for taxes due from Seller which shall have accrued prior to the Closing in connection with any Property and (z) any failure by Seller to comply with applicable "bulk sale" laws. (b) Whenever either party shall learn through the filing of a claim or the commencement of a proceeding or otherwise of the existence of any liability for which the other party is or may be responsible under this Agreement, the party learning of such liability shall notify the other party promptly and furnish such copies of documents (and make originals thereof available) and such other information as such party may have that may be used or useful in the defense of such claims and shall afford said other party full opportunity to defend the same in the name of such party and shall generally cooperate with said other party in the defense of any such claim. (c) The provisions of this Section 12.1 shall survive the Closing and the termination of this Agreement. 12.2. Brokerage Commissions. Each of the parties hereto represents to the other parties that it dealt with no broker, finder or like agent in connection with this Agreement or the transactions contemplated hereby, other than Merrill Lynch & Co. Seller shall be solely responsible for and shall indemnify and hold harmless Purchaser and its respective legal representatives, heirs, successors and assigns from and against any loss, liability or expense, including, reasonable attorneys' fees, arising out of any claim or claims for commissions or other compensation for bringing about this Agreement or the transactions contemplated hereby made by Merrill Lynch & Co. or any other broker, finder or like agent other than such loss, liability or expense resulting from Purchaser's breach of its -27- 32 representations made in this Section 12.2. The provisions of this Section 12.2 shall survive the Closing and any termination of this Agreement. 12.3. Publicity. The parties agree that no party shall, with respect to this Agreement and the transactions contemplated hereby, contact or conduct negotiations with public officials, make any public pronouncements, issue press releases or otherwise furnish information regarding this Agreement or the transactions contemplated to any third party without the consent of the other parties, which consent shall not be unreasonably withheld, delayed or conditioned, except to consultants, advisors, investors, lenders, underwriters and other parties reasonably necessary to consummate the transactions required hereby and as required by law or contractual obligations of such parties to third parties. No party, or its employees shall trade in the securities of any parent or affiliate of Seller or of Purchaser until a public announcement of the transactions contemplated by this Agreement has been made. No party shall record this Agreement or any notice thereof. 12.4. Notices. (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with written acknowledgment of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. (c) All such notices shall be addressed, if to Seller to: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07707-2700 Attn: Mr. David Simon [Telecopier No. (201) 882-8577] -28- 33 and Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07707-2700 Attn: General Counsel [Telecopier No. (201) 882-8577] with a copy to: Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street New York, New York 10022-4677 Attn: Eugene A. Pinover, Esq. [Telecopier No. (212) 821-8111] if to Purchaser, to: Equity Inns Partnership, L.P. 4735 Spottswood, Suite 102 Memphis, Tennessee 38117 Attn: Mr. Phillip H. McNeill, Sr. [Telecopier No. (901) 761-1485] with a copy to: Hunton & Williams 1751 Pinnacle Drive, Suite 1700 McLean, VA 22102 Attn: Gerald R. Best, Esq. [Telecopier No. (703) 714-7410] (d) By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America. 12.5. Waivers, Etc. Any waiver of any term or condition of this Agreement, or of the breach of any covenant, representation or warranty contained herein, in any one instance, shall not operate as or be deemed to be or construed as a further or continuing waiver of any other breach of such term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty, nor shall any failure at any time or times to enforce or require performance of any provision hereof operate as a waiver of or affect in any manner such party's right at a later time to enforce or require performance of such provision or any other provision hereof. -29- 34 This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge be effected, except by an instrument in writing executed by or on behalf of the party against whom enforcement of any amendment, waiver, change, modification, consent or discharge is sought. 12.6. Assignment; Successors and Assigns. This Agreement and all rights and obligations hereunder shall not be assignable by any party without the written consent of the other parties, except that, after the Closing, (i) Seller may assign its surviving rights, if any, under this Agreement to Tenant or an Affiliate of Seller, and (ii) Purchaser may assign its right to purchase a First Offer Hotel or an Option Hotel to one or more Affiliates of Purchaser, and Purchaser may assign its rights and obligations hereunder to an Affiliate of Purchaser, provided that Purchaser remain liable for its obligations hereunder. The provisions of this Agreement shall not merge with delivery of the deeds and shall survive Closing. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. This Agreement is not intended and shall not be construed to create any rights in or to be enforceable in any part by any other persons. 12.7. Severability. If any provision of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflict of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that such other provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case. 12.8. Counterparts, Etc. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof. -30- 35 12.9. Governing Law. This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the State of New York applicable to contracts between residents of the State of New York which are to be performed entirely within the State of New York, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the State of New York; or (vii) any combination of the foregoing. To the maximum extent permitted by applicable law, any action to enforce, arising out of, or relating in any way to, any of the provisions of this Agreement may be brought and prosecuted in such court or courts located in the State of New York as is provided by law; and the parties consent to the jurisdiction of said court or courts located in the State of New York and to service of process by registered mail, return receipt requested, or by any other manner provided by law. 12.10. Performance on Business Days. In the event the date on which performance or payment of any obligation of a party required hereunder is other than a Business Day, the time for payment or performance shall automatically be extended to the first Business Day following such date. 12.11. Attorneys' Fees. If any lawsuit or arbitration or other legal proceeding arises in connection with the interpretation or enforcement of this Agreement, the prevailing party therein shall be entitled to receive from the other party the prevailing party's costs and expenses, including reasonable attorneys' fees incurred in connection therewith, in preparation therefor and on appeal therefrom, which amounts shall be included in any judgment therein. 12.12. Section and Other Headings. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.13. No Oral Modifications. This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge be effected, except by an instrument in writing executed by or on behalf of the party against whom enforcement of any amendment, waiver, change, modification, consent or discharge is sought. -31- 36 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as a sealed instrument as of the date first above written. SELLER: PRIME HOSPITALITY CORP. By:_____________________________________ Its:_________________________________ PURCHASER: EQUITY INNS PARTNERSHIP, L.P. By: Equity Inns Trust, its general partner By:________________________________ Its:____________________________ The undersigned hereby acknowledges its agreement to the provisions of Section 3.2(e) hereof. EQUITY INNS TRUST By:____________________ Its:________________ 37 EXHIBIT A THE PROPERTIES
Location Allocable Purchase Price - -------- ------------------------ 1. Cincinnati, OH/ $ 7,780,391 Blue Ash 2. Columbus, OH $ 8,532,055 3. Flagstaff, AZ $ 5,286,945 4. Cincinnati, OH/ $ 6,985,218 Forest Park 5. Greensboro, NC $10,863,464 6. Indianapolis, IN/ $ 7,337,955 Keystone 7. Jacksonville, FL $ 6,519,073 8. Overland Park, KS $ 9,230,436 9. Richmond, VA/ $12,332,445 Innsbrook 10. Tampa, FL $11,442,955
38 EXHIBIT B-1 THROUGH B-10 LEGAL DESCRIPTIONS OF PROPERTIES 39 EXHIBIT C FORM OF LEASE 40 EXHIBIT D EXCEPTIONS TO SELLER REPRESENTATIONS AND WARRANTIES 41 EXHIBIT E SCHEDULE OF AGREEMENTS 42 EXHIBIT F REDEMPTION AND REGISTRATION RIGHTS AGREEMENT EX-23.1 8 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.1 ARTHUR ANDERSEN LLP 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 28, 1997, covering the Company's consolidated financial statements for the years ended December 31, 1994, 1995 and 1996 and to all references to our firm included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP Roseland, New Jersey October 23, 1997 EX-23.2 9 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.2 Consent of Independent Auditors We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data of Homegate" and to the use of our report dated February 20, 1997, with respect to the financial statements and schedule of Homegate Hospitality, Inc. included in the Proxy Statement of Homegate Hospitality, Inc. which is included in the Registration Statement on Form S-4 of Prime Hospitality Corp. and Subsidiaries for the registration of 6,513,292 shares of its common stock. Ernst & Young LLP Dallas, Texas October 24, 1997 EX-23.5 10 CONSENT OF BEAR, STEARNS & CO. INC. 1 Exhibit 23.5 CONSENT OF BEAR, STEARNS & CO. INC. We hereby consent to the inclusion in the Proxy Statement/Prospectus forming part of this Registration Statement on Form S-4 of Prime Hospitality Corp. of our opinion attached as Annex B thereto and to the reference to such opinion and to our firm therein. We also confirm the accuracy in all material respects of the description and summary of such fairness opinion and the description and summary of our analyses, observations, beliefs and conclusions relating thereto, set forth under the heading "The Merger -- Opinion of Homegate's Financial Advisor" therein. In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 and the rules and regulations of the Securities and Exchange Commission issued thereunder. BEAR, STEARNS & CO. INC. By: /s/ Thomas Flexner __________________________________ Managing Director October 24, 1997 EX-99 11 FORM OF PROXY 1 Exhibit 99 HOMEGATE HOSPITALITY, INC. PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD DECEMBER 1, 1997 The undersigned hereby (1) acknowledges receipt of the Notice of Special Meeting of Stockholders of Homegate Hospitality, Inc. (the "Company") to be held on December 1, 1997, and the Proxy Statement-Prospectus in connection therewith, each dated October 27, 1997, and (2) constitutes and appoints Robert A. Faith and John C. Kratzer and each of them, his attorneys and proxies, with full power of substitution to each, for and in the name, place, and stead of the undersigned, to vote, and to act with respect to, all of the shares of Common Stock of the Company standing in the name of the undersigned or with respect to which the undersigned is entitled to vote and act at that meeting and at any meeting(s) as adjourned ("Adjournment(s)"), as follows: - ------------------------------------------------------------------------------- || FOLD AND DETACH HERE || 2 [ X ] 1. APPROVAL AND ADOPTION OF THE MERGER OF A WHOLLY-OWNED SUBSIDIARY OF PRIME WITH AND INTO THE COMPANY AND THE AGREEMENT AND PLAN OF MERGER AMONG THE COMPANY, PRIME AND SUCH WHOLLY-OWNED SUBSIDIARY OF PRIME: FOR AGAINST SUSTAIN [ ] [ ] [ ] 2. IN THE DISCRETION of the proxies on any other matters as may properly come before the meeting or any Adjournment(s) thereof. THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER OF A WHOLLY-OWNED SUBSIDIARY OF PRIME WITH AND INTO THE COMPANY AND THE AGREEMENT AND PLAN OF MERGER AMONG THE COMPANY, PRIME AND SUCH WHOLLY-OWNED SUBSIDIARY OF PRIME. IN ORDER FOR THIS PROXY TO BE VALID, IT MUST BE SIGNED BELOW. Please sign below, date, and return promptly. DATED: _______________________________, 1997 ___________________________________________ (SIGNATURE OF STOCKHOLDER) ___________________________________________ (SIGNATURE IF HELD JOINTLY) IMPORTANT: Please sign exactly as name appears to the left. When signing on behalf of a corporation, partnership, estate, trust, or in other representative capacity, please sign name and title. For joint tenants, both should sign. ______________________________________________________________________________ FOLD AND DETACH HERE -----END PRIVACY-ENHANCED MESSAGE-----