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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 ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1998
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 identification no.)
incorporation or organization)
700 Route 46 East, Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 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 54,083,851 shares of common stock, $.01 par value
outstanding, as of May 8, 1998.
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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, 1997 and March 31, 1998............................... 1
Consolidated Statements of Income
Three Months Ended March 31, 1997
and March 31, 1998................................................. 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997
and March 31, 1998................................................. 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
1997 1998
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ............................................... $ 5,013 $ 35,098
Marketable securities available for sale ................................ 8,697 23,664
Accounts receivable, net of reserves .................................... 16,318 20,752
Current portion of mortgages and
notes receivable .................................................... 2,271 2,209
Other current assets .................................................... 28,780 28,899
----------- -----------
Total current assets .............................................. 61,079 110,622
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization ........................ 1,079,591 1,100,880
Mortgages and notes receivable, net of
current portion ......................................................... 19,698 19,095
Other assets ................................................................. 36,298 40,559
----------- -----------
TOTAL ASSETS ...................................................... $ 1,196,666 $ 1,271,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt ................................................. $ 3,871 $ 3,029
Other current liabilities ............................................... 76,921 78,859
----------- -----------
Total current liabilities ......................................... 80,792 81,888
Long-term debt, net of current portion ....................................... 554,500 569,266
Deferred income .............................................................. 18,708 74,651
Other liabilities ............................................................ 18,253 17,281
----------- -----------
Total liabilities ................................................. 672,253 743,086
----------- -----------
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; 47,182,972 and 46,838,482 shares issued
and outstanding at December 31, 1997 and March 31, 1998,
respectively ........................................................ 472 473
Capital in excess of par value .......................................... 419,242 421,751
Retained earnings ....................................................... 105,737 116,029
Treasury stock (50,039 shares at December 31, 1997
and 561,839 shares at March 31, 1998) ............................... (1,038) (10,183)
----------- -----------
Total stockholders' equity ........................................ 524,413 528,070
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 1,196,666 $ 1,271,156
=========== ===========
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, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
1997 1998
--------- ---------
Revenues:
Lodging ............................... $ 60,037 $ 86,601
Food and beverage ..................... 9,449 11,643
Management and other fees ............. 1,162 1,384
Interest on mortgages and
notes receivable .................. 1,729 1,575
Rental and other ...................... 5,676 2,085
--------- ---------
Total revenues ................. 78,053 103,288
--------- ---------
Costs and expenses:
Direct hotel operating expenses:
Lodging ........................... 15,123 20,501
Food and beverage ................. 7,965 9,440
Selling and general ............... 17,635 22,151
Occupancy and other operating ......... 5,792 12,588
General and administrative ............ 5,763 6,583
Depreciation and amortization ......... 7,690 10,900
--------- ---------
Total costs and expenses ....... 59,968 82,163
--------- ---------
Operating income ........................... 18,085 21,125
Investment income .......................... 615 1,261
Interest expense ........................... (4,715) (5,787)
--------- ---------
Income before income taxes
and extraordinary items ............... 13,985 16,599
Provision for income taxes ................. 5,783 6,308
--------- ---------
Income before extraordinary items .......... 8,202 10,291
Extraordinary items - Gains on discharges of
indebtedness (net of income taxes) .... 22 --
--------- ---------
Net income ................................. $ 8,224 $ 10,291
========= =========
Earnings per common share:
Basic:
Income before extraordinary items ..... $ 0.18 $ 0.22
Extraordinary items ................... -- --
--------- ---------
Net earnings ............................... $ 0.18 $ 0.22
========= =========
Diluted:
Income before extraordinary items ..... $ 0.17 $ 0.20
Extraordinary items ................... -- --
--------- ---------
Net earnings ............................... $ 0.17 $ 0.20
========= =========
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, 1997 AND 1998
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1997 1998
--------- ---------
Cash flows from operating activities:
Net income .................................... $ 8,224 $ 10,291
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............. 7,690 10,900
Amortization of deferred financing costs .. 606 826
Business interruption insurance revenue ... (4,990) (1,575)
Utilization of net operating loss
carryforwards .......................... 911 1,614
Gains on discharges of indebtedness ....... (37) --
Amortization of deferred gain ............. -- (2,156)
Increase (decrease) from changes in other
operating assets and liabilities:
Accounts receivable .................... (797) (4,434)
Other current assets ................... (1,274) 1,425
Other liabilities ...................... (1,636) (7,109)
--------- ---------
Net cash provided by operating
activities .......................... 8,697 9,782
--------- ---------
Cash flows from investing activities:
Net proceeds from mortgages and notes
receivable ................................ 377 621
Proceeds from sales of property, equipment
and leasehold improvements ................ 14,910 115,280
Construction of new hotels .................... (69,466) (88,281)
Purchases of property, equipment and
leasehold improvements .................... (19,673) (14,203)
Net proceeds from insurance settlement ........ 571 --
Increase in restricted cash ................... (7,769) (6,234)
Purchase of marketable securities ............. -- (350)
Proceeds from retirement of debt securities ... 177 --
Other ......................................... (1,261) (1,423)
--------- ---------
Net cash (used in) provided by investing
activities .......................... (82,134) 5,410
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt ............ 262,331 39,150
Payments of debt .............................. (107,033) (15,956)
Proceeds from the exercise of stock options
and warrants .............................. 441 896
Purchase of treasury stock .................... -- (9,145)
Other ......................................... -- (52)
--------- ---------
Net cash provided by financing
activities .......................... 155,739 14,893
--------- ---------
Net increase in cash and cash equivalents ..... 82,302 30,085
Cash and cash equivalents at beginning
of period ................................. 47,473 5,013
--------- ---------
Cash and cash equivalents at end of period .... $ 129,775 $ 35,098
========= =========
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, 1998 and the results of its operations for the three months
ended March 31, 1997 and 1998 and cash flows for the three months ended March
31, 1997 and 1998.
The consolidated financial statements for the three months ended March
31, 1997 and 1998 were prepared on a consistent basis with the audited
consolidated financial statements for the year ended December 31,1997. Certain
reclassifications have been made to the March 31,1997 consolidated financial
statements to conform them to the March 31, 1998 presentation.
The consolidated results of operations for the three months ended March
31, 1998 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,
1997.
NOTE 2 - ACCOUNTING POLICIES
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5) which is required to be adopted in 1999. At that time, the Company
will be required to record a cumulative effect of a change in accounting
principle to write off any unamortized pre-opening costs that remain on the
balance sheet at the date of adoption. Additionally, on a prospective basis
subsequent to the adoption of this new standard, all future pre-opening costs
will be expensed as incurred. The Company believes that the adoption of SOP
98-5 will not have a material effect on its financial condition or results of
its operations.
NOTE 3 - MERGER
On December 1, 1997, the Company merged with HomeGate Hospitality, Inc.
("HomeGate"), a provider of mid-price extended-stay hotels. The transaction was
accounted for as a pooling of interests, which required that the historical
consolidated statements of operations of the companies be restated on a combined
basis without giving effect to operating synergies.
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NOTE 4 - SALE/LEASEBACK TRANSACTION
In January 1998, the Company completed the sale/leaseback of eight
full-service hotels to American General Hospitality, Inc. ("American General")
for $138.4 million consisting of $114.4 million in cash, $10.2 million in
assumed debt and $13.8 million in American General limited partnership operating
units. The Company is operating the hotels under a lease agreement with American
General which has a term of 10 years. The transaction generated a net gain of
approximately $65.0 million which will be recognized as a reduction of rent
expense over the life of the lease. The Company has also entered into an
agreement to sell and lease back eleven additional full-service hotels to
American General not later than March 31, 1999.
NOTE 5 - EARNINGS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," (SFAS
128). Under SFAS 128, primary earnings per share has been replaced by basic
earnings per share which excludes any dilutive effects of options, warrants and
convertible securities. Fully diluted earnings per share is now called diluted
earnings per share and includes a change in applying the treasury stock method.
Earnings per share amounts for all prior periods have been restated to conform
to the SFAS 128 requirements.
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 share was
46.4 million and 46.9 million for the three months ended March 31, 1997 and
1998, respectively.
Diluted earnings per share reflects adjustments to basic earnings per
share for the dilutive effect of stock options and warrants and the elimination
of interest expense and the issuance of additional common shares from the
assumed conversion of the 7% convertible subordinated notes. The weighted
average number of common shares used in computing diluted earnings per share
was 55.4 million for both the three months ended March 31, 1997 and 1998,
respectively.
NOTE 6 - RENTAL AND OTHER REVENUE
Rental and other revenue is comprised of the following (in thousands):
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1998
------ ------
Business interruption insurance $4,990 $1,575
Rental income 580 258
Franchise revenue -- 252
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Other 106 --
------ ------
Total $5,676 $2,085
====== ======
Business interruption insurance revenue relates to damages caused by
Hurricane Bertha at the Company-owned Marriott's Frenchman's Reef Hotel (the
"Frenchman's Reef") in St. Thomas, U.S. Virgin Islands in July 1996 and is based
on the settlement of the Company's insurance claim. In March 1998, the Company
settled its property and business interruption insurance claim for $16.4
million. The Company had previously received $2.5 million in 1997 and received
the remaining amount, net of deductibles, in April 1998.
NOTE 7 - INTEREST EXPENSE
The Company capitalized $3.8 million and $7.2 million for the three
months ended March 31, 1997 and 1998, respectively, of interest related to
borrowings used to finance hotel construction. Also included in interest expense
is the amortization of deferred financing fees of $606,000 and $826,000 for the
three months ended March 31, 1997 and 1998, respectively.
NOTE 8 - TREASURY STOCK
In December 1997, the Company's Board of Directors approved a program
to purchase from time to time up to one million shares of its common stock at
various prices . Under this program, the Company purchased approximately
512,000 shares during the three months ended March 31,1998 at an average price
of $17.76.
NOTE 9 - SUBSEQUENT EVENTS
On April 17, 1998, the Company's $86.3 million 7% Convertible Notes due
2002 were converted into 7.2 million shares of common stock of the Company at a
conversion price of $12 per share. The notes were included as long-term debt as
of March 31, 1998 and were subsequently transferred to stockholders' equity in
April 1998.
In May 1998, the Company agreed to sell and leaseback ten AmeriSuites
to Equity Inns, Inc. ("Equity Inns") for $101.3 million in cash. The sale is
part of an ongoing strategic relationship between the Company and Equity Inns,
which contemplates the sale of approximately 20 AmeriSuites per year. The
Company will continue to operate the hotels under a ten-year lease agreement and
will also generate franchise income streams under a ten-year franchise
agreement. The transaction is expected to generate a net gain of approximately
$16.0 million which will be recognized as a reduction of rent expense over the
life of the lease. The agreement is subject to the completion of due diligence
and is expected to close by the end of the second quarter.
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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, as of April
30,1998, owned 124 hotels (the "Owned Hotels"), operated 18 hotels under
sale/leaseback agreements (the "Sale/Leaseback Hotels") and managed 12 hotels
for third parties (the "Managed Hotels"). The Company has significant equity
interests in the Owned Hotels and has economic interests limited to a
percentage of revenue (generally between 2.5% to 5.0%) on the Sale/Leaseback
Hotels and the Managed Hotels. The Company consolidates the results of
operations of its Owned Hotels and Sale/Leaseback Hotels and records management
fees (including incentive management fees) and interest income, where
applicable, on the Managed Hotels.
The Company's strategy is to capitalize on two lodging industry trends
perceived by management: (i) favorable industry fundamentals, in the segments
in which Prime operates (i.e. upscale all-suites and mid-price extended-stay),
which are producing strong earnings growth and (ii) growing consumer
preferences for newer accommodations with strong brand identities. Through its
development of proprietary brands, the Company is positioning itself to
generate additional revenue not dependent on investment in real estate. The
Company's external growth focuses on the accelerated expansion of its
proprietary AmeriSuites and HomeGate brands through new construction. Although
future results of operations may be adversely affected in the short term by the
costs associated with the construction and acquisition of new hotels, it is
expected that this impact will be offset, after an initial period, by revenues
generated by such new hotels.
On December 1, 1997, the Company completed its merger with HomeGate
Hospitality, Inc. ("HomeGate"), a provider of mid-price extended-stay hotels.
The transaction was accounted for as a pooling of interests which required that
the historical consolidated statements of operations of the companies be
restated on a combined basis without giving effect to operating synergies.
For the three months ended March 31, 1998, the Company's EBITDA
increased by $6.2 million, or 24.2%, from $25.8 million in 1997 to $32.0 million
in 1998, and Hotel EBITDA increased by $7.5 million, or 26.7%, from $28.0
million in 1997 to $35.4 million in 1998. EBITDA represents earnings before
interest, taxes, depreciation and amortization. Hotel EBITDA represents EBITDA
generated from the operations of Owned Hotels. Hotel EBITDA excludes management
fee income, interest income from mortgages and notes receivable, general and
administrative expenses and other revenues and expenses which do not directly
relate to the operations of Owned Hotels. The Company's hotels operate in four
segments of the industry: the upscale all-suites segment, under the Company's
proprietary AmeriSuites brand; the mid-price extended-stay segment under the
Company's proprietary HomeGate Studios & Suites brand; the upscale full-service
segment, under major national franchises; and the midprice limited-service
segment, primarily under the Company's
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proprietary Wellesley Inns brand. The following table illustrates the Hotel
EBITDA contribution from each segment (in thousands):
THREE MONTHS ENDED MARCH 31,
1997 1998
Amount % of Total Amount % of Total
------- ------- ------- -------
All-suites ........... $ 8,678 31.0% $16,725 47.2%
Full-service ......... 12,052 43.1 10,466 29.5
Limited-service ...... 6,407 22.9 6,787 19.2
Extended-Stay ........ 836 3.0 1,461 4.1
------- ------- ------- -------
Total ...... $27,973 100.0% $35,439 100.0%
======= ======= ======= =======
Hotel EBITDA for the three months ended, March 31, 1998 reflects the
shifting mix in the Company's hotel portfolio toward its proprietary brand
AmeriSuites. Based on the Company's development plans, Prime expects the
relative contribution from its all-suite AmeriSuites hotels and extended-stay
HomeGate hotels to increase in 1998 with the full-service hotel's percentage
contribution declining.
EBITDA and Hotel EBITDA are not measures of financial performance under
generally accepted accounting principles and should not be considered as
alternatives to net income as an indicator of the Company's operating
performance or as alternatives to cash flows as a measure of liquidity.
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
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, 1997 and 1998. The
results of the seven hotels divested during 1997 and 1998 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(2)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1998 1997 1998
(IN THOUSANDS, EXCEPT ADR AND REVPAR)
INCOME STATEMENT DATA:
Revenues:
Lodging ...................................... $ 60,037 $ 86,601 $ 35,592 $ 39,058
Food and Beverage ............................ 9,449 11,643 4,481 4,920
Management and Other Fees .................... 1,162 1,384
Interest on Mortgages and Notes Receivable ... 1,729 1,575
Rental and Other ............................. 5,676 2,085
---------- ----------
Total Revenues ....................... 78,053 103,288
Direct Hotel Operating Expenses:
Lodging ...................................... 15,123 20,501 9,022 9,470
Food and Beverage ............................ 7,965 9,440 3,776 4,108
Selling and General .......................... 17,635 22,151 9,660 9,611
Occupancy and Other Operating .................. 5,792 12,588
General and Administrative ..................... 5,763 6,583
Depreciation and Amortization .................. 7,690 10,900
Operating Income ............................... 18,085 21,125
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue .. 25.2% 23.7% 25.4% 24.3%
Food and Beverage, as a percentage of food and
beverage revenue .......................... 84.3% 81.1% 84.3% 83.5%
Selling and General, as a percentage of
lodging and food and beverage revenue ..... 25.4% 22.5% 24.1% 21.9%
Occupancy and Other Operating, as a percentage
of lodging and food and beverage revenue ..... 8.3% 12.8%
General and Administrative, as a percentage of
total revenue ................................ 7.4% 6.4%
Other Data((1)):
Occupancy ...................................... 59.7% 60.6% 63.1% 64.7%
Average Daily Rate ("ADR") ..................... $ 75.60 $ 82.78 $ 74.75 $ 80.28
Revenue per Available Room ("REVPAR") .......... $ 45.10 $ 50.14 $ 47.14 $ 51.95
Gross Operating Profit ......................... $ 19,970 $ 37,652 $ 17,615 $ 20,790
(1) For purposes of showing operating trends the seven hotels
divested in 1997 have been excluded from the other data
section of the tables.
(2) Comparable Owned Hotels refers to the 63 Owned Hotels which
were open for the full period in both 1997 and 1998 excluding
the Frenchman's Reef which was impacted by hurricane damage.
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Lodging revenues, which include room revenues and other related
revenues such as telephone and vending, increased by $26.6 million, or 44.2%,
for the three months ended March 31, 1998 as compared to the same period in
1997. Lodging revenues for the three months ended March 31, 1998 increased due
to incremental revenues of $21.4 million from new hotels and higher revenues for
comparable Owned Hotels, which increased by $3.5 million, or 9.7%. The revenue
gains during the three month periods were partially offset by decreases of $2.1
million related to the revenue from divested hotels. The following table sets
forth operating data for the comparable Owned Hotels for the three months ended
March 31, 1998 as compared to the same period in 1997, by product type:
THREE MONTHS ENDED
MARCH 31,
%
1997 1998 CHANGE
---- ---- ------
AMERISUITES
OCCUPANCY 61.1% 64.5%
ADR $72.86 $78.89
REVPAR $44.53 $50.89 14.3%
FULL-SERVICE
OCCUPANCY 58.0% 59.3%
ADR $86.90 $96.26
REVPAR $50.38 $57.11 13.4%
WELLESLEY INNS
OCCUPANCY 69.5% 70.0%
ADR $68.63 $70.93
REVPAR $47.67 $49.65 4.2%
TOTAL
OCCUPANCY 63.1% 64.7%
ADR $74.75 $80.28
REVPAR $47.14 $51.95 10.2%
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The Company achieved solid revenue growth in all of its industry
segments. The REVPAR increases reflect the growing recognition of AmeriSuites as
a leading brand in the fast-growing all-suites segment and continued favorable
industry trends in the full-service segment. The improvements in REVPAR at
comparable Owned Hotels were generated by increases in ADR, which rose by 7.4%
and occupancy gains of 1.6 percentage points, respectively, for the three month
period.
Food and beverage revenues increased by $2.2 million, or 23.2%, for the
three months ended March 31, 1998 as compared to the same period in 1997
primarily due to an increase of $1.7 million at the Frenchman's Reef, which
operated on an impaired basis during the three months ended March 31, 1997 due
to hurricane damage sustained in 1995 and 1996. Food and beverage revenues for
comparable Owned Hotels increased by $439,000, or 9.8%, for the three month
period due to an increase in banquet business.
Management and other fees consist of base and incentive fees earned
under management agreements, fees for additional services rendered to Managed
Hotels and sales commissions earned by the Company's national sales group,
Market Segments, Inc. ("MSI"). Management and other fees increased by $222,000,
or 19.1%, for the three months ended March 31, 1998 as compared to the same
period in 1997 primarily due to increased base and incentive management fees.
Interest on mortgages and notes receivable primarily relate to
mortgages secured by certain Managed Hotels. Interest on mortgages and notes
receivable decreased by $154,000, or 8.9%, for the three months ended March 31,
1998 as compared to the same period in 1997 due to conversions of notes
receivable into hotel assets.
Rental and other revenue decreased by $3.6 million, or 63.3%, for the
three months ended March 31, 1998 as compared to the same period in 1997 due to
decreased business interruption insurance revenue. Business interruption
insurance revenue is based on the settlement of the Company's claim related to
the hurricane damage at the Frenchmen's Reef caused by Hurricane Bertha in July
1996. Business interruption insurance revenue decreased by $3.4 million for the
three months ended March 31, 1998 as compared to the same period in 1997 due to
higher operating losses in 1997.
Direct lodging expenses increased by $5.4 million, or 35.6%, for the
three months ended March 31, 1998 as compared to the same period in 1997 due
primarily to the addition of new hotels. Direct lodging expenses, as a
percentage of lodging revenue, decreased from 25.2% to 23.7% for the three month
period due to increases in ADR and lower corresponding increases in
expenses. For comparable Owned Hotels, direct lodging expenses as a percentage
of lodging revenues also decreased from 25.4% to 24.3% due to ADR increases.
Direct food and beverage expenses for the three months ended March 31,
1998 increased by $1.5 million, or 18.5%, as compared to the same period in 1997
primarily due to the Frenchman's Reef. As a percentage of food and beverage
revenues, direct food and beverage
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expenses decreased from 84.3% to 81.1% for the three month period. For
comparable Owned Hotels, food and beverage expenses as a percentage of food and
beverage revenues also decreased from 84.3% to 83.5% for the three month period.
The decreases were primarily due to the higher margins associated with the
increased banquet business.
Direct hotel selling and general expenses consist primarily of hotel
expenses for Owned Hotels which are not specifically allocated to rooms or food
and beverage activities, such as administration, selling and advertising,
utilities, repairs and maintenance. Direct hotel selling and general expenses
increased by $4.5 million, or 25.6% for the three months ended March 31, 1998 as
compared to the same period in 1997 due primarily to the addition of new hotels.
As a percentage of hotel revenues (defined as lodging and food and beverage
revenues), direct hotel selling and general expenses decreased from 25.4% to
22.5% for the three month period. For the comparable Owned Hotels, direct hotel
selling and general expenses as a percentage of hotel revenues decreased from
24.1% to 21.9% for the three month period. The decreases were primarily due to
the ADR improvements, effective expense controls and decreases in snow removal
and other weather-related costs in the first quarter.
Occupancy and other operating expenses consist primarily of insurance,
real estate and other taxes and rent expense. Occupancy and other operating
expenses increased by $6.8 million, or 117.3%, for the three months ended March
31, 1998 as compared to the same period in 1997 due to the rent expense
associated with the sale/leaseback of hotels to American General and Equity
Inns. Occupancy and other operating expenses as percentage of hotel revenues
increased from 8.3% to 12.8% for the three month period due to rent expense
associated with the sale/leasebacks. Occupancy and other operating expenses are
expected to continue to increase as the Company plans to sell and leaseback
additional hotels in 1998.
General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating both the Owned Hotels and
Managed Hotels and general corporate expenses. General and administrative
expenses increased by $820,000, or 14.2%, for the three months ended March 31,
1998 as compared to the same period in 1997 due to increased advertising,
personnel and training costs associated with opening the new AmeriSuites hotels.
As a percentage of total revenues, general and administrative expenses decreased
from 7.4% to 6.4% for the three month period due to increased operating
leverage.
Depreciation and amortization expense increased by $3.2 million or
41.7%, for the three months ended March 31, 1998 as compared to the same period
in 1997 due to the impact of new hotel properties.
Investment income increased by $646,000 or 105.0%, for the three month
period as compared to the same period in 1997 due to changes in weighted average
cash balances.
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Interest expense increased by $1.1 million, or 22.7%, for the three
months ended March 31, 1998 as compared to the same period in 1997 primarily due
to the issuance of $200 million of Senior Subordinated Notes in March 1997
offset by capitalized interest related to new hotel construction. The Company
capitalized interest of $3.8 million and $7.2 million for the three months ended
March 31, 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Prime's external growth focuses on the accelerated expansion of its
proprietary AmeriSuites and HomeGates brands through new construction. As of
April 30, 1998, Prime had 71 AmeriSuites and 21 HomeGates in operation with
plans to have 95 AmeriSuites and 45 HomeGates open by the end of 1998.
Prime believes that it has access to sufficient resources to implement
its planned expansion of the AmeriSuites and HomeGate brands, including capital
from the following sources: (i) borrowing availability under the Company's
Revolving Credit Facility; (ii) proceeds from sale/leaseback transactions with
respect to certain of its properties and; (iii) internally generated cash flow.
The Company may also from time to time seek additional debt or equity financing.
At March 31, 1998, the Company had cash, cash equivalents and current
marketable securities of $58.8 million. In addition, at March 31, 1998, the
Company had $129.4 million available under the Revolving Credit Facility.
The Company's major sources of cash for the three months end March 31,
1998 were net proceeds from the sale/leaseback of hotels of $114.4 million,
borrowings under the Revolving Credit Facility of $37.5 million and cash flow
from operations of $9.8 million. The Company's major uses of cash during the
period were capital expenditures of $102.5 million relating primarily to the
development of new hotels and debt repayments of $16.0 million.
For the three months ended March 31, 1997 and 1998, cash flow from
operations was positively impacted by the utilization of net operating loss
carryforwards ("NOLs") and other tax basis differences of $1.0 million and $1.6
million, respectively. At March 31, 1998, the Company had federal NOLs relating
primarily to its predecessor, Prime Motor Inns, Inc. ("PMI"), of approximately
$77.7 million which are subject to annual utilization limitations and expire
beginning in 2005 and continuing through 2007.
Sources of Capital. The Company has undertaken a strategic initiative
to dispose of significant hotel real estate and to invest the proceeds in the
growth of its proprietary brands. As
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part of this initiative, Prime has entered into two strategic alliances with
real estate investment trusts.
In January 1998, the Company completed the sale/leaseback of eight
full-service hotels to American General for $138.4 million, consisting of $114.4
million in cash, $10.2 million in assumed debt and $13.8 million in American
General limited partnership operating units. Prime is operating the hotels under
a lease agreement with American General which has a term of 10 years. The sale
is the first phase of a transaction which also includes the sale and leaseback
of 11 additional full-service hotels to American General not later than March
31, 1999.
In May 1998, the Company agreed to sell and leaseback ten AmeriSuites
to Equity Inns for $101.3 million in cash. The sale is part of an ongoing
strategic relationship between the Company and Equity Inns, which contemplates
the sale of approximately 20 AmeriSuites per year. The Company will continue to
operate the hotels under a ten-year lease agreement and will also generate
franchise income streams under a ten-year franchise agreement. The agreement is
subject to the completion of due diligence and is expected to close by the end
of the second quarter.
The Company has a $200.0 million Revolving Credit Facility which bears
interest at LIBOR plus 2%. The facility is available through 2001 and may be
extended for an additional year. Borrowings under the facility are secured by
certain of the Company's hotels with recourse to Prime. Additional properties
may be added subject to the approval of the lenders. Availability under the
facility is subject to a borrowing base test and certain other covenants. As of
April 30, 1998, Prime had outstanding borrowings of $85.6 million under the
facility and further availability of $114.4 million.
Uses of Capital. The Company's capital spending is focused primarily on
the development of its AmeriSuites and HomeGate hotel chains. For the three
months ended March 31, 1998, the Company spent $47.9 million on new construction
of AmeriSuites and $40.4 million on new construction of HomeGates. The Company
expects to spend a total of approximately $500 million on development of new
hotels in 1998 to be funded by borrowings under the Revolving Credit Facility,
the sale/leaseback of hotels and internally generated cash flow.
On March 12, 1998, the Company settled its insurance claim for $16.4
million related to hurricane damage at the Frenchman's Reef caused by Hurricane
Bertha in July 1996. The Company had previously received $2.5 million in 1997
and received the remaining amount, net of deductibles, in April 1998.
For the three months ended March 31, 1998, the Company spent
approximately $14.2 million on capital improvements at its Owned Hotels of which
approximately $6.8 million related to the refurbishment of the Frenchman's Reef.
In December 1997, the Company's Board of Directors approved a program
to purchase from time to time up to one million shares of its common stock at
various prices. Under this
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program, the Company purchased approximately 512,000 shares at an average price
of $17.76 during the first quarter of 1998.
On April 17, 1998, the Company's $86.3 million 7% Convertible Notes due
2002 were converted into 7.2 million shares of common stock of the Company at a
conversion price of $12 per share.
In order to facilitate future tax-deferred exchanges of hotel
properties, the Company from time to time enters into arrangements with an
unaffiliated third party under Section 1031 of the Internal Revenue Code of
1986, as amended. As of March 31, 1998, the Company had advances of
approximately $42.3 million to such third party which advances are classified
as property, equipment and leasehold improvements.
The Company has preliminarily reviewed its systems and equipment as it
relates to year 2000 compliance. Based on this assessment, the Company has
determined that the cost of compliance is not expected to be material to its
cash flows, financial condition or results of operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) 10.1 Employment Agreement, dated February 20, 1998,
between David Simon and the Company.
10.2 Employment Agreement, dated February 20, 1998,
between John Elwood and the Company.
11 Computation of Earnings Per Share
27 Financial Data Schedule
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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 11, 1998 By: /s/ David A. Simon
------------------
David A. Simon, President and
Chief Executive Officer
Date: May 11, 1998 By: /s/ John M. Elwood
------------------
John M. Elwood, Executive
Vice President and Chief
Financial Officer
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