Filed pursuant to Rule 424(B)(3)
Registration No. 333-91096
Prospectus
Prime Hospitality Corp.
Offer to Exchange
Up to $200,000,000 8 3/8% Series B Senior Subordinated Notes due 2012 for all
outstanding 8 3/8% Series A Senior Subordinated Notes due 2012
-----------------
.. We are offering to exchange new registered 8 3/8% series B senior
subordinated notes due 2012 for all of our outstanding unregistered 8 3/8%
series A senior subordinated notes due 2012.
.. The exchange offer expires at 5:00 p.m., New York City time, on August 15,
2002, unless extended.
.. The exchange offer is subject only to the conditions that the exchange offer
will not violate any applicable law or any applicable interpretation of the
Securities and Exchange Commission.
.. All original notes outstanding that are validly tendered and not validly
withdrawn prior to the expiration of the exchange offer will be exchanged
for the exchange notes.
.. Tenders of outstanding notes may be withdrawn at any time before 5:00 p.m.,
New York City time, on the expiration date of the exchange offer.
.. The exchange of notes will not be a taxable exchange for U.S. federal income
tax purposes.
.. We will not receive any proceeds from the exchange offer.
.. The terms of the exchange notes to be issued are substantially identical to
the terms of the original notes, except that the exchange notes will not
have transfer restrictions, and you will not have registration rights.
.. There is no established trading market for the exchange notes, and we do not
intend to apply for listing of the exchange notes on any securities exchange.
See "Risk Factors" beginning on page 13 for a discussion of matters you should
consider before you participate in this exchange offer.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this prospectus is July 19, 2002
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with the exchange offer covered by this prospectus. If given or made
such information or representations must not be relied upon as having been
authorized by us. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implications that there
has not been any change in the facts set forth in this prospectus or in our
affairs since the date hereof.
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of those exchange notes. The letter of transmittal accompanying
this prospectus states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act. A participating broker-dealer may use this
prospectus in connection with resales of the exchange notes where the
corresponding original notes were acquired by the broker-dealer as a result of
market-making activities or other trading activities. We have agreed that, for
a period not to exceed 180 days after the exchange date, we will make this
prospectus available to any broker-dealer for use in connection with any of
those resales. See "Plan of Distribution."
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Table of Contents
Page
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SUMMARY................................................................... 1
RISK FACTORS.............................................................. 13
USE OF PROCEEDS........................................................... 23
THE EXCHANGE OFFER........................................................ 24
CAPITALIZATION............................................................ 31
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 34
DESCRIPTION OF CERTAIN INDEBTEDNESS....................................... 42
DESCRIPTION OF NOTES...................................................... 44
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 80
PLAN OF DISTRIBUTION...................................................... 84
LEGAL MATTERS............................................................. 85
EXPERTS................................................................... 85
WHERE YOU CAN FIND MORE INFORMATION....................................... 85
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 85
PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. F-1
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
Forward-looking statements include the information about our possible or
assumed future results of operations and statements preceded by, followed by or
that include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or similar expressions, or the negative thereof.
Actual results may differ materially from those expressed in these
forward-looking statements. Readers of this prospectus are cautioned not to
unduly rely on any forward-looking statements.
The following important factors, in addition to those discussed elsewhere in
this prospectus, could cause results to differ materially from those expressed
in such forward-looking statements: competition within each of our business
segments in areas such as access, location, quality or accommodations and room
rate structures; the balance between supply of and demand for hotel rooms and
accommodations; our continued ability to obtain new operating contracts and
franchise agreements; our ability to develop and maintain positive relations
with current and potential hotel owners and other industry participants; the
level of rates and occupancy that can be achieved by such properties and the
availability and terms of financing; our ability or the ability of our
franchisees to maintain the properties in a first-class manner, including
meeting capital expenditure requirements; changes in travel patterns, taxes and
government regulations which influence or determine wages, prices, construction
procedures and costs; the effect of international, national and regional
economic conditions that will affect, among other things, demand for products
and services at our hotels; government approvals, actions and initiatives
including the need for compliance with environmental and safety requirements,
and change in laws and regulations or the interpretation thereof and the
potential effects of tax legislative action; and other risks described in "Risk
Factors."
Although we believe the expectations reflected in these forward-looking
statements are based upon reasonable assumptions, no assurance can be given
that we will attain these expectations or that any deviations will not be
material. Except as otherwise required by the federal securities laws, we
disclaim any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
ii
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements, including the notes thereto,
appearing elsewhere in or incorporated by reference in this prospectus. Unless
the context indicates or requires otherwise, references in this prospectus to
the "Company," "Prime," "we," "our," and "us" are to Prime Hospitality Corp.
and its subsidiaries. This prospectus and the letters of transmittal that
accompany it collectively constitute the exchange offer.
The term EBITDA is used by us for the purpose of analyzing our operating
performance, leverage and liquidity. Hotel EBITDA represents EBITDA generated
from the operations of owned and leased 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 accounting principles generally
accepted in the United States and should not be considered as alternatives to
net income as an indicator of our operating performance or as alternatives to
cash flows as a measure of liquidity. Unless otherwise indicated, industry data
is based on reports of Smith Travel Research.
Our Company
We are a leading national hotel company which owns, manages and franchises
hotel properties. We control two proprietary hotel brands--AmeriSuites(R) and
Wellesley Inns & Suites(R)--and operate a portfolio of upscale, full-service
hotels under franchise agreements with national hotel chains, including Hilton,
Radisson, Sheraton, Holiday Inn and Ramada. As of March 31, 2002, our hotel
portfolio was comprised of 141 AmeriSuites hotels, 73 Wellesley Inns & Suites
hotels and 20 non-proprietary brand hotels in 33 states.
During the past several years, we have positioned ourselves as a diversified
hotel operating company, generating revenue through hotel ownership, management
and franchising. Our growth has been focused on the development of our
AmeriSuites and Wellesley Inns & Suites brands. We plan to continue growing
these brands primarily through franchising and selective development. Since we
began our franchising strategy in June 1998, we have executed 91 franchise
agreements. These agreements have resulted in 24 hotels either opened or under
construction. To supplement this growth strategy, we plan to continue
opportunistically selling existing hotel real estate while retaining valuable
franchise and management agreements. During the past three years, we have sold
approximately $338.3 million of hotel real estate and related assets.
Our primary operating objective is to provide guests with the best possible
price to value relationship for comfortable, attractive accommodations with
high quality services. Each hotel's management team is empowered to take all
necessary steps to ensure guest satisfaction within established guidelines. As
a leading domestic hotel operating company, we enjoy a number of operating
advantages over other lodging companies. With almost 200 hotels under
management covering a number of price points and geographic regions, we have
the critical mass to support operating, marketing and financial systems. We
believe that our broad array of central services permits on-site hotel general
managers to effectively focus on providing guest services, resulting in
economies of scale.
We believe that as a result of the actions taken to reposition ourselves as
a diversified hotel operating company, we should be able to execute our
strategy in today's challenging operating environment. The following are key
highlights of our financial and strategic position:
Strong Balance Sheet and Liquidity. We believe that we are well positioned
to take advantage of our balance sheet and available liquidity. Our debt to
EBITDA ratio was 3.2x and our debt to book capitalization percentage was 30.4%
as of March 31, 2002. We intend to grow our brands primarily through
franchising and we plan to fund our corporate development and capital
improvements with internally generated cash flow.
1
Well-Positioned Brands. We believe that the AmeriSuites and Wellesley Inns
& Suites brands offer our guests an excellent value, and that the moderate
price point segments in which these brands operate are positioned to perform
well in today's economy. In addition, AmeriSuites and Wellesley Inns & Suites
are primarily in suburban "drive-to" locations focused on the transient
business and leisure traveler, are less reliant on airline transportation and
large group or convention travelers, and have less exposure to the more
volatile upscale and urban markets.
Infrastructure in Place to Support Brand Growth. As a diversified hotel
company, we are positioned to pursue the growth of our brands through multiple
means, including franchising existing brands, adding new management contracts,
and selectively developing owned hotels. We believe our brands are
well-positioned to grow as a result of the significant investments made by us
in our franchise infrastructure, the increase in customer brand awareness of
our proprietary brands and our significant brand initiatives including expanded
marketing efforts and new guest loyalty programs.
Our Hotels
The following table details the composition of our portfolio as of March 31,
2002:
Hotels Rooms
------ ------
AmeriSuites
Owned.................. 65 8,384
Leased................. 27 3,306
Managed................ 25 3,222
Franchised............. 24 2,963
--- ------
Total.................. 141 17,875
Wellesley Inns & Suites
Owned.................. 54 6,376
Leased................. -- --
Managed................ 6 668
Franchised............. 13 1,195
--- ------
Total.................. 73 8,239
Non-Proprietary Brands
Owned.................. 10 1,923
Leased................. 1 160
Managed................ 9 1,509
Franchised............. -- --
--- ------
Total.................. 20 3,592
Total Portfolio
Owned.................. 129 16,683
Leased................. 28 3,466
Managed................ 40 5,399
Franchised............. 37 4,158
--- ------
Total.................. 234 29,706
Note: In addition to the above, as of March 31, 2002, there was one owned
AmeriSuites and five franchised AmeriSuites under construction. In May 2002,
two of the franchised hotels opened. Through June 10, 2002, the Wellesley chain
added a net of one additional franchised hotel.
2
AmeriSuites. As of March 31, 2002, we had 141 AmeriSuites in operation.
AmeriSuites are positioned in the upscale segment of the lodging industry,
competing predominantly with other upscale and mid-price brands such as
Courtyard by Marriott, Hilton Garden Inns, Hampton Inn & Suites and Holiday
Inn. Located in 31 states, AmeriSuites are all-suite hotels which typically
contain approximately 128 suites each and have an average age of 4.8 years. The
hotels are consistent in quality, amenities and construction, and are situated
primarily near suburban commercial centers, corporate office parks and other
travel destinations and near dining, shopping and entertainment amenities. In
2001, AmeriSuites contributed approximately 54.4% of our Hotel EBITDA.
Wellesley Inns & Suites. As of March 31, 2002, we had 73 Wellesley Inns &
Suites in operation. Wellesley Inns & Suites are positioned in the mid-price
segment of the industry and compete with other chains such as Hampton Inn &
Suites, La Quinta Inn & Suites, Holiday Inn Express and Comfort Inn & Suites.
Wellesley Inns & Suites contain between 100 and 130 rooms and are located in 22
states primarily in the Southeast, Northeast and Southwest. We intend to grow
the Wellesley Inns & Suites brand primarily through franchisees and
opportunities to convert existing limited service hotels into Wellesley Inns &
Suites properties. During 2001, five hotels were converted from other brands to
our Wellesley Inns & Suites brand. In 2001, Wellesley Inns & Suites contributed
approximately 24.4% of our Hotel EBITDA.
Non-Proprietary Brands. As of March 31, 2002, we had 20 hotels operated
under national franchises. We own 10 of these hotels, lease one hotel and
manage nine of these hotels for third parties. The non-proprietary branded
hotels operate primarily in the upscale full-service segment under national
franchises such as Hilton, Radisson, Sheraton, Holiday Inn and Ramada and
generally provide food and beverage service and banquet facilities. The hotels
are primarily located in the Northeast. In 2001, our non-proprietary brand
hotels contributed approximately 21.2% of our Hotel EBITDA.
Our Business Strategy
Through the development of our proprietary brands, we believe we have
repositioned ourselves as a diversified hotel operating company with ownership,
franchise and management interests. We further believe that this
diversification allows us to generate additional franchise revenues which
require minimal capital investment. The key tactics to our business strategy
include:
Growing Proprietary AmeriSuites and Wellesley Brands. Through franchising
and selected development of owned hotels, we intend to grow our brands.
Franchising typically requires minimal capital investment and is the primary
focus for our growth. Currently, we have seven AmeriSuites under construction,
with an additional 58 signed franchise agreements for new AmeriSuites to be
built. We also have three Wellesley Inns & Suites currently under conversion
and nine signed franchise agreements for new Wellesley Inns & Suites to be
converted or built. In addition, we will continue to selectively develop
AmeriSuites projects and to focus our Wellesley development effort on the
conversion of other limited service hotels under different brands.
Selected Asset Sales to Strengthen Balance Sheet and Fund Brand Growth. We
have undertaken a strategy of selectively selling assets while retaining
valuable franchise and management agreements. We have used the net proceeds
from these sales to repay debt and fund brand growth. Since the beginning of
2001, we have sold $64.9 million of assets, and over the past three years have
sold approximately $338.3 million of assets. We have reduced our debt balance
since the beginning of 2001 by $35.0 million from the net proceeds of asset
sales along with our cash flow from operations.
Continue to Deepen Brand Infrastructure. We believe that growing the
required infrastructure to own and operate hotel brands will enable our brands
to compete effectively with older, more established brands. We also may
consider leveraging our existing franchise infrastructure by potentially adding
new hotel brands. Recent brand initiatives include:
. increased AmeriSuites and Wellesley brand advertising on a national and
regional level;
. introduction of a frequent guest program;
. expansion of national companies listing AmeriSuites and Wellesley as a
preferred hotel provider; and
. upgraded and enhanced e-commerce platforms for reservations and
marketing alliances.
3
Maintain Financial Strength and Flexibility. We have historically
positioned ourselves to both endure economic downturns, as well as take
advantage of investment opportunities as they arise. We intend to maintain our
prudent approach to leverage in order to maintain our financial strength and
flexibility.
Recent Developments
Effects of September 11th Attacks and Softening Economy. As of the week
ended June 8, 2002, according to Smith Travel Research, occupancy, average
daily rate, or ADR, and revenue per available room, or RevPAR, declines for the
U.S. lodging industry have been reduced to 2.4%, 3.8% and 6.0%, respectively,
compared with the same period in 2001. In 2001, the combination of the soft
economy and the September 11th terrorist attacks resulted in a decline in the
demand for hotel rooms of 3.4% from 2000. This resulted in a decrease in
overall occupancy levels from 63.7% in 2000 to 60.1% in 2001. In addition, due
to the decline in travel, ADR decreased by 1.4% from $86.04 in 2000 to $84.85
in 2001, resulting in a RevPAR decrease of 6.9%. Beginning in the middle of the
first quarter of 2002, industry performance has improved.
Operating Expectations and Liquidity. We expect year-over-year quarterly
comparisons for EBITDA and RevPAR to be negative in the first half of 2002.
Based on the covenants in our senior credit facility and as a result of
weakened financial results, the availability under our senior credit facility
may be restricted. While we believe improvements in year-over-year quarterly
comparisons for EBITDA and RevPAR as well as availability under our senior
credit facility should occur in the second half of 2002, there can be no
assurances that such improvements will occur or that our financial performance
will not further deteriorate.
Asset Divestitures/Financial Condition. We have undertaken a strategic
initiative to dispose of hotel real estate and to utilize proceeds to retire
debt or invest in the growth of our brands to support our repositioning as a
diversified hotel operating company. During the past three years, we have sold
approximately $338.3 million of assets. During 2001, we sold $34.5 million of
assets including one AmeriSuites and four Wellesley Inns & Suites. In the three
months ended March 31, 2002, we generated an additional $15.4 million in
proceeds from the sale of a full-service hotel and a Wellesley Inns & Suites.
We utilized the proceeds from asset sales along with our cash flow from
operations to reduce our debt balance since the beginning of 2001 by $35.0
million to $310.7 million as of March 31, 2002.
Conversion of Equity Inns Leases. On January 1, 2002, we converted 19
hotels owned by Equity Inns, Inc. from lease agreements to management
agreements.
Recent Hotel Openings. Since December 31, 2001, we have opened four
franchised AmeriSuites hotels, bringing the total number of AmeriSuites open to
143.
Sale of Properties. In January 2002, we sold a full-service Radisson hotel
in Trevose, Pennsylvania and a Wellesley Inn & Suites in Miami, Florida for an
aggregate consideration of $15.4 million.
Proposed Refinancing. On May 16, 2002, we entered into a commitment letter
with CIBC World Markets Corp. and Canadian Imperial Bank of Commerce. Pursuant
to this commitment letter we seek to establish a new senior revolving credit
facility of approximately $125,000,000 with a syndicate of financial
institutions. We intend to use available borrowings under this facility to
refinance our senior credit facility and to redeem our first mortgage notes.
The establishment of this facility is subject to, among other things,
satisfactory completion of a due diligence investigation by the prospective
lenders and their counsel and the negotiation and execution of definitive
documents. There can be no assurance that we will be able to establish this
facility.
4
The Tender Offer
On May 14, 2002, our tender offer and consent solicitation for all of our
$190,000,000 outstanding 9 3/4% senior subordinated notes due 2007 expired.
Pursuant to the tender offer, we purchased $189,692,000 of the 9 3/4% notes. We
used the net proceeds from the offering of the original notes, along with
available cash, to fund the tender offer. In connection with the tender offer,
we obtained noteholder consents to effect certain changes to the covenants
contained in the indenture under which the 9 3/4% notes were issued. Tendering
and consenting holders received tender consideration of $1,050.00 per $1,000
principal amount of such notes. This consideration included a consent payment
of $30.00 per $1,000 principal amount of such notes. On June 14, 2002, we
redeemed the remaining $308,000 of the 9 3/4% notes at 104.875% of par or
$323,015 pursuant to the terms of the underlying indenture.
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Our principal executive offices are located at 700 Route 46 East, Fairfield,
New Jersey 07004 and our telephone number is (973) 882-1010.
5
The Exchange Offer
On April 29, 2002, we privately placed $200,000,000 aggregate principal
amount of 8 3/8% series A senior subordinated notes due 2012, which we refer to
collectively as the original notes, in a transaction exempt from registration
under the Securities Act. In connection with the private placement, we entered
into a registration rights agreement, dated as of April 29, 2002, with the
initial purchaser of the original notes. In the registration rights agreement,
we agreed to register under the Securities Act an offer of our new 8 3/8%
series B senior subordinated notes due 2012, which we refer to collectively as
the exchange notes, in exchange for the original notes. The exchange offer is
intended to satisfy our obligations under the registration rights agreement. We
also agreed to deliver this prospectus to the holders of the original notes. In
this prospectus we refer to the original notes and the exchange notes as the
notes. You should read the discussion under the heading "Description of Notes"
for information regarding the notes.
The Exchange Offer.......... This is an offer to exchange $1,000 in principal
amount of exchange notes for each $1,000 in
principal amount of original notes. The exchange
notes are substantially identical to the original
notes, except that:
. the exchange notes will be freely
transferable, other than as described in this
prospectus;
. the exchange notes will not contain any
legend restricting their transfer;
. holders of the exchange notes will not be
entitled to the rights of the holders of the
original notes under the registration rights
agreement; and
. the exchange notes will not contain any
provisions regarding the payment of
liquidated damages.
We believe that you can transfer the exchange
notes without complying with the registration and
prospectus delivery provisions of the Securities
Act if you:
. acquire the exchange notes in the ordinary
course of your business;
. are not and do not intend to become engaged
in a distribution of the exchange notes;
. are not an affiliate of ours;
. are not a broker-dealer that acquired the
original notes directly from us; and
. are not a broker-dealer that acquired the
original notes as a result of market-making
or other trading activities.
If any of these conditions are not satisfied and
you transfer any exchange note without delivering
a proper prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act.
6
Each broker-dealer that receives exchange notes for its own account
in exchange for original notes that it acquired as a result of market-
making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of those
exchange notes. See "Plan of Distribution."
Registration Rights Agreement.... Under the registration rights agreement, we have agreed to use our
best efforts to consummate the exchange offer or cause the original
notes to be registered under the Securities Act to permit resales. If we
are not in compliance with our obligations under the registration
rights agreement, liquidated damages will accrue on the original notes
in addition to the interest that is otherwise due on the original notes. If
the exchange offer is completed on the terms and within the time
period contemplated by this prospectus, no liquidated damages will
be payable on the notes. The exchange notes will not contain any
provisions regarding the payment of liquidated damages. See
"Description of Notes--Registration Rights; Liquidated Damages."
Minimum Condition................ The exchange offer is not conditioned on any minimum aggregate
principal amount of original notes being tendered for exchange.
Expiration Date.................. The exchange offer will expire at 5:00 p.m., New York City time, on
August 15, 2002, unless we extend it.
Exchange Date.................... Original notes will be accepted for exchange at the time when all
conditions of the exchange offer are satisfied or waived. The
exchange notes will be delivered promptly after we accept the
original notes.
Conditions to the Exchange Offer. Our obligation to complete the exchange offer is subject to certain
conditions. See "The Exchange Offer--Conditions to the Exchange
Offer." We reserve the right to terminate or amend the exchange offer
at any time prior to the expiration date upon the occurrence of certain
specified events.
Withdrawal Rights................ You may withdraw the tender of your original notes at any time
before the expiration of the exchange offer on the expiration date.
Any original notes not accepted for any reason will be returned to you
without expense as promptly as practicable after the expiration or
termination of the exchange offer.
Procedures for Tendering Original
Notes.......................... See "The Exchange Offer--How to Tender."
U.S. Federal Income Tax
Consequences................... The exchange of the original notes for exchange notes by U.S. holders
should not be a taxable exchange for U.S. federal income tax
purposes and U.S. holders should not recognize any taxable gain or
loss as a result of such exchange. See "Certain Federal Income Tax
Considerations."
7
Effect on Holders of Original If the exchange offer is completed on the terms and within the period
Notes...................... contemplated by this prospectus, holders of original notes will have
no further registration or other rights under the registration rights
agreement, except under limited circumstances. See "Description of
Notes--Registration Rights; Liquidated Damages."
Holders of original notes who do not tender their original notes
will continue to hold those original notes. All untendered, and
tendered but unaccepted, original notes will continue to be
subject to the restrictions on transfer provided for in the original
notes and the indenture under which the original notes have been
issued. To the extent that original notes are tendered and accepted in
the exchange offer, the trading market, if any, for the original notes
could be adversely affected. See "Risk Factors--You may not be able
to sell your original notes if you do not exchange them for registered
exchange notes in the exchange offer."
Use of Proceeds.............. We will not receive any proceeds from the issuance of the exchange
notes in the exchange offer. The net proceeds from the sale of the
original notes were approximately $195.5 million after deducting the
initial purchaser's discount and expenses related to the initial offering
of the original notes. The net proceeds from the initial offering of the
original notes, along with available cash, were used to fund the tender
offer for our 9 3/4% senior subordinated notes due 2007. See "Use of
Proceeds."
Exchange Agent............... Wells Fargo Bank Minnesota, NA is serving as the exchange agent in
connection with the exchange offer.
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TERMS OF THE NOTES
The summary below describes the principal terms of the notes. Certain of the
terms and conditions described below are subject to important limitations and
exceptions. The "Description of Notes" section of this prospectus contains a
more detailed description of the terms and conditions of the notes.
The terms of the exchange notes to be issued are substantially identical to
the terms of the original notes, except that the exchange notes will be
registered under the Securities Act and certain transfer restrictions,
registration rights and liquidated damages relating to the original notes will
not apply to the exchange notes. The exchange notes will evidence the same debt
as the original notes and will be entitled to the benefits of the indenture.
See "Description of Notes."
Issuer...................... Prime Hospitality Corp.
Notes Offered............... $200.0 million in aggregate principal amount of
8 3/8% series B senior subordinated notes due
2012.
Maturity.................... May 1, 2012.
Interest Payment Dates...... May 1 and November 1 of each year. The first
payment will be made on November 1, 2002.
Optional Redemption......... We may redeem the notes on or after May 1, 2007,
at the redemption prices listed under
"Description of the Notes--Optional Redemption."
Prior to May 1, 2005, we may use the proceeds of
certain sales of our equity to redeem up to 35%
of the original principal amount of the notes at
a redemption price of 108.375% of their principal
amount, plus accrued and unpaid interest to the
redemption date.
Change of Control Offer..... If we experience a change of control, holders of
the notes may require us to repurchase part or
all of their notes at 101% of their principal
amount, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption
date.
Ranking..................... The notes will be unsecured senior subordinated
indebtedness and will be junior in right of
payment to all of our existing and future senior
indebtedness, including our obligations under our
senior credit facility and our 9 1/4% first
mortgage notes due 2006.
Covenants................... We will issue the notes under an indenture with
Wells Fargo Bank Minnesota, NA which will act as
trustee on your behalf. The indenture will, among
other things, restrict our ability and the
ability of our subsidiaries to:
. sell all or substantially all assets or merge
or consolidate with or into other companies;
. borrow money;
. incur liens;
. pay dividends or make other distributions;
. make other restricted payments and
investments; and
9
. enter into transactions with certain
affiliates.
Registration Rights......... Pursuant to the registration rights agreement, we
agreed to:
. file, within 60 days of the date on which we
issued the original notes, an exchange offer
registration statement with respect to an
offer to exchange the original notes for the
exchange notes that are identical in all
material respects to the original notes
except that they will not contain terms with
respect to transfer restrictions or
registration rights and will be registered
under the Securities Act. This exchange offer
registration statement is being filed to
satisfy such obligation;
. use best efforts to cause this exchange offer
registration statement to become effective
under the Securities Act within 120 days
after the date on which we issued the
original notes; and
. use best efforts to consummate the exchange
offer within 30 business days after the
effective date of this exchange offer
registration statement.
In addition, under certain circumstances, we may
be required to file a shelf registration
statement to cover resales of the notes held by
you.
If we do not comply with certain covenants set
forth in the registration rights agreement, we
must pay liquidated damages to holders of the
original notes. See "Description of
Notes--Registration Rights; Liquidated Damages."
Risk Factors................ You should consider carefully all of the
information set forth in this prospectus and, in
particular, you should evaluate the specific
factors under "Risk Factors."
10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The table below presents selected consolidated financial data derived from
our historical financial statements for the three months ended March 31, 2002
and 2001 and for the three years ended December 31, 2001. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements and
related notes included herein and other financial information incorporated
herein by reference and otherwise included herein.
Three Months Ended
March 31, Year Ended December 31,
---------------------- ----------------------------------
2002 2001 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(unaudited) (audited)
(dollars in thousands)
Income Statement Data:
Total revenue.......................... $ 98,124 129,660 $ 477,111 $ 548,121 $ 542,136
Property operating expenses............ 52,289 66,111 249,221 268,724 268,436
Corporate operating and property
management expenses.................. 27,973 30,620 116,373 111,895 99,378
Other charges.......................... -- -- -- -- 30,456
Depreciation and amortization.......... 9,990 9,264 38,176 40,739 44,769
---------- ---------- ---------- ---------- ----------
Income from operations................. 7,872 23,665 73,241 126,763 99,097
Investment income...................... 485 576 2,244 1,936 1,613
Interest expense, net(a)............... 7,753 8,908 33,643 41,325 43,634
Other income, net...................... -- -- 22,261 13,901 7,182
Provision for income taxes............. 236 5,903 24,711 39,497 25,061
Cumulative effect of accounting change,
net(b)............................... -- -- -- -- 5,315
---------- ---------- ---------- ---------- ----------
Income from continuing operations...... $ 368 $ 9,430 $ 39,492 $ 61,778 $ 33,882
========== ========== ========== ========== ==========
Cash Flow Data:
Cash flows provided by (used in):
Operating activities................... $ 4,941 $ 8,725 $ 63,211 $ 77,833 $ 99,792
Investing activities................... 9,704 (1,707) (7,132) 129,082 (6,590)
Financing activities................... (8,110) 3,769 (27,723) (212,420) (98,496)
EBITDA(c).............................. 17,822 33,378 113,027 170,071 177,027
Balance Sheet Data
Cash and cash equivalents.............. $ 36,626 $ 12,522 $ 30,091 $ 1,735 $ 7,240
Total assets........................... 1,145,298 1,167,539 1,156,770 1,165,872 1,328,779
Long-term debt (including current
portion)............................. 310,710 348,856 320,032 345,689 549,032
Total stockholders' equity............. 710,422 679,558 707,941 668,100 632,000
Financial Ratios:
EBITDA to cash interest(c)............. 3.14x 4.74x 3.50x 3.96x 3.44x
Net debt to EBITDA(c)(d)............... 2.80x 2.07x 2.57x 2.02x 3.06x
--------
(a) After giving effect to the offering of the original notes and the
application of the proceeds therefrom as described under "Use of Proceeds,"
our pro forma net interest expense for the three months ended March 31,
2002 would have been $7,242.
(b) Cumulative effect of a change in accounting principle of $5.3 million (net
of income taxes) in 1999, relates to our adoption of Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). We
adopted SOP 98-5 on January 1, 1999, and were required to write-off any
unamortized pre-opening costs that remained on the balance sheet.
11
(c) 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 us
for the purpose of analyzing our operating performance, leverage and
liquidity. Hotel EBITDA represents EBITDA generated from the operations of
owned hotels. EBITDA is not a measure of financial performance under
accounting principles generally accepted in the United States and should
not be considered as an alternative to net income as an indicator of our
operating performance or as an alternative to cash flows as a measure of
liquidity.
(d) Net debt is the sum of the current and long-term portions of debt reduced
by the cash balance.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods indicated was
as follows:
Three Months
Ended
March 31, Year Ended December 31,
----------- -----------------------------
2002 2001 2001 2000 1999 1998 1997
----- ----- ----- ----- ----- ----- -----
Ratio of earnings to fixed charges 1.01x 1.65x 1.75x 2.15x 1.61x 1.73x 1.69x
For this ratio, earnings consist of earnings (loss) before income taxes,
minority interest and discontinued operations plus fixed charges excluding
capitalized interest. Fixed charges consist of interest expensed and
capitalized, plus the portion of rent expense under operating leases deemed by
us to be representative of the interest factor.
After giving effect to the offering of the original notes and the application
of the proceeds therefrom as described under "Use of Proceeds," our pro forma
ratio of earnings to fixed charges for the year ended March 31, 2002 would have
been 1.01x.
12
RISK FACTORS
In addition to the other information contained in this prospectus, before
tendering your original notes for the exchange notes offered hereby, you should
consider carefully the following factors, which may be generally applicable to
the original notes as well as the exchange notes. This prospectus contains
forward-looking statements which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this prospectus.
Risks Relating to the Notes
You may not be able to sell your original notes if you do not exchange them for
registered exchange notes in the exchange offer.
If you do not exchange your original notes for exchange notes in the
exchange offer, your original notes will continue to be subject to the
restrictions on transfer as stated in the legend on the original notes. In
general, you may not reoffer, resell or otherwise transfer the original notes
in the United States unless they are:
. registered under the Securities Act;
. offered or sold under an exemption from the Securities Act and
applicable state securities laws; or
. offered or sold in a transaction not subject to the Securities Act and
applicable state securities laws.
We do not currently anticipate that we will register the original notes under
the Securities Act.
Holders of the original notes who do not tender their original notes will have
no further registration rights under the registration rights agreement.
Holders who do not tender their original notes, except for limited instances
involving the initial purchaser or holders of original notes who are not
eligible to participate in the exchange offer or who do not receive freely
transferable exchange notes in the exchange offer, will not have any further
registration rights under the registration rights agreement or otherwise and
will not have rights to receive liquidated damages.
The market for original notes may be significantly more limited after the
exchange offer and you may not be able to sell your original notes after the
exchange offer.
If original notes are tendered and accepted for exchange under the exchange
offer, the trading market for original notes that remain outstanding may be
significantly more limited. As a result, the liquidity of the original notes
not tendered for exchange could be adversely affected. The extent of the market
for original notes and the availability of price quotations would depend upon a
number of factors, including the number of holders of original notes remaining
outstanding and the interest of securities firms in maintaining a market in the
original notes. An issue of securities with a similar outstanding market value
available for trading, which is called the "float," may command a lower price
than would be comparable to an issue of securities with a greater float. As a
result, the market price for original notes that are not exchanged in the
exchange offer may be affected adversely as original notes exchanged in the
exchange offer reduce the float. The reduced float also may make the trading
price of the original notes that are not exchanged more volatile.
There are state securities law restrictions on resale of the exchange notes.
In order to comply with the securities laws of certain jurisdictions, the
exchange notes may not be offered or resold by any holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. We do not currently intend to register or
qualify the resale of the exchange notes in any such jurisdictions. However, an
13
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state
securities laws may also be available.
Your original notes will not be accepted for exchange if you fail to follow the
exchange offer procedures and, as a result, your original notes will continue
to be subject to existing transfer restrictions and you may not be able to sell
your original notes.
We will not accept your original notes for exchange if you do not follow the
exchange offer procedures. We will issue exchange notes as part of the exchange
offer only after a timely receipt of your original notes, a properly completed
and duly executed letter of transmittal and all other required documents.
Therefore, if you want to tender your original notes, please allow sufficient
time to ensure timely delivery. If we do not receive your original notes,
letter of transmittal and other required documents by the expiration date of
the exchange offer, we will not accept your original notes for exchange. We are
under no duty to give notification of defects or irregularities with respect to
the tenders of original notes for exchange. If there are defects or
irregularities with respect to your tender of original notes, we will not
accept your original notes for exchange.
There is no established trading market for the exchange notes.
The exchange notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to:
. the liquidity of any such market that may develop;
. the ability of holders of exchange notes to sell their exchange notes; or
. the price at which the holders of exchange notes would be able to sell
their exchange notes.
If such a market were to exist, the exchange notes could trade at prices that
may be higher or lower than their principal amount or purchase price, depending
on many factors, including prevailing interest rates, the market for similar
notes and our financial performance. We have been advised by the initial
purchaser that it presently intends to make a market in the exchange notes.
However, they are not obligated to do so, and any market-making activity with
respect to the exchange notes may be discontinued at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Exchange Act of 1934, as amended.
Our substantial indebtedness could adversely affect our financial health and
prevent us from fulfilling our obligations under these notes.
We have now and, after the offering, will continue to have a significant
amount of indebtedness. On March 31, 2002, after giving pro forma effect to the
offering of the original notes and the application of the net proceeds
therefrom as described in "Use of Proceeds," we would have had total
outstanding indebtedness of approximately $320.7 million (of which $200 million
would have consisted of the notes and the balance would have consisted of
senior debt).
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
14
. place us at a competitive disadvantage compared to our competitors that
have less debt; and
. limit our ability to borrow additional funds.
In addition, the indenture, our senior credit facility and our first
mortgage notes contain financial and other restrictive covenants that will
limit our ability to engage in activities that may be in our long-term best
interests. Our failure to comply with those covenants could result in an event
of default which, if not cured or waived, could result in the acceleration of
all of our debts.
Despite current indebtedness levels, we and our subsidiaries may still be able
to incur substantially more debt. This could further exacerbate the risks
associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not fully prohibit us
or our subsidiaries from doing so. As of March 31, 2002, after giving pro forma
effect to the offering of the original notes and the application of the net
proceeds therefrom as described in "Use of Proceeds," our senior credit
facility would permit additional borrowing of up to $114.4 million and all of
those borrowings could rank senior to the notes. If new debt is added to our or
our subsidiaries' current debt levels, the related risks that we and they now
face could intensify.
To service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including
the notes, and to fund planned capital expenditures will depend on our ability
to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our senior credit
facility, will be adequate to meet our future liquidity needs for at least the
next 12 months.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be available to us
under our senior credit facility in an amount sufficient to enable us to pay
our indebtedness, including the notes, or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness, including the
notes, on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness, including our senior credit facility or the
notes, on commercially reasonable terms or at all.
Your right to receive payments on the notes is junior to our existing
indebtedness and possibly all of our future borrowings.
The notes rank behind all of our existing indebtedness (other than trade
payables) and all of our future borrowings (other than trade payables), except
any future indebtedness that expressly provides that it ranks equal with, or
subordinated in right of payment to, the notes. As a result, upon any
distribution to our creditors in a bankruptcy, liquidation or reorganization or
similar proceeding relating to us or our property, the holders of our senior
debt will be entitled to be paid in full and in cash before any payment may be
made with respect to the notes.
Assuming we had completed the offering of the original notes on March 31,
2002 and applied the net proceeds therefrom as described in "Use of Proceeds,"
the notes would have been subordinated to approximately $120.7 million of
senior debt and approximately $85.4 million would have been available for
borrowing, subject to attainment of certain covenant testing, as additional
senior debt under our senior credit facility. We will be permitted to borrow
substantial additional indebtedness, including senior debt, in the future under
the terms of the indenture.
15
In addition, all payments on the notes and the guarantees will be blocked in
the event of a payment default on senior debt and may be blocked for up to 179
of 360 consecutive days in the event of certain non-payment defaults on senior
debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us, holders of the notes will participate with trade
creditors and all other holders of our subordinated indebtedness in the assets
remaining after we have paid all of our senior debt. However, because the
indenture requires that amounts otherwise payable to holders of the notes in a
bankruptcy or similar proceeding be paid to holders of senior debt instead,
holders of the notes may receive less, ratably, than holders of trade payables
in any such proceeding. In any of these cases, we may not have sufficient funds
to pay all of our creditors and holders of notes may receive less, ratably,
than the holders of our senior debt.
We may not have access to the cash flow or assets of our subsidiaries that we
may need to make payments on the notes.
For purposes of the indenture, our subsidiaries are divided into two
categories:
. Restricted Subsidiaries, which generally are subject to the restrictive
covenants set forth in the indenture; and
. Unrestricted Subsidiaries, which generally are not.
As of March 31, 2002, after giving effect to the offering of the original
notes and the application of the net proceeds therefrom as described in "Use of
Proceeds," our subsidiaries would have had approximately $13.5 million of
indebtedness outstanding to which the notes will be effectively subordinated.
Under certain future circumstances, we may be required to cause one or more
Restricted Subsidiaries to guarantee the notes, although none of our Restricted
Subsidiaries is presently required to guarantee the notes. Any such guarantee
will be subordinated on the same basis to senior debt of the Restricted
Subsidiary providing such guarantee as the notes are subordinated to our senior
debt. Any such guarantee may also be subject to challenge under applicable
fraudulent conveyance or other bankruptcy laws.
If an active trading market does not develop for these notes you may not be
able to resell them.
These notes have not been registered under the Securities Act. Accordingly,
the notes may only be offered or sold pursuant to an exemption from the
registration requirements of the Securities Act or pursuant to an effective
registration statement. We are required to commence the exchange offer for the
notes, or to register sales of the notes under the Securities Act, within
certain time periods as described in the section called "Description of
Notes--Registration Rights." Prior to this offering, there was no public market
for these notes and, although the notes are expected to be eligible for trading
in PORTAL, we cannot assure you that an active trading market will develop for
the notes. If no active trading market develops, you may not be able to resell
your notes at their fair market value or at all. Future trading prices of the
notes will depend on many factors, including, among other things, our ability
to effect the exchange offer, prevailing interest rates, our operating results
and the market for similar securities. We have been informed by the initial
purchaser that it currently intends to make a market in these notes after this
offering is completed. However, the initial purchaser may cease its
market-making at any time. We do not intend to apply for listing the notes on
any securities exchange.
Risks Relating to Our Business
Recent terrorist activities have created uncertainty for travel-related
businesses, including lodging companies.
The September 11th attacks have caused a disruption in travel-related
businesses in the United States. Consistent with the rest of the lodging
industry, we have experienced a decline in occupancy and average daily rate due
to the decline in travel. We are unable to predict whether this adverse impact
is only temporary or of
16
more lasting duration. Military actions against terrorists, new terrorist
attacks, actual or threatened, and other political events may cause a lengthy
period of uncertainty that could continue to adversely affect the lodging
industry, including us, as a result of customer reluctance to travel. Even
absent new events that create uncertainty, it may take some period of time for
travel to return to a more normal level.
The recent economic slowdown has had a significant adverse effect on our RevPAR
performance.
We experienced declines in revenues per available room, or RevPAR, beginning
in March 2001, even before the September 11th attacks. A sharper than
anticipated decline in business travel was the primary cause of the decline,
which was principally reflected in decreased occupancies. This decline has been
exacerbated by the September 11th attacks. We expect that the hotel industry
will experience a RevPAR decline for the full year 2002. The decline in
occupancy has also resulted in declines in room rates as hotels compete more
aggressively for guests, both of which have had a significant adverse effect on
our RevPAR and operating performance. If the economic slowdown worsens or
continues for a protracted period of time, it could have a material adverse
effect on our operations and earnings.
We are restricted by our debt obligations.
As of March 31, 2002, our total long-term debt (net of current portion) was
$309.7 million. We may incur additional indebtedness, including additional
secured indebtedness, in connection with the implementation of our growth
strategy. The degree to which we are leveraged, as well as our rent expense,
could have important consequences, including:
. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes
may be impaired;
. a substantial portion of our cash flow from operations may be dedicated
to the payment of principal and interest on our indebtedness and rent
expense, thereby reducing the funds available to us for our operations;
. in addition to the notes, certain other agreements governing our
indebtedness, including our senior credit facility and our first mortgage
notes, contain financial and other restrictive covenants, including those
restricting the incurrence of additional indebtedness, the creation of
liens, the payment of dividends and sales of assets, as well as those
imposing minimum net worth requirements;
. we may be at a competitive disadvantage to our competitors with less debt;
. we may be hindered in our ability to adjust rapidly to changing market
conditions; and
. our debt could make us less flexible to respond to a downturn in general
economic conditions or in our business.
Our ability to satisfy our obligations will be dependent upon our future
performance, which is subject to prevailing economic conditions and financial,
business and other factors, including factors beyond our control. There can be
no assurance that our operating cash flow will be sufficient to meet our debt
service requirements or to repay the notes at maturity or that we will be able
to refinance the notes or other indebtedness at maturity.
We may not be able to continue our AmeriSuites and Wellesley Inns & Suites
expansion.
We are committed to expanding our AmeriSuites and our Wellesley Inns &
Suites hotel brands. We will be required to expend significant management and
financial resources to expand these hotel brands and develop brand name
identification. We compete with other companies in our segments, some of which
have greater brand recognition and financial resources than we have. As a
result, there is no assurance that we can successfully expand the AmeriSuites
or Wellesley Inns & Suites hotel brands or compete effectively with these other
franchises. Expansion of these brands may present operating and marketing
challenges that are different from those currently encountered by us in our
existing markets. There can be no assurance that we will anticipate all of
17
the changing demands that expanding operations will impose on our management
and management information systems or our reservation service. The failure to
adapt our systems and procedures could have a material adverse effect on our
business.
Our expenses remain constant even if our revenue drops.
The expenses of owning property are not necessarily reduced when
circumstances like market factors and competition cause a reduction in income
from the property. Because of the effects of the September 11th attacks and
the current economic recession, we are working with our managers to
substantially reduce the operating costs of our hotels. In addition, based on
our assessment of the current operating environment, and in order to conserve
capital, we have reduced or suspended all non-essential capital expenditure
projects. Nevertheless, our financial condition could be adversely affected by
the following costs:
. interest rate levels;
. debt service levels (including on loans secured by mortgages);
. the availability of financing;
. the cost of compliance with government regulation, including zoning and
tax laws; and
. changes in governmental regulations, including those governing usage,
zoning and taxes.
If we are unable to reduce our expenses to reflect our current reduction in
revenue, our business will be adversely affected.
We may be unable to sell properties when appropriate because real estate
investments are illiquid.
Real estate investments generally cannot be sold quickly. We may not be able
to vary our portfolio promptly in response to economic and other conditions.
The inability to respond promptly to changes in the performance of our
investments could adversely affect our financial condition and ability to
service debt.
We may have to pay higher insurance premiums for our hotels.
Due to changes in the insurance market arising prior to the September 11th
attacks and the effects of the September 11th attacks, it is becoming more
difficult and more expensive to obtain insurance. We may encounter difficulty
in obtaining or renewing property or casualty insurance on our properties. In
addition, such insurance may be more limited and for some catastrophic risks
(e.g., earthquake, flood and terrorism) may not be generally available at
current levels. Even if we are able to renew our policies or to obtain new
policies at levels and with limitations consistent with our current policies,
we cannot be sure that we will be able to obtain such insurance at premium
rates that are commercially reasonable.
Rising interest rates could have an adverse effect on our cash flow and
interest expense.
Some of our borrowings bear interest at a variable rate, including amounts
outstanding under our senior credit facility. In addition, we may incur
indebtedness in the future that bears interest at a variable rate or we may be
required to retain our existing indebtedness at higher interest rates.
Accordingly, increases in interest rates could increase our interest expense
and adversely affect our cash flow, reducing the amounts available to make
payments on our other indebtedness, including the notes.
The geographic concentration of our hotels exposes us to any adverse
developments specifically affecting those areas.
Many of our hotels are located in Florida, New Jersey, Texas and Georgia,
and such geographic concentration exposes our operating results to events or
conditions which specifically affect those areas, such as
18
local and regional economic, weather and other conditions. Adverse developments
which specifically affect those areas may have a material adverse effect on our
results of operations.
We are subject to substantial 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, we are subject to laws governing our relationship
with employees, including minimum wage requirements, overtime, working
conditions and work permits requirements. Our 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 us. 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, or the ADA, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that we are 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 us as well as the lodging industry in general.
We rely on good franchisor relationships.
Under our franchise agreements, the applicable 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, we would have to explore entering
into a franchise agreement with another franchisor. There can be no assurance,
however, that a desirable replacement relationship would be available.
We depend on our key employees.
We are dependent on our President, Chief Executive Officer and Chairman of
the Board, A.F. Petrocelli, our Senior Vice President and Chief Financial
Officer, Douglas W. Vicari, and on certain other key members of our executive
management staff, the loss of whose services could have a material adverse
effect on our business and future operations.
We may be adversely affected by a change of control.
A Change of Control (as defined in the indenture) could require us to
refinance substantial amounts of indebtedness. Upon the occurrence of a Change
of Control, the holders of the notes would be entitled to require us to
purchase the notes at a purchase price equal to 101% of the principal amount of
such notes, plus accrued and unpaid interest, if any, to the date of purchase.
The Change of Control may also constitute a change of control or event of
default under our other indebtedness, including our senior credit facility and
the indenture with respect to our first mortgage notes. However, our senior
credit facility prohibits the purchase of the notes and our first mortgage
notes by us in the event of a Change of Control, unless and until such time as
the indebtedness under our senior credit facility is repaid in full. Our
failure to purchase the notes would result in a default under the indenture,
our senior credit facility and our first mortgage notes indenture. The failure
to repay the indebtedness under our senior credit facility and our first
mortgage notes indenture, if accelerated, would also constitute an event of
default under the indenture, which could have adverse consequences to us and
the holders of the notes. In the event of a Change of Control, there can be no
assurance that we would have sufficient assets to satisfy all of our
obligations under our senior credit facility, the notes and our first mortgage
notes. See "Description of the Notes."
Risks Relating to Our Industry
Our properties are subject to all the operating risks common to the hotel
industry.
Operating risks factors common to the hotel industry include:
19
. competition within each of our business segments in areas such as access,
location, quality or accommodations and room rate structures;
. the balance between supply and demand of and demand for hotel rooms and
accommodations;
. our continued ability to obtain new operating contracts and franchise
agreements;
. our ability to develop and maintain positive relations with current and
potential hotel owners and other industry participants;
. the level of rates and occupancy that can be achieved by such properties
and the availability and terms of financing;
. our ability or the ability of our franchisees to maintain the properties
in a first-class manner, including meeting capital expenditure
requirements;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. the effect of international, national and regional economic conditions
that will affect, among other things, demand for products and services at
our hotels; and
. government approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and change in laws
and regulations or the interpretation thereof and the potential effects
of tax legislative action.
The lodging industry is highly competitive.
We have no single competitor or small number of competitors that are
considered to be dominant in the industry. We operate in areas that contain
numerous competitors, some of which may have substantially greater resources
than us. Competition in the lodging industry is based generally on location,
availability, room rates or accommodations price, range and quality of services
and guest amenities offered. New or existing competitors could significantly
lower rates or offer greater conveniences, services or amenities or
significantly expand, improve or introduce new facilities in markets in which
we compete, thereby adversely affecting our operations and the number of
suitable business opportunities.
The hotel industry is seasonal in nature.
The hotel industry is seasonal in nature; however, the periods during which
our properties experience higher hotel revenue vary from property to property
and depend principally upon location. Although our revenue historically has
been lower in the first quarter than in the second, third or fourth quarters,
future acquisitions may affect seasonal fluctuations in revenue and cash flow.
The hotel and lodging business is capital intensive.
In order for our properties to remain attractive and competitive, we have to
spend money periodically to keep them well maintained, modernized and
refurbished. This creates an ongoing need for cash and, to the extent
expenditures cannot be funded from cash generated by our operations, we may be
required to borrow or otherwise obtain these funds. Accordingly, our financial
results may be sensitive to these costs and availability of funds.
Real estate investments are subject to numerous risks.
Real property investments are subject to varying degrees of risk. The
investment returns available from equity investments in real estate depend in
large part on the amount of income earned and capital appreciation generated by
the related properties, as well as the expenses incurred.
20
In addition, a variety of other factors affect income from properties and
real estate values, including governmental regulations, real estate, zoning,
tax and eminent domain laws, interest rate levels and the availability of
financing. For example, new or existing real estate, zoning or tax laws can
make it more expensive and/or time-consuming to develop real property or
expand, modify or renovate hotels.
When interest rates increase, the cost of acquiring, developing, expanding
or renovating real property increases. On the other hand, when interest rates
increase, real property values decrease as the number of potential buyers
decreases. Similarly, as financing becomes less available, it becomes more
difficult both to acquire and to sell real property. In addition, governments
can, under eminent domain laws, take real property. Sometimes this taking is
for less compensation than the owner believes the property is worth. Any of
these factors could have a material adverse impact on our results of operations
or financial condition.
In addition, equity real estate investments, such as the investments we hold
and any additional properties that we may acquire, are relatively difficult to
sell quickly. If our properties do not generate revenue sufficient to meet
operating expenses, including debt service and capital expenditures, our income
will be adversely affected.
Hotel development is subject to timing, budgeting and other risks.
We intend to develop hotel properties as suitable opportunities arise. New
project development has a number of risks, including risks associated with:
. construction delays or cost overruns that may increase project costs;
. receipt of zoning, occupancy and other required governmental permits and
authorizations;
. incurring development costs for projects that are not pursued to
completion;
. hurricanes, floods, fires or other "acts of God" that could adversely
impact a project; and
. governmental restrictions on the nature or size of a project.
We cannot assure you that any development project will be completed on time
or within budget.
Environmental regulations could make us liable for cleaning up hazardous
substances.
The comprehensive and frequently changing network of environmental laws,
ordinances and regulations of various federal, state and local and foreign
governments regulate certain of our operations and could make us liable for any
employee health and safety problems and for the costs of managing, removing or
cleaning up hazardous or toxic substances on, under, from or in property we
currently own or operate or that we previously owned or operated or to which we
may have sent waste. Those laws could impose liability without regard to
whether we knew of, or were responsible for, the presence of hazardous or toxic
substances and such liability could be joint and several. The presence of
hazardous or toxic substances, or the failure to properly clean up substances
when present, could jeopardize our ability to develop, use, sell or rent the
real property or to borrow using the real property as collateral. If we arrange
for the disposal or treatment of hazardous or toxic wastes we could be liable
for the costs of removing or cleaning up wastes at the disposal or treatment
facility, even if we never owned or operated that facility. Other laws,
ordinances and regulations may require us to manage, abate or remove certain
lead- or asbestos-containing materials. Similarly, the operation and closure of
storage tanks are often regulated by federal, state, local and foreign laws.
Certain laws, ordinances and regulations, such as those governing the
management or preservation of wetlands, coastal zones and threatened or
endangered species, could limit our ability to develop, use, sell or rent our
real property. Future changes in environmental laws or the discovery of
currently unknown environmental conditions may have a material adverse effect
on our financial condition or results of operations.
21
General economic conditions may negatively impact our ability to achieve
important financial tests.
Moderate or severe economic downturns or adverse conditions may adversely
affect our hotel operations. These conditions may be widespread or isolated to
one or more geographic regions. As a result, general economic conditions may
have a negative impact on our ability to achieve or sustain substantial
improvements in funds from operations and other important financial tests.
Further, an economic downturn in the countries of our high-end international
customers could cause a reduction in the frequency of their visits and,
consequently, the revenue generated by those customers.
22
USE OF PROCEEDS
There will be no proceeds to us from the exchange pursuant to the exchange
offer. The net proceeds from the sale of the original notes were approximately
$195.5 million after deducting the initial purchaser's discount and expenses
related to the offering of the original notes. The net proceeds from the
offering of the original notes were used, along with available cash, to fund
the tender offer and consent solicitation with respect to $189,692,000 of our
9 3/4% senior subordinated notes due 2007 which expired on May 14, 2002.
Tendering holders received total consideration of $1,050.00 per $1,000.00
principal amount of such notes. This consideration included a consent payment
of $30.00 per $1,000.00 principal amount of such notes. On June 14, 2002, we
redeemed the remaining $308,000 of the 9 3/4% notes for $323,015.
23
THE EXCHANGE OFFER
Purpose of the Exchange Offer
On April 29, 2002, we privately placed the original notes in a transaction
exempt from registration under the Securities Act. Accordingly, the original
notes may not be reoffered, resold or otherwise transferred in the United
States unless so registered or unless an exemption from the Securities Act
registration requirements is available. Pursuant to the registration rights
agreement, we agreed to:
. file, within 60 days of the date on which we issued the original notes,
an exchange offer registration statement, with respect to an offer to
exchange the original notes for exchange notes that are identical in all
material respects to the original notes except that they will not contain
terms with respect to transfer restrictions or registration rights and
will be registered under Securities Act. This exchange offer registration
statement is being filed to satisfy such obligation;
. use best efforts to cause the exchange offer registration statement to
become effective under the Securities Act within 120 days after the date
on which we issued the original notes; and
. use best efforts to consummate the exchange offer within 30 business days
after the effective date of the exchange offer registration statement.
In addition, under certain circumstances, we may be required to file a shelf
registration statement to cover resales of the notes held by you.
If we do not comply with certain covenants set forth in the registration
rights agreement, we must pay liquidated damages to holders of the original
notes. See "Description of Notes--Registration Rights; Liquidated Damages." The
sole purpose of the exchange offer is to fulfill our obligations with respect
to the registration rights agreement.
Terms of the Exchange
We hereby offer to exchange, upon the terms and subject to the conditions
set forth herein and in the letter of transmittal accompanying this prospectus,
$1,000 in principal amount of exchange notes for each $1,000 in principal
amount of the original notes. The terms of the exchange notes are identical in
all respects to the terms of the original notes for which they may be exchanged
pursuant to this exchange offer, except that the exchange notes will generally
be freely transferable by holders thereof, and the holders of the exchange
notes (as well as remaining holders of any original notes) will not be entitled
to registration rights under the registration rights agreement. The exchange
notes will evidence the same debt as the original notes and will be entitled to
the benefits of the indenture. See "Description of Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of original notes being tendered for exchange.
Based on interpretations by the Staff of the Securities and Exchange
Commission set forth in no-action letters issued to third parties, we believe
that exchange notes issued pursuant to the exchange offer in exchange for the
original notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than any holder which is (i) our "affiliate" within the
meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired
original notes directly from us or (iii) broker-dealers who acquired original
notes as a result of market making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such exchange notes are acquired in the ordinary
course of such holders' business, and such holders are not engaged in, and do
not intend to engage in, and have no arrangement or understanding with any
person to participate in, a distribution of such exchange notes. Each
broker-dealer that receives exchange notes pursuant to the exchange offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. The letter of transmittal states that by so acknowledging,
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the
24
meaning of the Securities Act. Broker-dealers who acquired original notes as a
result of market making or other trading activities may use this prospectus, as
supplemented or amended, in connection with resales of the exchange notes. We
have agreed that, for a period not to exceed 180 days after the exchange date,
we will make this prospectus available to any broker-dealer for use in
connection with any such resale. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Tendering holders of original notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the original notes
pursuant to the exchange offer.
The exchange notes will bear interest from and including their respective
dates of issuance. Holders whose original notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the exchange notes, such interest to be payable with the first interest payment
on the exchange notes, but will not receive any payment in respect of interest
on the original notes accrued after the issuance of the exchange notes.
Expiration Date; Extensions; Termination; Amendments
The exchange offer expires on the expiration date. The expiration date is
5:00 p.m., New York City time, on August 15, 2002, unless we in our sole
discretion extend the period during which the exchange offer is open, in which
event the expiration date is the latest time and date on which the exchange
offer, as so extended by us, expires. We reserve the right to extend the
exchange offer at any time and from time to time prior to the expiration date
by giving written notice to Wells Fargo Bank Minnesota, NA, as the exchange
agent, and by timely public announcement communicated, unless otherwise
required by applicable law or regulation, by making a release to the Dow Jones
News Service. During any extension of the exchange offer, all original notes
previously tendered pursuant to the exchange offer and not validly withdrawn
will remain subject to the exchange offer.
The exchange date will be the first business day following the expiration
date. We expressly reserve the right to (i) terminate the exchange offer and
not accept for exchange any original notes for any reason, including if any of
the events set forth below under "--Conditions to the Exchange Offer" shall
have occurred and shall not have been waived by us and (ii) amend the terms of
the exchange offer in any manner, whether before or after any tender of the
original notes. If any such termination or amendment occurs, we will notify the
exchange agent in writing and will either issue a press release or give written
notice to the holders of the original notes as promptly as practicable. Unless
we terminate the exchange offer prior to 5:00 p.m., New York City time, on the
expiration date, we will exchange the exchange notes for the original notes on
the exchange date.
If we waive any material condition to the exchange offer, or amend the
exchange offer in any other material respect, and if at the time that notice of
such waiver or amendment is first published, sent or given to holders of
original notes in the manner specified above, the exchange offer is scheduled
to expire at any time earlier than the expiration of a period ending on the
fifth business day from, and including, the date that such notice is first so
published, sent or given, then the exchange offer will be extended until the
expiration of such period of five business days.
This prospectus and the related letter of transmittal and other relevant
materials will be mailed by us to record holders of original notes and will be
furnished to brokers, banks and similar persons whose names, or the names of
whose nominees, appear on the lists of holders for subsequent transmittal to
beneficial owners of original notes.
How to Tender
The tender to us of original notes by you pursuant to one of the procedures
set forth below will constitute an agreement between you and us in accordance
with the terms and subject to the conditions set forth herein and in the letter
of transmittal.
25
General Procedures. A holder of an original note may tender the same by (i)
properly completing and signing the letter of transmittal or a facsimile
thereof (all references in this prospectus to the letter of transmittal shall
be deemed to include a facsimile thereof) and delivering the same, together
with the certificate or certificates representing the original notes being
tendered and any required signature guarantees (or a timely confirmation of a
book-entry transfer, referred to herein as a Book-Entry Confirmation, pursuant
to the procedure described below), to the exchange agent at its address set
forth on the back cover of this prospectus on or prior to the expiration date
or (ii) complying with the guaranteed delivery procedures described below.
If tendered original notes are registered in the name of the signer of the
letter of transmittal and the exchange notes to be issued in exchange therefor
are to be issued (and any untendered original notes are to be reissued) in the
name of the registered holder, the signature of such signer need not be
guaranteed. In any other case, the tendered original notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to us and
duly executed by the registered holder and the signature on the endorsement or
instrument of transfer must be guaranteed by a firm, referred to herein as an
Eligible Institution, that is a member of a recognized signature guarantee
medallion program, referred to herein as an Eligible Program, within the
meaning of Rule 17Ad-15 under the Exchange Act. If the exchange notes and/or
original notes not exchanged are to be delivered to an address other than that
of the registered holder appearing on the note register for the original notes,
the signature on the letter of transmittal must be guaranteed by an Eligible
Institution.
Any beneficial owner whose original notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender original notes should contact such holder promptly and instruct such
holder to tender original notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such original notes himself, such beneficial
owner must, prior to completing and executing the letter of transmittal and
delivering such original notes, either make appropriate arrangements to
register ownership of the original notes in such beneficial owner's name or
follow the procedures described in the immediately preceding paragraph. The
transfer of record ownership may take considerable time.
Book-Entry Transfer. The exchange agent will make a request to establish an
account with respect to the original notes at The Depository Trust Company,
referred to herein as the Book-Entry Transfer Facility, for purposes of the
exchange offer within two business days after receipt of this prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of original notes by causing
the Book-Entry Transfer Facility to transfer such original notes into the
exchange agent's account at the Book-Entry Transfer Facility in accordance with
the Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of original notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the letter of transmittal, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the exchange agent at the address specified on
the back cover page of this prospectus on or prior to the expiration date or
the guaranteed delivery procedures described below must be complied with.
The method of delivery of original notes and all other documents is at your
election and risk. If sent by mail, we recommend that you use registered mail,
return receipt requested, obtain proper insurance, and complete the mailing
sufficiently in advance of the expiration date to permit delivery to the
exchange agent on or before the expiration date.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the exchange agent will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a holder pursuant to the exchange offer if the holder does not
provide its taxpayer identification number (social security number or employer
identification number) and certify that such number is correct. Each tendering
holder should complete and sign the main signature form and the Substitute Form
W-9 included as part of the letter of transmittal, so as to provide the
information and certification necessary to avoid backup withholding, unless an
applicable exemption exists and is proved in a manner satisfactory to us and
the exchange agent.
26
Guaranteed Delivery Procedures. If a holder desires to accept the exchange
offer and time will not permit a letter of transmittal or original notes to
reach the exchange agent before the expiration date, a tender may be effected
if the exchange agent has received at its office listed on the back cover
hereof on or prior to the expiration date a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the names in which the original notes are registered and,
if possible, the certificate numbers of the original notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within
three New York Stock Exchange trading days after the date of execution of such
letter, telegram or facsimile transmission by the Eligible Institution, the
original notes, in proper form for transfer, will be delivered by such Eligible
Institution together with a properly completed and duly executed letter of
transmittal (and any other required documents). Unless original notes being
tendered by the above-described method (or a timely Book-Entry Confirmation)
are deposited with the exchange agent within the time period set forth above
(accompanied or preceded by a properly completed letter of transmittal and any
other required documents), we may, at our option, reject the tender. Copies of
a Notice of Guaranteed Delivery which may be used by Eligible Institutions for
the purposes described in this paragraph are being delivered with this
prospectus and the related letter of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed letter of transmittal
accompanied by the original notes (or a timely Book-Entry Confirmation) is
received by the exchange agent. Issuances of exchange notes in exchange for
original notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the letter of
transmittal (and any other required documents) and the tendered original notes
(or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of original notes will be
determined by us and our determination will be final and binding. We reserve
the absolute right to reject any or all tenders not in proper form or the
acceptances for exchange of which may, in the opinion of our counsel, be
unlawful. We also reserve the absolute right to waive any of the conditions of
the exchange offer or any defect or irregularities in tenders of any particular
holder whether or not similar defects or irregularities are waived in the case
of other holders. None of us, the exchange agent or any other person will be
under any duty to give notification of any defects or irregularities in tenders
or shall incur any liability for failure to give any such notification. Our
interpretation of the terms and conditions of the exchange offer (including the
letter of transmittal and the instructions thereto) will be final and binding.
Terms and Conditions of the Letter of Transmittal
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer.
The party tendering original notes for exchange, referred to herein as the
Transferor, exchanges, assigns and transfers the original notes to us and
irrevocably constitutes and appoints the exchange agent as the Transferor's
agent and attorney-in-fact to cause the original notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the original
notes and to acquire exchange notes issuable upon the exchange of such tendered
original notes, and that, when the same are accepted for exchange, we will
acquire good and unencumbered title to the tendered original notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by us to be necessary or
desirable to complete the exchange, assignment and transfer of tendered
original notes. The Transferor further agrees that acceptance of any tendered
original notes by us and the issuance of exchange notes in exchange therefor
shall constitute performance in full by us of our obligations under the
registration rights agreement and that we shall have no further obligations or
liabilities thereunder (except in certain limited circumstances). All authority
conferred by the Transferor will survive the death or incapacity of the
Transferor and every obligation of the Transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such Transferor.
27
By tendering original notes, the Transferor certifies (a) that it is not an
"affiliate" of ours within the meaning of Rule 405 under the Securities Act,
that it is not a broker-dealer that owns original notes acquired directly from
us or an affiliate of ours, that it is acquiring the exchange notes offered
hereby in the ordinary course of such Transferor's business and that such
Transferor has no arrangement with any person to participate in the
distribution of such exchange notes or (b) that it is an "affiliate" (as so
defined) of ours or of the initial purchaser in the offering of the original
notes, and that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable to it.
Withdrawal Rights
Original notes tendered pursuant to the exchange offer may be withdrawn at
any time prior to the expiration date. For a withdrawal to be effective, a
written or facsimile transmission notice of withdrawal must be timely received
by the exchange agent at its address set forth on the back cover of this
prospectus. Any such notice of withdrawal must specify the person named in the
letter of transmittal as having tendered original notes to be withdrawn, the
certificate numbers of original notes to be withdrawn, the principal amount of
original notes to be withdrawn (which must be an authorized denomination), a
statement that such holder is withdrawing his election to have such original
notes exchanged, and the name of the registered holder of such original notes,
and must be signed by the holder in the same manner as the original signature
on the letter of transmittal (including any required signature guarantees) or
be accompanied by evidence satisfactory to us that the person withdrawing the
tender has succeeded to the beneficial ownership of the original notes being
withdrawn. The exchange agent will return the properly withdrawn original notes
promptly following receipt of notice of withdrawal. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by us, and our determination will be final and binding on all
parties.
Acceptance of Original Notes for Exchange; Delivery of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer, the
acceptance for exchange of original notes validly tendered and not withdrawn
and the issuance of the exchange notes will be made on the exchange date. For
the purposes of the exchange offer, we shall be deemed to have accepted for
exchange validly tendered original notes when, as and if we have given written
notice thereof to the exchange agent.
The exchange agent will act as agent for the tendering holders of original
notes for the purposes of receiving exchange notes from us and causing the
original notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the exchange offer, delivery of exchange notes to
be issued in exchange for accepted original notes will be made by the exchange
agent promptly after acceptance of the tendered original notes. Original notes
not accepted for exchange by us will be returned without expense to the
tendering holders (or in the case of original notes tendered by book-entry
transfer into the exchange agent's account at the Book-Entry Transfer Facility
pursuant to the procedures described above, such non-exchanged original notes
will be credited to an account maintained with such Book-Entry Transfer
Facility) promptly following the expiration date or, if we terminate the
exchange offer prior to the expiration date, promptly after the exchange offer
is so terminated.
Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to issue exchange notes in
respect of any properly tendered original notes not previously accepted and may
terminate the exchange offer (by oral or written notice to the exchange agent
and by timely public announcement communicated, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the exchange offer, if
(a) there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any court
or governmental agency or other governmental regulatory or administrative
agency or commission, (i) seeking to restrain or prohibit the making or
consummation of the exchange offer or any other
28
transaction contemplated by the exchange offer, (ii) assessing or seeking any
damages as a result thereof, or (iii) resulting in a material delay in our
ability to accept for exchange or exchange some or all of the original notes
pursuant to the exchange offer; (b) any statute, rule, regulation, order or
injunction shall be sought, proposed, introduced, enacted, promulgated or
deemed applicable to the exchange offer or any of the transactions contemplated
by the exchange offer by any government or governmental authority, domestic or
foreign, or any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or foreign, that
in our sole judgment might directly or indirectly result in any of the
consequences referred to in clauses (a)(i) or (ii) above or, in our sole
judgment, might result in the holders of exchange notes having obligations with
respect to resales and transfers of exchange notes which are greater than those
described in the interpretations of the Commission referred to herein, or would
otherwise make it inadvisable to proceed with the exchange offer; or (c) a
material adverse change shall have occurred in our business, condition
(financial or otherwise), operations, or prospects.
The foregoing conditions are for our sole benefit and may be asserted by us
with respect to all or any portion of the exchange offer regardless of the
circumstances (including any action or inaction by us) giving rise to such
condition or may be waived by us in whole or in part at any time or from time
to time in our sole discretion. The failure by us at any time to exercise any
of the foregoing rights will not be deemed a waiver of any such right, and each
right will be deemed an ongoing right which may be asserted at any time or from
time to time. In addition, we have reserved the right, notwithstanding the
satisfaction of each of the foregoing conditions, to terminate or amend the
exchange offer.
Any determination by us concerning the fulfillment or non-fulfillment of any
conditions will be final and binding upon all parties. In addition, we will not
accept for exchange any original notes tendered and no exchange notes will be
issued in exchange for any such original notes, if at such time any stop order
shall be threatened or in effect with respect to the registration statement of
which this prospectus constitutes a part or qualification of the indenture
under the Trust Indenture Act of 1939.
Exchange Agent
Wells Fargo Bank Minnesota, NA has been appointed as the exchange agent for
the exchange offer. Letters of transmittal must be addressed to the exchange
agent at its address set forth on the back cover page of this prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
Solicitation of Tenders; Expenses
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and will not make any payments to brokers, dealers or others
for soliciting acceptances of the exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will
reimburse it for reasonable out-of-pocket expenses in connection therewith. We
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding tenders
for their customers. The expenses to be incurred in connection with the
exchange offer, including the fees and expenses of the exchange agent and
printing, accounting and legal fees, will be paid by us and are estimated at
approximately $500,000.
No person has been authorized to give any information or to make any
representations in connection with the exchange offer other than those
contained in this prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by us.
Neither the delivery of this prospectus nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change
in our affairs since the respective dates as of which information is given
herein. The exchange offer is not being made to (nor will tenders be accepted
from or on behalf of) holders of original notes in any jurisdiction in which
the making of the exchange offer or the acceptance thereof would not be in
compliance with the laws of
29
such jurisdiction. However, we may, at our discretion, take such action as we
may deem necessary to make the exchange offer in any such jurisdiction and
extend the exchange offer to holders of original notes in such jurisdiction. In
any jurisdiction the securities laws or blue sky laws of which require the
exchange offer to be made by a licensed broker or dealer, the exchange offer is
being made on behalf of us by one or more registered brokers or dealers which
are licensed under the laws of such jurisdiction.
Appraisal Rights
You will not have dissenters' rights or appraisal rights in connection with
the exchange offer.
Federal Income Tax Consequences
The exchange of original notes for exchange notes by holders should not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange. See "Certain Federal Income Tax Considerations."
Other
Participation in the exchange offer is voluntary and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered original notes pursuant to the terms of this exchange offer,
we will have fulfilled a covenant contained in the terms of the original notes
and the registration rights agreement. Holders of the original notes who do not
tender their original notes in the exchange offer will continue to hold such
original notes and will be entitled to all the rights, and limitations
applicable thereto, under the indenture, except for any such rights under the
registration rights agreement which by their terms terminate or cease to have
further effect as a result of the making of this exchange offer. See
"Description of Notes." All untendered original notes will continue to be
subject to the restriction on transfer set forth in the indenture. To the
extent that original notes are tendered and accepted in the exchange offer, the
trading market, if any, for the original notes could be adversely affected. See
"Risk Factors--The market for original notes may be significantly more limited
after the exchange offer and you may not be able to sell your original notes
after the exchange offer."
We may in the future seek to acquire untendered original notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plan to acquire any original notes which are
not tendered in the exchange offer.
30
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
March 31, 2002 and as adjusted to give effect to the initial offering of the
original notes and the application of the proceeds therefrom as described in
"Use of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and notes thereto included herein and other
financial information incorporated herein by reference and otherwise included
herein.
March 31, 2002
-------------------------
Actual As Adjusted(1)
---------- --------------
(dollars in thousands)
Current portion of debt.......................................................... $ 1,001 $ 1,001
---------- ----------
Long-term debt, net of current portion:
Senior credit facility(2)..................................................... $ -- $ --
9 1/4% first mortgage notes due 2006.......................................... 103,970 103,970
Mortgages and other notes payable............................................. 15,739 15,739
9 3/4% senior subordinated notes due 2007..................................... 190,000 --
8 3/8% senior subordinated notes due 2012..................................... -- 200,000
---------- ----------
Total long-term debt, net of current portion.............................. $ 309,709 $ 319,709
---------- ----------
Total debt................................................................ $ 310,710 $ 320,710
========== ==========
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;
56,384,401 shares issued and outstanding.................................... 564 564
Capital in excess of par value................................................ 526,771 526,771
Retained earnings............................................................. 297,934 295,748
Accumulated other comprehensive loss, net of taxes............................ -- --
Treasury stock, at cost (11,507,078 shares)................................... (114,847) (114,847)
Total stockholders' equity................................................ 710,422 708,236
---------- ----------
Total capitalization...................................................... $1,021,132 $1,028,946
========== ==========
--------
(1) As adjusted to reflect the initial offering of the original notes and the
application of the net proceeds therefrom as described in "Use of Proceeds"
and the redemption of the outstanding 9 3/4% notes which we did not
purchase pursuant to the tender offer.
(2) Our senior credit facility provides for availability of funds up to the
lesser of $125.0 million and a borrowing base determined under the
agreement. As of March 31, 2002, we had no outstanding borrowings under our
senior credit facility and had additional borrowing availability of
approximately $85.4 million, subject to achieving certain covenant ratios.
31
SELECTED CONSOLIDATED FINANCIAL DATA
The table below presents selected consolidated financial data derived from
our historical financial statements for the five years ended December 31, 2001
and for the three months ended March 31, 2002 and 2001. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements and
notes thereto included herein and other financial information which is
incorporated herein by reference and otherwise included herein.
As of and for the
Three Months Ended
March 31, As of and for the Year Ended December 31,
--------------------- ----------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (audited)
(dollars in thousands)
Statement of Operations Data:
Total revenues.......................... $ 98,124 $ 129,660 $ 477,111 $ 548,121 $ 542,136 $ 458,858 $ 330,253
Income from continuing operations
before the items listed below.......... 368 9,430 39,492 61,778 39,197 52,951 25,126
Discontinued operations (net of income
taxes)(c).............................. 406 176 777 1,036 1,000 896 805
Extraordinary items losses on discharge
of indebtedness (net of income
taxes)................................. -- -- (76) (314) -- -- --
Cumulative effect of a change in
accounting principle (net of income
taxes)(a).............................. -- -- -- -- (5,315) -- --
Net income.............................. 774 9,606 40,193 62,500 34,882 53,847 25,931
Pro-forma effect of change in accounting
principle (net of income taxes)(b)..... -- -- -- -- -- (3,788) (255)
Pro-forma net income after taxes(b)..... $ 774 $ 9,606 $ 40,193 $ 62,500 $ 34,882 $ 50,059 $ 25,676
Net Income Per Common Share:
Basic................................ $ 0.02 $ 0.21 $ .90 $ 1.37 $ .68 $ 1.04 $ .56
Diluted.............................. $ 0.02 $ 0.21 $ .88 $ 1.34 $ .67 $ 1.00 $ .54
Pro-Forma Net Income Per Common
Share(b):
Basic................................ -- -- -- -- -- $ .97 $ .55
Diluted.............................. -- -- -- -- -- $ .94 $ .53
Balance Sheet Data:
Total assets......................... $1,145,298 $1,167,539 $1,156,770 $1,165,872 $1,328,779 $1,408,398 $1,196,666
Long-term debt, net of current
portion............................. 309,709 343,052 309,736 340,987 543,485 582,031 554,500
Stockholders' equity................. 710,422 679,558 707,941 668,100 632,000 641,045 524,413
--------
(a) Cumulative effect of a change in accounting principle of $5.3 million (net
of income taxes) in 1999, relates to the adoption by us of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"). We adopted SOP 98-5 on January 1, 1999, and were required to
write-off any unamortized pre-opening costs that remained on the balance
sheet.
(b) Pro-forma amounts reflect the effect on net income and earnings per share
had we written off pre- opening costs pursuant to SOP-98-5 in 1997 and 1998.
(c) The operating results of the full service hotel and the Wellesley Inn that
were sold in January 2002 have been presented as discontinued operations
for all years presented.
32
Unaudited selected consolidated quarterly financial data for the three
months ended March 31, 2002 and for the years ending December 31, 2001 and 2000
follow (in thousands, except per share amounts):
March 31, March 31, June 30, September 30, December 31,
Three Months Ended 2002 2001 2001 2001 2001
------------------ --------- --------- -------- ------------- ------------
Total revenue................................. $98,124 $129,660 $131,784 $116,922 $ 98,746
Operating income.............................. 7,872 23,665 26,272 15,679 7,725
Income before discontinued operations, net of
income taxes and extraordinary items, net of
income taxes................................ 368 9,430 20,428 5,045 4,587
Discontinued operations (net of income taxes). 406 176 304 90 209
Extraordinary items (net of income taxes)..... -- -- (110) 34 --
Net income.................................... 774 9,606 20,622 5,169 4,796
Earnings per common share:
Basic:
Income before discontinued operations, net of
income taxes and extraordinary items, net of
income taxes................................ $ 0.02 $ 0.21 $ 0.45 $ 0.12 $ 0.11
Discontinued operations (net of income taxes). -- -- 0.01 -- --
Extraordinary items (net of income taxes)..... -- -- -- -- --
Earnings per share............................ $ 0.02 $ 0.21 $ 0.46 $ 0.12 $ 0.11
Diluted:
Income before discontinued operations, net of
income taxes and extraordinary items, net of
income taxes................................ $ 0.02 $ 0.21 $ 0.44 $ 0.11 $ 0.10
Discontinued operations (net of income taxes). -- -- 0.01 -- --
Extraordinary items (net of income taxes)..... -- -- -- -- --
Earnings per share............................ $ 0.02 $ 0.21 $ 0.45 $ 0.11 $ 0.10
March 31, June 30, September 30, December 31,
Three Months Ended 2000 2000 2000 2000
------------------ --------- -------- ------------- ------------
Total revenue................................. $135,655 $138,036 $143,446 $130,985
Operating income.............................. 29,541 36,363 32,972 27,887
Income before discontinued operations, net of
income taxes and extraordinary items, net of
income taxes................................ 10,616 24,160 15,267 11,735
Discontinued operations (net of income taxes). 141 237 385 273
Extraordinary items (net of income taxes)..... (302) -- -- (12)
Net income.................................... 10,455 24,397 15,652 11,996
Earnings per common share:
Basic:
Income before discontinued operations, net of
income taxes and extraordinary items, net of
income taxes................................ $ 0.22 $ 0.53 $ 0.34 $ 0.24
Discontinued operations (net of income taxes). -- .01 .01 .01
Extraordinary items (net of income taxes)..... -- -- -- --
Earnings per share............................ $ 0.22 $ 0.54 $ 0.35 $ 0.27
Diluted:
Income before discontinued operations, net of
income taxes and extraordinary items, net of
income taxes................................ $ 0.22 $ 0.52 $ 0.33 $ 0.25
Discontinued operations (net of income taxes). -- .01 .01 .01
Extraordinary items (net of income taxes)..... -- -- -- --
Earnings per share............................ $ 0.22 $ 0.53 $ 0.34 $ 0.26
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
We are an owner, manager and franchisor of hotels. As of March 31, 2002, our
portfolio consists of 234 hotels in operation containing 29,706 rooms located
in 33 states. We control two hotel brands--AmeriSuites(R) and Wellesley Inns &
Suites(R)--and operate a portfolio of upscale, full-service hotels under
franchise agreements with national hotel chains. We own and operate 129 hotels,
the Owned Hotels, operate 28 hotels under lease agreements primarily with real
estate investment trusts, the Leased Hotels, manage 40 hotels for third
parties, the Managed Hotels, and franchise 37 hotels which we do not operate,
the Franchised Hotels. Our portfolio is comprised of 141 AmeriSuites hotels, 73
Wellesley Inns & Suites hotels and 20 non-proprietary brand hotels.
Our strategy is to develop our proprietary AmeriSuites and Wellesley Inns &
Suites brands. Through the development of our proprietary brands, we are in the
process of transforming ourself from an owner/operator into a franchisor and
manager and have positioned ourself to generate additional revenues with
minimal capital investment. Our strategy is also focused on growing the
operating profits of our portfolio. With nearly 200 hotels in operation, we
believe we possess the hotel management expertise to maximize the profitability
and value of our hotel assets.
Our operating results for 2001 and for the first quarter of 2002 were
impacted by the weakness in the economy which had a significant negative impact
on business travel. As a result, for the year ended December 31, 2001 and for
the first quarter of 2002, revenues from comparable Owned and Leased hotels
declined by 7.9% and 13.3%, respectively, and gross operating profits on these
hotels declined by 15.7% and 21.9%, respectively. Overall, for the year ended
December 31, 2001 and for the first quarter of 2002, revenue declined by 13.0%
and 24.3%, respectively, and EBITDA decreased by 33.5% and 45.8%, respectively,
due to the results of the comparable Owned and Leased hotels and the effect of
asset sales and lease terminations.
Results of operations for the three months ended March 31, 2002 compared to
the three months ended March 31, 2001.
Hotel revenues consist of lodging revenues (which consist primarily of room,
telephone and vending revenues) and food and beverage revenues. Hotel revenues
decreased by $30.3 million, or 24.2%, for the three months ended March 31, 2002
compared to the same period in 2001, primarily due to a 13.3% decline in
revenues from comparable hotels and the impact of asset sales and lease
terminations in 2001.
We operate three product types: our proprietary AmeriSuites which are
upscale all-suites hotels; our proprietary Wellesley Inns & Suites which are
mid-price limited service hotels and our non-proprietary brand hotels which are
primarily upscale full-service hotels.
34
The following table illustrates the revenue per available room, or REVPAR,
change for the quarter, by segment for all owned, leased and managed hotels
where we have a significant financial interest which were operated for
comparable three-month periods in 2002 and 2001.
Three Months ended March 31,
----------------------------
2002 2001 % Change
------- ------- --------
AmeriSuites
Occupancy............................... 60.8% 60.9%
ADR..................................... $ 73.63 $ 83.24
REVPAR.................................. $ 44.78 $ 50.70 (11.7)%
Wellesley Inns & Suites
Occupancy............................... 57.8% 61.3%
ADR..................................... $ 61.83 $ 68.90
REVPAR.................................. $ 35.72 $ 42.26 (15.5)%
Non-Proprietary Brands
Occupancy............................... 54.8% 60.7%
ADR..................................... $103.32 $112.58
REVPAR.................................. $ 56.65 $ 68.95 (17.8)%
Total
Occupancy............................... 59.5% 61.1%
ADR..................................... $ 73.14 $ 82.15
REVPAR.................................. $ 43.54 $ 50.19 (13.3)%
The REVPAR at comparable hotels was impacted in this three-month period by
the slowdown in the economy which has affected business travel. The decline was
primarily driven by a decrease in average daily rate, or ADR, of 11.0%. Key
markets which contributed to the decline were Atlanta, Chicago, Dallas,
Northern New Jersey and South Florida.
Management, franchise and other fees consist primarily of base and incentive
fees earned under management agreements, royalties earned under franchise
agreements and sales commissions earned by the Company's national sales group.
Management, franchise and other fees decreased by $0.9 million, or 25.2%, for
the three months ended March 31, 2002 compared to the same period in 2001. The
decrease was due to a decline in the number of managed hotels partially offset
by franchise royalty fees derived from hotels sold to franchisees and new hotel
openings.
Rental and other revenues consist of rental income, interest on mortgages
and notes receivable and other miscellaneous operating income. Rental and other
revenues decreased by $0.3 million, or 31.9%, for the three months ended March
31, 2002 compared to the same period in 2001 due to the retirement of a note
receivable.
Hotel operating expenses consist of all direct costs related to the
operation of our properties (lodging, food and beverage, administration,
selling and advertising, utilities and repairs and maintenance). Hotel
operating expenses decreased by $13.8 million, or 20.9%, for the three months
ended March 31, 2002 compared to the same period in 2001 due to the decline in
revenues. For the comparable three-month periods, hotel operating expenses, as
a percentage of hotel revenues, increased from 52.9% in 2001 to 55.2% in 2002
due to the decline in ADR.
Rent and other occupancy expenses consist primarily of rent expense,
property insurance and real estate and other taxes. Rent and other occupancy
expenses decreased by $1.9 million, or 8.1%, for the three months ended March
31, 2002 as compared to the same period in 2001, primarily due to the
termination of eight hotel leases with MeriStar Hospitality in 2001.
35
General and administrative expenses consist primarily of centralized
management expenses associated with operating the hotels, corporate expenses
and national brand advertising expenses. General and administrative expenses
decreased by $0.8 million, or 10.5%, for the three months ended March 31, 2002
compared to the same period in 2001, due primarily to the timing of brand
advertising expenditures.
Depreciation and amortization expense increased by $0.7 million, or 7.8%,
for the three months ended March 31, 2002 compared to the same period in 2001.
This increase was due to depreciation associated with maintenance capital
additions in 2001 partially offset by the impact of asset sales in 2001.
Investment income decreased by $0.1 million, or 15.8%, for the three months
ended March 31, 2002 compared to the same period in 2001 primarily due to lower
interest rates in 2002.
Interest expense decreased by $1.2 million, or 13.0%, for the three months
ended March 31, 2002 compared to the same period in 2001 primarily due to the
retirement of debt resulting from asset sales and operating cash flow.
Results of operations for the year ended December 31, 2001 compared to the
year ended December 31, 2000.
Hotel revenues for the year ended December 31, 2001 decreased by $66.9
million, or 12.7%, from $528.3 million in 2000 to $461.4 million in 2001. The
decrease was due primarily to a 7.9% decline in revenues from comparable Owned
and Leased hotels, and the impact of asset sales and lease terminations.
The following table illustrates the REVPAR change by segment in 2001 for the
Owned and Leased hotels, which were operated for comparable periods in 2001 and
2000.
Year Ended
December 31,
----------------
2001 2000 % Change
------- ------- ----------
AmeriSuites
Occupancy.............. 64.3% 68.3% (4.0) pts.
ADR.................... $ 78.42 $ 80.20 (2.2)%
REVPAR................. $ 50.42 $ 54.78 (7.9)%
Wellesley Inns & Suites
Occupancy.............. 60.6% 63.6% (3.0) pts.
ADR.................... $ 60.11 $ 60.29 (0.3)%
REVPAR................. $ 36.44 $ 38.35 (5.0)%
Non-Proprietary Brands
Occupancy.............. 66.6% 73.4% (6.8) pts.
ADR.................... $110.91 $112.90 (1.8)%
REVPAR................. $ 73.87 $ 82.87 (10.9)%
Total
Occupancy.............. 63.3% 67.4% (4.1) pts.
ADR.................... $ 76.79 $ 78.32 (2.0)%
REVPAR................. $ 48.61 $ 52.79 (7.9)%
The REVPAR decreases reflect the weak economy compounded by the effects of
the September 11/th/ terrorist attacks. The decline was comprised of a decrease
in occupancy of 4.1 percentage points and a decrease in ADR of 2.0%.
Management, franchise and other fees decreased by $2.5 million, or 16.1%,
from $15.5 million in 2000 to $13.0 million in 2001. The decrease was primarily
due to decreased base and incentive management fees
36
associated with the Managed Hotels and partially offset by an increase in
franchise royalty fees derived from hotels sold to franchisees and new hotel
openings.
Rental and other consists of rental income, interest on mortgages and notes
receivable and other miscellaneous operating income. Rental and other decreased
by $1.6 million from $4.3 million in 2000 to $2.7 million in 2001. This
decrease is primarily due to the settlement of various cash flow mortgages and
notes receivable in 2000.
Hotel operating expenses decreased by $19.5 million during 2001 to $249.2
million as a result of the decrease in hotel revenue. Hotel operating expenses,
as a percentage of hotel revenues, increased from 50.9% in 2000 to 54.0% in
2001 due to the decline in revenues at our hotels.
Rent and other occupancy expenses increased by $4.1 million, or 5.0%, from
$83.5 million in 2000 to $87.6 million in 2001 due primarily to the impact of
operating 27 leased properties for a full year in 2001 compared to six months
in 2000.
General and administrative expenses increased by $344,000, or 1.2%, from
$28.4 million in 2000 to $28.8 million in 2001, due primarily to increased
brand advertising, which rose from $6.3 million in 2000 to $7.3 million in 2001
partially offset by decreases due to cost containment programs. As a percentage
of total revenues, general and administrative expenses increased from 5.1% in
2000 to 5.9% in 2001.
Depreciation and amortization expense decreased by $2.6 million, or 6.4%,
from $40.7 million in 2000 to $38.1 million in 2001. This decrease was
primarily due to the disposal of five hotel properties during 2001 and the full
year effect of the properties sold in 2000.
Investment income increased by $308,000, or 15.9%, from $1.9 million in 2000
to $2.2 million in 2001 primarily due to higher cash balances and interest
earned on security deposits on the leased hotels acquired from Sholodge in July
2000.
Interest expense decreased by $7.7 million, or 18.6%, from $41.3 million in
2000 to $33.6 million in 2001, primarily due to the paydowns of debt resulting
from asset sales and operating cash flows. We capitalized $1.6 million and $2.3
million of interest in 2001 and 2000, respectively. Excluding the impact of
capitalized interest and the amortization of deferred loan fees, cash interest
expense declined by $10.7 million, or 24.9%, from $43.0 million in 2000 to
$32.3 million in 2001.
Other income consists of property transactions and other items, which are
not part of our recurring operations. Other income in 2001 consisted of net
gains related to the disposition of properties and recognition of the remaining
unamortized portion of the deferred gain related to the termination of the
MeriStar hotel leases totaling $36.2 million, partially offset by losses of
$4.2 million on the sale of marketable securities and valuation adjustments
relating primarily to vacant land parcels of $6.7 million. Other income in 2000
consisted of net gains on disposition of property of $13.9 million.
Results of Operations for the year ended December 31, 2000 compared to the
year ended December 31, 1999.
Hotel revenues for the year ended December 31, 2000 increased by $6.1
million, or 1.2%, from $522.2 million in 1999 to $528.3 million in 2000. The
increase was due primarily to incremental revenues of $49.7 million from new
and converted hotels added during 1999 and 2000. The new hotels consist
primarily of the leasehold interests on 27 Sumner Suites hotels acquired from
Sholodge in July 2000 and subsequently converted to AmeriSuites in November
2000. In addition, we realized growth in revenues at comparable Owned and
Leased Hotels of $11.6 million. These increases were offset by a decrease in
revenues of $55.6 million related to properties sold during the year.
37
The following table illustrates the REVPAR growth by segment in 2000 for the
Owned hotels, which were operated for comparable periods in 2000 and 1999.
Year Ended
December 31,
----------------
2000 1999 % Change
------- ------- --------
AmeriSuites
Occupancy................... 67.7% 65.3% 2.4 pts.
ADR......................... $ 81.61 $ 81.78 (.2)%
REVPAR...................... $ 55.27 $ 53.40 3.5%
Wellesley Inns & Suites
Occupancy................... 66.5% 63.6% 2.9 pts.
ADR......................... $ 60.77 $ 60.16 1.0%
REVPAR...................... $ 40.44 $ 38.27 5.7%
Non-Proprietary Brands
Occupancy................... 72.9% 71.4% 1.5 pts.
ADR......................... $111.83 $106.68 4.8%
REVPAR...................... $ 81.55 $ 76.12 7.1%
Total
Occupancy................... 68.2% 65.7% 2.5 pts.
ADR......................... $ 82.06 $ 81.21 1.0%
REVPAR...................... $ 55.99 $ 53.36 4.9%
The REVPAR increases reflect the results of continued favorable industry
trends in the full-service segment, which is concentrated in the Northeast, and
growing recognition of AmeriSuites as a leading brand in the fast-growing
all-suites segment. The limited-service segment also reflected strong growth
over the prior year due primarily to 38 properties converted from HomeGates to
Wellesley Inns & Suites in the fourth quarter of 1999. The improvements in
REVPAR at comparable Owned Hotels were generated by increases in ADR, which
rose by 1.0%, and an increase in occupancy, which rose by 2.5pts or 3.8%.
Management, franchise and other fees increased by $1.9 million, or 13.9%,
from $13.6 million in 1999 to $15.5 million in 2000. The increase was primarily
due to increased base and incentive management fees associated with the Managed
Hotels and franchise royalty fees derived from hotels sold to franchisees and
new hotel openings.
Rental and other decreased by $2.0 million from $6.3 million in 1999 to $4.3
million in 2000. This decrease is primarily due to the settlement of various
cash flow mortgages and notes receivable in 1999 and 2000.
Hotel operating expenses increased slightly from $268.4 million to $268.7
million. Hotel operating expenses, as a percentage of hotel revenues, decreased
slightly from 51.4% in 1999 to 50.9% in 2000 due to the strong REVPAR increases
at the hotels.
Rent and other occupancy expenses increased by $13.3 million, or 18.9%, from
$70.2 million in 1999 to $83.5 million in 2000, primarily due to the addition
of the 27 leased hotels acquired from Sholodge in July 2000.
General and administrative expenses decreased by $770,000, or 2.6%, from
$29.2 million in 1999 to $28.4 million in 2000. As a percentage of total
revenues, general and administrative expenses decreased slightly from 5.3% in
1999 to 5.1% in 2000.
Depreciation and amortization expense decreased by $4.0 million, or 9.0%,
from $44.7 million in 1999 to $40.7 million in 2000. This decrease was
primarily due to the disposal of 22 hotel properties during 2000.
38
Valuation and other charges in 1999 consisted of a $7.1 million valuation
allowance related to five HomeGate properties, a $22.0 million valuation
allowance related to the Frenchman's Reef hotel and $1.4 million for severance
charges related to a restructuring of our corporate and regional offices.
Investment income increased by $323,000, or 20.0%, from $1.6 million in 1999
to $1.9 million in 2000 primarily due to higher cash balances during the year
and interest earned on security deposits on the leased hotels acquired from
Sholodge.
Interest expense decreased by $2.3 million, or 5.3%, from $43.6 million in
1999 to $41.3 million in 2000, primarily due to the paydowns of debt resulting
from asset sales and operating cash flows. We capitalized $2.3 million and
$11.0 million of interest in 2000 and 1999, respectively. Excluding the impact
of capitalized interest and the amortization of deferred loan fees, cash
interest expense declined by $10.9 million, or 21.2%, from $51.5 million in
1999 to $40.6 million in 2000.
Other income in 2000 consisted of $13.9 million of net gains related to the
disposition of properties. Other income in 1999 consisted of a $4.0 million fee
for the termination of a hotel sale agreement, net gains on disposition of
property of $8.0 million and losses of $4.8 million on the sales of marketable
securities.
Cumulative effect of a change in accounting principle of $5.3 million (net
of income taxes) in 1999, relates to our adoption of Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). We adopted
SOP 98-5 on January 1, 1999 and were required to write-off any unamortized
pre-opening costs that remained on the balance sheet.
Liquidity and Capital Resources
At March 31, 2002, we had cash and cash equivalents of $36.6 million. In
addition, at March 31, 2002, we had $85.4 million available to us under our
senior credit facility subject to the achievement of certain covenant ratios.
Our major sources of cash for the three months ended March 31, 2002 were
cash flows from operations of $4.9 million and net proceeds from asset sales of
$15.0 million. Our major uses of cash during the period were debt repayments of
$9.3 million and capital expenditures of $3.5 million.
Sources of Capital. We have undertaken a strategic initiative to diversify
our operations. As part of this strategy, we have disposed of certain hotel
real estate while retaining the franchise rights. We have used the proceeds
primarily to reduce debt and fund brand growth. The combination of these asset
sales and operating cash flow continues to strengthen our overall financial
condition. At March 31, 2002, our debt to EBITDA ratio was 3.2 times and our
debt to book capitalization was 30.4%
During the quarter ended March 31, 2002, we sold a Radisson Hotel in
Trevose, PA and a Wellesley Inn in Miami, FL for gross proceeds of $15.4
million. We retained the franchise rights to the Wellesley Inn under a 20-year
franchise agreement.
We have a senior revolving credit facility with borrowing capacity of $125
million, which bears interest at LIBOR plus 2.0%. In December 2001, we
exercised our option and extended the maturity of the senior credit facility to
December 2002. Borrowings under the senior credit facility are secured by first
liens on certain of our hotels with recourse to us. Additional properties may
be added subject to the approval of the lenders. Availability under the senior
credit facility is subject to a borrowing base test and certain other
covenants. During 2001, we borrowed and repaid $13.0 million and had no amounts
outstanding at March 31, 2002, with further availability of $85.4 million under
our borrowing base test.
The senior credit facility contains covenants requiring us to maintain
certain financial ratios and limitations on the incurrence of debt, liens,
dividend payments, stock repurchases, certain investments, transactions with
39
affiliates, asset sales, mergers and consolidations and any change of control.
In October 1999, the senior credit facility was amended to allow an additional
$100.0 million of share repurchases to be funded by 50% of the proceeds from
asset sales. In April 2000, the senior credit facility was amended to allow for
additional retirements of other debt owed by us.
On May 14, 2002, our tender offer and consent solicitation for all of our
$190,000,000 outstanding 9 3/4% senior subordinated notes due 2007 expired.
Pursuant to the tender offer, we purchased $189,692,000 of the 9 3/4% notes. We
used the net proceeds from the offering of the original notes, along with
available cash, to fund the tender offer. In connection with the tender offer,
we obtained noteholder consents to effect certain changes to the covenants
contained in the indenture under which the 9 3/4% notes were issued. Tendering
and consenting holders received tender consideration of $1,050.00 per $1,000
principal amount of such notes. This consideration included a consent payment
of $30.00 per $1,000 principal amount of such notes. On June 14, 2002, we
redeemed the remaining $308,000 of the 9 3/4% notes at 104.875% of par or
$323,015 pursuant to the terms of the underlying indenture.
On May 16, 2002, we entered into a commitment letter with CIBC World Markets
Corp. and Canadian Imperial Bank of Commerce. Pursuant to this commitment
letter we seek to establish a new senior revolving credit facility of
approximately $125,000,000 with a syndicate of financial institutions. We
intend to use available borrowings under this facility to refinance our senior
credit facility and to redeem our first mortgage notes. The establishment of
this facility is subject to, among other things, satisfactory completion of a
due diligence investigation by the prospective lenders and their counsel and
the negotiation and execution of definitive documents. There can be no
assurance that we will be able to establish this facility.
Uses of Capital. We utilized the proceeds from asset sales, along with our
cash flow from operations, to reduce our debt balance during the year by $25.7
million to $320.0 million at December 31, 2001. This reduction of debt was
primarily comprised of gross payments of $15.6 million of mortgage debt on
assets sold, and the retirement of $10.0 million of our 9 3/4% senior
subordinated notes due 2007. During the three months ended March 31, 2002, we
retired $9.3 million of mortgage debt, which comprised substantially all of our
debt maturities in 2002. We now have no significant maturities of debt until
2006.
We also purchased approximately 376,200 shares of our common stock during
2001 for $3.6 million at an average cost of $9.86 per share. Our senior credit
facility limits the purchase of these shares to 50% of the proceeds from asset
sales not to exceed $100 million. As of March 31, 2002, we had repurchased
$34.7 million of our shares under this covenant and have $65.3 million of
availability based on the proceeds from asset sales.
We intend to continue the growth of our brands primarily through franchising
and, therefore, our corporate development will be limited. We spent $20.9
million during 2001 on new construction, opening one new AmeriSuites and
converting two hotels to Wellesley Inns. During the three months ended March
31, 2002, we spent $2.8 million on new construction. We currently have one
AmeriSuites hotel under construction and anticipate spending $5.0 million to
complete this project in 2002. In addition, in 2001 we also spent $22.0 million
($0.7 million during the three months ended March 31, 2002) on maintenance
capital at our Owned Hotels and corporate offices and expect to spend a similar
amount in 2002. We plan to fund our corporate development and capital
improvements with internally generated cash flow.
Significant Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and
40
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect more
significant judgements and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition. Room revenue and other revenues are recognized when
earned. Management and franchise fee revenues are recognized when all material
services or conditions relating to the respective property or franchisee have
been substantially performed or satisfied by us. Such revenues, when
recognized, are included in management, franchise and other fees on the
accompanying consolidated financial statements.
Gains and losses resulting from sales of hotels are recorded in full when
title is conveyed to the buyer and when various criteria are met relating to
the buyer's financial commitment and any subsequent involvement by us with
respect to the hotels being sold.
Our sales of hotels are sometimes accompanied by a leaseback of the
facilities under operating lease arrangements. Such sales are recognized when
the above sales criteria are met and certain specific criteria are met relating
to the lease terms. Related profit is deferred and is recognized as income over
the remaining lease term.
Insurance Programs. We use 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 our per occurrence
and aggregate cash outlay.
We maintain 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 us. Claims for benefits in excess
of these amounts are covered by insurance purchased by us.
Provisions have been made in our consolidated financial statements which
represent the expected future payments based on the estimated ultimate cost for
incidents incurred through the balance sheet date and are included in other
current liabilities.
Long-Lived Assets. Property, equipment and leasehold improvements that we
intend 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.
Construction in progress represents costs incurred in the development of
hotels. Such costs include construction costs and capitalized interest.
We review each of our assets held for use for which indicators of impairment
are present to determine whether the carrying amount of the asset will be
recovered. We recognize impairment if the future undiscounted cash flows
(before interest charges) are less than the carrying amount. Assets held for
sale are recorded at the lower of carrying value or fair value less costs to
sell.
Quantitative and Qualitative Disclosures About Market Risk
We are currently not exposed to changes in interest rates as we have no
floating rate debt arrangements. Therefore, a hypothetical 100 basis point
adverse move (increase) in interest rates along the entire rate curve would not
adversely affect our annual interest cost.
41
DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Credit Facility
We established our senior 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. In December 1997,
our senior credit facility was amended and the availability of funds was
increased to $200.0 million. Pursuant to the terms of the agreements, the
aggregate amount of our senior credit facility was reduced to $175.0 million in
December 2000 and was further reduced to $125.0 million in December 2001. Our
senior credit facility is secured by first liens on certain of our hotels with
recourse to the Company. Availability under our senior credit facility is
subject to a borrowing base test and certain other covenants. Our senior credit
facility bears interest at LIBOR plus 2.0%, which is paid monthly. Under its
terms, our senior credit facility was to expire in December 2001 with a
one-year renewal option. In December 2001, we exercised our option and our
senior credit facility is now available through December 2002. Our senior
credit facility contains covenants requiring us to maintain certain financial
ratios and limitations on the incurrence of debt, liens, dividend payments,
stock repurchases, certain investments, transactions with affiliates, asset
sales, mergers and consolidations and any change of control. In October 1999,
our senior credit facility was amended to allow an additional $100 million of
share repurchases. The purchases of these additional shares are limited to 50%
of the proceeds from asset sales. In April 2000, our senior credit facility was
amended to allow for additional retirements of other debt owed by us.
During 2001, we had gross borrowings and subsequent repayments of $13.0
million under our senior credit facility. As of March 31, 2002, we had no
outstanding borrowings under our senior credit facility and had additional
borrowing capacity of $85.4 million based on our borrowing base test, subject
to our attaining certain covenant ratios.
9 1/4% First Mortgage Notes due 2006
In January 1996, we issued $120.0 million of 9 1/4% first mortgage notes due
2006. Under certain circumstances, we may issue up to an additional $80.0
million of first mortgage notes, although we have no present intention to do
so. Interest on the first mortgage notes is payable semi-annually on January 15
and July 15. The first mortgage notes are secured by first liens on 17 of our
hotels and related real and personal property with net book value of
approximately $109.4 million. The first mortgage notes are redeemable, in whole
or in part, at our option on or after January 15, 2001 at redemption prices
(expressed as a percentage of the principal amount) declining annually over a
three-year period from 104.625% to 100.000%, together with accrued and unpaid
interest, if any, to the redemption date. If a Change of Control (as defined in
the indenture with respect to the first mortgage notes) occurs, the holder of a
first mortgage note will have the right to require us to repurchase all
outstanding first mortgage notes, in whole or in part, owned by such holder at
101% of their principal amount plus accrued and unpaid interest, if any, to the
date of repurchase. The first mortgage notes rank pari passu in right of
payment to all of our existing and future senior indebtedness and rank senior
in right of payment to all of our subordinated indebtedness. The first mortgage
notes are not guaranteed by any of our subsidiaries. The indenture governing
the first mortgage notes contains certain covenants, including limitations on
the incurrence of debt, dividend payments, certain investments, transactions
with affiliates, asset sales and mergers and consolidations. As of March 31,
2002, we had repurchased and retired $16.0 million of the first mortgage notes.
Other Secured Debt
As of March 31, 2002, we had mortgage and other notes payable of
approximately $16.7 million that are secured by mortgage notes receivable and
hotel properties with a book value of approximately $34.1 million. Principal
and interest on these mortgages and notes are generally paid monthly. At March
31, 2002, these notes bear interest at rates ranging from 6.70% to 8.63% per
annum, with a weighted average interest rate of 8.25%, and mature from 2002
through 2009.
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On May 16, 2002, we entered into a commitment letter with CIBC World Markets
Corp. and Canadian Imperial Bank of Commerce. Pursuant to this commitment
letter we seek to establish a new senior revolving credit facility of
approximately $125,000,000 with a syndicate of financial institutions. We
intend to use available borrowings under this facility to refinance our senior
credit facility and to redeem our first mortgage notes. The establishment of
this facility is subject to, among other things, satisfactory completion of a
due diligence investigation by the prospective lenders and their counsel and
the negotiation and execution of definitive documents. There can be no
assurance that we will be able to establish this facility.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "Prime"
refers only to Prime Hospitality Corp. and not to any of its Subsidiaries.
Prime has issued the original notes and will issue the exchange notes under
an indenture, dated April 29, 2002, among itself and Wells Fargo Bank
Minnesota, NA, as trustee. The terms of the notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, as amended.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of the notes. Copies of the indenture and the
registration rights agreement are available as set forth below under
"--Additional Information." Certain defined terms used in this description but
not defined below under "--Certain Definitions" have the meanings assigned to
them in the indenture and the registration rights agreement.
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indenture.
Brief Description of the Notes
The notes:
. are general unsecured obligations of Prime;
. are subordinated in right of payment to all existing and future Senior
Debt of Prime; and
. are pari passu in right of payment with any future senior subordinated
Indebtedness of Prime.
Assuming we had completed this offering of notes and applied the net
proceeds as described in "Use of Proceeds," as of March 31, 2002, Prime would
have had total Senior Debt of approximately $130.0 million, and, in addition,
Prime's Subsidiaries would have had approximately $13.5 million of
Indebtedness. As indicated above and as discussed in detail below under the
caption "--Subordination," payments on the notes will be subordinated to the
payment in full in cash of Senior Debt. The indenture will permit the
incurrence of additional Senior Debt.
For purposes of the indenture, Prime's Subsidiaries are divided into two
categories (i) Restricted Subsidiaries, which generally are subject to the
restrictive covenants set forth in the indenture, and (ii) Unrestricted
Subsidiaries, which generally are not. On the date of the indenture, none of
Prime's Subsidiaries will be designated as an Unrestricted Subsidiary. None of
Prime's Restricted Subsidiaries is presently required to guarantee the notes,
although under certain future circumstances Prime may be required to cause one
or more Restricted Subsidiaries to guarantee the notes on a subordinated basis.
See "--Subsidiary Guarantees." Subsidiaries that are properly designated and
maintained as Unrestricted Subsidiaries by Prime will not be required to
guarantee the notes under any circumstances.
Principal, Maturity and Interest
The indenture does not limit the maximum aggregate principal amount of notes
that Prime may issue thereunder. Prime will issue exchange notes in an
aggregate principal amount of up to $200.0 million in connection with this
exchange offer. Prime may issue additional notes from time to time after this
exchange offer. Any offering of additional notes is subject to the covenant
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." The notes and any additional
notes subsequently issued under the indenture will be treated as a single class
for all purposes under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. Prime will issue notes in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on May 1, 2012.
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Interest on the notes will accrue at the rate of 8 3/8% per annum and will
be payable semi-annually in arrears on May 1 and November 1, commencing on
November 1, 2002. Prime will make each interest payment to the holders of
record on the immediately preceding April 15 and October 15. Interest on the
exchange notes will accrue from the date of original issuance of the related
original notes or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Methods of Receiving Payments on the Notes
Principal of and premium, interest and Liquidated Damages, if any, on the
original notes will be payable at the office or agency of Prime maintained for
such purpose or, at the option of Prime, payment of interest and Liquidated
Damages, if any, may be made by check mailed to the holders of the notes at
their respective addresses set forth in the register of holders of notes;
provided that all payments with respect to notes the holders of which have
given wire transfer instructions to Prime will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
holders thereof. No Liquidated Damages will be paid by Prime on the exchange
notes.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. Prime may
change the paying agent or registrar without prior notice to the holders of the
notes, and Prime or any of its Subsidiaries may act as paying agent or
registrar.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents in connection with a
transfer of notes. Holders will be required to pay all taxes due on transfer.
Prime is not required to transfer or exchange any note selected for redemption.
Also, Prime is not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
Subsidiary Guarantees
As of the date of the indenture, no Subsidiary of Prime or business entity
in which Prime owns an interest will be required to act as a Guarantor in
respect of the notes. However, the indenture provides that if:
(1) Prime or any Restricted Subsidiary shall transfer or cause to be
transferred, in one or a series of related transactions, any assets (including
cash or Cash Equivalents other than pursuant to clause (5) of the definition of
Permitted Investments), businesses, divisions, real property or equipment
having a book value or fair market value (as determined in good faith by the
Board of Directors of Prime, whose determination shall be conclusive and
evidenced by a resolution of such Board), in excess of $10.0 million to any
Restricted Subsidiary that is not a Guarantor; or
(2) if Prime or any of its Restricted Subsidiaries shall acquire or create
after the date of the indenture another Restricted Subsidiary having total
assets with a fair market value in excess of $10.0 million at the time of such
acquisition or creation,
Prime will cause such Restricted Subsidiary to execute and deliver to the
trustee a supplemental indenture pursuant to which such Restricted Subsidiary
shall guarantee, on an unsecured senior subordinated basis, all of the
obligations of Prime with respect to the notes together with an opinion of
counsel (which counsel may be an employee of Prime) to the effect that the
supplemental indenture has been duly executed and delivered by such Restricted
Subsidiary and is in compliance in all material respects with the terms of the
indenture.
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The Indebtedness represented by any such Guarantee will be subordinated on
the same basis to Senior Debt of the Guarantor as the notes are subordinated to
Senior Debt of Prime.
The indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity, whether or not affiliated with such Guarantor
(other than Prime or another Guarantor), unless:
(1) subject to the provisions of the following paragraph, the Person formed
by or surviving any such consolidation or merger (if other than such Guarantor)
assumes all the obligations of such Guarantor pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the trustee under
the indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default exists; and
(3) such Guarantor, or any Person formed by or surviving any such
consolidation or merger would be permitted by virtue of Prime's Fixed Charge
Coverage Ratio to incur, immediately after giving effect to such transaction,
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio set forth in the covenant described above under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Certain Capital Stock."
The indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, which sale or other disposition is
otherwise in compliance with the terms of the indenture, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor or the corporation
acquiring the property will be automatically and unconditionally released and
relieved of any obligations under its Subsidiary Guarantee. For purposes of a
Guarantee with respect to the notes, each Guarantor's liability will be that
amount from time to time equal to the aggregate liability of such Guarantor
thereunder, but shall be limited to the least of:
(1) the aggregate amount of the obligations of Prime under the notes and
the indenture; or
(2) the amount, if any, which would not have:
(A) rendered such Guarantor "insolvent" (as such term is defined in the
Federal Bankruptcy Code and in the Debtor and Creditor Law of the State of
New York); or
(B) left it with unreasonably small capital at the time its Guarantee
with respect to the notes was entered into, after giving effect to the
incurrence of existing Indebtedness immediately prior to such time,
provided that, it shall be a presumption in any lawsuit or other proceeding in
which a Guarantor is a party that the amount guaranteed pursuant to the
Guarantee with respect to the notes is the amount set forth in clause (1) above
unless any creditor, or representative of creditors of such Guarantor, or
debtor in possession or trustee in bankruptcy of the Guarantor, otherwise
proves in such a lawsuit that the aggregate liability of the Guarantor is
limited to the amount set forth in clause (2) above.
The indenture provides that, in making any determination as to the solvency
or sufficiency of capital of a Guarantor in accordance with the previous
sentence, the right of such Guarantor to contribution from other Guarantors and
any other rights such Guarantor may have, contractual or otherwise, shall be
taken into account.
Subordination
The payment of all Obligations on the notes is subordinated in right of
payment, as set forth in the indenture, to the prior payment in full in cash of
all Obligations on Senior Debt, whether outstanding on the date of the
indenture or thereafter incurred.
Upon any payment or distribution of assets of Prime of any kind or
character, whether in cash, property or securities, to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors or marshalling of assets of Prime or in a bankruptcy,
reorganization, insolvency, receivership or other
46
similar proceeding relating to Prime or its property, whether voluntary or
involuntary, all Obligations due upon all Senior Debt shall first be paid in
full in cash, or such payment shall be duly provided for to the satisfaction of
the holders of Senior Debt, before any payment or distribution of any kind or
character is made on account of any Obligations on the notes, or for the
acquisition by Prime or any of its Subsidiaries of any of the notes for cash or
property or otherwise, and, until all Obligations with respect to Senior Debt
are paid in full in cash, any distribution to which the holders would be
entitled shall be made to the holders of Senior Debt (except that holders of
notes may receive Permitted Junior Securities and payments made from the trust
described under "--Legal Defeasance and Covenant Defeasance").
If any default occurs and is continuing in the payment when due, whether at
maturity, upon any redemption, by declaration or otherwise, of any principal
of, interest on, unpaid drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any Senior Debt, no payment of any
kind or character shall be made by or on behalf of Prime or any other Person on
its behalf with respect to any Obligations on the notes or to acquire any of
the notes for cash or property or otherwise (except that holders of notes may
receive Permitted Junior Securities and payments made from the trust described
under "--Legal Defeasance and Covenant Defeasance").
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
trustee (a "Default Notice"), then, unless and until all events of default have
been cured or waived or have ceased to exist or the trustee receives notice
from the Representative for the respective issue of Designated Senior Debt
terminating the Blockage Period (as defined below), during the 179 days after
the delivery of such Default Notice (the "Blockage Period"), neither Prime nor
any of its Subsidiaries shall:
(1) make any payment of any kind or character with respect to any
Obligations on the notes except that holders of notes may receive Permitted
Junior Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance;" or
(2) acquire any of the notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 179 days from the date the payment on the notes was due
and only one such Blockage Period may be commenced within any 365 consecutive
days.
No event of default which existed or was continuing on the date of the
commencement of any Blockage Period with respect to the Designated Senior Debt
shall be, or be made, the basis for commencement of a second Blockage Period by
the representative of such Designated Senior Debt whether or not within a
period of 365 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days (it being
acknowledged that any subsequent action, or any breach of any financial
covenants for a period commencing after the date of commencement of such
Blockage Period that, in either case, would give rise to an event of default
pursuant to any provisions under which an event of default previously existed
or was continuing shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of Prime,
creditors of Prime who are not holders of Senior Debt, including the holders of
the notes, may recover less ratably than holders of Senior Debt. See "Risk
Factors--Your right to receive payments on these notes is junior to our
existing indebtedness and possibly all of our future borrowings."
None of Prime's Subsidiaries is presently required to guarantee the notes,
although under certain future circumstances Prime may be required to cause one
or more Restricted Subsidiaries to guarantee the notes on a subordinated basis.
The Indebtedness represented by any such Guarantee will be subordinated on the
same basis to Senior Debt of the Guarantor as the notes are subordinated to
Senior Debt of Prime.
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Optional Redemption
At any time prior to May 1, 2005, Prime may redeem up to 35% of the
aggregate principal amount of notes issued under the indenture at a redemption
price of 108.375% of the principal amount, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date, with the net cash proceeds
of one or more public offerings of its common equity (a "Public Equity
Offering") provided that:
(1) at least 65% of the aggregate principal amount of notes issued under
the indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by Prime and its Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of such
Public Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be redeemable
at Prime's option prior to May 1, 2007.
After May 1, 2007, Prime may redeem all or a part of the notes upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, on the notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period
beginning on May 1 of the years indicated below:
Year Percentage
---- ----------
2007.............................................. 104.188%
2008.............................................. 102.792%
2009.............................................. 101.396%
2010 and thereafter............................... 100.000%
Mandatory Redemption
Prime is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Repurchase at the Option of Holders
Change of Control
The indenture provides that upon the occurrence of a Change of Control, each
holder will have the right to require that Prime purchase all or a portion of
such holder's notes pursuant to the offer described below (the "Change of
Control Offer"), at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the
date of purchase.
The indenture will provide that, prior to the mailing of the notice referred
to below, but in any event within 30 days following any Change of Control,
Prime covenants to:
(1) repay in full and terminate all commitments under Indebtedness under
Credit Facilities and all other Senior Debt the terms of which require
repayment upon a Change of Control or offer to repay in full and terminate all
commitments under all Indebtedness under Credit Facilities and all other such
Senior Debt and to repay the Indebtedness owed to each lender or holder of
Senior Debt which has accepted such offer; or
(2) obtain the requisite consents under Credit Facilities and all other
Senior Debt to permit the repurchase of the notes as provided below.
Prime shall first comply with the covenant in the immediately preceding
sentence before it shall be required to repurchase notes pursuant to the
provisions described below and Prime's failure to comply with the covenant
described in the immediately preceding sentence shall constitute an Event of
Default described in clause (3) and not in clause (2) under "--Events of
Default" below.
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Within 30 days following the date upon which the Change of Control occurred,
Prime must send, by first class mail, a notice to each holder, with a copy to
the trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a note purchased pursuant to a Change
of Control Offer will be required to surrender the note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the note completed, to
the trustee or Paying Agent, if any, at the address specified in the notice
prior to the close of business on the third business day prior to the Change of
Control Payment Date.
On the Change of Control Payment Date, Prime will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions of notes properly tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate principal
amount of notes or portions of notes being purchased by Prime.
The paying agent will promptly mail to each holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prime will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require Prime to make a Change of
Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the holders of the notes to require that Prime repurchase or redeem
the notes in the event of a takeover, recapitalization or similar transaction.
Prime will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by Prime and purchases
all notes properly tendered and not withdrawn under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Prime. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require Prime to repurchase its notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of Prime to another Person or group may be uncertain.
Prime will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of notes
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the indenture, Prime shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Change of Control" provisions of the indenture by virtue thereof.
49
Asset Sales
The indenture provides that Prime will not, and will not permit any of its
Restricted Subsidiaries to, conduct an Asset Sale, unless:
(1) Prime (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (evidenced by a resolution of
the Board of Directors set forth in an officers' certificate delivered to the
trustee); and
(2) at least 75% of the consideration therefor received by Prime or such
Restricted Subsidiary is in the form of cash or Cash Equivalents provided,
however, that the principal amount of the following shall be deemed to be cash
for purposes of this provision:
(a) any liabilities (as shown on Prime's or such Restricted Subsidiary's
most recent balance sheet or in the notes thereto), of Prime or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the notes or any Guarantee thereof) that are assumed or
forgiven by the transferee of any such assets; and
(b) any notes or other obligations received by Prime or any such
Restricted Subsidiary from such transferee that are converted by Prime or
such Restricted Subsidiary into cash within 90 days of the closing of such
Asset Sale (to the extent of the cash received).
Notwithstanding the foregoing, the restriction in clause (2) above will not
apply with respect to mortgages or other notes receivable received by Prime or
any Restricted Subsidiary from a transferee of any assets to the extent such
mortgages or other notes receivable are Restricted Investments permitted to be
made by Prime or such Restricted Subsidiary under the covenant entitled
"Restricted Payments."
Within 365 days of any Asset Sale, Prime or such Restricted Subsidiary may:
(1) apply the Net Proceeds from such Asset Sale to prepay any Indebtedness
that ranks by its terms senior to the notes (or any Guarantee thereof) and, in
the case of any Indebtedness under a revolving Credit Facility, to effect a
permanent reduction in the amount of Indebtedness that may be incurred pursuant
to clause (2) of the second paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Certain Capital Stock," or
(2) invest the Net Proceeds from such Asset Sale in property or assets used
in a Hospitality-Related Business; provided that Prime or such Restricted
Subsidiary will have complied with this clause (2) if, within 365 days of such
Asset Sale, Prime or such Restricted Subsidiary shall have commenced and not
completed or abandoned an investment in compliance with this clause (2) and
shall have segregated such Net Proceeds from the general funds of Prime and its
Subsidiaries for that purpose and such Investment is substantially completed
within 180 days after the first anniversary of such Asset Sale.
Pending the final application of any Net Proceeds, Prime may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from an Asset Sale that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $25.0
million, Prime shall make an offer, to all holders of notes and other
Indebtedness that ranks by its terms pari passu in right of payment with the
notes and the terms of which contain substantially similar requirements with
respect to the application of net proceeds from asset sales as are contained in
the indenture (an "Asset Sale Offer") to purchase on a pro rata basis the
maximum principal amount of notes, that is an integral multiple of $1,000, that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase, in
accordance with the procedures set forth in the indenture. To the extent that
the aggregate amount of notes and other such Indebtedness tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, Prime may use such
deficiency for general corporate purposes. If the aggregate principal amount of
notes surrendered by holders thereof exceeds the amount of Excess Proceeds
available for purchase
50
thereof, the trustee shall select the notes to be purchased in the manner
described under the caption "--Selection and Notice" below. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Prime will comply, to the extent applicable, with the requirements of Rule
14e-1 under the Exchange Act and other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with any offer to purchase the notes as described above. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the indenture, Prime shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the "Asset Sale" provisions of the indenture by virtue thereof.
The agreements governing Prime's outstanding Senior Debt currently restricts
Prime from purchasing any notes, and also provide that certain change of
control or asset sale events with respect to Prime would constitute a default
under these agreements. Any future credit agreements or other agreements
relating to Senior Debt to which Prime becomes a party may contain similar
restrictions and provisions. In the event a Change of Control or Asset Sale
occurs at a time when Prime is prohibited from purchasing notes, Prime could
seek the consent of its senior lenders to the purchase of notes or could
attempt to refinance the borrowings that contain such prohibition. If Prime
does not obtain such a consent or repay such borrowings, Prime will remain
prohibited from purchasing notes. In such case, Prime's failure to purchase
tendered notes would constitute an Event of Default under the indenture which
would, in turn, constitute a default under such Senior Debt. In such
circumstances, the subordination provisions in the indenture would likely
restrict payments to the holders of notes.
Selection and Notice
If less than all of the notes are to be purchased or redeemed at any time,
the trustee will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities exchange
on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part, provided that if a
partial redemption is made, selection of the notes or portions thereof for
redemption shall be made by the trustee only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to procedures of The
Depository Trust Company), unless such method is otherwise prohibited.
Notices of redemption will be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address, except that redemption notices may be
mailed more than 60 days prior to a redemption date if the notice is issued in
connection with a defeasance of the notes or a satisfaction and discharge of
the indenture. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that
note that is to be redeemed. A new note in principal amount equal to the
unredeemed portion of the original note will be issued in the name of the
holder of notes upon cancellation of the original note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption as long as Prime has deposited with the trustee funds in
satisfaction of the applicable redemption price pursuant to the indenture.
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Certain Covenants
Restricted Payments
Prime will not, and will not permit any of its Subsidiaries to, directly or
indirectly:
(1) declare or pay any dividend or make any distribution on account of
Prime's or any of its Restricted Subsidiaries' Equity Interests (other than:
(1) dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of Prime; or (2) dividends or distributions by a Restricted
Subsidiary of Prime, provided that to the extent that a portion of such
dividend or distribution is paid to a holder of Equity Interests of a
Restricted Subsidiary other than Prime or a Restricted Subsidiary, such portion
of such dividend or distribution is not greater than such holder's pro rata
aggregate common equity interest in such Restricted Subsidiary);
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Prime or any Restricted Subsidiary or other Affiliate of Prime
(other than (A) any Equity Interests owned by Prime or any Wholly Owned
Restricted Subsidiary of Prime and (B) pursuant to transactions otherwise
constituting Permitted Investments hereunder);
(3) purchase, redeem or otherwise acquire or retire for value any
Indebtedness of Prime or any Restricted Subsidiary that is subordinated or
junior in right of payment, by its terms, to the notes or any Guarantee thereof
prior to the scheduled final maturity or sinking fund payment dates for payment
of principal and interest in accordance with the original documentation for
such subordinated or junior Indebtedness; or
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or would
occur as a consequence of such Restricted Payment;
(2) Prime would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the covenant described under the caption "--Incurrence
of Indebtedness and Issuance of Certain Capital;" and
(3) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Prime and its Restricted Subsidiaries after the
date of the indenture (excluding Restricted Payments permitted by clauses (2),
(3), (4) and (5) of the next succeeding paragraph), is less than the sum,
without duplication, of:
(a) 50% of the Consolidated Net Income of Prime for the period (taken as
one accounting period) from January 1, 1996 to the end of Prime's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit; plus
(b) 100% of the aggregate net cash proceeds received by Prime from the
issue or sale, in either case, since January 1, 1996, of either (A) Equity
Interests of Prime or of (B) debt securities of Prime that have been
converted or exchanged into such Equity Interests (other than Equity
Interests (or convertible or exchangeable debt securities) sold to a
Restricted Subsidiary of Prime and other than Disqualified Stock or debt
securities that have been converted or exchanged into Disqualified Stock);
plus
(c) in case any Unrestricted Subsidiary has been redesignated a
Restricted Subsidiary and becomes a Guarantor pursuant to the terms of the
indenture or has been merged, consolidated or amalgamated with or into, or
transfers or conveys assets to, or is liquidated into, Prime or a Restricted
Subsidiary that is a Guarantor, and provided that no Default or Event of
Default shall have occurred and be continuing or would occur as a
consequence thereof, the lesser of (A) the book value (determined in
accordance with GAAP) at the date of such redesignation, combination or
transfer of the aggregate Investments made by Prime and its
52
Restricted Subsidiaries in such Unrestricted Subsidiary (or of the assets
transferred or conveyed, as applicable) and (B) the fair market value of
such Investment in such Unrestricted Subsidiary at the time of such
redesignation, combination or transfer (or of the assets transferred or
conveyed, as applicable), in each case as determined in good faith by the
Board of Directors of Prime, whose determination shall be conclusive and
evidenced by a resolution of such Board and, in each case, after deducting
any Indebtedness associated with the Unrestricted Subsidiary so designated
or combined or with the assets so transferred or conveyed; plus
(d) 50% of any dividends or interest actually received in cash by Prime
or a Restricted Subsidiary that is a Guarantor after the date of the
indenture from (A) a Restricted Subsidiary the Net Income of which has been
excluded from the computation of Consolidated Net Income, (B) an
Unrestricted Subsidiary, (C) a Person that is not a Subsidiary or (D) a
Person that is accounted for on the equity method; plus
(e) $25.0 million; minus
(f) the aggregate amount of all Restricted Payments made by the Company
and its Restricted Subsidiaries from and after January 1, 1996 and on or
before the date of the indenture.
To the extent that any Restricted Investment made since January 1, 1996 is
sold for cash or Cash Equivalents or otherwise liquidated or repaid for cash
after the date of the indenture, the lesser of (A) the cash return of capital
with respect to such Restricted Investment less the cost of disposition, if
any, and (B) the aggregate amount of the Investment made by Prime or a
Restricted Subsidiary in such Restricted Investment shall not, following such
sale, liquidation or repayment, be counted in the calculation of the aggregate
amount of Restricted Payments made by Prime or its Restricted Subsidiaries for
purposes of this clause (3).
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indenture;
(2) the redemption, purchase, retirement or other acquisition of any Equity
Interests of Prime in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Restricted Subsidiary of Prime)
of other Equity Interests of Prime (other than any Disqualified Stock);
provided that the amount of any proceeds that is utilized for such redemption,
repurchase, retirement or other acquisition shall be excluded from clause
(3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repayment or purchase of Indebtedness of
Prime or any Restricted Subsidiary that is subordinated or junior in right of
payment, by its terms, to the notes or any Guarantee thereof in a Permitted
Refinancing;
(4) the defeasance, redemption, repayment or purchase of Indebtedness of
Prime or any Restricted Subsidiary that is subordinated or junior in right of
payment, by its terms, to the notes or any Guarantee thereof with the proceeds
of a substantially concurrent sale (other than to a Subsidiary of Prime) of
Equity Interests (other than Disqualified Stock) of Prime; provided that the
amount of any proceeds that is utilized for such defeasance, redemption,
repayment or purchase shall be excluded from clause (3)(b) of the preceding
paragraph; or
(5) the purchase, redemption or other acquisition or retirement for value
of any Equity Interests of Prime pursuant to any management equity subscription
agreement or stock option agreement; provided, however, that the aggregate
price paid for all such purchased, redeemed, acquired or retired Equity
Interests shall not exceed $1.0 million per year,
provided that, in the case of clauses (2) through (5) above, no Default or
Event of Default shall have occurred and be continuing or would occur as a
consequence thereof.
In determining whether any Restricted Payment is permitted by the foregoing
covenant, Prime may allocate or reallocate all or any portion of such
Restricted Payment among the clauses (1) through (5) of the preceding
53
paragraph or among such clauses and the first paragraph of this covenant
including clauses (1), (2) and (3), provided that at the time of such
allocation or reallocation, all such Restricted Payments, or allocated portions
thereof, would be permitted under the various provisions of the foregoing
covenant.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors of Prime set
forth in an officers' certificate delivered to the trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by Prime or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, Prime shall deliver
to the trustee an officers' certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this covenant were computed, which calculations may be based upon Prime's
latest available financial statements.
Incurrence of Indebtedness and Issuance of Certain Capital Stock
The indenture provides that Prime will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable with respect to
(collectively, "incur" and correlatively, an "incurrence" of) any Indebtedness
(including Acquired Debt), that Prime will not issue any shares of Disqualified
Stock and that Prime will not permit any of its Restricted Subsidiaries to
issue any Preferred Stock, provided, however, that Prime may incur Indebtedness
or issue shares of Disqualified Stock and its Restricted Subsidiaries may issue
Preferred Stock, if the Fixed Charge Coverage Ratio for Prime's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock or Preferred Stock is issued would have
been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or Preferred Stock
had been issued, as the case may be, at the beginning of such four-quarter
period.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Prime's Unrestricted Subsidiaries of Non-Recourse
Indebtedness; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Indebtedness of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary
of Prime;
(2) the incurrence by Prime or its Restricted Subsidiaries of Indebtedness
pursuant to a Credit Facility in an aggregate principal amount not to exceed
$150.0 million at any one time outstanding, plus up to an additional $50.0
million in aggregate principal amount of Indebtedness at any one time
outstanding that may be incurred from time to time, pursuant to one or more
Credit Facilities, minus the aggregate amount of all proceeds of all sales or
other dispositions of assets that have been applied to permanently reduce the
outstanding amount of such Indebtedness pursuant to clause (1) of the second
paragraph of the covenant described under the caption "--Repurchase at the
Option of Holders--Asset Sales;"
(3) the incurrence by Prime and its Restricted Subsidiaries of Existing
Indebtedness;
(4) Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness that
is permitted by the terms of the indenture to be outstanding or required by the
terms of Credit Facilities to be outstanding;
(5) the incurrence or the issuance by Prime of Refinancing Indebtedness or
Refinancing Disqualified Stock of Prime or any Restricted Subsidiary or the
incurrence or issuance by a Restricted Subsidiary of Refinancing Indebtedness
or Refinancing Disqualified Stock of such Restricted Subsidiary, as the case
may be; provided, however, that such Refinancing Indebtedness or Refinancing
Disqualified Stock, as the case may be, is a Permitted Refinancing;
(6) the incurrence by Prime or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Prime and any of its Restricted
Subsidiaries; provided, however, that (a) any subsequent issuance or
54
transfer of Equity Interests that results in any such Indebtedness being held
by a Person other than a Restricted Subsidiary and (b) any sale or other
transfer of any such Indebtedness to a Person that is not either Prime or a
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Prime or such Restricted Subsidiary, as the
case may be;
(7) the incurrence of Indebtedness represented by the notes and any
Guarantee thereof;
(8) the incurrence by Prime or any of its Restricted Subsidiaries, in the
ordinary course of business and consistent with past practice, of Indebtedness
to secure performance bonds not to exceed $30.0 million at any one time
outstanding; or
(9) the incurrence by Prime or any of its Restricted Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount at any time outstanding not to
exceed $20.0 million; provided that the net proceeds of such Indebtedness are
used to finance the renovation or refurbishment of properties owned by Prime or
a Restricted Subsidiary which are employed in a Hospitality-Related Business.
In the event any Restricted Subsidiary of Prime becomes a guarantor of
Prime's first mortgage notes pursuant to the subsidiary guarantee provisions of
the indenture with respect thereto as in effect on the date of the indenture,
such Guarantee shall not be deemed a separate incurrence of the underlying
Indebtedness represented by the first mortgage notes for purposes of this
covenant.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (9) above, or is entitled to be
incurred pursuant to the first paragraph of this covenant, Prime will be
permitted to classify such item of Indebtedness on the date of its incurrence,
or later reclassify all or a portion of such item of Indebtedness, in any
manner that complies with this covenant. Indebtedness under Credit Facilities
outstanding on the date on which notes are first issued and authenticated under
the indenture will be deemed to have been incurred on such date in reliance on
the exception provided by clause (2) of the definition of Permitted Debt.
Anti-Layering
The indenture provides that (i) Prime will not incur, issue, assume or
otherwise become liable for any Indebtedness that is senior in right of payment
to the notes and subordinate in right of payment to any other Indebtedness of
Prime and (ii) no Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is senior in right of payment
to the Guarantee by such Guarantor of the notes and subordinate or junior in
right of payment to any other Indebtedness of the Guarantor.
Liens
The indenture provides that Prime will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien of any kind securing Indebtedness or trade payables on any asset
now owned or hereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The indenture provides that Prime will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(1) (i) pay dividends or make any other consensual distributions to Prime
or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with
respect to any other interest or participation in, or measured by, its profits,
or (ii) pay any Indebtedness owed to Prime or any of its Restricted
Subsidiaries;
55
(2) make loans or advances or capital contributions to Prime or any of its
Restricted Subsidiaries; or
(3) sell, lease or transfer any of its properties or assets to Prime or any
of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indenture;
(2) the indenture and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Prime or any of its Restricted Subsidiaries or of any Person that
becomes a Restricted Subsidiary as in effect at the time of such acquisition or
such Person becoming a Restricted Subsidiary (except to the extent such
Indebtedness was incurred in connection with or, if incurred within one year
prior to such acquisition or such Person becoming a Restricted Subsidiary, in
contemplation of such acquisition or such Person becoming a Restricted
Subsidiary), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that the Consolidated
Cash Flow of such Person is not taken into account (to the extent of such
restriction) in determining whether such acquisition was permitted by the terms
of the indenture;
(5) any instrument governing Indebtedness or Capital Stock of a Person who
becomes a Guarantor as in effect at the time of becoming a Guarantor (except to
the extent such Indebtedness was incurred in connection with or, if incurred
within one year prior to the time of becoming a Guarantor, in contemplation of
such Guarantee), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person who became a Guarantor;
(6) by reason of customary non-assignment provisions in leases entered into
in the ordinary course of business and consistent with past practices;
(7) purchase money obligations for property acquired in the ordinary course
of business that impose restrictions of the nature described in clause (3) of
the first paragraph on the property so acquired;
(8) permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced;
(9) customary restrictions in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements and
mortgages;
(10) any agreement for the sale or other disposition of a Subsidiary that
restricts distributions by that Subsidiary pending its sale or other
disposition;
(11) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption "--Liens" that
limit the right of the debtor to dispose of the assets subject to such Liens;
(12) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course of
business; or
(13) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
56
Merger, Consolidation or Sale of Assets
The indenture provides that Prime may not consolidate or merge with or into
(whether or not Prime is the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless:
(1) Prime is the surviving corporation or the Person formed by or surviving
any such consolidation or merger (if other than Prime) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than Prime) or the Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of Prime pursuant to a supplemental indenture under the notes and
the indenture;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) Prime or any Person formed by or surviving any such consolidation or
merger, or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made:
(a) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of Prime immediately
preceding the transaction; and
(b) will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Certain Capital Stock."
Upon any such consolidation, merger, lease, conveyance or transfer in
accordance with the foregoing, the successor Person formed by such
consolidation or into which Prime is merged or to which such lease, conveyance
or transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, Prime under the indenture with the same effect as if
such successor had been named as Prime therein and thereafter (except in the
case of a lease) the predecessor corporation will be relieved of all further
obligations and covenants under the indenture and the notes.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default or Event
of Default. For purposes of making the determination as to whether such
designation would cause a Default or Event of Default, all outstanding
Investments by Prime and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of the covenant described
under the caption "--Restricted Payments." All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the greatest of
(x) the net book value of such Investments at the time of such designation, (y)
the fair market value of such Investments at the time of such designation and
(z) the original fair market value of such Investments at the time they were
made. Such designation will only be permitted if such Restricted Payment would
be permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to the
trustee by filing with the trustee a certified copy of the resolution of the
Board of Directors of Prime giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
conditions.
Transactions with Affiliates
The indenture provides that Prime will not, and will not permit any of its
Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from,
57
or enter into any contract, agreement, understanding, loan, advance or
Guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Prime or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by Prime or such Restricted Subsidiary on
an arm's length basis with an unrelated Person; and
(2) Prime delivers to the trustee:
(a) with respect to any Affiliate Transaction involving aggregate
payments in excess of $5.0 million, an officers' certificate certifying that
such Affiliate Transaction complies with clause (1) above and such Affiliate
Transaction is approved by a majority of the disinterested non-employee
members of the Board of Directors;
(b) with respect to any Affiliate Transaction involving aggregate
payments in excess of $10.0 million (other than an Affiliate Transaction
involving the acquisition or disposition of a hotel by Prime or a Restricted
Subsidiary of Prime), an opinion as to the fairness to Prime or such
Restricted Subsidiary from a financial point of view issued, at the option
of Prime, by an investment banking firm of national standing or a real
estate appraisal firm of recognized standing (a "Qualified Appraiser"); and
(c) with respect to any Affiliate Transaction involving the acquisition
or disposition of a hotel by Prime or a Restricted Subsidiary of Prime and
(x) involving aggregate payments of less than $25.0 million, an appraisal by
a Qualified Appraiser to the effect that the transaction is being undertaken
at fair market value or (y) involving aggregate payments of $25.0 million or
more, an opinion as to the fairness of the transaction to Prime or such
Restricted Subsidiary from a financial point of view issued by an investment
banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment, deferred compensation, stock option, noncompetition,
consulting or similar agreement entered into by Prime or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of Prime or such Restricted Subsidiary;
(2) transactions between or among Prime and/or its Restricted Subsidiaries;
(3) the incurrence of fees in connection with the provision of hotel
management services, provided that such fees are paid in the ordinary course of
business and are consistent with past practice; and
(4) Restricted Payments permitted by the provisions of the indenture
described above under the covenant described under the caption "--Restricted
Payments."
Line of Business
The indenture provides that for so long as any notes are outstanding, Prime
will not, and will not permit any of its Restricted Subsidiaries to, engage in
any business or activity other than a Hospitality-Related Business.
Payments for Consent
The indenture provides that neither Prime nor any of its Subsidiaries will,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of any notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of the indenture or the notes unless such consideration is offered
to be paid or agreed to be paid to all holders of the notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
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Reports
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, Prime will furnish to the holders of notes all
quarterly and annual financial information that would be required to be
contained in a filing with the Securities and Exchange Commission on Forms 10-Q
and 10-K if Prime were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report by Prime's certified
independent accountants.
In addition, whether or not required by the rules and regulations of the
Securities and Exchange Commission, Prime will submit a copy of all such
information with the Securities and Exchange Commission for public availability
(unless the Securities and Exchange Commission will not accept such a
submission) and file such information with the trustee and make such
information available to investors and securities analysts who request it in
writing. In addition, for so long as the notes are outstanding, Prime will
continue to provide to holders and to prospective purchasers of notes the
information required by Rule 144(d)(4).
If Prime has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Prime and
its Restricted Subsidiaries separate from the financial condition and results
of operations of the Unrestricted Subsidiaries of Prime.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the notes
(whether or not such payment shall be prohibited by the subordination
provisions of the indenture);
(2) default in payment when due of the principal of or premium or
Liquidated Damages, if any, on the notes at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase notes tendered
pursuant to a Change of Control Offer or an Asset Sale Offer) (whether or not
such payment shall be prohibited by the subordination provisions of the
indenture);
(3) failure by Prime or any Restricted Subsidiary to comply with the
covenants described under the captions "--Repurchase at the Option of
Holders--Change of Control" (other than a default provided for in clause (2)
above), "--Repurchase at the Option of Holders--Asset Sales" (other than a
default provided for in clause (2) above), "--Certain Covenants--Restricted
Payments," "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Certain Capital Stock," "--Certain Covenants--Prohibition on Incurrence of
Senior Subordinated Debt" and "--Certain Covenants--Merger, Consolidation or
Sale of Assets," which failure continues for a period of 30 days after written
notice shall have been given to Prime by the trustee or to Prime and the
trustee from holders of at least 25% in principal amount of notes then
outstanding;
(4) failure by Prime or any Guarantor for 60 days in the performance of any
other covenant, warranty or agreement in the indenture or the notes after
written notice shall have been given to Prime by the trustee or to Prime and
the trustee from holders of at least 25% in principal amount of the notes then
outstanding;
(5) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
Non-Recourse Indebtedness of Prime or any of its Restricted Subsidiaries with
an aggregate principal amount in excess of the lesser of:
(a) 10% of the total assets of Prime and its Restricted Subsidiaries
measured as of the end of Prime's most recent fiscal quarter for which
internal financial statements are available immediately prior to the date on
which such default occurred, determined on a pro forma basis; and
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(b) $100.0 million, and such failure continues for a period of 10 days
or more, or the acceleration of the final stated maturity of any such
Non-Recourse Indebtedness (which acceleration is not rescinded, annulled or
otherwise cured within 10 days of receipt by Prime or such Restricted
Subsidiary of notice of any such acceleration);
(6) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness (other than Non-Recourse Indebtedness) of Prime or any
Restricted Subsidiary of Prime and such failure continues for a period of 10
days or more, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise cured
within 10 days of receipt by Prime or such Restricted Subsidiary of notice of
any such acceleration) if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at final maturity or which has been accelerated,
in each case with respect to which the 10-day period described above has
passed, aggregates $20.0 million or more at any time;
(7) failure by Prime or any of its Restricted Subsidiaries to pay final
judgments rendered against them (other than judgment liens without recourse to
any assets or property of Prime or any of its Restricted Subsidiaries other
than assets or property securing Non-Recourse Indebtedness) aggregating in
excess of $20.0 million, which judgments are not paid, discharged or stayed for
a period of 90 days (other than any judgments as to which a reputable insurance
company has accepted full liability);
(8) except as permitted by the indenture, any Guarantee with respect to the
notes shall be held in a judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor (or
its successors or assigns), or any Person acting on behalf of such Guarantor
(or its successors or assigns), shall deny or disaffirm its obligations or
shall fail to comply with any obligations under its Guarantee; and
(9) certain events of bankruptcy or insolvency with respect to Prime, any
Guarantor or any of Prime's Subsidiaries that would constitute a Significant
Subsidiary or any group of Prime's Subsidiaries that, taken together, would
constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the then outstanding notes may declare
all the notes to be, due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Prime, any of its Subsidiaries that
would constitute a Significant Subsidiary or any group of its Subsidiaries
that, taken together, would constitute a Significant Subsidiary or any
Guarantor, all outstanding notes will become due and payable without further
action or notice. Under certain circumstances, the holders of a majority in
principal amount of the outstanding notes may rescind any acceleration with
respect to the notes and its consequences. Holders of the notes may not enforce
the indenture or the notes except as provided in the indenture. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding notes may direct the trustee in its exercise of any trust or power.
The trustee may withhold from holders of the notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
The indenture provides that no holder of a note may pursue a remedy under
the indenture unless: (i) the holder of a note gives to the trustee written
notice of a continuing Event of Default or the trustee receives such notice
from Prime; (ii) the holders of at least 25% in principal amount of the then
outstanding notes make a written request to the trustee to pursue a remedy;
(iii) such holder of a note or holders of notes offer and, if requested,
provide to the trustee indemnity satisfactory to the trustee against any loss,
liability or expense; (iv) the trustee does not comply with the request within
60 days after receipt of the request and the offer and, if requested, the
provision of indemnity; and (v) during such 60-day period the holders of a
majority in principal amount of the then outstanding notes do not give the
trustee a direction inconsistent with the request; provided, however, that such
provision does not affect the right of a holder of a note to sue for
enforcement of any overdue payment thereon.
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Prime is required to deliver to the trustee annually a statement regarding
compliance with the indenture, including with respect to any Restricted
Payments made during such year, the basis upon which the calculations required
by the covenants described under the caption "--Certain Covenants--Restricted
Payments" were computed (which calculations may be based on Prime's latest
available financial statements) and Prime is required upon becoming aware of
any Default or Event of Default, to deliver to the trustee a statement
specifying such Default or Event of Default. Prime will also be required to
deliver to the trustee, forthwith upon any officer becoming aware of a Default
or an Event of Default, an officers' certificate specifying such Default or
Event of Default and what action Prime is taking or proposes to take with
respect thereto.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder, past, present
or future of Prime, any successor Person or any Guarantor, as such, shall have
any liability for any obligations of Prime under the notes, any Guarantee
thereof or the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of notes by accepting a
note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the notes. Such waiver and release may not be
effective to waive or release liabilities under the federal securities laws and
it is the view of the Securities and Exchange Commission that such a waiver or
release is against public policy.
Legal Defeasance and Covenant Defeasance
Prime may, at its option and at any time, elect to have all of its
obligations and the obligations of any Guarantor discharged with respect to the
outstanding notes ("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, and Liquidated Damages, if any, and
interest on such notes when such payments are due;
(2) Prime's and any Guarantor's obligations with respect to the notes
concerning issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
Prime's and any Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Prime may, at its option and at any time, elect to have the
obligations of Prime and any Guarantor released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Prime must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the outstanding notes on the stated maturity or on the applicable redemption
date, as the case may be, of such principal or installment of principal of, and
premium, if any, or interest on the outstanding notes;
(2) in the case of Legal Defeasance, Prime shall have delivered to the
trustee an opinion of counsel (which counsel may be an employee of Prime or any
Subsidiary of Prime) reasonably acceptable to the trustee confirming that (A)
Prime has received from, or there has been published by, the Internal Revenue
Service a
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ruling or (B) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the holders of the
outstanding notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Prime shall have delivered to the
trustee an opinion of counsel (which counsel may be an employee of Prime or any
Subsidiary of Prime) reasonably acceptable to the trustee confirming that the
holders of the outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement
or instrument (other than the indenture) to which Prime or any of its
Subsidiaries is a party or by which Prime or any of its Subsidiaries is bound;
(6) Prime shall have delivered to the trustee an officers' certificate
stating that the deposit was not made by Prime with the intent of preferring
the holders of notes over the other creditors of Prime with the intent of
defeating, hindering, delaying or defrauding creditors of Prime or others; and
(7) Prime shall have delivered to the trustee an officers' certificate and
an opinion of counsel (which counsel may be an employee of Prime), each
stating, that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next three succeeding paragraphs of this
subsection, the indenture or the notes may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of the notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for notes), and any existing default or compliance with any
provision of the indenture or the notes may be waived with the consent of the
holders of a majority in principal amount of the then outstanding notes
(including consents obtained in connection with a tender offer or exchange
offer for notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder of notes):
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
premium or Liquidated Damages, if any, or interest on the notes (except a
rescission of acceleration of the notes by the holders of at least a majority
in aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of notes to receive payments of
principal of, premium or Liquidated Damages, if any, or interest on the notes;
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(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders"); or
(8) make any change in the foregoing amendment and waiver provisions.
The indenture provides that, without the consent of at least 75% in
aggregate principal amount of notes outstanding, Prime will not amend, modify
or alter the Convertible Note indenture in any way that will (i) increase the
rate of or change the time for payment of interest on any Convertible Notes,
(ii) increase the principal of, advance the final maturity date of or shorten
the Weighted Average Life to Maturity of any Convertible Notes (iii) alter the
redemption provision or the price or terms at which Prime is required to offer
to purchase such Convertible Notes or (iv) amend the provisions of Article
Twelve of the indenture governing the Convertible Notes which relate to
subordination.
In addition, any amendment to, or waiver of, the provisions of the indenture
relating to subordination that adversely affect the rights of the holders of
the notes will require the consent of the holders of at least 75% in aggregate
principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any holder of notes,
Prime and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Prime's obligations to holders of
notes in the case of a merger or consolidation or sale of assets;
(4) to release a Guarantor in accordance with the indenture;
(5) to make any change that would provide any additional rights or benefits
to the holders of notes (including providing for Guarantees with respect to the
notes pursuant to the covenant described under the caption "--Subsidiary
Guarantees") or that does not adversely affect the legal rights under the
indenture of any such holder; or
(6) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture Act.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of
notes) as to all outstanding notes when either:
(1) all such notes theretofore authenticated and delivered (except lost,
stolen or destroyed notes that have been replaced or paid and notes for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by Prime and thereafter repaid to Prime or discharged from such trust)
have been delivered to the trustee for cancellation; or
(2) (a) all such notes not theretofore delivered to the trustee for
cancellation have become due and payable by their terms or shall have been
called for redemption and Prime has irrevocably deposited or caused to be
deposited with the trustee as trust funds in trust for such purpose an amount
of money sufficient to pay and discharge the entire Indebtedness on the notes
not theretofore delivered to the trustee for cancellation or redemption, for
the principal amount, premium and Liquidated Damages, if any, and accrued
interest to the date of such deposit; (b) Prime has paid all other sums payable
by it under the indenture; and (c) Prime has delivered irrevocable instructions
to the trustee to apply the deposited money toward the payment of the notes at
maturity or on the redemption date, as the case may be. In addition, Prime must
deliver an officers' certificate and an opinion of counsel stating that all
conditions precedent to satisfaction and discharge have been complied with.
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Concerning the Trustee
If the trustee becomes a creditor of Prime or any Guarantor, the indenture
limits its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Securities and Exchange Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless such holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
Book-Entry, Delivery and Form
The notes will be issued in the form of a single fully registered global
note without coupons that will be deposited with The Depository Trust Company,
New York, New York, referred to herein as DTC, and registered in the name of
its nominee, Cede & Co. This means that we will not issue certificates to each
owner of notes. One global note will be issued to DTC, which will keep a
computerized record of its participants (for example, your broker) whose
clients have purchased the notes. The participant will then keep a record of
its clients who purchased the notes. Unless it is exchanged in whole or in part
for a certificated note, the global note may not be transferred, except that
DTC, its nominees, and their successors may transfer the global note as a whole
to one another.
DTC has provided us with the following information: DTC is (i) a
limited-purpose trust company organized under the New York Banking Law, (ii) a
banking organization within the meaning of the New York Banking Law, (iii) a
member of the United States Federal Reserve System, (iv) a clearing corporation
within the meaning of the New York Uniform Commercial Code and (v) a clearing
agency registered under the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants, referred to herein as Direct
Participants, deposit with DTC. DTC also records the settlement among Direct
Participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for Direct Participants'
accounts. This eliminates the need to exchange certificates. Direct
Participants include securities brokers and dealers (including the initial
purchasers), banks, trust companies, clearing corporations and certain other
organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its Direct Participants are
on file with the Securities and Exchange Commission.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc.
We expect that, pursuant to procedures established by DTC, ownership of
beneficial interests in the notes evidenced by the global note will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to beneficial interests of
Direct Participants) and records of Direct Participants (with respect to
beneficial interests of persons who hold through Direct Participants). Neither
we nor the Trustees will have any responsibility or liability for any aspect of
the records of DTC or for maintaining, supervising or reviewing any records of
DTC or any of its Direct Participants relating to beneficial ownership
interests in the notes. The laws of some states require that certain purchasers
of securities take physical delivery of such securities in definitive form.
Such limits and laws may impair your ability to own, pledge or transfer
beneficial interests in the global note.
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So long as DTC or its nominee is the registered owner of the global note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the global note for all purposes under the
indenture. Except as described below, as an owner of a beneficial interest in
notes evidenced by the global note you will not be entitled to have any of the
individual notes represented by such global note registered in your name, you
will not receive or be entitled to receive physical delivery of any such notes
in definitive form and you will not be considered the owner or holder thereof
under the indenture for any purpose, including with respect to the giving of
any direction, instructions or approvals to the Trustee thereunder.
Accordingly, you must rely on the procedures of DTC and, if you are not a
Direct Participant, on the procedures of the Direct Participant through which
you own your interest, to exercise any rights of a holder under the indenture.
We understand that, under existing industry practice, if we request any action
of holders or if an owner of a beneficial interest in a global note desires to
give or take any action which a holder is entitled to give or take under the
indenture, DTC would authorize the Direct Participants holding the relevant
beneficial interest to give or take such action, and such Direct Participants
would authorize beneficial owners through such Direct Participants to give or
take such actions or would otherwise act upon the instructions of beneficial
owners holding through them.
Payments of principal of, any premium, if any, and any interest or
additional amount on, individual notes represented by a global note registered
in the name of the holder of the global note or its nominee will be made by the
Trustee to or at the direction of the holder of the global note or its nominee,
as the case may be, as the registered owner of the global note under the
indenture. Under the terms of the indenture, we and the Trustee may treat the
persons in whose name notes, including a global note, are registered as the
owners thereof for the purpose of receiving such payments. Consequently,
neither we nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of notes (including principal,
premium, if any, and interest or additional amount payable thereon).
We believe, however, that it is currently the policy of DTC to immediately
credit the accounts of relevant Direct Participants with such payments in
amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of DTC. Payments by Direct
Participants to the beneficial owners of notes will be governed by standing
instructions and customary practice and will be the responsibility of DTC's
Direct Participants. Redemption notices with respect to any notes will be sent
to the holder of the global note (i.e., DTC, its nominee or any subsequent
holder). If less than all of the notes of any series are to be redeemed, we
expect the holder of the global note to determine the amount of interest of
each Direct Participant in the notes to be redeemed by lot. None of the
Trustee, any paying agent, the security registrar for such notes or us will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the global
note for such notes.
Neither we nor the Trustee will be liable for any delay by the holder of a
global note or DTC in identifying the beneficial owners of notes and we and the
Trustee may conclusively rely on, and will be protected in relying on,
instructions from the holder of a global note or DTC for all purposes.
The notes, which are represented by the global note, will be exchangeable
for certificate notes with the same terms in authorized denominations only if:
. DTC notifies us that it is unwilling or unable to continue as depository
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depository is not appointed by us within 90 days;
. we determine not to require all of the notes to be represented by a
global note and notify the trustee of our decision, in which case we
will issue individual notes in denominations of $1,000 and integral
multiples thereof; or
. there has occurred and is continuing an Event of Default with respect to
the notes.
Same day settlement and payment
We will make all payments of principal and interest in respect of the notes
in immediately available funds. The notes will trade in DTC's Same-Day Funds
Settlement System until maturity or until the notes are issued in
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certificated form, and secondary market trading activity in the notes will
therefore be required by DTC to settle in immediately available funds. We
expect that secondary trading in the certificated securities, if any, will also
be settled in immediately available funds. No assurance can be given as to the
effect, if any, of settlement in immediately available funds on trading
activity in the notes.
Governing law
The indenture and the notes will be governed by, and construed in accordance
with, the laws of the State of New York without giving effect to applicable
principles of conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
Registration Rights; Liquidated Damages
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the registration rights agreement in its entirety
because it, and not this description, defines your registration rights as
holders of the notes. See "--Additional Information."
On April 29, 2002, Prime and the initial purchaser entered into the
registration rights agreement. Pursuant to the registration rights agreement,
Prime agreed to file with the Securities and Exchange Commission the exchange
offer registration statement on the appropriate form under the Securities Act
with respect to the exchange notes. This exchange offer registration statement
is being filed to satisfy this obligation. Upon the effectiveness of the
exchange offer registration statement, Prime will offer to the holders of
Transfer Restricted Securities (as defined below) pursuant to the exchange
offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for exchange notes.
If:
(1) Prime is not
(a) required to file the exchange offer registration statement; or
(b) permitted to consummate the exchange offer because the exchange
offer is not permitted by applicable law or Commission policy; or
(2) any holder of Transfer Restricted Securities notifies Prime prior to
the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Securities and Exchange Commission policy
from participating in the exchange offer; or
(b) that it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is not
appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly from
Prime or an affiliate of Prime,
Prime will file with the Securities and Exchange Commission a shelf
registration statement to cover resales of the notes by the holders of the
notes who satisfy certain conditions relating to the provision of information
in connection with the shelf registration statement. Prime will use its best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Securities and Exchange Commission.
For purposes of the preceding, "Transfer Restricted Securities" means each
note until:
(1) the date on which such note has been exchanged by a Person other than a
broker-dealer for an exchange note in the exchange offer;
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(2) following the exchange by a broker-dealer in the exchange offer of a
note for an exchange note, the date on which such exchange note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the exchange offer registration
statement;
(3) the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
(4) the date on which such note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreement provides that:
(1) Prime will file an exchange offer registration statement with the
Securities and Exchange Commission on or prior to 60 days after the closing of
the offering of the original notes which occurred on April 29, 2002;
(2) Prime will use its best efforts to have the exchange offer registration
statement declared effective by the Securities and Exchange Commission on or
prior to 120 days after the closing of the offering of the original notes which
occurred on April 29, 2002;
(3) unless the exchange offer would not be permitted by applicable law or
Securities and Exchange Commission policy, Prime will
(a) commence the exchange offer; and
(b) use its best efforts to issue on or prior to 30 business days, or
longer, if required by the federal securities laws, after the date on which
the exchange offer registration statement is declared effective by the
Securities and Exchange Commission, exchange notes in exchange for all notes
tendered prior thereto in the exchange offer; and
(4) if obligated to file the shelf registration statement, Prime will use
its best efforts to file the shelf registration statement with the Securities
and Exchange Commission on or prior to 60 days after such filing obligation
arises and to cause the shelf registration statement to be declared effective
by the Securities and Exchange Commission on or prior to 120 days after such
obligation arises.
If:
(1) Prime fails to file any of the registration statements required by the
registration rights agreement on or before the date specified for such filing;
or
(2) any of such registration statements is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"); or
(3) Prime fails to consummate the exchange offer within 30 business days of
the Effectiveness Target Date with respect to the exchange offer registration
statement; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or usable
in connection with resales of Transfer Restricted Securities during the periods
specified in the registration rights agreement (each such event referred to in
clauses (1) through (4) above, a "Registration Default"),
then Prime will pay Liquidated Damages to each holder of original notes, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default in an amount equal to $0.05 per week per $1,000
principal amount of notes held by such holder.
The amount of the Liquidated Damages will increase by an additional $0.05
per week per $1,000 principal amount of notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages for all Registration Defaults of $0.50 per week
per $1,000 principal amount of notes.
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All accrued Liquidated Damages will be paid by Prime on each interest
payment date to the Global Note holder by wire transfer of immediately
available funds or by federal funds check and to holders of Certificated Notes
by wire transfer to the accounts specified by them or by mailing checks to
their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of notes will be required to make certain representations to Prime
(as described in the registration rights agreement) in order to participate in
the exchange offer and will be required to deliver certain information to be
used in connection with the shelf registration statement and to provide
comments on the shelf registration statement within the time periods set forth
in the registration rights agreement in order to have their notes included in
the shelf registration statement and benefit from the provisions regarding
Liquidated Damages set forth above. By acquiring Transfer Restricted
Securities, a holder is deemed to have agreed to indemnify Prime against
certain losses arising out of information furnished by such holder in writing
for inclusion in any shelf registration statement. Holders of notes will also
be required to suspend their use of the prospectus included in the shelf
registration statement under certain circumstances upon receipt of written
notice to that effect from Prime.
Additional Information
Anyone who received this prospectus may obtain a copy of the indenture and
the registration rights agreement without charge by writing to Prime
Hospitality Corp., 700 Route 46 East, P.O. Box 2700, Fairfield, New Jersey
07004, Attention: Joseph Bernadino, Esq.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
merged with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person;
and
(2) Indebtedness encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Asset Sale" means:
(1) the sale, lease (other than operating leases in respect of facilities
which are ancillary to the operation of Prime's or a Restricted Subsidiary's
hotel properties), conveyance or other disposition of any property or assets of
Prime or any Restricted Subsidiary (including by way of a sale and leaseback
transaction and including a disposition by Prime or a Restricted Subsidiary of
Equity Interests in an Unrestricted Subsidiary);
(2) the issuance or sale of Equity Interests of any of Prime's Restricted
Subsidiaries; or
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(3) any Event of Loss.
Notwithstanding the preceding, none of the following items will be deemed to
be an Asset Sale:
(1) the sale or disposition of personal property held for sale in the
ordinary course of business;
(2) the sale or disposal of damaged, worn out or other obsolete property in
the ordinary course of business so long as such property is no longer necessary
for the proper conduct of the business of Prime or such Restricted Subsidiary,
as applicable;
(3) the transfer of assets by Prime to a Restricted Subsidiary of Prime or
by a Restricted Subsidiary of Prime to Prime or to another Restricted
Subsidiary of Prime;
(4) the exchange of assets held by Prime or a Restricted Subsidiary of
Prime for one or more hotels and/or one or more Hospitality-Related Businesses
of any person or entity owning one or more hotels and/or one or more
Hospitality-Related Businesses; provided, that the Board of Directors of Prime
has determined that the terms of any exchange are fair and reasonable and that
the fair market value of the assets received by Prime, as set forth in an
opinion of a Qualified Appraiser, are equal to or greater than the fair market
value of the assets exchanged by Prime or a Restricted Subsidiary of Prime;
(5) any Restricted Payment, dividend or purchase or retirement of Equity
Interests permitted under the covenant described under the caption "--Certain
Covenants--Restricted Payments;"
(6) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of Prime in compliance with the provisions of
the indenture described above under the captions "--Repurchase at the Option of
Holders--Change of Control" and "--Certain Covenants--Merger, Consolidation or
Sale of Assets;"
(7) the conversion of or foreclosure on any mortgage or note, provided that
Prime or a Restricted Subsidiary receives the real property underlying any such
mortgage or note;
(8) the sale or disposition of those assets pledged as collateral for the
First Mortgage Notes, provided, that the proceeds from the sale or disposition
of such assets shall be used to temporarily reduce revolving credit borrowings;
or
(9) any transaction or series of related transactions that would otherwise
be an Asset Sale where the fair market value of the assets, sold, leased,
conveyed or otherwise disposed of was less than $10.0 million or an Event of
Loss or related series of Events of Loss pursuant to which the aggregate value
of property or assets involved in such Event of Loss or Events of Loss is less
than $10.0 million.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including,
without limitation, with respect to partnerships, partnership interests
(whether general or limited) and any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, such partnership.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition, bankers acceptances with
maturities not exceeding six months from the date of acquisition and overnight
bank deposits, in each case with any domestic commercial bank having capital
and surplus in excess of $500.0 million;
69
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) entered
into with any financial institution meeting the qualifications specified in
clause (3) above;
(5) commercial paper or commercial paper Master Notes having a rating of
P-2 or the equivalent thereof by Moody's Investors Service, Inc. or A-2 or the
equivalent thereof by Standard & Poor's Corporation and in each case maturing
within six months after the date of acquisition;
(6) money market mutual funds that provide daily purchase and redemption
features; and
(7) corporate debt with maturities of not greater than six months and with
a rating of A or the equivalent thereof by Standard & Poor's Corporation and a
rating of A2 or the equivalent thereof by Moody's Investors Service, Inc.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of Prime's assets to any person or
group (as such term is used in Section 13(d) (3) of the Exchange Act) other
than to a Wholly Owned Restricted Subsidiary that is a Guarantor;
(2) the adoption of a plan relating to the liquidation or dissolution of
Prime;
(3) the acquisition by any person or group (as such term is used in Section
13(d) (3) of the Exchange Act) of a direct or indirect interest in more than
50% of the ownership of Prime or the voting power of the voting stock of Prime
by way of purchase, merger or consolidation or otherwise (other than a creation
of a holding company that does not involve a change in the beneficial ownership
of Prime as a result of such transaction);
(4) the merger or consolidation of Prime with or into another corporation
or the merger of another corporation into Prime with the effect that
immediately after such transaction the stockholders of Prime immediately prior
to such transaction hold less than 50% of the total voting power of all
securities generally entitled to vote in the election of directors, managers,
or trustees of the Person surviving such merger or consolidation; or
(5) the first day on which a majority of the members of the Board of
Directors of Prime are not Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale, to the extent such losses were deducted in
computing Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person for such
period, to the extent such provision for taxes was included in computing
Consolidated Net Income; plus
(3) Consolidated Interest Expense of such Person for such period to the
extent such expense was deducted in computing Consolidated Net Income; plus
(4) Consolidated Depreciation and Amortization Expense of such Person for
such period, to the extent deducted in computing Consolidated Net Income in
each case, on a consolidated basis for such Person and its Restricted
Subsidiaries and determined in accordance with GAAP; minus
(5) other income as reflected on such Person's consolidated financial
statements, as prepared in accordance with GAAP, to the extent such other
income was included in computing Consolidated Net Income.
Notwithstanding the foregoing, the provision for taxes on the income or
profits of, the depreciation and amortization of and the interest expense of, a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in the same
proportion) that the Net Income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of
70
such Person and only if a corresponding amount would be permitted at the date
of determination to be dividended to such Person by such Restricted Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
Any calculation of the Consolidated Cash Flow of an individual hotel
property shall be calculated in a manner consistent with the foregoing.
"Consolidated Depreciation and Amortization Expense" means, with respect to
any Person for any period, the total amount of depreciation and amortization
expense (including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and the
total amount of non-cash charges (other than non-cash charges that represent an
accrual or reserve for cash charges in future periods or which involved a cash
expenditure in a prior period) of such Person and its Restricted Subsidiaries
for such period on a consolidated basis as determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of:
(1) interest expense, whether paid or accrued, to the extent such expense
was deducted in computing Consolidated Net Income (including amortization of
original issue discount, non-cash interest payments, the interest component of
Capital Lease Obligations, and net payments (if any) pursuant to Hedging
Obligations, but excluding amortization of deferred financing fees);
(2) commissions, discounts and other fees and charges paid or accrued with
respect to letters of credit and bankers acceptance financing; and
(3) interest for which such Person or its Restricted Subsidiaries is
liable, whether or not actually paid, pursuant to Indebtedness or under a
Guarantee of Indebtedness of any other Person; in each case, calculated for
such Person and its Restricted Subsidiaries for such period on a consolidated
basis as determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that the following shall be excluded:
(1) the Net Income of any Person that is not a Restricted Subsidiary or
that is accounted for by the equity method of accounting shall be excluded,
whether or not distributed to Prime or one of its Restricted Subsidiaries;
(2) the Net Income of any Person that is a Restricted Subsidiary and that
is restricted from declaring or paying dividends or other distributions,
directly or indirectly, by operation of the terms of its charter, any
applicable agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation or otherwise shall be included only to the extent of
the amount of dividends or distributions paid to the referent Person or a
Wholly Owned Restricted Subsidiary;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition; and
(4) the cumulative effect of change in accounting principles.
"Consolidated Net Worth" means, with respect to any Person, as of any date
of determination, the sum of:
(1) the consolidated equity of the common stockholders of such Person and
its consolidated Subsidiaries as of such date plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of Preferred Stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
71
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such Preferred
Stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Issuance Date in the book value of any asset owned by such
Person or a consolidated Subsidiary of such Person, (y) all Investments as of
such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments) and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Prime who:
(1) was a member of such Board of Directors on the date of the indenture; or
(2) was nominated for election or elected to such Board of Directors with
the affirmative vote of at least a majority of the Continuing Directors who
were members of such Board at the time of such nomination or election.
"Credit Facilities" means one or more borrowing arrangements, to be entered
into, by and between Prime and/or one or more Restricted Subsidiaries and a
commercial bank or other institutional lender, including any related notes,
security documentation, guarantees, collateral documents, instruments and
agreements executed in connection therewith, in each case as amended, modified,
supplemented, restructured, renewed, restated, refunded, replaced or refinanced
or extended from time to time on one or more occasions.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) Indebtedness under or in respect of a Credit Facility;
(2) Indebtedness under or in respect of Prime's 91/4% First Mortgage Notes
due 2006; and
(3) any other Indebtedness constituting Senior Debt which, at the time of
determination, has an aggregate principal amount of at least $25.0 million and
is specifically designated in the instrument evidencing such Senior Debt as
"Designated Senior Debt" by Prime.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder of the Capital Stock, in whole or in part, on or prior to the
date that is 91 days after the date on which the notes mature. Notwithstanding
the preceding sentence, any Capital Stock that would constitute Disqualified
Stock solely because the holders of the Capital Stock have the right to require
Prime to repurchase such Capital Stock upon the occurrence of a change of
control or an asset sale will not constitute Disqualified Stock if the terms of
such Capital Stock provide that Prime may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for Capital Stock).
"Event of Loss" means, with respect to any property or asset (tangible or
intangible, real or personal), any of the following: (A) any loss, destruction
or damage of such property or asset; or (B) any actual condemnation, seizure or
taking by the power of eminent domain or otherwise of such property or asset,
or confiscation of such property or asset or the requisition of the use of such
property or asset.
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"Existing Indebtedness" means Indebtedness of Prime and its Restricted
Subsidiaries in existence on the date of the indenture (after giving effect to
the use of proceeds of the Offering), excluding, for this purpose, amounts
committed for under Credit Facilities as in effect on the date of the indenture.
"Existing Real Estate" means any real estate owned, leased or optioned by
Prime or any of its Subsidiaries on the date of the indenture, or any real
estate on which Prime or any of its Subsidiaries holds a mortgage on the date
of the indenture.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that Prime or
any of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings that provide working
capital in the ordinary course of business) or issues or redeems Preferred
Stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of Preferred Stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period.
For purposes of making the computation referred to above, acquisitions,
dispositions and discontinued operations (as determined in accordance with
GAAP) that have been made by Prime or any of its Restricted Subsidiaries,
including all mergers, consolidations and dispositions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be calculated on a pro forma basis assuming that all
such acquisitions, dispositions, discontinued operations, mergers,
consolidations (and the reduction of any associated fixed charge obligations
resulting therefrom) had occurred on the first day of the four-quarter
reference period.
"Fixed Charges" means, with respect to any Person for any period, the sum of:
(1) e of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued, to the extent such expense was deducted in computing
Consolidated Net Income; plus
(2) the product of (i) all cash dividend payments (and non-cash dividend
payments in the case of a Person that is a Restricted Subsidiary) on any series
of Preferred Stock of such Person or its Restricted Subsidiaries (other than
Preferred Stock owned by such Person or its Restricted Subsidiaries), times
(ii) a fraction, the numerator of which is one and the denominator of which is
one, minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
obligations or guarantee the full faith and credit of the United States of
America is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) or otherwise
incurring, assuming or becoming liable for the payment of any principal,
premium or interest, direct or indirect, in any manner (including, without
limitation, letters of credit and reimbursement agreements in respect thereof),
of all or any part of any Indebtedness.
"Guarantors" means such Persons that become a guarantor of the notes
pursuant to the terms of the indenture, and each of their respective successors.
73
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Hospitality-Related Business" means the hotel business and other businesses
necessary for, incident to, in support of, connected with or arising out of the
hotel business, including, without limitation, (i) developing, managing,
operating, improving or acquiring lodging facilities, restaurants and other
food-service facilities, sports or entertainment facilities, and convention or
meeting facilities, and marketing services related thereto, (ii) acquiring,
developing, operating, managing or improving the Existing Real Estate, any real
estate taken in foreclosure (or similar settlement) by Prime or any of its
Restricted Subsidiaries, or any real estate ancillary or connected to any hotel
owned, managed or operated by Prime or any of its Restricted Subsidiaries,
(iii) owning and managing mortgages in, or other Indebtedness secured by Liens
on hotels and real estate related or ancillary to hotels or (iv) other related
activities thereto.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof);
(3) representing Capital Lease Obligations;
(4) the balance deferred and unpaid of the purchase price of any property;
or
(5) representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, and also includes, to
the extent not otherwise included, the Guarantee of any Indebtedness of such
Person or any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Prime or any Restricted Subsidiary of Prime sells or otherwise disposes of
any Equity Interests of any direct or indirect Restricted Subsidiary of Prime
such that, after giving effect to any such sale or disposition, Prime no longer
owns, directly or indirectly, greater than 50% of the outstanding Common Stock
of such Restricted Subsidiary, Prime shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Common Stock of such Restricted Subsidiary not sold or disposed of.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with any Asset Sale, and excluding any
extraordinary gain (but not loss), together with any related provision for
taxes on such extraordinary gain (but not loss).
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"Net Proceeds" means the aggregate cash proceeds received by Prime or any of
its Restricted Subsidiaries in respect of any Asset Sale, net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions), and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets the
subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets.
"Non-Recourse Indebtedness" means Indebtedness:
(1) as to which neither Prime nor any of its Restricted Subsidiaries:
(a) provides credit support (other than in the form of a Lien on an
asset serving as security for Non-Recourse Indebtedness) pursuant to any
undertaking, agreement or instrument that would constitute Indebtedness;
(b) is directly or indirectly liable (other than in the form of a Lien
on an asset serving as security for Non-Recourse Indebtedness); or
(c) constitutes the lender; and
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of Prime or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Junior Securities" means Equity Interest in Prime or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to
a greater extent than, the notes are subordinated to Senior Debt pursuant to
Article 10 of the indenture.
"Permitted Investments" means:
(1) any Investments in Prime or any Guarantor;
(2) Investments in any Restricted Subsidiary that is not a Guarantor not to
exceed an aggregate of $5.0 million per Restricted Subsidiary;
(3) any Investments in Cash Equivalents;
(4) Investments by Prime or any Restricted Subsidiary of Prime in a Person,
if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Prime or any
Guarantor; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, Prime or a Restricted Subsidiary of Prime or any Guarantor;
(5) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales;"
(6) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of Prime;
(7) any Investments received in compromise of obligations of such persons
incurred in the ordinary course of trade creditors or customers that were
incurred in the ordinary course of business, including pursuant to any
75
plan of reorganization or similar arrangement upon the bankruptcy or insolvency
of any trade creditor or customer;
(8) Hedging Obligations; and
(9) net cash advances to Restricted Subsidiaries in the ordinary course of
business and consistent with Prime's past cash management practices in an
amount not to exceed $30.0 million at any one time outstanding.
"Permitted Liens" means:
(1) Liens of Prime securing Senior Debt that was permitted by the terms of
the indenture to be incurred;
(2) Liens in favor of Prime;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Prime or any Restricted Subsidiary of
Prime; provided that such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with Prime or the Restricted
Subsidiary;
(4) Liens on property existing at the time of acquisition of the property
by Prime or any Restricted Subsidiary of Prime, provided that such Liens were
in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature incurred
in the ordinary course of business;
(6) Liens existing on the date of the indenture;
(7) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as is required in conformity with GAAP
has been made therefor;
(8) Liens securing Non-Recourse Indebtedness;
(9) Liens incurred in connection with Credit Facilities; and
(10) Liens incurred in the ordinary course of business of Prime or any
Restricted Subsidiary of Prime with respect to obligations that do not exceed
$5.0 million at any one time outstanding.
"Permitted Refinancing" means Refinancing Indebtedness or Refinancing
Disqualified Stock, as the case may be, to the extent:
(1) the principal amount of Refinancing Indebtedness or the liquidation
preference amount of Refinancing Disqualified Stock, as the case may be, does
not exceed the principal amount of Indebtedness or the liquidation preference
amount of Disqualified Stock, as the case may be, so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of premiums and
reasonable expenses incurred in connection therewith);
(2) such Refinancing Indebtedness or Refinancing Disqualified Stock, as the
case may be, is scheduled to mature or is redeemable at the option of the
holder, as the case may be, no earlier than the Indebtedness or Disqualified
Stock, as the case may be, being refinanced;
(3) in the case of Refinancing Indebtedness, the Refinancing Indebtedness
has a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(4) in the case of Refinancing Disqualified Stock, the Disqualified Stock
has a Weighted Average Life to Mandatory Redemption equal to or greater than
the Weighted Average Life to Mandatory Redemption of the Disqualified Stock
being extended, refinanced, renewed, replaced, defeased or refunded; or
(5) if the Indebtedness or the Disqualified Stock, as the case may be,
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated or junior in right of payment to the notes, the Refinancing
Indebtedness or Refinancing Disqualified Stock, as the case may be, is
subordinated or junior in right of payment
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to the notes on terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness or the Disqualified
Stock, as the case may be, being extended, refinanced, renewed, replaced,
defeased or refunded or is payable solely in Equity Interests of the Person
whose Indebtedness is being purchased, redeemed or otherwise acquired or
retired for value.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock" means any Equity Interest with preferential right in the
payment of dividends or liquidation or any Disqualified Stock.
"Refinancing Disqualified Stock" means Disqualified Stock issued in exchange
for, or the proceeds of which are used, to extend, refinance, renew, replace,
defease or refund Disqualified Stock or Indebtedness permitted to be issued
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Certain Capital Stock" or
Indebtedness referred to in clauses (3), (5), (7) and (9) of the second
paragraph of such covenant.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or the
proceeds of which are used to extend, refinance, renew, replace, defease or
refund Indebtedness permitted to be incurred pursuant to the Fixed Charge
Coverage Ratio test set forth in the covenant described under the caption
"--Certain Covenants --Incurrence of Indebtedness and Issuance of Certain
Capital Stock" or Indebtedness referred to in clauses (3), (5), (7) and (9) of
the second paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Certain Capital Stock."
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of Designated Senior Debt; provided, that if, and for
so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute
the holders of a majority in outstanding principal amount of such Designated
Senior Debt in respect of any Designated Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means, in the case of Prime or any Guarantor, the principal
of, premium, if any, and interest (including any interest accruing subsequent
to the filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) on any Indebtedness of Prime, whether outstanding
on the date of the indenture or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
notes.
Without limiting the generality of the foregoing, "Senior Debt" shall also
include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of:
(1) all Obligations of every nature of Prime under Credit Facilities,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities, whether outstanding on the date of the indenture or thereafter
incurred;
77
(2) all Hedging Obligations (including Guarantees thereof), whether
outstanding on the date of the indenture or thereafter incurred; and
(3) Prime's 91/4% First Mortgage Notes due 2006.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(1) any Indebtedness of Prime or any Guarantor to a Subsidiary of Prime or
any Affiliate of Prime or any of such Affiliate's Subsidiaries;
(2) Indebtedness to, or guaranteed on behalf of, any shareholder, director,
officer or employee of Prime or any Subsidiary of Prime or any Guarantor
(including, without limitation, amounts owed for compensation);
(3) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(4) any liability for federal, state, local or other taxes owed or owing by
Prime or any Guarantor;
(5) that portion of Indebtedness incurred in violation of the indenture; and
(6) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of Prime or any Guarantor.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a board
resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Indebtedness;
(2) is not party to any agreement, contract, arrangement or understanding
with Prime or any Restricted Subsidiary of Prime unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
Prime or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of Prime;
(3) is a Person with respect to which neither Prime nor any of its
Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe
for additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Prime or any of its Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Prime or any of its Restricted Subsidiaries
and has at least one executive officer that is not a director or executive
officer of Prime or any of its Restricted Subsidiaries.
Any such designation by the Board of Directors shall be evidenced to the
trustee by filing with the trustee a certified copy of the board resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary
78
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of Prime as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Certain Capital Stock," Prime shall be in default of such
covenant). The Board of Directors of Prime may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary, provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Prime of any outstanding Indebtedness of such Unrestricted
Subsidiary, and such designation shall only be permitted if (1) such
Indebtedness is permitted under the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Certain
Capital Stock," and (2) no Default or Event of Default would be in existence
following such designation.
"Weighted Average Life to Mandatory Redemption" means, when applied to any
Disqualified Stock at any date, the number of years obtained by dividing (a)
the sum of the products obtained by multiplying (x) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity, in respect thereof, by (y)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
liquidation preference amount of such Disqualified Stock.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
79
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain U.S. Federal income tax
consequences of the purchase, ownership and disposition of the notes. This
discussion only deals with persons that hold notes as a capital asset within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended,
referred to herein as the Code, and that purchase the notes for cash at
original issue. This discussion does not address the U.S. Federal income tax
consequences that may be relevant to a particular holder subject to special
treatment under certain U.S. Federal income tax laws (for example, persons
subject to the alternative minimum tax provisions of the Code). Also, this
discussion is not intended to be wholly applicable to all categories of
investors, some of which, such as dealers in securities or foreign currency,
banks, trusts, insurance companies, tax-exempt organizations (employment,
charitable or other), persons that hold notes as part of a hedging or
conversion transaction or a straddle, persons deemed to sell notes under the
constructive sale provisions of the Code, persons that have a functional
currency other than the U.S. dollar and investors in pass-through entities, may
be subject to special rules.
This discussion is based on the Code, the final, temporary and proposed
Treasury regulations promulgated thereunder, administrative pronouncements and
judicial decisions, all as in effect on the date hereof and all of which are
subject to change, possibly with retroactive effect. We have not requested, and
will not request, a ruling from the U.S. Internal Revenue Service, referred to
herein as the IRS, with respect to any of the U.S. Federal income tax
consequences described below. There can be no assurance that the IRS will not
disagree with or challenge any of the conclusions set forth herein.
Persons considering the purchase of notes should consult their own tax
advisors concerning the application of U.S. Federal income tax laws, as well as
the laws of any state, local or foreign taxing jurisdiction, to their
particular situations.
U.S. Holders
The following discussion is limited to persons that are U.S. Holders. For
these purposes, "U.S. Holder" means the beneficial owner of a note that for
U.S. Federal income tax purposes is (i) an individual who is a citizen or
resident of the United States, (ii) a corporation or other entity taxable as a
corporation that is created or organized under the laws of the United States or
any political subdivision thereof or therein, (iii) an estate the income of
which is subject to U.S. Federal income tax regardless of its source, (iv) a
trust subject to the primary supervision of a U.S. court and the control of one
or more U.S. persons or (v) a person whose worldwide income or gain is
otherwise subject to U.S. Federal income tax on a net income basis.
(1) Interest
A U.S. Holder must generally include interest on a note in its ordinary
income at the time such interest is received or accrued, in accordance with
such U.S. Holder's method of accounting for U.S. Federal income tax purposes.
(2) Sale, Exchange or Redemption of Notes
Upon the sale, exchange or redemption of a note, a U.S. Holder generally
will recognize taxable gain or loss equal to the difference between (i) the
amount realized on such disposition and (ii) such U.S. Holder's adjusted tax
basis in the note. Notwithstanding the foregoing, any amounts realized in
connection with any sale, exchange or redemption with respect to accrued
interest not previously included in income will be treated as ordinary interest
income. A U.S. Holder's adjusted tax basis in a note generally will equal the
cost of such note less any principal payments received by such holder.
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(3) Exchange Offer
The exchange of notes for the exchange notes pursuant to the exchange offer
should not constitute a taxable event for U.S. Federal income tax purposes. As
a result, (i) a U.S. Holder of notes should not recognize taxable gain or loss
as a result of the exchange of notes for exchange notes pursuant to the
exchange offer, (ii) the holding period of the exchange notes should include
the holding period of the notes surrendered in exchange therefor and (iii) a
U.S. Holder's adjusted tax basis in the exchange notes should be the same as
such U.S. Holder's adjusted tax basis in the notes surrendered in exchange
therefor.
(4) Contingent Payments
In certain circumstances, we may be obligated to pay you amounts in excess
of the stated interest and principal payable on the notes. The obligation to
make such payments, including liquidated damages and redemption premiums
payable in certain circumstances, may implicate the provisions of Treasury
regulations relating to "contingent payment debt instruments". If the notes
were deemed to be contingent payment debt instruments, U.S. Holders might,
among other things, be required to treat any gain recognized on the sale or
other disposition of a note as ordinary income, subject to tax at the maximum
federal rate of 38.6%, rather than as capital gain which may be subject to tax
at a maximum federal rate of 20%. We intend to take the position that the
likelihood that such payments will be made is remote and therefore the notes
are not subject to the rules governing contingent payment debt instruments.
This determination will be binding on a holder unless such holder explicitly
discloses on a statement attached to the holder's timely filed U.S. federal
income tax return for the taxable year that includes the acquisition date of
the note that such holder's determination is different. The regulations
applicable to contingent payment debt instruments have not been the subject of
authoritative interpretation and therefore the scope of the regulations is not
certain. Purchasers of notes are urged to consult their tax advisors regarding
the possible application of the contingent payment debt instrument rules to the
notes.
(5) Information Reporting and Backup Withholding
A U.S. Holder of notes may be subject to backup withholding, currently at a
rate of 30% but subject to gradual reduction to 28% by year 2006 (the
"Applicable Backup Withholding Rate"), with respect to "reportable payments,"
which includes interest and principal paid on or the gross proceeds of a sale,
exchange or redemption of the notes. The payor of any reportable payments will
be required to deduct and withhold the Applicable Backup Withholding Rate from
such payments if (i) the payee fails to establish that it is entitled to an
exemption, (ii) the payee fails to furnish its correct Taxpayer Identification
Number ("TIN") to the payor in the prescribed manner, (iii) the IRS notifies
the payor that the TIN furnished by the payee is incorrect, (iv) the payee has
failed properly to report the receipt of reportable payments and the IRS has
notified the payor that backup withholding is required or (v) the payee fails
to certify under penalties of perjury that such payee is not subject to backup
withholding. If any one of these events occurs with respect to a U.S. Holder of
notes, we or our paying or other withholding agent will be required to withhold
the Applicable Backup Withholding Rate from any payments of principal and
interest on a note.
Any amount withheld from a payment to a U.S. Holder under the backup
withholding rules will be allowed as a refund or credit against such holder's
U.S. Federal income tax liability, so long as the required information is
provided to the IRS. We, our paying agent or other withholding agent generally
will report to a U.S. Holder of notes and to the IRS the amount of any
reportable payments made in respect of the notes for each calendar year and the
amount of tax withheld, if any, with respect to such payments.
Non-U.S. Holders
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a beneficial owner of a note that is not a U.S. Holder
(a "Non-U.S. Holder").
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(1) Interest
Subject to the discussion of backup withholding below, payments of interest
on a note to a Non-U.S. Holder generally will not be subject to U.S. Federal
income or withholding tax, provided that (i) the holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of our stock that are entitled to vote, (ii) the holder is not (a) a
controlled foreign corporation that is related to us through stock ownership or
(b) a bank receiving interest on a loan entered into in the ordinary course of
business, (iii) such interest is not effectively connected with the conduct by
the Non-U.S. Holder of a trade or business within the United States and (iv) we
or our paying agent receives appropriate documentation establishing that the
Non-U.S. Holder is not a U.S. person.
A Non-U.S. Holder that does not qualify for exemption from withholding under
the preceding paragraph generally will be subject to withholding of U.S.
Federal income tax at a 30% rate (or lower applicable treaty rate) on payments
of interest on the notes.
If interest on the notes is effectively connected with the conduct by an
Non-U.S. Holder of a trade or business within the United States, such interest
will be subject to U.S. Federal income tax on a net income basis at the rate
applicable to U.S. persons generally (and, with respect to corporate holders,
may also be subject to a 30% branch profits tax). If interest is subject to
U.S. Federal income tax on a net income basis in accordance with these rules,
such payments will not be subject to U.S. withholding tax so long as the
relevant Non-U.S. Holder provides us or our paying agent with the appropriate
documentation.
(2) Sale, Exchange or Redemption of Notes
Subject to the discussion of backup withholding, any gain realized by a
Non-U.S. Holder on the sale, exchange or redemption of a note generally will
not be subject to U.S. Federal income tax, unless (i) such gain is effectively
connected with the conduct by such Non-U.S. Holder of a trade or business
within the United States, (ii) the Non-U.S. Holder is an individual who is
present in the United States for 183 days or more in the taxable year of
disposition and certain other conditions are satisfied or (iii) the Non-U.S.
Holder is subject to tax pursuant to the provisions of U.S. Federal income tax
law applicable to certain expatriates.
(3) Information Reporting and Backup Withholding
Backup withholding and information reporting generally will not apply to
interest payments made to a Non-U.S. Holder in respect of the notes if such
Non-U.S. Holder furnishes us or our paying agent with appropriate documentation
of such holder's non-U.S. status.
The payment of proceeds from a Non-U.S. Holder's disposition of notes to or
through the U.S. office of any broker, domestic or foreign, will be subject to
information reporting and possible backup withholding unless such holder
certifies as to its non-U.S. status under penalties of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that such holder is a U.S. person or that the conditions of an
exemption are not, in fact, satisfied. The payment of the proceeds from a
Non-U.S. Holder's disposition of a note to or through a non-U.S. office of
either a U.S. broker or a non-U.S. broker that is a U.S.-related person will be
subject to information reporting, but not backup withholding, unless such
broker has documentary evidence in its files that such Non-U.S. Holder is not a
U.S. person and the broker has no knowledge to the contrary, or the Non-U.S.
Holder establishes an exemption. For this purpose, a "U.S.-related person" is
(i) a controlled foreign corporation for U.S. Federal income tax purposes, (ii)
a foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding payment
(or for such part of the period that the broker has been in existence) is
derived from activities that are effectively connected with the conduct of a
U.S. trade or business or (iii) a foreign partnership that is either engaged in
the conduct of a trade or business in the U.S. or of which 50% or more of its
income or capital interests are held by U.S. persons. Neither information
reporting nor backup withholding will apply to a payment of the proceeds of a
Non-U.S. Holder's disposition of notes by or through a non-U.S. office of a
non-U.S. broker
82
that is not a U.S.-related person. Copies of any information returns filed with
the IRS may be made available by the IRS, under the provisions of a specific
treaty or agreement, to the taxing authorities of the country in which the
Non-U.S. Holder resides.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. Federal income tax liability, provided that the requisite
procedures are followed.
Prospective purchasers of notes are urged to consult their own tax advisors
with respect to the application to their particular situations of U.S. Federal
income tax laws, as well as the laws of any state, local or foreign taxing
jurisdiction.
83
PLAN OF DISTRIBUTION
Based on interpretations by the Staff of the Securities and Exchange
Commission set forth in no-action letters issued to third parties, we believe
that exchange notes issued pursuant to the exchange offer in exchange for the
original notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than any holder which is (i) an "affiliate" of ours
within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer
who acquired original notes directly from us or (iii) broker-dealers who
acquired original notes as a result of market-making or other trading
activities) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such exchange notes are acquired
in the ordinary course of such holders' business, and such holders are not
engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such
exchange notes; provided that broker-dealers, referred to herein as
Participating Broker-Dealers, receiving exchange notes in the exchange offer
will be subject to a prospectus delivery requirement with respect to resales of
such exchange notes. To date, the Staff has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
exchange pursuant to the exchange offer (other than a resale of an unsold
allotment from the sale of the original notes to the initial purchaser) with
the prospectus contained in the exchange offer registration statement. Pursuant
to the registration rights agreement, we have agreed to permit Participating
Broker-Dealers and other persons, if any, subject to similar prospectus
delivery requirements to use this prospectus in connection with the resale of
such exchange notes. We have agreed that, for a period not to exceed 180 days
after the exchange date, we will make this prospectus, and any amendment or
supplement to this prospectus, available to any broker-dealer that requests
such documents in the letter of transmittal.
Each holder of the original notes who wishes to exchange its original notes
for exchange notes in the exchange offer will be required to make certain
representations to us as set forth in "The Exchange Offer--Terms and Conditions
of the Letter of Transmittal." In addition, each holder who is a broker-dealer
and who receives exchange notes for its own account in exchange for original
notes that were acquired by it as a result of market-making activities or other
trading activities, will be required to acknowledge that it will deliver a
prospectus in connection with any resale by it of such exchange notes.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker/dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the original notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in
the registration rights agreement.
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LEGAL MATTERS
Certain legal matters with respect to the legality of the exchange notes
offered hereby will be passed upon for us by Willkie Farr & Gallagher, New
York, New York. Jack H. Nusbaum, one of our directors who beneficially owns
25,000 shares of our common stock and an additional 75,000 shares of 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. at December
31, 2001 and 2000, and for each of the three years in the period ended December
31, 2001, appearing in this registration statement and the prospectus which
forms a part thereof have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act, and in
accordance therewith file reports, proxy materials and other information with
the Securities and Exchange Commission. The reports, proxy materials and other
information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material also can be obtained from the Public Reference
Section of the Securities and Exchange Commission, Washington, D.C. 20549 at
prescribed rates. The Securities and Exchange Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of such site is http://www.sec.gov. Our common stock
and our 91/4% first mortgage notes are listed on the New York Stock Exchange.
Reports, proxy materials and other information concerning us may also be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Our Annual Report on Form 10-K for the year ended December 31, 2001, our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, our Current
Report on Form 8-K filed with the Commission on May 7, 2002, our Current Report
on Form 8-K filed with the Commission on July 12, 2002 and all documents filed
by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this prospectus and before the closing of this exchange offer shall
be deemed incorporated herein by reference, and such documents shall be deemed
to be a part hereof from the date of filing such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement as
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
We will provide without charge to each person to whom this prospectus is
delivered, on the request of any such person, a copy of any or all of the above
documents incorporated herein by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the documents that this prospectus incorporates). Requests should be directed
to Prime Hospitality Corp., 700 Route 46 East, Fairfield, New Jersey 07004,
Attention: Corporate Secretary, (973) 882-1010.
85
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................................. F-2
Consolidated Financial Statements:
Balance Sheets at December 31, 2001 and 2000............................................ F-3
Statements of Income for the Years Ended December 31, 2001, 2000 and 1999............... F-4
Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999. F-5
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999........... F-6
Notes to Consolidated Financial Statements.............................................. F-7
Balance Sheets at March 31, 2002 and 2001............................................... F-26
Statements of Income for the Three Months Ended March 31, 2002 and 2001................. F-27
Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001............. F-28
Notes to Consolidated Financial Statements.............................................. F-29
All 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.
F-1
REPORT OF INDEPENDENT AUDITORS
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, 2001 and 2000, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of Prime
Hospitality Corp. and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities", which required the expensing of unamortized pre-opening costs in
1999.
ERNST & YOUNG LLP
New York, New York
February 6, 2002 except for
Note 20 which the date
is June 20, 2002
F-2
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except per share data)
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 30,091 $ 1,735
Marketable securities available for sale........................................ -- 3,325
Accounts receivable, net of allowance of $1,065 and $1,067 in 2001 and 2000,
respectively.................................................................. 19,486 27,916
Current portion of mortgages and notes receivable............................... 460 3,306
Other current assets............................................................ 34,371 23,777
---------- ----------
Total current assets......................................................... 84,408 60,059
Property, equipment and leasehold improvements, net of accumulated depreciation
and amortization.............................................................. 989,009 1,015,997
Assets held for sale............................................................ 32,106 32,517
Mortgages and notes receivable, net of current portion.......................... 11,953 11,991
Other assets.................................................................... 39,294 45,308
---------- ----------
Total Assets................................................................. $1,156,770 $1,165,872
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt......................................................... $ 10,296 $ 4,702
Current portion of deferred income.............................................. 4,022 10,322
Other current liabilities....................................................... 51,123 50,412
---------- ----------
Total current liabilities.................................................... 65,441 65,436
Long-term debt, net of current portion.......................................... 309,736 340,987
Deferred income, net of current portion......................................... 18,468 60,950
Deferred income taxes........................................................... 44,620 17,848
Other liabilities............................................................... 10,564 12,551
---------- ----------
Total Liabilities............................................................ 448,829 497,772
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; 56,221,567
and 55,972,932 shares issued and outstanding in 2001 and 2000, respectively... 562 560
Capital in excess of par value.................................................. 525,068 524,549
Retained earnings............................................................... 297,159 256,966
Accumulated other comprehensive loss, net of taxes.............................. (1) (2,838)
Treasury stock, at cost (11,507,078 and 11,130,878 shares in 2001 and 2000,
respectively)................................................................. (114,847) (111,137)
---------- ----------
Total Stockholders' Equity................................................... 707,941 668,100
---------- ----------
Total Liabilities and Stockholders' Equity............................... $1,156,770 $1,165,872
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F-3
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31
----------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Hotel revenues............................................................ $461,414 $528,288 $522,150
Management, franchise and other fees (Note 17)............................ 12,996 15,529 13,637
Rental and other.......................................................... 2,701 4,304 6,349
-------- -------- --------
Total revenues........................................................ 477,111 548,121 542,136
Costs and expenses:
Hotel operating expenses.................................................. 249,221 268,724 268,436
Rent and other occupancy.................................................. 87,599 88,465 70,178
General and administrative................................................ 28,774 28,430 29,200
Depreciation and amortization............................................. 38,176 40,739 44,769
Valuation and other charges............................................... -- -- 30,456
-------- -------- --------
Total costs and expenses.............................................. 403,770 421,358 443,039
Operating income............................................................. 73,341 126,763 99,097
Investment income............................................................ 2,244 1,936 1,613
Interest expense............................................................. (33,643) (41,325) (43,634)
Other income, net............................................................ 22,261 13,901 7,182
-------- -------- --------
Income from continuing operations before income taxes and other items listed
below...................................................................... 64,203 101,275 64,258
Provision for income taxes................................................... 24,711 39,497 25,061
-------- -------- --------
Income from continuing operations before other items listed below............ 39,492 61,778 39,197
Discontinued operations, net of income taxes of $497, $662 and $639 in
2001, 2000 and 1999, respectively.......................................... 777 1,036 1,000
Extraordinary item (net of income tax benefits of $47 and $201 in 2001 and
2000, respectively)........................................................ (76) (314) --
Cumulative effect of a change in accounting principle (net of income taxes of
$3,398).................................................................... -- -- (5,315)
-------- -------- --------
Net income................................................................... $ 40,193 $ 62,500 $ 34,882
======== ======== ========
Basic earnings per Common Share:
Income from continuing operations before other items listed below............ $ 0.88 $ 1.35 $ 0.77
Discontinued operations...................................................... .02 .02 .02
Extraordinary item........................................................... -- -- --
Cumulative effect of a change in accounting principle........................ -- -- (0.11)
-------- -------- --------
Net income per common share.................................................. $ 0.90 $ 1.37 $ 0.68
======== ======== ========
Diluted earnings per Common Share:
Income from continuing operations before other items listed below............ $ 0.86 $ 1.32 $ 0.75
Discontinued operations...................................................... .02 .02 .02
Extraordinary item........................................................... -- -- --
Cumulative effect of a change in accounting principle........................ -- -- (0.10)
-------- -------- --------
Net income per common share.................................................. $ 0.88 $ 1.34 $ 0.67
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
F-4
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Accumulated
Other
Common Stock Capital in Comprehensive
------------------ Excess of Retained Loss, Net of Treasury Comprehensive
Shares Amount Par Value Earnings Taxes Stock Total Income
---------- ------ ---------- -------- ------------- --------- -------- -------------
Balance December 31, 1998................ 53,731,814 $552 $511,981 $159,584 $(4,993) $ (26,079) $641,045 $ --
Net income............................... -- -- -- 34,882 -- -- 34,882 34,882
Utilization of net operating loss
carryforwards........................... -- -- 3,425 -- -- -- 3,425 --
Amortization of pre-fresh start tax basis
differences............................. -- -- 484 -- -- -- 484 --
Proceeds from exercise of stock options.. 545,087 5 3,944 -- -- -- 3,949 --
Unrealized gain marketable securities
available for sale (net of
income taxes)........................... -- -- -- -- 2,299 -- 2,299 2,299
Treasury stock purchases................. (5,793,139) -- -- -- -- (54,084) (54,084) --
-------
Comprehensive income..................... -- -- -- -- -- -- -- $37,181
---------- ---- -------- -------- ------- --------- -------- =======
Balance December 31, 1999................ 48,483,762 557 519,834 194,466 (2,694) (80,163) 632,000 $ --
Net income............................... -- -- -- 62,500 -- -- 62,500 62,500
Utilization of net operating loss
carryforwards........................... -- -- 3,057 -- -- -- 3,057 --
Proceeds from exercise of stock options.. 228,922 3 1,658 -- -- -- 1,661 --
Unrealized loss marketable securities
available for sale (net of income
taxes).................................. -- -- -- -- (144) -- (144) (144)
Treasury stock purchases................. (3,867,300) -- -- -- -- (30,974) (30,974) --
-------
Comprehensive income..................... -- -- -- -- -- -- -- $62,356
---------- ---- -------- -------- ------- --------- -------- =======
Balance December 31, 2000................ 44,845,384 560 524,549 256,966 (2,838) (111,137) 668,100 $ --
Net income............................... -- -- -- 40,193 -- -- 40,193 40,193
Proceeds from exercise of stock options.. 245,305 2 2,008 -- -- -- 2,010 --
Unrealized gain marketable securities
available for sale (net of
income taxes)........................... -- -- -- -- 2,837 -- 2,837 2,837
Treasury stock purchases................. (376,200) -- -- -- -- (3,710) (3,710) --
Amortization of pre-fresh start tax basis -- -- (1,489) -- -- -- (1,489) --
-------
Comprehensive income..................... -- -- -- -- -- -- -- $43,030
---------- ---- -------- -------- ------- --------- -------- -------
Balance December 31, 2001................ 44,714,489 $562 $525,068 $297,159 $ (1) $(114,847) $707,941
========== ==== ======== ======== ======= ========= ======== =======
See Accompanying Notes to Consolidated Financial Statements.
F-5
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------
2001 2000 1999
-------- --------- --------
Cash flows from operating activities:
Net income................................................................ $ 40,193 $ 62,500 $ 34,882
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................................... 38,411 41,611 45,835
Valuation adjustment on properties held for sale........................ -- -- 29,045
Valuation adjustments on non-hotel properties........................... 6,745 -- --
Amortization of deferred financing costs................................ 3,018 2,921 3,113
Utilization of net operating loss carryforwards......................... -- 3,057 3,425
Extraordinary items..................................................... -- 514 --
Amortization of pre-fresh start tax basis differences................... -- -- 484
Net gains on sales of assets and lease terminations..................... (36,329) (13,901) (7,993)
Net loss on sales of marketable securities.............................. 4,346 -- 4,811
Cumulative effect of a change in accounting principle................... -- -- 8,713
Amortization of deferred income......................................... (11,619) (9,984) (10,028)
Deferred income taxes................................................... 27,218 20,744 (7,860)
Increase/(decrease) from changes in other operating assets and liabilities:
Accounts receivable..................................................... 8,430 (6,537) (564)
Other current assets.................................................... (10,594) (866) 9,306
Other assets and liabilities............................................ (6,608) (22,226) (13,377)
-------- --------- --------
Net cash provided by operating activities........................... 63,211 77,833 99,792
Cash flows from investing activities:
Net proceeds from mortgages and notes receivable........................ 1,757 1,387 785
Disbursements for mortgages and notes receivable........................ (469) (668) (1,771)
Proceeds from sales of property, equipment and leasehold
improvements, net..................................................... 32,634 183,497 86,660
Purchases of property, equipment and leasehold improvements............. (22,982) (19,702) (20,384)
Construction of new hotels.............................................. (19,906) (19,312) (88,013)
Decrease/(increase) in restricted cash.................................. -- 400 8,580
Proceeds from insurance settlement...................................... -- -- 4,706
Proceeds from sales of marketable securities............................ 3,629 -- 7,725
Security deposits on leased hotels...................................... -- (16,500) --
Purchase of marketable securities....................................... -- -- (4,702)
Other................................................................... (1,795) (20) (176)
-------- --------- --------
Net cash (used in) provided by investing activities................. (7,132) 129,082 (6,590)
Cash flows from financing activities:
Net proceeds from issuance of debt...................................... 12,626 30,820 22,352
Payments of debt........................................................ (38,649) (213,927) (70,713)
Proceeds from the exercise of stock options and warrants................ 2,010 1,661 3,949
Purchase of treasury stock.............................................. (3,710) (30,974) (54,084)
-------- --------- --------
Net cash (used in) financing activities............................. (27,723) (212,420) (98,496)
Net increase/(decrease) in cash and cash equivalents....................... 28,356 (5,505) (5,294)
Cash and cash equivalents at beginning of year............................. 1,735 7,240 12,534
-------- --------- --------
Cash and cash equivalents at end of year................................... $ 30,091 $ 1,735 $ 7,240
======== ========= ========
See Accompanying Notes to Consolidated Financial Statements.
F-6
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
Note 1--Business Operations and Significant Accounting Policies
Business Activities
Prime Hospitality Corp. ("Prime or the Company") is an owner, manager and
franchisor of hotels, with 233 hotels in operation containing 29,641 rooms
located in 33 states (the "Portfolio") as of December 31, 2001. Prime controls
two hotel brands--AmeriSuites(R) and Wellesley Inns & Suites(R)--as well as a
portfolio of upscale, full-service hotels operated under franchise agreements
with national hotel chains. The Portfolio is comprised of 131 Owned and
operated hotels (the "Owned Hotels"), 28 hotels operated under lease agreements
with real estate investment trusts (the "Leased Hotels"), 38 hotels managed for
third parties (the "Managed Hotels"), and 36 franchised hotels which Prime does
not operate (the "Franchised Hotels"). There are 139 AmeriSuites hotels, 74
Wellesley Inns & Suites hotels and 20 non-proprietary brand hotels in the
Portfolio as of December 31, 2001.
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 approximated 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 accounting
principles generally accepted in the United States 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. At December 31, 2001 and 2000, cash and
cash equivalents were comprised of approximately $28.0
F-7
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million and $0.2 million, respectively, of cash, and $2.0 million and $1.5
million, respectively, of commercial paper and other cash equivalents.
Marketable Securities
Marketable securities consist of equity securities, which are available for
sale. Marketable securities are valued at current market value. The differences
between the historical cost of the marketable securities available for sale and
the current market value are reflected in stockholders' equity, as accumulated
other comprehensive losses, net of income taxes. Realized gains and losses are
determined using the cost basis of the security recorded at the time of
purchase. At December 31, 2000, the Company had marketable securities available
for sale of $3.3 million, with an original cost basis of $8.0 million.
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.
Construction in progress represents costs incurred in the development of
hotels. Such costs include construction costs and capitalized interest.
The Company reviews each of its assets held for use for which indicators of
impairment are present to determine whether the carrying amount of the asset
will be recovered. The Company recognizes impairment if the future undiscounted
cash flows (before interest charges) are less than the carrying amount.
Assets held for sale are recorded at the lower of carrying value or fair
value less costs to sell (See Note 3).
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. Interest
income on cash flow mortgages and delinquent notes receivable is generally
recognized when cash is received.
The Company measures impairment of its mortgages and notes receivable based
on the present value of expected future cash flows discounted at the effective
interest rate. Impairment can also be measured based on observable market price
or the fair value of collateral, if the mortgages and notes receivable are
collateral dependent. If the measure of the impaired mortgage or note
receivable is less than the recorded investment, 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 of the mortgage and notes receivable had
occurred as of December 31, 2001, 2000 and 1999.
Other Assets
Other assets consist primarily of deferred issuance costs related to the
Company's debt obligations and security deposits. Deferred issuance costs are
amortized over the respective terms of the loans.
F-8
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Insurance Programs
The Company uses an incurred loss retrospective insurance plan for general
and auto liability and workers' compensation. Predetermined loss limits have
been arranged with insurance companies to limit the Company's per occurrence
and aggregate cash outlay.
The Company maintains a self-insurance program for major medical and
hospitalization coverage for employees and dependents, which is partially
funded by payroll deductions. Payments for major medical and hospitalization
below specified aggregate annual amounts are self-insured by the Company.
Claims for benefits in excess of these amounts are covered by insurance
purchased by the Company.
Provisions have been made in the consolidated financial statements which
represent the expected future payments based on the estimated ultimate cost for
incidents incurred through the balance sheet date and are included in other
current liabilities.
Revenue Recognition
Room revenue and other revenues are recognized when earned. Management and
franchise fee revenues are recognized when all material services or conditions
relating to the respective property or franchisee have been substantially
performed or satisfied by the Company. Such revenues, when recognized, are
included in management, franchise and other fees on the accompanying
consolidated financial statements.
Gains and losses resulting from sales of hotels are recorded in full when
title is conveyed to the buyer and when various criteria are met relating to
the buyer's financial commitment and any subsequent involvement by the Company
with respect to the hotels being sold.
The Company's sales of hotels are sometimes accompanied by a leaseback of
the facilities under operating lease arrangements. Such sales are recognized
when the above sales criteria are met and certain specific criteria are met
relating to the lease terms. Related profit is deferred and is recognized as
income over the remaining lease term.
Income Taxes
The Company files a consolidated Federal income tax return. In accordance
with 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.
Deferred income tax assets and liabilities are recorded to reflect the tax
consequences on future years of temporary differences of revenue and expense
items for financial statement and income tax purposes.
Pre-Opening Costs
In January 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities," ("SOP 98-5"). The Company recorded a $5.3
million charge, net of income taxes, for the cumulative effect of a change in
accounting principle to write off the unamortized pre-opening costs that
remained on the balance sheet at the date of adoption. Additionally, subsequent
to the adoption of this new standard, all future pre-opening costs are being
expensed as incurred.
F-9
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to the Company's adoption of SOP 98-5, non-capital expenditures
incurred before the opening of new or renovated hotels, such as payroll and
operating supplies, were deferred and expensed within one year after opening.
Deferred Income
Deferred income consists of gains on properties which were sold and where
the Company has continuing involvement with regard to minimum cash flow returns
to the buyers either in the form of a lease or management agreement. Deferred
income is amortized over the life of the respective agreements, either as a
reduction of rent or other funding expense or as an addition to management,
franchise and other fees when such fees are below market levels.
Long-Lived Assets
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144, "Accounting for the impairment or Disposal of Long-Lived
Assets" which supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of"; however it
retains the fundamental provisions of that statement related to the recognition
and measurement of the impairment of long-lived assets to be "held and used".
In addition, the Statement provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset or asset
group to be disposed of other than by sale (e.g. abandoned) be classified as
"held and used" until it is disposed of, and establishes more restrictive
criteria to classify an asset or asset group as "held for sale". The Company's
management does not anticipate that the adoption of this Statement will have an
effect on the earnings or the financial position of the Company.
Reclassifications
Certain reclassifications have been made to the December 31, 2000 and 1999
consolidated financial statements to conform them to the December 31, 2001
presentation.
Note 2--Hotel Acquisitions
On July 10, 2000, the Company acquired the leasehold interests on 24 Sumner
Suites hotels owned by Hospitality Properties Trust ("HPT") from Sholodge, Inc.
("Sholodge") and entered into lease agreements on three additional Sumner
Suites hotels owned by Sholodge for $1.6 million. On November 1, 2000, the
Company converted all 27 hotels to its AmeriSuites brand. The leases provide
for a fixed annual minimum rent of approximately $27 million plus 8% of
revenues in excess of base levels. The leases with HPT and Sholodge expire in
2013 and 2011, respectively, and are renewable at the Company's option for
various periods through 2048 and 2061, respectively. Under the terms of the
lease with HPT, the Company posted a $16.5 million cash deposit which will be
returned to the Company at the earliest of the end of the lease term or when
the hotels achieve a 1.3 to 1.0 cash flow coverage. The Company also received
the rights to $28.5 million of other security deposits due upon the expiration
of the leases. These other security deposits are recorded at their present
value on the Company's financial statements and are being accreted over the
term of the lease.
Note 3--Hotel Dispositions
Sale/Leaseback Transactions
In January 1998, the Company completed the sale/leaseback of eight
full-service hotels to MeriStar Hospitality Corp. ("MeriStar"), formally known
as American General Hospitality, Inc., for total consideration of
F-10
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$138.4 million. The Company was operating the hotels under an operating lease
agreement, which had a term of ten years. The transaction generated a net gain
of approximately $64.9 million, which was deferred and was being recognized as
a reduction of rent expense over the life of the lease. In 2001, MeriStar and
Prime terminated the leases. The Company received a net termination fee of $1.0
million and recognized the remaining unamortized portion of the deferred gain
of $36 million into income. Such amounts are included in other income, net in
the accompanying consolidated financial statement.
The Company also had a contract to sell and lease back nine additional
full-service hotels from MeriStar not later than March 31, 1999. MeriStar was
unable to fulfill its contractual obligation and the Company received a $4.0
million contract termination fee in 1999. Such amount is included in other
income, net in the accompanying consolidated financial statements.
In 1997 and 1998, the Company entered into two separate transactions with
Equity Inns, Inc. ("Equity Inns") for the sale and lease back of 19 AmeriSuites
hotels. The transactions generated gross proceeds of $184 million and all 19
hotels were operated by Prime under lease agreements with Equity Inns through
December 2001. Effective January 1, 2002, the leases were converted into
management agreements and Equity Inns also signed franchise agreements with
Prime to license the AmeriSuites name. Both the management and franchise
agreements expire on various dates in 2007 and 2008.
The management agreements provide for a subsidiary of Prime to share in the
cash flow above and to fund deficits below certain thresholds. The agreements
also require the Prime subsidiary to guarantee a minimum return to Equity Inns
equal to the minimum rents under the prior lease agreements (approximately
$20.1 million in aggregate in 2001). The Prime subsidiary's obligations under
the management agreement are supported by a guarantee by Prime of $3.4 million.
The sales of the hotels in 1997 and 1998 generated gains of $36.0 million.
Such gains were deferred and amortized over the life of the initial lease (ten
years). As of December 31, 2001, approximately $22.0 million remained in
deferred income. This amount will continue to be amortized over the remaining
life of the management agreement due to Prime's continuing involvement
regarding the cash flow guarantees under the management agreement.
Other Dispositions
During 2001, the Company sold one AmeriSuites hotel for $14.0 million, four
Wellesley Inns hotels for $15.4 million and two parcels of land for $5.1
million. The Company recognized a net gain of $3.1 million in these
dispositions. The net gain is included in other income, net. The Company
retained the franchise rights on the AmeriSuites and Wellesley Inns properties
pursuant to 20-year franchise agreements. The Company also entered into an
agreement to manage the AmeriSuites property it sold.
During 2000, the Company also sold five AmeriSuites hotels for $56.0
million, ten Wellesley Inns for $45.0 million, one full-service hotel for $18.2
million and five land parcels for $4.8 million. In addition, the Company sold
its Frenchman's Reef hotel in St. Thomas, U.S.V.I. ("Frenchman's Reef") for
$73.0 million. During 1999, the Company had reduced the carrying value of this
asset by $24.5 million to reflect the estimated fair value less the costs to
sell the hotel.
In February 2000, the Company's five remaining HomeGate hotels and the
Company's rights to the HomeGate brand name were also sold for approximately
$17.7 million, including the assumption of debt by the purchaser of
approximately $17.4 million related to these properties. During 1999, the
Company had reduced the carrying value of the assets by $2.5 million to reflect
the estimated fair value less the costs to sell the hotels.
F-11
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Asset sales generated net gains of approximately $13.9 million during 2000,
which are included in other income, net in the accompanying consolidated
financial statements. The Company also retained the franchise rights on the
AmeriSuites and Wellesley Inns under 20-year franchise agreements. In addition,
the Company entered into management agreements on one of the sold AmeriSuites
and four of the sold Wellesley Inns.
During 1999, the Company sold eight AmeriSuites, one HomeGate hotel, an
apartment building and three vacant land sites for total proceeds of $86.7
million. The transaction generated net gains of $8.0 million. The Company
retained the franchise rights on the AmeriSuites sales under franchise
agreements generally ranging from ten to twenty years.
In addition to the hotels sold in 2000 and 2001, the Company has four hotels
that are currently being marketed for sale with a carrying value of $22.2
million as of December 31, 2001. These hotels consist of three Wellesley Inns
and one full-service hotel which contributed $2.4 million and $1.4 million,
respectively of operating income for the year ended December 31, 2001. In
addition, land parcels with a carrying value of $9.9 million are also for sale.
During 2001, the Company recorded a valuation allowance of $6.7 million against
various land parcels held for sale. The adjustment represented the difference
between the carrying cost of the assets and the fair market value, less the
costs to sell the assets and is recorded in other income, net in Company's
consolidated statement of income. Management estimated the fair market value
based on comparative land sales in their respective markets. The Company
completed the sale of the full-service hotel and one of the Wellesley Inns in
January 2002. The realized gross proceeds of approximately $15.4 million on
these sales resulted in gains of approximately $700,000. The Company
anticipates the sale of the remaining two properties to be completed during
2002. The Company has discontinued depreciating these assets while they are
held for sale.
Note 4--Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the following (in
thousands):
December 31,
---------------------- Years of
2001 2000 Useful Life
---------- ---------- -----------
Land and land leased to others(a)................... $ 140,497 $ 157,698
Hotels.............................................. 764,372 767,243 20 to 40
Furniture, fixtures and autos....................... 169,745 165,748 3 to 10
Leasehold improvements.............................. 78,776 61,165 3 to 40
Construction in progress............................ 11,151 6,097
---------- ----------
Sub-total........................................ 1,164,541 1,157,951
Less accumulated depreciation and amortization...... (175,532) (141,954)
---------- ----------
Total property, equipment and leasehold improvements $ 989,009 $1,015,997
========== ==========
--------
(a) Included in land at December 31, 2001 and 2000, was $3.8 million and $7.8
million, respectively, of land associated with hotels under construction.
At December 31, 2001, the Company is the lessor of land and certain
restaurant facilities in Company-owned hotels with an approximate aggregate
book value of $6.8 million pursuant to noncancelable operating
F-12
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
leases expiring on various dates through 2010. Minimum future rent under such
leases for each of the next 5 years subsequent to December 31, 2001, and
thereafter are as follows:
2002......................................... $ 754
2003......................................... 646
2004......................................... 38
2005......................................... 39
2006......................................... 42
Thereafter................................... 167
------
Total........................................ $1,686
======
Depreciation and amortization expense on property, equipment and leasehold
improvements was $38.4 million, $41.4 million and $45.4 million for the years
ended December 31, 2001, 2000 and 1999, respectively.
During the years ended December 31, 2001, 2000 and 1999, the Company
capitalized $1.6 million, $2.3 million and $11.0 million, respectively, of
interest related to borrowings used to finance hotel construction.
In order to facilitate future tax-deferred exchanges of hotel properties,
the Company entered into arrangements with an unaffiliated third party under
Section 1031 of the Internal Revenue Code of 1986, as amended. At December 31,
2001, the Company had loans of approximately $138.3 million to such third
party, which represented the total costs to construct and furnish 15
AmeriSuites hotels. These loans are classified as property, equipment and
leasehold improvements in the Company's accompanying financial statements.
Note 5--Mortgages and Notes Receivable
Mortgages and notes receivable are comprised of the following (in thousands):
December 31,
----------------
2001 2000
------- -------
Properties operated by the Company(a).................. $ 9,491 $ 9,870
Other(b)............................................... 2,922 5,427
------- -------
Total mortgage and notes receivable.................... 12,413 15,297
Less current portion................................... (460) (3,306)
------- -------
Long-term portion...................................... $11,953 $11,991
======= =======
--------
(a) At December 31, 2001, the Company is the holder of mortgage notes
receivable with a book value of $9.5 million secured by the Company's
leasehold positions in three hotels. These notes bear interest at rates
ranging from 8.5% to 13.0% and mature on various dates from 2008 through
2015. The mortgages were derived from the sales of hotel properties.
(b) Other notes receivable consist primarily of mezzanine loans issued to
franchisees, as well as loans secured by hotel properties not currently
managed by the Company. Other notes receivable mature through 2011 and bear
interest at an approximate effective rate of 8.3%.
F-13
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Debt
Debt consists of the following (in thousands):
December 31,
------------------
2001 2000
-------- --------
9.75% Senior Subordinated Notes(a)........... $190,000 $200,000
Revolving Credit Facility(b)................. -- --
9.25% First Mortgage Notes(c)................ 103,970 104,070
Mortgages and other notes payable(d)......... 26,062 41,619
-------- --------
Total debt................................... 320,032 345,689
Less current maturities...................... (10,296) (4,702)
-------- --------
Long-term debt, net of current portion....... $309,736 $340,987
======== ========
--------
(a) In March 1997, the Company issued $200.0 million 9.75% 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, and
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 eachanniversary date. As of December 31, 2001, the Company had
repurchased and retired $10.0 million of these notes.
(b) 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 or a borrowing
base determined under the agreement. In December 1997, the Revolving Credit
Facility was amended and the availability of funds was increased to $200.0
million. Pursuant to the terms of the agreements, the aggregate amount of
the Revolving Credit Facility was reduced to $175.0 million in December
2000 and was further reduced to $125.0 million in December 2001. The
Revolving Credit Facility is secured by first liens on certain of the
Company's hotels with recourse to the Company. Availability under the
facility is subject to a borrowing base test and certain other covenants.
The Revolving Credit Facility bears interest at LIBOR plus 2.0%, which is
paid monthly. Under its terms, the Facility was to expire in December 2001
with a one-year renewal option. In December 2001, the Company exercised its
option and the Facility is now available through December 2002. The
Revolving Credit Facility contains covenants requiring the Company to
maintain certain financial ratios and limitations on 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. In October 1999, the Revolving Credit
Facility was amended to allow an additional $100 million of share
repurchases. The purchases of these additional shares are limited to 50% of
the proceeds from asset sales. In April 2000, the Revolving Credit Facility
was amended to allow for additional retirements of other debt owed by the
Company.
During 2001, the Company had gross borrowings and subsequent repayments of
$13.0 million under the Revolving Credit Facility. As of December 31, 2001,
the Company had no outstanding borrowings under this facility and had
additional borrowing capacity of $114.4 million under its borrowing base
test.
(c) During 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. At December 31, 2001, the notes are secured by first liens on 17
hotels with net book value of $109.4 million and contain certain covenants
including limitations on the incurrence of debt, dividend payments, certain
investments, and transactions with affiliates, asset sales and mergers and
consolidations. These notes are redeemable, in whole or in part, at the
F-14
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
option of the Company after January 15, 2001 at premiums to principal, which
decline on each anniversary date. As of December 31, 2001, the Company had
repurchased and retired $16.0 million of these notes.
(d) The Company has mortgage and other notes payable of approximately $26.1
million that are secured by mortgage notes receivable and hotel properties
with a book value of $61.3 million. Principal and interest on these
mortgages and notes are generally paid monthly. At December 31, 2001 these
notes bear interest at rates ranging from 6.7% to 8.6%, with a weighted
average interest rate of 6.8%, and mature from 2002 through 2009. In
February 2002, the Company repaid $9.2 million on these mortgages.
In October 1999, the Company entered into an interest rate protection
agreement with a major financial institution, which reduced the Company's
exposure to fluctuations in interest rates by effectively fixing interest rates
on $40.0 million of variable interest rate debt. Under this agreement, on a
monthly basis the Company paid a fixed rate of interest of 6.03% and received a
floating interest rate payment equal to the 30 day LIBOR rate on a $40.0
million notional principal amount. Due to the Company's limited exposure to
interest rate fluctuations (approximately $9.3 million of floating rate debt at
December 31, 2001), the agreement was subsequently terminated in October 2000
and all unamortized costs were recognized in the Company's consolidated
financial statements.
Maturities of long-term debt subsequent to December 31, 2001 are as follows
(in thousands):
2002................................................ $ 10,296
2003................................................ 1,052
2004................................................ 1,122
2005................................................ 925
2006................................................ 104,220
Thereafter.......................................... 202,417
--------
Total............................................... $320,032
========
Note 7--Other Current Assets/Liabilities
Other current assets consist of the following (in thousands):
December 31,
---------------
2001 2000
------- -------
Hotel inventories............................ $12,959 $13,589
Prepaid federal income tax................... 12,416 --
Deferred tax asset........................... 5,591 6,037
Accrued interest receivable.................. 139 455
Prepaid expenses............................. 1,725 2,298
Other........................................ 1,541 1,398
------- -------
Total current assets...................... $34,371 $23,777
======= =======
F-15
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other current liabilities consist of the following (in thousands):
December 31,
---------------
2001 2000
------- -------
Accounts payable.................... $ 5,579 $ 6,019
Construction payables............... 879 554
Interest payable.................... 9,130 9,174
Accrued payroll and related benefits 4,680 4,698
Accrued expenses.................... 16,589 22,366
Accrued sales and use taxes......... 2,585 3,563
Insurance reserves.................. 4,694 3,385
Other............................... 6,987 653
------- -------
Total current liabilities........ $51,123 $50,412
======= =======
Note 8--Commitments and Contingencies
Leases
The Company leases various hotels under lease agreements with initial terms
expiring at various dates from 2003 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.
The Company operates 28 hotels under lease agreements, primarily with Real
Estate Investment Trusts ("REITs"). These are comprised of 24 AmeriSuites owned
by Hospitality Properties Trust (HPT), three AmeriSuites owned by Sholodge and
one full-service hotel owned by Winston Hotels ("Winston"). The leases are with
subsidiaries of Prime and have terms ranging from 10 to 13 years expiring from
2007 to 2013 with certain renewal options. The 27 hotels leased from HPT and
Sholodge provide for a fixed annual minimum rent plus eight percent of revenue
in excess of a base year. The hotel leased from Winston provides for rent equal
to the greater of base rent, which increases annually by the inflation rate, or
percentage rent based on a percentage of room, food and beverage and other
revenue.
In September 2001, Prime notified Winston that it would no longer fund rent
payments in the event that the hotel's cash flow is insufficient to cover the
rent. Winston has notified Prime that it is in default under its lease. Prime's
obligations under the lease are limited to its security deposit which
approximates $500,000.
All of the lease agreements related to the 27 AmeriSuites hotels maintain
restrictions which prevent the Company from operating an AmeriSuites hotel or
similar type of hotel with a restricted area.
On January 1, 2002, the Company converted its leases on 19 AmeriSuites it
leased from Equity Inns into management agreements. These management agreements
run for the unexpired term of the leases they replaced and require Prime to
guarantee a certain minimum level of cash flow (See Note 3).
F-16
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Below is a schedule of the future guaranteed minimum cash flow levels (in
thousands):
Operating Management
Leases Agreements Total
--------- ---------- --------
2002.................................... $ 35,647 $ 20,140 $ 55,787
2003.................................... 35,628 20,140 55,768
2004.................................... 35,381 20,140 55,521
2005.................................... 35,289 20,140 55,429
2006.................................... 35,224 20,140 55,364
Thereafter.............................. 227,437 25,416 252,853
-------- -------- --------
Total................................... $404,606 $126,116 $530,722
======== ======== ========
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, 2001,
2000 and 1999 (in thousands):
December 31,
-----------------------
2001 2000 1999
------- ------- -------
Rentals...................................... $65,709 $56,878 $43,397
Contingent rentals........................... 5,738 14,859 12,826
------- ------- -------
Rental expense............................ $71,447 $71,737 $56,223
======= ======= =======
Such amounts are included in occupancy and other operating expenses in the
accompanying consolidated financial statements.
Employee Benefits
The Company does not provide any material post employment benefits.
Litigation
The Company currently and from time to time is involved in litigation
arising in the ordinary course of its business. The Company does not believe
that it is involved in any litigation that is likely, individually or in the
aggregate, to have a material adverse effect on its financial condition or
results of operations or cash flows.
On August 18, 1999, plaintiff, a former employee of the Company, filed a
complaint against the Company in the United States District Court for the
Virgin Islands (the "Court"). The complaint alleges that the Company contracted
in 1978 to pay plaintiff ten percent of the pre-tax earnings on any use or sale
of a 16.354-acre property on St. Thomas, U.S. Virgin Islands known as the
"Gilbert Land," and that the Company breached this contract by making
commercial use of the Gilbert Land without paying the plaintiff. The complaint
seeks compensatory, incidental and consequential damages, interest and costs, a
declaratory judgment that the Company is liable for payment of ten percent of
pre-tax earnings on use or sale of the Gilbert Land, and attorneys' fees and
expenses. Prime believes the plaintiff's action is without merit and intends to
vigorously defend this case.
F-17
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Income Taxes
The provision for income taxes (including amounts applicable to
extraordinary items) consisted of the following for the years ended December
31, 2001, 2000 and 1999 (in thousands):
December 31,
------------------------
2001 2000 1999
------- ------- -------
Current:
Federal....... $(1,153) $15,114 $24,362
State......... (903) 4,100 5,800
------- ------- -------
(2,056) 19,214 30,162
Deferred:
Federal....... 22,494 18,144 (6,560)
State......... 4,724 2,600 (1,300)
------- ------- -------
27,218 20,744 (7,860)
------- ------- -------
Total..... $25,162 $39,958 $22,302
======= ======= =======
Income taxes are provided at the applicable federal and state statutory
rates. The tax effects of the changes in the temporary differences in the areas
listed below resulted in deferred income tax provisions for the years ended
December 31, 2001, 2000 and 1999 (in thousands):
December 31,
--------------------------
2001 2000 1999
------- ------- --------
Utilization of net operating loss............................ -- $ 3,057 $ 3,057
Amortization of deferred gains............................... 16,928 3,495 3,510
Amortization of pre-fresh start basis differences--properties
and notes.................................................. -- -- 432
Change in accounting method for depreciation................. 10,675 -- --
Depreciation................................................. (350) (268) 863
Property valuation reserves.................................. (1,131) (875) (10,166)
Property sales............................................... (546) 14,895 (3,005)
State income tax, net of federal income tax benefit.......... 3,070 1,690 (845)
Other........................................................ (1,428) (1,250) (1,706)
------- ------- --------
Total..................................................... $27,218 $20,744 $ (7,860)
======= ======= ========
The following is a reconciliation of the statutory Federal tax rate to the
Company's effective income tax rate:
December 31,
------------------
2001 2000 1999
---- ---- ----
Statutory Federal tax rate.................... 35.0% 35.0% 35.0%
State income taxes, net of Federal tax benefit 3.8% 4.3% 5.1%
Other, net.................................... (.3)% (0.3)% (1.1)%
---- ---- ----
Effective income tax rate.................. 38.5% 39.0% 39.0%
==== ==== ====
At December 31, 2001, the Company had available federal net operating loss
carry forwards related to PMI of approximately $52.4 million, which will expire
in 2006. This amount is subject to an annual utilization
F-18
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 has not recognized the future tax benefits associated with the
net operating loss carryforwards. Accordingly, the Company has provided a
valuation allowance of approximately $19.3 million against the deferred tax
asset at December 31, 2001. To the extent any available carry forwards or other
tax benefits related to PMI 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, 2001, 2000 and 1999, the Company recognized $0, $3.1
million and $3.1 million per year, respectively, of such benefits as a
contribution to stockholders' equity and a corresponding reduction of the
valuation allowance associated with the net operating losses.
Additionally, the Company recognized $484,000 as a contribution to
stockholders' equity for the year ended December 31, 1999 which represents the
amortization of pre-fresh start tax basis differences related to properties and
notes receivable.
At December 31, 2001, the Company had deferred tax liabilities of $40.1
million relating to the differences in the methods of accounting for the
Company's fixed assets.
Note 10--Common Stock and Common Stock Equivalents
Common Stock
During 2001, the Company repurchased approximately 376,200 shares of its
common stock for $3.7 million at average cost of $9.86 per share. In 2000, the
Company repurchased 3.9 million shares of its common stock for $31.0 million
for a total average cost of $8.00. The Revolving Credit Facility limits the
purchase of these shares to 50% of the proceeds from asset sales not to exceed
$100 million. Through February 6, 2002, the Company has repurchased $34.7
million of its shares under this covenant and has $65.3 million of availability
based on the proceeds from asset sales.
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. At December 31, 2001, a total of 6.6 million options were
outstanding with another 2.7 million options available to be issued. At
December 31, 2001, the weighted average contractual life remaining related to
these plans is approximately 8.2 years and the weighted average exercise price
of the options outstanding is $8.34.
In October 2001, the Company granted options to purchase 3,000,000 shares of
common stock to the Company's president and CEO. These options vest ratably
over a three year period. The options are priced at $9.12 per share, which
reflects the market value at the date of grant, and expire in 2011. At December
31, 2001, all of these options were outstanding.
In October 1998, the Board of Directors granted options to purchase
1,750,000 shares of common stock to the Company's president and CEO. These
options vest ratably over a five-year period with respect to 1,000,000 of the
options. The additional 750,000 options vest as certain performance criteria
are met or, if the criteria are not met, the options vest eight years after the
original grant date. At December 31, 2001, 1,750,000 options were
F-19
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding under this plan. The options are priced at $5.91 per share, which
reflects the market value at the date of grant, and expire in 2008.
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 from the date of grant and expire ten years from the date of grant.
During 2001, 2000 and 1999, respectively, options to purchase 268,000, 454,000
and 544,000 shares of common stock, respectively, were granted under this plan.
At December 31, 2001, 1,527,000 options were outstanding under this plan. The
options are priced from $4.72 to $11.25 and expire from 2005 to 2011.
Under the 1995 Non-Employee Director Stock Option Plan, options to purchase
10,000 shares of common stock are automatically granted to each non-employee
director at the fair market value of the common stock at the date of grant. All
options will be fully vested and exercisable one year after the date of grant
and will expire ten years after the date of grant, or earlier if the
non-employee director ceases to be a director. During 1998 options to purchase
190,000 shares of common stock were granted under this plan. At December 31,
2001, 330,000 options were outstanding under this plan. The options are priced
from $9.31 to $10.00 and expire from 2005 to 2008.
Under the Company's 1992 Stock Option and Performance Incentive Plans,
options to purchase 81,000 shares of common stock were outstanding at December
31, 2000. The unexercised options relating to this plan expired on December 31,
2001.
Effective January 1, 1996, the Company adopted the provisions of FASB 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 $37.7 million or $.82
per share in 2001, $57.2 million, or $1.22 per share in 2000 and $32.0 million,
or $.61 per share in 1999. This pro forma impact only takes into account
options granted since January 1, 1998 and is likely to increase in future years
as additional options are granted and amortized ratably over the vesting
period. The weighted average fair value of options granted during 2001, 2000
and 1999 was $4.83, $4.44 and $5.92, respectively.
The fair value was estimated using the Black-Scholes option-pricing model
based on the weighted average market price at grant date of $9.09 in 2001,
$9.16 in 2000, and $11.25 in 1999 and the following weighted average
assumptions: risk-free interest rate of 5.05% in 2001 and 5.05% in 2000 and
6.23% in 1999, volatility of 46.1% in 2001 and 39.5% for 2000 and 42.3% in
1999, and dividend yield of 0.0% for 2001, 2000 and 1999.
F-20
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the stock options outstanding:
Number of Option Price
Shares Per Share
---------- -------------
Outstanding at December 31, 1998........ 5,359,000
Granted................................. 544,000 $11.25-$11.25
Exercised............................... (549,000) $ 3.20-$10.00
Canceled................................ (1,365,000) $ 3.63-$20.16
---------- -------------
Outstanding at December 31, 1999........ 3,989,000
Granted................................. 454,000 $ 9.16-$10.41
Exercised............................... (229,000) $ 4.72-$10.00
Canceled................................ (367,000) $ 4.72-$11.25
---------- -------------
Outstanding at December 31, 2000........ 3,847,000
Granted................................. 3,268,000 $ 8.60-$ 9.12
Exercised............................... (245,000) $ 4.72-$11.25
Canceled................................ (263,000) $ 4.72-$11.25
---------- -------------
Outstanding at December 31, 2001........ 6,607,000 $ 4.72-$13.78
==========
Exercisable at December 31, 1999........ 1,410,000 $ 4.72-$13.78
==========
Exercisable at December 31, 2000........ 1,705,000 $ 4.72-$13.78
==========
Exercisable at December 31, 2001........ 1,860,000 $ 4.72-$11.25
========== =============
Note 11--Earnings Per Share
For the Year Ended,
December 31, 2001
------------------------
Per-Share
Income Shares Amount
------- ------ ---------
Basic Earnings per Share:
Net income................................ $40,193 44,740 $.90
Diluted Earnings per Share:
Common stock equivalents.................. -- 1,138 --
------- ------ ----
Net income plus assumed conversions....... $40,193 45,878 $.88
======= ====== ====
For the Year Ended,
December 31, 2000
------------------------
Per-Share
Income Shares Amount
------- ------ ---------
Basic Earnings per Share:
Net income................................ $62,500 45,718 $1.37
Diluted Earnings per Share:
Common stock equivalents.................. -- 806 --
------- ------ -----
Net income plus assumed conversions....... $62,500 46,524 $1.34
======= ====== =====
F-21
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year Ended,
December 31, 1999
------------------------
Per-Share
Income Shares Amount
------- ------ ---------
Basic Earnings per Share:
Net income................................ $34,882 50,966 $.68
Diluted Earnings per Share:
Common stock equivalents.................. -- 1,028 --
------- ------ ----
Net income plus assumed conversions....... $34,882 51,994 $.67
======= ====== ====
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Dilutive earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year adjusted
for the incremented shares attributed to outstanding options which represents
common stock equivalents.
Note 12--Hotel Revenues
Hotel revenues consist of lodging revenues (which consist primarily of room,
telephone and vending revenues) and food and beverage revenues. For the years
ended December 31, 2001, 2000 and 1999 hotel revenues were comprised of the
following:
December 31,
--------------------------
2001 2000 1999
-------- -------- --------
Lodging revenues........................ $433,462 $483,565 $469,653
Food and beverage revenues.............. 27,952 44,723 52,497
-------- -------- --------
Total hotel revenues................. $461,414 $528,288 $522,150
======== ======== ========
Note 13--Valuation and Other Charges--Operating Hotels
Valuation and other charges in 1999 consist of a $29.1 million valuation
allowance related to certain non-prototype HomeGate properties and the
Frenchman's Reef hotel and $1.4 million for severance charges. Both the
Homegate properties and the Frenchman's Reef hotel were subsequently sold in
2000.
Note 14--Other Income, Net
Other income consists of items, which are not considered part of the
Company's recurring operations and is composed of the following for the years
ended December 31, 2001, 2000 and 1999 (in thousands):
December 31,
------------------------
2001 2000 1999
------- ------- -------
Gains on property sales and lease
terminations.......................... $36,329 $13,901 $ 7,993
Valuation reserves--non-hotel assets.... (6,745) -- --
Loss on the sale of marketable
securities............................ (4,346) -- (4,811)
Contract termination fee................ -- -- 4,000
Other................................... (2,977) -- --
------- ------- -------
Total................................ $22,261 $13,901 $ 7,182
======= ======= =======
F-22
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Other Comprehensive Income
For the years ended December 31, 2001, 2000 and 1999, comprehensive income
consisted of the following (in thousands):
December 31,
------------------------
2001 2000 1999
------- ------- -------
Net income................................ $40,193 $62,500 $34,882
Unrealized (loss) gain on marketable
securities, (net of income taxes of
$1,814, $92, and (1,338), respectively
for 2001, 2000 and 1999)................ 2,837 (144) 2,299
------- ------- -------
Total.................................. $43,030 $62,356 $37,181
======= ======= =======
Note 16--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 approximate their reported carrying
amounts.
December 31,
---------------------------------------
2001 2000
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Mortgage and notes receivable $ 11,953 $ 11,953 $ 11,991 $ 11,991
Long-term debt............... 309,736 311,296 340,987 337,987
The fair value for mortgages and notes receivable is based on discounted
cash flows and other methods applicable to the industry. Valuations for
long-term debt are based on quoted market prices or current rates available to
the Company for debt of the same maturities.
The Company's mortgages and other notes receivable (See Note 5) are derived
primarily from and are secured by hotel properties, which constitutes a
concentration of credit risk. These notes are subject to many of the same risks
as the Company's operating hotel assets. A significant portion of the
collateral is located in the Northeastern United States.
Note 17--Related Party Transactions
The following summarizes significant financial information with respect to
transactions with present officers, directors, their relatives and certain
entities they control or in which they have a beneficial interest for the years
ended December 31, 2001, 2000 and 1999 (in thousands):
December 31,
--------------
2001 2000 1999
---- ---- ----
Management and other fee income................... $121 $165 $136
The amounts above relate to two hotels managed by the Company for an entity
controlled by the Company's Chairman and Chief Executive Officer.
F-23
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 18--Supplemental Cash Flow Information
The following summarizes non-cash investing and financing activities for the
years ended December 31, 2001, 2000 and 1999 (in thousands):
December 31,
-------------------
2001 2000 1999
---- ------- ------
Marketable securities exchanged in connection with the acquisition of hotels -- $ 1,652 $ --
Hotels received in settlements of mortgage notes receivable................. -- -- 2,800
Hotels sold in exchange for assumption of debt.............................. -- 17,364 --
Note receivable and equity interests received from the sale of hotels....... -- 3,348 --
Cash paid for interest was $32.3 million, $43.0 million and $51.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively.
Cash paid for income taxes was $12.5 million, $21.0 million and $31.0
million for the years ended December 31, 2001, 2000 and 1999, respectively.
Note 19--Geographic and Business Information
The Company's hotels primarily operate in three major lodging industry
segments: the all-suites segment, under its AmeriSuites brand; the
limited-service segment, primarily under its Wellesley Inns & Suites brand and
the full-service segment under major national franchises. The AmeriSuites are
upscale, all-suite limited service hotels containing approximately 128 suites
and are located in 31 states throughout the United States. The Wellesley Inns &
Suites hotels compete in the mid-price segment, and are primarily located in
the Northeast, Texas and Florida regions of the United States. A Wellesley Inn
& Suites hotel has between 100 to 140 rooms and suites. Non-proprietary brand
hotels compete primarily in the upscale full-service segment, with food and
beverage service and banquet facilities under franchise agreements with
national hotel brands. The Company's full-service hotels are primarily located
in the northeastern region of the United States.
The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its Owned Hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized by certain of its hotel properties. The Company's taxes are
included in the consolidated Federal income tax return of the Company and are
allocated based upon the relative contribution to the Company's consolidated
taxable income/losses and changes in temporary differences. Other income, net
consist of property transactions, which are not part of the recurring operation
of the Company. The allocation of interest expense, taxes and other income, net
are not evaluated at the segment level and therefore, would be necessary in
order to reconcile EBITDA to consolidated net income on the consolidated
financial statements.
F-24
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents revenues and other financial information by
business segment for the years ended December 31, 2001, 2000 and 1999 (in
thousands):
Limited Full Corporate/
December 31, 2001 All-Suites Service Service Other Consolidated
----------------- ---------- -------- -------- ---------- ------------
Revenues........................... $261,479 $ 90,167 $109,768 $15,697 $ 477,111
EBITDA (1)......................... 66,620 29,318 25,100 (9,521) 111,517
Depreciation and Amortization...... 19,270 11,702 5,662 1,542 38,176
Capital expenditures............... 26,458 10,109 3,389 2,932 42,888
Total Assets....................... 597,780 363,802 107,828 87,360 1,156,770
Limited Full Corporate/
December 31, 2000 All-Suites Service Service Other Consolidated
----------------- ---------- -------- -------- ---------- ------------
Revenues........................... $257,975 $107,285 $163,028 $19,833 $ 548,121
EBITDA (1)......................... 80,183 41,720 39,061 6,537 167,501
Depreciation and Amortization...... 19,855 12,724 6,985 1,175 40,739
Capital expenditures............... 20,039 8,351 6,381 4,243 39,014
Total Assets....................... 600,196 372,997 115,771 76,908 1,165,872
Limited Full Corporate/
December 31, 1999 All-Suites Service Service Other Consolidated
----------------- ---------- -------- -------- ---------- ------------
Revenues........................... $238,656 $103,271 $180,223 $ 19,986 $ 542,136
EBITDA (1)......................... 87,714 41,049 39,371 6,188 174,322
Depreciation and Amortization...... 20,876 13,619 9,338 936 44,769
Capital expenditures............... 54,084 41,871 11,239 1,203 108,397
Total Assets....................... 590,579 429,395 196,123 112,682 1,328,779
--------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization from the hotels.
NOTE 20--Discontinued Operations
The operating results of the Full Service hotel and the Wellesley Inn sold
during January 2002 (see note 3) have been presented as discontinued operations
for all periods presented.
F-25
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 36,626 $ 30,091
Accounts receivable (net of allowances of $758 and $1,065 in 2002
in 2002 and 2001, respectively)............................................. 18,286 19,486
Current portion of mortgages and notes receivable............................. 452 460
Other current assets.......................................................... 37,164 34,371
---------- ----------
Total current assets...................................................... 92,528 84,408
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization............................... 1,000,119 989,009
Properties held for sale......................................................... -- 32,106
Mortgages and notes receivable, net of current portion........................... 12,074 11,953
Other assets..................................................................... 40,577 39,294
---------- ----------
TOTAL ASSETS.................................................................. $1,145,298 $1,156,770
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt....................................................... $ 1,001 $ 10,296
Current portion of deferred income............................................ 3,766 4,022
Other current liabilities..................................................... 51,612 51,123
---------- ----------
Total current liabilities................................................. 56,379 65,441
Long-term debt, net of current portion........................................... 309,709 309,736
Other liabilities................................................................ 6,486 10,564
Deferred income taxes............................................................ 44,620 44,620
Deferred income.................................................................. 17,682 18,468
---------- ----------
Total liabilities......................................................... 434,876 448,829
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; 56,384,401
and 56,221,567 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively.......................... 564 562
Capital in excess of par value................................................ 526,771 525,068
Retained earnings............................................................. 297,934 297,159
Accumulated other comprehensive loss, net of taxes............................ -- (1)
Treasury stock (11,507,078 shares at March 31, 2002
and December 31, 2001)...................................................... (114,847) (114,847)
---------- ----------
Total stockholders' equity................................................ 710,422 707,941
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................ $1,145,298 $1,156,770
========== ==========
See Accompanying Notes to Interim Consolidated Financial Statements.
F-26
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, 2002 and 2001
(In thousands, except per share amounts)
2002 2001
------- --------
Revenues:
Hotel revenues.................................................. $94,762 $125,087
Management, franchise and other fees............................ 2,750 3,675
Rental and other revenues....................................... 612 898
------- --------
Total revenues.............................................. 98,124 129,660
Cost and expenses:
Hotel operating expenses........................................ 52,289 66,111
Rent and other occupancy........................................ 21,407 23,286
General and administrative...................................... 6,566 7,334
Depreciation and amortization................................... 9,990 9,264
------- --------
Total costs and expenses.................................... 90,252 105,995
Operating income................................................... 7,872 23,665
Investment income.................................................. 485 576
Interest expense................................................... (7,753) (8,908)
Other income, net.................................................. -- --
------- --------
Investment before income taxes and discontinued operations......... 604 15,333
Provision for income taxes......................................... 236 5,903
------- --------
Income before discontinued operations.............................. 368 9,430
Discontinued operations:
(Loss) income from discontinued operations, net of income taxes. (25) 176
Gain on disposal, net of income taxes........................... 431 --
------- --------
Net income......................................................... $ 774 $ 9,606
======= ========
Earnings per common share:
Basic:
Income before discontinued operations........................... $ 0.01 $ 0.21
Income from discontinued operations, net of income taxes........ 0.01 0.00
------- --------
Net earnings....................................................... $ 0.02 $ 0.21
======= ========
Diluted:
Income before discontinued operations........................... $ 0.01 $ 0.21
Income from discontinued operations, net of income taxes........ 0.01 0.00
------- --------
Net earnings....................................................... $ 0.02 $ 0.21
======= ========
See Accompanying Notes to Interim Consolidated Financial Statements.
F-27
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 2002 and 2001
(In thousands)
2002 2001
------- -------
Cash flows from operating activities:
Net Income........................................................................ $ 774 $ 9,606
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 9,990 9,427
Amortization of deferred financing costs.......................................... 811 763
Utilization of net operating loss carryforwards................................... 495 764
Net gain on asset disposals....................................................... (706) --
Deferred income taxes............................................................. -- 977
Amortization of deferred income................................................... (882) (2,538)
Increase (decrease) from changes in other operating assets and liabilities:
Accounts receivable........................................................... 1,200 (5,226)
Other current assets.......................................................... (2,772) (1,644)
Other liabilities............................................................. (3,969) (3,404)
------- -------
Net cash provided by operating activities..................................... 4,941 8,725
Cash flows from investing activities:
Proceeds from mortgages and notes receivable...................................... 98 1,452
Disbursements for mortgages and notes receivable.................................. (243) (201)
Proceeds from sales of property, equipment and leasehold improvements............. 15,022 4,664
Construction and conversion of hotels............................................. (2,836) (2,734)
Purchases of property, equipment and leasehold improvements....................... (697) (3,953)
Other............................................................................. (1,640) (935)
------- -------
Net cash provided by (used in) investing activities........................... 9,704 (1,707)
Cash flows from financing activities:
Net proceeds from issuance of debt................................................ -- 8,965
Payments of debt.................................................................. (9,322) (5,833)
Proceeds from the exercise of stock options....................................... 1,212 637
------- -------
Net cash (used in) provided by financing activities........................... (8,110) 3,769
Net increase in cash and cash equivalents......................................... 6,535 10,787
Cash and cash equivalents at beginning of period.................................. 30,091 1,735
------- -------
Cash and cash equivalents at end of period........................................ $36,626 $12,522
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES OF NON-CASH ACTIVITIES:
Reclassification of Assets Held for Sale to Property.............................. $17,483 $ --
Land acquired in exchange for notes receivable.................................... $ -- $ 1,952
OTHER CASH FLOW DISCLOSURES:
Interest paid..................................................................... $ 5,685 $ 6,943
Income taxes paid................................................................. $ 42 $ 390
See Accompanying Notes to Interim Consolidated Financial Statements.
F-28
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2002 and 2001
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
In the opinion of management, the accompanying interim unaudited
consolidated financial statements of Prime Hospitality Corp. and subsidiaries
(the "Company") contain all material adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of
the Company as of March 31, 2002 and the results of its operations for the
three months ended March 31, 2002 and 2001 and cash flows for the three months
ended March 31, 2002 and 2001.
The consolidated financial statements for the three months ended March 31,
2002 and 2001 were prepared on a consistent basis with the audited consolidated
financial statements for the year ended December 31, 2001. Certain
reclassifications have been made to the March 31, 2001 consolidated financial
statements to conform them to the March 31, 2002 presentation.
The consolidated results of operations for the three months ended March 31,
2002 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, 2001.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not included all the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.
NOTE 2--ACCOUNTING POLICIES
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" which supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Disposed of"; however it
retains the fundamental provisions of that statement related to the recognition
of measurement of the impairment of long-lived assets to be "held and used". In
addition, the Statement provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset or asset
group to be disposed of other than by sale (e.g. abandoned) be classified as
"held and used" until it is disposed of, and establishes more restrictive
criteria to classify an asset or asset group as "held for sale". The Company
adopted the Statement in the first quarter of this year. Management does not
anticipate that the adoption of this Statement will have an effect on earnings
or the financial position of the Company.
NOTE 3--HOTEL DISPOSITIONS
During the three months ended March 31, 2002, the Company sold a Radisson
Hotel in Trevose, PA and a Wellesley Inn in Miami, FL for gross proceeds of
$15.4 million, realizing gains of approximately $700,000. These gains are
included in "Gain on disposal, net of income taxes" in the Consolidated
Statement of Income.
NOTE 4--EARNINGS PER COMMON SHARE
Basic earnings per common share was computed based on the weighted average
number of common shares outstanding during each period. The weighted average
number of common shares used in computing basic earnings per common share was
44.9 million for both the three months ended March 31, 2002 and 2001.
F-29
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Diluted earnings per common share reflect adjustments to the basic earnings
per common share for the dilutive effect of stock options. The weighted average
number of common shares used in computing diluted earnings per common share was
46.8 million and 46.3 million for the three months ended March 31, 2002 and
2001, respectively.
NOTE 5--COMPREHENSIVE INCOME
For the three months ended March 31, 2002 and 2001, comprehensive income
consisted of the following (in thousands):
Three Months
Ended March 31,
---------------
2002 2001
---- -------
Net income...................................................................... $774 $ 9,606
Unrealized gain on marketable securities available for sale, net of income taxes -- 452
---- -------
Total........................................................................ $774 $10,058
==== =======
NOTE 6--GEOGRAPHIC AND BUSINESS INFORMATION
The Company's hotels primarily operate in three major lodging industry
segments: the all-suites segment, under its AmeriSuites brand; the
limited-service segment, primarily under its Wellesley Inns & Suites brand; and
the full-service segment under major national franchises. The Company's 141
AmeriSuites are upscale hotels located in 31 states throughout the United
States. The 73 Wellesley Inns & Suites hotels compete in the mid-price segment,
and are primarily located in the Northeast, Texas and Florida regions of the
United States. The Company also operates 20 non-proprietary brand hotels, which
compete primarily in the upscale full-service segment, with food service and
banquet facilities under franchise agreements with national hotel brands. The
Company's non-proprietary hotels are primarily located in the northeastern
region of the United States.
The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its owned hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized by certain of its hotel properties. The Company's taxes are
included in the consolidated Federal income tax return and are allocated based
upon the relative contribution to the Company's consolidated taxable
income/losses and changes in temporary differences. Other income, net consist
of property transactions, which are not part of the recurring operation of the
Company. The allocation of interest expense, taxes and other income, net are
not evaluated at the segment level and therefore, would be necessary in order
to reconcile EBITDA to consolidated net income on the consolidated financial
statements.
F-30
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents revenues and other financial information for
the owned and leased hotels by business segment for the three months ended
March 31, 2002 and 2001 (in thousands):
All- Limited- Full- Corporate/
Three Months Ended March 31, 2002 Suites Service Service Other Consolidated
--------------------------------- -------- -------- ------- ---------- ------------
Total revenues................. $ 58,255 $ 20,854 $15,698 $ 3,317 $ 98,124
EBITDA(1)...................... 7,036 4,687 2,378 3,761 17,862
Depreciation and amortization.. 4,848 3,207 1,418 517 9,990
Capital expenditures........... 1,785 874 175 699 3,533
Total Assets................... $518,100 $348,044 $88,323 $45,652 $1,000,119
All- Limited- Full- Corporate/
Three Months Ended March 31, 2001 Suites Service Service Other Consolidated
--------------------------------- -------- -------- -------- ---------- ------------
Total revenues................. $ 67,667 $ 26,756 $ 30,730 $ 4,507 $ 129,660
EBITDA(1)...................... 14,543 9,637 4,826 4,372 33,378
Depreciation and amortization.. 4,615 2,942 1,353 354 9,264
Capital expenditures........... 1,453 3,667 705 862 6,687
Total Assets................... $583,958 $383,613 $107,896 $92,072 $1,167,539
--------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization and includes the EBITDA on properties included in discontinued
operations.
NOTE 7--SUBSEQUENT EVENTS
In April 2002, the Company completed the issuance of $200 million 8 3/8%
Senior Subordinated Notes due in 2012. On April 29, 2002 (the "Consent Date")
the Company received the tenders and consents required to eliminate or modify
certain covenants and related provisions in the indenture governing its
outstanding 9 3/4% Senior Subordinated Notes due 2007 (the "Notes"). As of the
Consent Date, tenders and consents representing approximately 99.8% of the $190
million aggregate principal amount outstanding of the Notes were received by
the depository and accepted for payment by the Company.
Prime paid the total consideration of $1,050 per $1,000 principal amounts of
the Notes validly tendered on or prior to the Consent Date by delivery to the
depository. The Company paid for the Notes with the net proceeds of the $200
million 8 3/8% Senior Subordinated Notes due 2012 and cash on hand.
F-31
PRIME HOSPITALITY CORP.
All tendered original notes, executed letters of transmittal, and other
related documents should be directed to the exchange agent. Requests for
assistance and for additional copies of this prospectus, the letter of
transmittal and other related documents should be directed to the exchange
agent.
The exchange agent
for the exchange offer is
WELLS FARGO BANK MINNESOTA, NA
By Facsimile:
(612) 667-4927
Confirm by telephone:
(800) 344-5128
By Registered or Certified Mail:
Wells Fargo Bank Minnesota, NA
MAC #N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
By Hand:
Wells Fargo Bank Minnesota, NA
608 Second Avenue South
Corporate Trust Operations
12/th/ Floor
Minneapolis, MN 55402
By Overnight Courier or Regular Mail:
Wells Fargo Bank Minnesota, NA
MAC #N9303-121
Corporate Trust Operations
6/th/ & Marquette Avenue
Minneapolis, MN 55479