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FORM 10-Q
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _______ TO_______
Commission File No. 1-6869
PRIME HOSPITALITY CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-2640625
(State or other jurisdiction of (I.R.S. employer)
incorporation or organization) identification no.)
700 Route 46 East, Fairfield, New Jersey 07004
(Address of principal executive offices)
(201) 882-1010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
------ ------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes x No
------ ------
The registrant had 31,106,014 shares of common stock, $.01 par value
outstanding, as of May 8, 1996.
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements
Consolidated Balance Sheets-
December 31, 1995 and March 31, 1996 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income
Three Months Ended March 31, 1995
and March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1995
and March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Interim Consolidated Financial Statements . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
ASSETS (Unaudited)
------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $49,533 $23,629
Marketable securities available for sale . . . . . . . . . . 11,929 7,999
Restricted cash . . . . . . . . . . . . . . . . . . . . . . 8,973 9,434
Accounts receivable, net of reserves . . . . . . . . . . . 13,139 14,318
Current portion of mortgages and
notes receivable . . . . . . . . . . . . . . . . . . . . 1,533 1,173
Other current assets . . . . . . . . . . . . . . . . . . . 8,070 9,928
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 93,177 66,481
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization. 398,201 529,916
Mortgages and notes receivable, net of
current portion . . . . . . . . . . . . . . . . . . . . . . 64,962 25,405
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 16,901 21,074
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . $573,241 $642,876
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of debt . . . . . . . . . . . . . . . . . . $5,731 $5,699
Other current liabilities . . . . . . . . . . . . . . . . . 38,961 40,250
-------- --------
Total current liabilities . . . . . . . . . . . . . . . 44,692 45,949
Long-term debt, net of current portion . . . . . . . . . . . . 276,920 335,271
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 18,713 18,682
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . 340,325 399,902
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share;
20,000,000 shares authorized; none issued . . . . . . . . -- --
Common stock, par value $.01 per share;
75,000,000 shares authorized; 31,004,499 and
31,049,512 shares issued and outstanding
at December 31, 1995 and March 31,1996,
respectively . . . . . . . . . . . . . . . . . . . . . . 310 310
Capital in excess of par value . . . . . . . . . . . . . . 183,050 185,166
Retained earnings . . . . . . . . . . . . . . . . . . . . . 49,556 57,498
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . 232,916 242,974
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $573,241 $642,876
======== ========
See Accompanying Notes to Interim Consolidated Financial Statements.
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
1995 1996
------- -------
Revenues:
Lodging. . . . . . . . . . . . . . . . . . . . . $34,375 $41,974
Food and beverage . . . . . . . . . . . . . . . 8,884 8,024
Management and other fees . . . . . . . . . . . 1,637 1,692
Interest on mortgages and
notes receivable . . . . . . . . . . . . . . 3,026 2,681
Business interruption insurance . . . . . . . . -- 3,739
Rental and other . . . . . . . . . . . . . . . 316 504
------- -------
Total revenues . . . . . . . . . . . . . . 48,238 58,614
------- -------
Costs and expenses:
Direct hotel operating expenses:
Lodging . . . . . . . . . . . . . . . . . . . 8,698 10,624
Food and beverage . . . . . . . . . . . . . . 6,657 6,914
Selling and general . . . . . . . . . . . . . 11,824 14,010
Occupancy and other operating . . . . . . . . . 2,611 3,482
General and administrative . . . . . . . . . . 3,872 4,219
Depreciation and amortization . . . . . . . . . 3,976 5,224
------- -------
Total costs and expenses . . . . . . . . . 37,638 44,473
------- -------
Operating income . . . . . . . . . . . . . . . . . 10,600 14,141
Investment income . . . . . . . . . . . . . . . . 514 1,265
Interest expense . . . . . . . . . . . . . . . . . (4,100) (5,851)
Other income. . . . . . . . . . . . . . . . . . . -- 3,432
------- -------
Income before income taxes
and extraordinary items . . . . . . . . . . . . 7,014 12,987
Provision for income taxes . . . . . . . . . . . 2,806 5,195
------- -------
Income before extraordinary items . . . . . . . . 4,208 7,792
Extraordinary items - Gains on discharges of
indebtedness (net of income taxes) 7 149
------- -------
Net income . . . . . . . . . . . . . . . . . . . . $ 4,215 $ 7,941
======= =======
Earnings per common share:
Primary:
Income before extraordinary items . . . . . . $ .13 $ .24
Extraordinary items . . . . . . . . . . . . . -- --
------- -------
Net earnings $ .13 $ .24
======= =======
Fully diluted:
Income before extraordinary items . . . . . . $ .13 $ .22
Extraordinary items . . . . . . . . . . . . . -- --
------- -------
Net earnings $ .13 $ .22
======= =======
See Accompanying Notes to Interim Consolidated Financial Statements.
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1995 1996
------- -------
CASH FLOWS
- ----------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $4,215 $7,941
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 3,976 5,224
Business interruption insurance revenue (3,739)
Utilization of net operating loss
carryforwards . . . . . . . . . . . . . . . . . . . . . . 1,418 1,958
Gains on settlements of notes receivable . . . . . . . . . . -- (1,778)
Gains on discharges of indebtedness . . . . . . . . . . . . (11) (249)
Gains on sales of assets . . . . . . . . . . . . . . . . . . -- (1,956)
Compensation expense related to stock
options . . . . . . . . . . . . . . . . . . . . . . . . . 12 --
Increase (decrease) from changes in other
operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (1,965) (1,179)
Other current assets . . . . . . . . . . . . . . . . . . . (538) 1,883
Other liabilities . . . . . . . . . . . . . . . . . . . . (2,258) 550
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . . 4,849 8,655
-------- --------
Cash flows from investing activities:
Net proceeds from mortgages and notes
receivable . . . . . . . . . . . . . . . . . . . . . . . . 3,211 8,275
Disbursements for mortgages and
notes receivable . . . . . . . . . . . . . . . . . . . . . (800)
Proceeds from sales of property, equipment
and leasehold improvements . . . . . . . . . . . . . . . . 13 3,706
Purchases of property, equipment and
leasehold improvements . . . . . . . . . . . . . . . . . . (16,072) (103,648)
Increase in restricted cash (585) (461)
Proceeds from sales of marketable securities. . . . . . . . . 100 4,856
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 (129)
-------- --------
Net cash used in investing activities . . . . . . . . . . (12,918) (88,201)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of debt . . . . . . . . . . . . . . 39,000 114,979
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . (1,533) (61,494)
Proceeds from the exercise of stock options
and warrants . . . . . . . . . . . . . . . . . . . . . . . . 472 157
-------- --------
Net cash provided by financing activities . . . . . . . . 37,939 53,642
-------- --------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . . . . . . . 29,870 (25,904)
Cash and cash equivalents at beginning of period . . . . . . . 12,524 49,533
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . $42,394 $23,629
======== ========
See Accompanying Notes to Interim Consolidated Financial Statements.
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying interim unaudited
consolidated financial statements of Prime Hospitality Corp. and subsidiaries
(the "Company") contain all material adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of
the Company as of March 31, 1996 and the results of its operations for the
three months ended March 31, 1995 and 1996 and cash flows for the three months
ended March 31 , 1995 and 1996.
The financial statements for the three months ended March 31, 1995 and
1996 were prepared on a consistent basis with the audited consolidated
financial statements for the year ended December 31, 1995.
The consolidated results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results to be expected for
the full year. These interim unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
Note 2 - ACQUISITIONS
On March 6, 1996, the Company acquired 18 hotels consisting of 16
Wellesley Inns and two other limited-service hotels for approximately
$65,100,000 in cash. The acquisition enabled the Company to establish full
control over its proprietary Wellesley Inns brand with all 30 Wellesley Inns
owned and operated by the Company. The acquisition price was comprised of
approximately $60,400,000 to purchase the first mortgage on the 18 hotels with
a face value of approximately $70,500,000 and $4,700,000 to purchase the
interests of the three partnerships which owned the hotels. Approximately
$1,900,000 of the total purchase price was paid to a partnership in which a
general partner is the father of the Company's President and Chief Executive
Officer. In connection with the transaction, the Company also terminated its
management agreements and junior subordinated mortgages related to the 18
hotels. The transaction has been accounted for as a purchase and, accordingly,
the revenues and expenses of these hotels have been included in reported
results from the date of acquisition. If these operations had been included in
the consolidated financial statements since January 1, 1996, reported results
would not have been materially different.
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Note 3 - DEBT
On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First
Mortgage Notes due 2006. Interest on the notes is payable semi-annually on
January 15 and July 15. The notes are secured by 15 hotels and contain certain
covenants including limitations on the incurrence of debt, dividend payments,
certain investments, transactions with affiliates, asset sales and mergers and
consolidations. These notes are redeemable, in whole or in part, at the option
of the Company after January 15, 2001 at premiums to principal which decline on
each anniversary date. The Company utilized a portion of the proceeds to pay
down $51,601,000 of debt.
Note 4 - EARNINGS PER COMMON SHARE
Primary earnings per common share was computed based on the weighted
average number of common shares and common share equivalents (dilutive stock
options and warrants) outstanding during each period. The weighted average
number of common shares used in computing primary earnings per share was
32,365,000 and 32,865,000 for the three months ended March 31, 1995 and 1996,
respectively.
Fully diluted earnings per share, in addition to the adjustments for
primary earnings per share, reflects the elimination of interest expense and
the issuance of additional common shares from the assumed conversion of the 7%
convertible subordinated notes from their issuance in April 1995. The weighted
average number of common shares used in computing fully diluted earnings per
share was 32,365,000 and 40,346,000 for the three months ended March 31, 1995
and 1996, respectively.
Note 5 - BUSINESS INTERRUPTION INSURANCE REVENUE
In September 1995, the Company-owned Marriott's Frenchman's Reef Hotel
(the "Frenchman's Reef") in St. Thomas U.S. Virgin Islands suffered hurricane
damage. Due to extensive property and business interruption insurance, the
Company believes that its liquidity will be affected only to the extent of its
insurance deductibles for which the Company provided a reserve of $2,200,000 in
1995. The Company has continued to operate the hotel and has repaired a
majority of the damaged rooms on an interim basis. However, the impact of the
hurricane has caused operating profits to decline from the prior year level.
For the three months ended March 31, 1996, the Company continued to record the
operating revenues and expenses of the Frenchman's Reef. In addition, the
Company estimated its business interruption insurance proceeds assuming no
growth over the prior year's profit level and recorded revenue and a
corresponding receivable of $3,739,000. The Company is currently engaged in
discussions with its insurance carrier regarding the amount of property and
business interruption insurance proceeds to be paid and is assessing the extent
of refurbishment required at the Frenchman's Reef.
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Note 6 - OTHER INCOME
Other income consists of items which are not considered part of the
Company's recurring operations. For the three months ended March 31, 1996,
other income consisted of a gain on the settlement of a note receivable of
$1,778,000 and a gain on the sale of a hotel of $1,654,000.
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PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is a leading hotel owner/operator which owns or leases
82 hotels (the "Owned Hotels") and manages 16 hotels (the "Managed Hotels") for
third parties. The Company has a financial interest in the form of mortgages or
profit participations (primarily incentive management fees) in 9 of the Managed
Hotels. The Company consolidates the results of operations of its Owned Hotels
and records management fees (including incentive management fees) and interest
income, where applicable, on the Managed Hotels.
The Company has implemented a growth strategy which focuses on
improving results at existing hotels, maximizing the value of its proprietary
AmeriSuites and Wellesley Inns hotels and acquiring hotels with potential for
operating and marketing improvements. For the three months ended March 31,
1996, earnings from recurring operations have increased by 36.2%, attributable
to an 11.3% increase in revenue per available room ("REVPAR") at comparable
hotels, the addition of 32 hotels primarily through acquisition or construction
in the past two years and the impact of increased operating leverage. Although
future results of operations may be adversely affected in the short-term by the
costs associated with the acquisition and construction of new hotels, it is
expected that this impact will be offset, after an initial period, by revenues
generated by these new hotels. The Company believes that it is well positioned
to benefit from the expected continued improvements in the lodging industry due
to its hotel equity ownership position and its growth strategy.
In September 1995, the Company-owned Marriott's Frenchman's Reef
Hotel (the "Frenchman's Reef") in St. Thomas U.S. Virgin Islands suffered
hurricane damage. Due to extensive property and business interruption
insurance, the Company believes that its liquidity will be affected only to the
extent of its insurance deductibles for which the Company provided a reserve of
$2.2 million in 1995. The Company has continued to operate the hotel and has
repaired a majority of the damaged rooms on an interim basis. However, the
impact of the hurricane has caused operating profits to decline from the prior
year level. For the three months ended March 31, 1996, the Company continued
to record the operating revenues and expenses of the Frenchman's Reef. In
addition, the Company estimated its business interruption insurance proceeds
assuming no growth over the prior year's profit level and recorded revenue and
a corresponding receivable of $3.7 million. The Company is currently engaged
in discussions with its insurance carrier regarding the amount of property and
business interruption insurance proceeds to be paid and is assessing the extent
of refurbishment required at the Frenchman's Reef.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1995
The following table presents the components of operating income,
operating expense margins and other data for the Company and the Company's
comparable Owned Hotels for the three months ended March 31, 1996 and 1995. The
results of the two hotels divested during 1995 and 1996 are not material to an
understanding of the results of the Company's operations in such periods and,
therefore, are not separately discussed.
Comparable Owned
Total Hotels(1)
------------------ ---------------------
Three Months Ended Three Months Ended
March 31, March 31,
1995 1996 1995 1996
------- ---- ---- ----
(Dollars in thousands,except ADR and REVPAR)
Revenues:
Lodging . . . . . . . . . . . . . . . . . . . . . . . $34,375 $41,974 $25,033 $28,279
Food and Beverage . . . . . . . . . . . . . . . . . . 8,884 8,024 5,336 5,908
Management and Other Fees . . . . . . . . . . . . . . 1,637 1,692
Interest on Mortgages and Notes Receivable . . . . . . 3,026 2,681
Business Interruption Insurance . . . . . . . . . . . . - 3,739
Rental and Other . . . . . . . . . . . . . . . . . . . 316 504
--------- --------
Total Revenues . . . . . . . . . . . . . . . . . . 48,238 58,614
Direct Hotel Operating Expenses:
Lodging . . . . . . . . . . . . . . . . . . . . . . . 8,698 10,624 6,832 7,240
Food and Beverage . . . . . . . . . . . . . . . . . . 6,657 6,914 4,382 4,884
Selling and General . . . . . . . . . . . . . . . . . 11,824 14,010 8,274 9,237
Occupancy and Other Operating . . . . . . . . . . . . . 2,611 3,482
General and Administrative . . . . . . . . . . . . . . . 3,872 4,219
Depreciation and Amortization . . . . . . . . . . . . . 3,976 5,224
Operating Income . . . . . . . . . . . . . . . . . . . . 10,600 14,141
Operating Expense Margins:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue . . . . . 25.3% 25.3% 27.3% 25.6%
Food and Beverage, as a percentage of food and
beverage revenue . . . . . . . . . . . . . . . . . 74.9% 86.2% 82.1% 82.7%
Selling and General, as a percentage of lodging and
food and beverage revenue . . . . . . . . . . . . . 27.3% 28.0% 27.2% 27.0%
Occupancy and Other Operating, as a percentage of
lodging and food and beverage revenue . . . . . . . 6.0% 7.0%
General and Administrative, as a percentage of total
revenue . . . . . . . . . . . . . . . . . . . . . . 8.0% 7.2%
Other Data(2):
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . 63.7% 65.9% 63.7% 66.8%
Average daily rate ("ADR") . . . . . . . . . . . . . . . $65.97 $69.78 $65.97 $70.03
Revenue per available room ("REVPAR") . . . . . . . . . . $42.02 $45.95 $42.02 $46.75
Gross Operating Profit . . . . . . . . . . . . . . . . . $10,881 $17,194 $10,881 $12,826
- ---------------------
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(1) For purposes of this discussion of results of operations for 1996
compared to 1995, comparable Owned Hotels refers to 46 Owned Hotels
that were owned or leased by the Company during all of the three
months ended March 31, 1995 and 1996. The Frenchman's Reef has not
been classified as a comparable Owned Hotel due to the effect of the
hurricane damage.
(2) For purposes of showing operating trends, the results of the
Frenchman's Reef and the two disposed hotels have been excluded from
the Other Data section of the table.
Lodging revenues, which include room revenues and other related
revenues such as telephone and vending, increased by $7.6 million, or 22.1%,
during the three months ended March 31, 1996 over the same period of the prior
year. The increase was primarily due to incremental lodging revenues of $8.9
million from the 32 new hotels added during 1995 and 1996 with the balance
coming from growth in revenues at comparable Owned Hotels. Lodging revenues for
comparable Owned Hotels increased by $3.2 million, or 13.0%, for the three
months ended March 31, 1996 as compared to the same period of the prior year
driven by strong results at the Company's AmeriSuites hotels. The revenue
gains were offset by a decrease of $4.2 million at the Frenchman's Reef
attributable to the impact of the 1995 hurricane.
The Company operates in three major segments of the industry:
full-service, all-suites and limited-service. The following table illustrates
the growth in REVPAR for the comparable Owned Hotels for the three months ended
March 31, 1996 as compared to the same period in the prior year by industry
segment:
Full-service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1%
All-suites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.9%
Limited-service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3%
The REVPAR growth at comparable Owned Hotels reflects strong results
in all of the Company's industry segments: full-service, its all-suite
AmeriSuites and its limited-service Wellesley Inns. Repositioning efforts at
both full-service and limited-service hotels contributed to the foregoing
REVPAR increases. The improvements in REVPAR were generated by increases in
ADR, which rose by 6.2%, and occupancy gains of 4.8% for the three month period
as compared to the same period in the prior year.
Food and beverage revenues decreased by $860,000, or 9.7%, for the
three months ended March 31, 1996 compared to the same period in the prior
year. This decrease was primarily due to lower food and beverage revenues at
the Frenchman's Reef which declined by $2.4 million from the same period in the
prior year due to the hurricane damage. This was
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12
partially offset by additional revenues of $1.0 million attributable to the new
hotels and increased revenues at comparable Owned Hotels. Food and beverage
revenues for comparable Owned Hotels increased by $572,000, or 10.7%, for the
three months ended March 31, 1996, due primarily to increased banquet business
at several hotels.
Management and other fees consist of base and incentive fees earned
under management agreements, fees for additional services rendered to Managed
Hotels and sales commissions earned by the Company's national sales group,
Market Segments, Inc. ("MSI"). Management and other fees increased by $55,000,
or 3.4%, for the three months ended March 31, 1996 as compared to the same
period in the prior year due primarily to increased incentive management fees
partially offset by the conversions of Managed Hotels into Owned Hotels.
Interest on mortgages and notes receivable during the period primarily
related to mortgages secured by certain Managed Hotels. Interest on mortgages
and notes receivable decreased by $345,000, or 11.4%, for the three months
ended March 31, 1996 as compared to the same period in the prior year,
primarily due to the Company's conversions of notes receivable into cash or
hotel assets during 1995 and 1996. Interest on mortgages and notes receivable
will continue to decrease and operating revenues and expenses will increase due
to the March 31, 1996 conversion of a $22.4 million note into a long-term
lease.
Direct lodging expenses increased by $1.9 million, or 22.1%, for the
three months ended March 31, 1996 compared to the same period in the prior year
due primarily to the addition of new hotels. Direct lodging expenses, as a
percentage of lodging revenue, remained constant at 25.3% during the three
month periods. For comparable Owned Hotels, direct lodging expenses as a
percentage of lodging revenues decreased from 27.3% to 25.6% for the three
month period due primarily to increases in ADR which had minimal corresponding
increases in expenses.
Direct food and beverage expenses increased by $257,000, or 3.9%, for
the three months ended March 31, 1996 as compared to the same period in the
prior year primarily due to increased banquet business. As a percentage of food
and beverage revenues, direct food and beverage expenses increased from 74.9%
to 86.2% for the three month period. The increase was primarily due to the
impact of decreased revenues from the food and beverage operations at the
Frenchman's Reef. For comparable Owned Hotels direct food and beverage
expenses, as a percentage of food and beverage revenue, remained relatively
stable for both periods as the higher margins associated with the increased
banquet business were offset by lower margins at the Hasbrouck Heights Crowne
Plaza due to the refurbishing of the hotel. The Company anticipates completing
this project during the second quarter.
Direct hotel selling and general expenses consist primarily of hotel
expenses for Owned Hotels which are not specifically allocated to rooms or food
and beverage activities, such as administration, selling and advertising,
utilities, repairs and maintenance. Direct hotel selling and general expenses
increased by $2.2 million, or 18.5%, for the three months ended March
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31, 1996 as compared to the same period in the prior year due primarily to the
addition of new hotels. As a percentage of hotel revenues (defined as lodging
and food and beverage revenues), direct hotel selling and general expenses
increased from 27.3% to 28.0% for the three month period due to increased
utility and snow removal costs related to the severe winter weather. For
comparable Owned Hotels, direct selling and general expenses as a percentage of
revenues decreased slightly from 27.2% to 27.0% for the three month periods, as
the higher weather-related costs were offset by the impact of improved
revenues.
Occupancy and other operating expenses consist primarily of insurance,
real estate and other taxes and rent expense. For the three months ended March
31, 1996, occupancy and other operating expenses increased by $871,000, or
33.4%, as compared to the same period in the prior year primarily due to the
addition of new hotels and increased real estate taxes on certain hotels which
were partially assessed in the prior year. As a result, occupancy and other
operating expenses as a percentage of hotel revenues increased from 6.0% to
7.0% for the three month period.
General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating both the Owned and Managed
Hotels and general corporate expenses. General and administrative expenses
increased by $347,000, or 9.0%, for the three months ended March 31, 1996,
primarily due to increased personnel, advertising and training costs associated
with opening new hotels. As a percentage of total revenues, general and
administrative expenses decreased from 8.0% to 7.2% for the three month period
due to operating leverage.
Depreciation and amortization expense increased by $1.2 million, or
31.4%, for the three months ended March 31, 1996 as compared to the same period
in the prior year due to the impact of new hotel properties acquired or opened
in the past year and refurbishment efforts at several hotels.
Interest expense increased by $1.8 million, or 42.7%, for the three
months ended March 31, 1996 as compared to the same period in the prior year
primarily due to the issuance of $86.3 million of 7% Convertible Subordinated
Notes due 2002 (the "Convertible Notes") in April 1995 and a net increase of
$68.4 million in debt, after application of the proceeds to repay indebtedness,
from the $120.0 million First Mortgage Notes due 2006 ("the First Mortgage
Notes") issued in January 1996. Investment income increased by $751,000 for
the three month period primarily due to higher average cash balances generated
by the new borrowings.
Other income consists of items which are not part of the Company's
recurring operations. Other income for the three months ended March 31, 1996
consisted of a gain on the settlement of a note receivable of $1.8 million and
a gain on the sale of a hotel of $1.6 million.
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Pretax extraordinary gains of approximately $249,000 relate to the
retirement of secured notes with a face value of $8.5 million. Pretax
extraordinary gains of approximately $11,000 for the three months ended March
31, 1995 relate to the retirement of debt with a face value of $388,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth strategy focuses on increasing its equity
ownership in strategically positioned hotels. The Company is expanding its
AmeriSuites hotel brand and expects to open 20 AmeriSuites hotels in 1996.
Additionally, the Company has acquired and is repositioning 18 hotels acquired
in March 1996, 16 of which are Wellesley Inns.
The Company believes it has the financial resources available to
execute its growth and hotel acquisition strategy. The Company's development
and acquisition program has been funded over the past year primarily with the
proceeds from the issuance of $86.3 million of Convertible Notes and $120.0
million of First Mortgage Notes. The Company intends to finance development and
acquisitions in 1996 with existing cash balances, cash flow from operations and
a secured revolving credit facility. The Company currently has 40 unencumbered
hotels which may be used as collateral for this facility. The Company believes
that these sources will be adequate to fund its growth strategy. Additionally,
the Company believes that its cash flow from operations is sufficient to fund
its anticipated working capital needs, routine capital expenditures and debt
service obligations through 1996.
At March 31, 1996, the Company had cash and cash equivalents of $23.6
million, current marketable securities of $8.0 million and restricted cash,
which is primarily collateral for various debt obligations, of $9.4 million.
Cash and cash equivalents and current marketable securities decreased by $29.8
million during the three months ended March 31, 1996 primarily due to the
acquisition and development of hotels offset by new borrowings.
The Company's major sources of cash for the three months ended March
31, 1996 were net proceeds of approximately $115.0 million from the issuance of
the $120.0 million First Mortgage Notes in January 1996, cash flow from
operations of $8.7 million and collections of mortgage and notes receivable of
$8.3 million. The Company's major uses of cash during the quarter were capital
expenditures relating primarily to acquisitions and development of $103.6
million and debt payments of $61.5 million.
Cash flow from operations increased to $8.7 million for the three
months ended March 31, 1996 as compared to $4.9 million for the same period in
the prior year due to the improved operating results. Cash flow from
operations was positively impacted by the utilization of net operating loss
carry forwards ("NOLs") of $2.0 million for the three months ended March 31,
1996 as compared to $1.4 for the same period in the prior year. At March 31,
1996, the Company had federal NOLs relating to its predecessor, PMI, of
approximately $119.2 million
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which are subject to annual utilization limitations and expire beginning in
2005 and continuing through 2007.
Debt. In January 1996, the Company issued $120.0 million of First
Mortgage Notes. Interest on the First Mortgage Notes is payable semi-annually
on January 15 and July 15. The notes are secured by 15 hotels and contain
certain covenants including limitations on the incurrence of debt, dividend
payments, certain investments, transactions with affiliates, asset sales and
mergers and consolidations. The First Mortgage Notes are redeemable, in whole
or in part, at the option of the Company on or after January 15, 2001 at
premiums to principal which decline on each anniversary date thereafter. The
Company utilized a portion of the proceeds to pay down approximately $51.6
million of indebtedness, with the remainder of the proceeds to be used to
finance the development or acquisition of hotels or hotel portfolios.
During the first quarter, the Company prepaid and retired $6.0 million
of its senior secured notes resulting in pre-tax extraordinary gains of
$60,000. The Company also retired $2.4 million of debt in conjunction with the
sale of a hotel which resulted in a pre-tax extraordinary gain of $189,000. In
April 1996, the Company, utilizing the proceeds from the settlement of a note
receivable, prepaid and retired $6.5 million of senior secured notes. A
pre-tax extraordinary gain of $45,000 will be recorded in the second quarter.
The Company has $31.6 million of debt related to the Frenchman's Reef
which was scheduled to mature in December 1996. In March 1996, the Company and
the lender entered into an agreement to extend the maturity of the loan to July
1997. The loan bears interest at the same rate currently in effect and
principal payments are waived until July 1997. All other terms and conditions
of the loan remain in effect. See "--Capital Investments."
The Company is currently negotiating a $150 million senior revolving
credit facility (the "Revolving Credit Facility") with a group of financial
institutions. Under the proposed agreement, the Revolving Credit Facility will
be guaranteed by the Company and secured by substantially all of the Company's
currently unencumbered hotels. Additional properties may be added subject to
the approval of the lenders. The proceeds of this permanent financing will be
used for the development and acquisition of hotel properties, the repayment of
existing indebtedness and general corporate purposes. The Company anticipates
that the Revolving Credit Facility will bear interest at a floating rate and be
available for five years. The Company expects to enter into the Revolving
Credit Facility in June 1996. In the interim, the Company may enter into a
short term borrowing arrangement with one of the financial institutions secured
by certain of these hotels to finance its development and working capital
needs.
Capital Investments. The Company has implemented a hotel development
and acquisition program which focuses on the development of its AmeriSuites
hotel chain and the consolidation of its Wellesley Inns chain. In connection
with this program, the Company spent approximately $92.6 million in cash on
acquisitions and construction funded primarily by a combination of existing
cash balances, cash flow from operations and the issuance of the First Mortgage
Notes.
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The Company plans to double the size of its AmeriSuites chain in 1996
by opening 20 new Amerisuites hotels. Since January 1, 1996, the Company has
opened six new AmeriSuites hotels in Miami, Dallas, Cleveland and Detroit,
bringing the number of AmeriSuites to 25 as of May 1, 1996. The Company has 16
AmeriSuites hotels under construction and 18 additional AmeriSuites sites under
contract which are scheduled for the commencement of construction in 1996.
On March 6, 1996, the Company acquired 18 hotels consisting of 16
Wellesley Inns and two other limited service hotels for approximately $65.1
million in cash. The acquisition enabled the Company to establish full control
over its proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and
operated by the Company. The Company intends to refurbish these hotels to
ensure consistent quality and enhance the value of its brand.
The Company is currently engaged in discussions with its insurance
carrier regarding the amount of insurance proceeds to be paid and is assessing
the extent of refurbishments at the Frenchman's Reef related to the September
1995 hurricane. Due to extensive property and business interruption insurance,
the Company believes that its liquidity will be affected only to the extent of
its insurance deductibles for which the Company provided a reserve of $2.2
million in 1995. Additionally, the Company's debt in the amount of $31.6
million related to the Frenchman's Reef is further secured by an assignment of
property insurance proceeds. The lender has sole discretion concerning the
utilization of such proceeds for refurbishment. The Company is discussing with
the lender the terms under which the lender will make such funds available.
During the first quarter of 1996, the Company spent approximately
$10.9 million on capital improvements at its Owned Hotels, of which
approximately $4.6 million related to refurbishments and repositionings of
recently acquired hotels. The Company intends to spend an additional $12 to $13
million in 1996 relating to the refurbishing and repositioning of the Hasbrouck
Heights Crowne Plaza and the 16 recently acquired Wellesley Inns.
Asset Realizations. The Company has pursued a strategy of converting
mortgage notes receivable and other assets into cash or operating hotel assets.
Since July 31, 1992, the Company has received $108.6 million in cash and added
nine operating hotel assets through note settlements, lease terminations and
property sales. During the first quarter, the Company received $8.3 million in
cash in settlement of notes receivable and $3.7 million in cash on sales of
properties resulting in gains of $3.4 million. In January 1996, the Company
obtained control of the 210-room Cocoa Beach Howard Johnson Hotel by converting
its $9.7 million mortgage note receivable into a long-term lease. On March 31,
1996, the Company obtained control of the 204- room Fairfield Radisson by
converting its $22.4 million mortgage note receivable into a long-term lease.
The Company is currently involved in litigation with Financial
Security Assurance, Inc. ("FSA") in which FSA seeks approximately $31,200,000
received by the Company in settlement of a note and guaranty from Allen V. Rose
and Arthur Cohen ("Rose and Cohen"). The
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Company previously received two favorable court rulings approving the Company's
settlement with Rose and Cohen and finding that the Company alone was entitled
to the settlement proceeds. The Company had reached a settlement in 1993 with
Rose and Cohen which provided for Rose or his affiliate to pay the Company
$25,000,000 plus proceeds from the sale of approximately 1,100,000 shares of
the Company's common stock held by Rose, bringing the total settlement proceeds
to approximately $31,200,000. FSA asserted that, under the terms of an
intercreditor agreement, it was entitled to receive the settlement proceeds
otherwise payable to the Company. The U.S. Bankruptcy Court for the Southern
District of Florida (the "Bankruptcy Court") ruled in favor of the Company in
April 1994 and the Company used $25,000,000 of the settlement proceeds to
retire certain senior secured notes. FSA appealed to the U.S. District Court
for the Southern District of Florida (the "U.S. District Court"), which
affirmed the Bankruptcy Court's ruling. On May 12, 1995, the Company used the
remaining proceeds plus accrued interest to prepay senior secured notes. On
May 23, 1995, FSA filed a notice of appeal with the U.S. Court of Appeals for
the 11th Circuit (the "U.S. Court of Appeals"). On April 10, 1996, the case
was presented before the U.S. Court of Appeals. The Company believes that the
U.S. Court of Appeals will affirm the U.S. District Court ruling and that
there will be no effect on the Company's financial position, results of
operations or liquidity.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) On March 21, 1996 a report on Form 8-K was filed announcing the
Company's acquisition of 18 hotels consisting of 16 Wellesley Inns
and two other limited-service hotels for approximately $65,100,000 in
cash.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME HOSPITALITY CORP.
Date: May 10, 1996 By: /s/ David A. Simon
-------------------------
David A. Simon, President and
Chief Executive Officer
Date: May 10, 1996 By: /s/ John M. Elwood
-------------------------
John M. Elwood, Executive
Vice President and Chief
Financial Officer
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EXHIBIT INDEX
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Exhibit No. Description
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EX-27 Financial Data Schedule