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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 JUNE 30, 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 52,749,962 shares of common stock outstanding, $.01 par
value, as of August 11, 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 June 30, 1998..................... 1
Consolidated Statements of Income
Three and Six Months Ended June 30, 1997
and June 30, 1998....................................... 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997
and June 30, 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 4. Submission of Matters to a Vote to a Vote of Security
Holders................................................. 18
Item 6. Exhibits and Reports on Form 8-K........................... 19
Signatures ................................................ 20
3
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31, June 30
1997 1998
=========== ===========
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 5,013 $ 59,399
Marketable securities available for sale ............. 8,697 19,476
Accounts receivable, net of reserves ................. 16,318 22,011
Current portion of mortgages and
notes receivable ................................... 2,271 2,142
Other current assets ................................. 28,780 16,864
----------- -----------
Total current assets ........................... 61,079 119,892
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization ..... 1,079,591 1,109,133
Mortgages and notes receivable, net of
current portion ...................................... 19,698 13,496
Other assets ............................................. 36,298 40,119
----------- -----------
TOTAL ASSETS ................................... $ 1,196,666 $ 1,282,640
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt .............................. $ 3,871 $ 3,197
Other current liabilities ............................ 76,921 81,983
----------- -----------
Total current liabilities ...................... 80,792 85,180
Long-term debt, net of current portion ................... 554,500 474,021
Deferred income .......................................... 18,558 86,014
Other liabilities ........................................ 18,403 10,050
----------- -----------
Total liabilities .............................. 672,253 655,265
----------- -----------
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
53,633,015 shares issued and outstanding
at December 31, 1997 and June 30, 1998,
respectively ....................................... 472 546
Capital in excess of par value ....................... 419,242 508,656
Unrealized loss on marketable securities, net of taxes -- (2,612)
Retained earnings .................................... 105,737 139,600
Treasury stock (50,039 shares at December 31, 1997
and 1,048,939 shares at June 30, 1998) ............. (1,038) (18,815)
----------- -----------
Total stockholders' equity ..................... 524,413 627,375
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 1,196,666 $ 1,282,640
=========== ===========
See Accompanying Notes to Interim Consolidated Financial Statements
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
========= ========= ========= =========
Revenues:
Lodging ................................ $ 68,591 $ 100,394 $ 128,628 $ 186,995
Food and beverage ...................... 11,257 14,683 20,706 26,325
Management, franchise and other ........ 4,137 6,521 10,976 9,990
Interest on mortgages and
notes receivable ..................... 1,574 1,349 3,303 2,924
--------- --------- --------- ---------
Total revenues .................... 85,559 122,947 163,613 226,234
--------- --------- --------- ---------
Costs and expenses:
Direct hotel operating expenses:
Lodging .............................. 16,182 24,122 31,306 44,623
Food and beverage .................... 7,691 10,446 15,656 19,886
Selling and general .................. 16,366 24,052 34,001 46,203
Occupancy and other operating .......... 5,935 13,425 11,728 26,013
General and administrative ............. 5,758 6,399 11,521 12,982
Depreciation and amortization .......... 8,035 19,862 15,724 30,762
--------- --------- --------- ---------
Total costs and expenses .......... 59,967 98,306 119,936 180,469
--------- --------- --------- ---------
Operating income ........................... 25,592 24,641 43,677 45,765
Investment income .......................... 1,618 725 2,231 1,987
Interest expense ........................... (7,926) (5,701) (12,641) (11,488)
Other income ............................... 1,858 18,353 1,858 18,353
--------- --------- --------- ---------
Income before income taxes
and extraordinary items ................ 21,142 38,018 35,125 54,617
Provision for income taxes ................. 8,627 14,447 14,410 20,754
--------- --------- --------- ---------
Income before extraordinary items .......... 12,515 23,571 20,715 33,863
Extraordinary items - Gains on discharges of
indebtedness (net of income taxes) ..... 53 -- 75 --
--------- --------- --------- ---------
Net income ................................. $ 12,568 $ 23,571 $ 20,790 $ 33,863
========= ========= ========= =========
Earnings per common share:
Basic:
Income before extraordinary items ...... $ 0.27 $ 0.45 $ 0.45 $ 0.68
Extraordinary items .................... -- -- -- --
--------- --------- --------- ---------
Net earnings ............................... $ 0.27 $ 0.45 $ 0.45 $ 0.68
========= ========= ========= =========
Diluted:
Income before extraordinary items ...... $ 0.24 $ 0.43 $ 0.41 $ 0.63
Extraordinary items .................... -- -- -- --
--------- --------- --------- ---------
Net earnings ............................... $ 0.24 $ 0.43 $ 0.41 $ 0.63
========= ========= ========= =========
See Accompanying Notes to Interim Consolidated Financial Statements
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PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(In Thousands)
1997 1998
========= =========
Cash flows from operating activities:
Net income ....................................... $ 20,790 $ 33,863
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 15,724 30,762
Amortization of deferred financing costs ....... 1,335 1,567
Business interruption insurance revenue ........ (6,366) --
Utilization of net operating loss
carryforwards ............................... 1,824 3,227
Gains on settlement of notes receivable ........ -- (18,353)
Gains on discharges of indebtedness ............ (125) --
Gain on disposal of assets ..................... (1,858) --
Amortization of deferred gain .................. -- (4,329)
Increase (decrease) from changes in other
operating assets and liabilities:
Accounts receivable ......................... (4,049) (5,693)
Other current assets ........................ (2,842) 929
Other liabilities ........................... 10,178 2,426
--------- ---------
Net cash provided by operating
activities ................................. 34,611 44,399
--------- ---------
Cash flows from investing activities:
Net proceeds from mortgages and notes
receivable ..................................... 509 24,605
Disbursements for mortgages and
notes receivable ............................... (794) --
Proceeds from sales of property, equipment
and leasehold improvements ..................... 6,453 211,236
Construction of new hotels ....................... (137,549) (196,413)
Purchases of property, equipment and
leasehold improvements ......................... (30,017) (21,058)
Net proceeds from insurance settlement ........... -- 3,782
Decrease in restricted cash ...................... 2,772 (5,981)
Purchase of marketable securities ................ -- (375)
Proceeds from retirement of debt securities ...... 800 --
Other ............................................ (1,369) (3,654)
--------- ---------
Net cash (used in) provided by investing
activities ................................. (159,195) 12,142
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt ............... 267,254 79,926
Payments of debt ................................. (109,037) (66,354)
Purchase of treasury stock ....................... -- (17,777)
Proceeds from the exercise of stock options
and warrants ................................... 744 2,050
--------- ---------
Net cash provided (used in) by financing
activities ................................. 158,961 (2,155)
--------- ---------
Net increase in cash and cash equivalents ........ 34,377 54,386
Cash and cash equivalents at beginning of period . 47,473 5,013
--------- ---------
Cash and cash equivalents at end of period ....... $ 81,850 $ 59,399
========= =========
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" or "Prime") contain all material adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of June 30, 1998 and the results of its operations for the
three and six months ended June 30, 1997 and 1998 and cash flows for the six
months ended June 30, 1997 and 1998.
The consolidated financial statements for the three and six months ended
June 30, 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 June 30, 1997 consolidated financial
statements to conform them to the June 30, 1998 presentation.
The consolidated results of operations for the three and six months ended
June 30, 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 the results of its operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which is effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company has
not yet quantified the impact of adopting SFAS 133 on its financial statements,
however, the Company expects the impact to be immaterial due to its limited
derivative activity.
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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.
Note 4 - Debt
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 transferred to stockholders'
equity in April 1998.
Note 5 - Sale/Leaseback Transactions
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.
In June 1998, the Company sold nine AmeriSuites hotels to Equity Inns,
Inc. ("Equity Inns") for $97.0 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 hotels per year. The Company will continue to
operate the hotels under a lease agreement between Equity Inns and a subsidiary
of the Company for a ten-year term with certain renewal options. The
transaction generated a net gain of $15.0 million, which will be recognized as
a reduction of rent expense over the life of the lease. The Company will also
generate franchise income streams under a ten-year franchise agreement.
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Note 6 - 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 46.5
million and 52.6 million for the three months ended June 30, 1997 and 1998,
respectively, and 46.5 million and 49.7 million for the six months ended June
30, 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
55.7 million and 55.2 million for the three months ended June 30, 1997 and 1998,
respectively, and 55.6 million and 55.3 million for the six months ended June
30, 1997 and 1998, respectively.
Note 7 - Interest Expense
The Company capitalized $3.9 million and $6.6 million for the three months
ended June 30, 1997 and 1998, respectively, and $7.7 million and $13.8 million
for the six months ended June 30, 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 $764,000 and
$742,000 for the three months ended June 30, 1997 and 1998, respectively, and
$1.4 million and $1.6 million for the six months ended June 30, 1997 and 1998,
respectively.
Note 8 - Treasury Stock
In December 1997, the Company approved a program to purchase from time to
time up to one million shares of its common stock at various prices. The Company
completed this common stock purchase program over the six months ended June 30,
1998 at an average price of $17.78 per share. In July 1998, the Company
announced that it has authorized the repurchase of an additional two million
shares of stock at various prices from time to time. The Company is currently
limited to the purchase of approximately 400,000 shares under the terms of its
$200 million revolving credit
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facility ("Revolving Credit Facility"). The Company has requested a waiver of
those restrictive covenants in order to fully implement its new repurchase
program.
Note 9 - Comprehensive Income
In 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income," (SFAS 130). Under SFAS 130, the Company is required to report all
changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners in their
capacity as owners.
For the three and six months ended June 30, 1998, comprehensive income
consisted of the following (in thousands):
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- ------------- -------------
Net income $ 12,568 $ 23,571 $ 20,790 $ 33,863
Unrealized loss on
marketable securities;
net of taxes -- (2,612) -- (2,612)
-------- -------- -------- --------
Total $ 12,568 $ 20,959 $ 20,790 $ 31,251
======== ======== ======== ========
Note 10- Depreciation and Amortization
During the quarter, the Company established a $10 millions valuation
reserve recorded as part of depreciation and amortization expense, related to
the expected sale of seven non-prototype HomeGate hotels. In accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company has reduced the carrying value of the
assets to reflect current market conditions.
Note 11- Other Income
Other income consists of property transactions and other assets sales and
retirements. For the six months ended June 30, 1997, other income consisted of
net gains on property transactions of $1.9 million. For the six months ended
June 30, 1998 other income consisted of gains on the settlement of notes
receivable of $18.4 million.
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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 an owner, manager and franchisor of hotels throughout the
United States and the U.S. Virgin Islands. The Company operates three
proprietary brands, AmeriSuites (all-suites), HomeGate Studios & Suites
(extended-stay) and Wellesley Inns (limited service). Also within its portfolio
are owned and/or managed hotels operated under franchise agreements with
national hotel chains. As of July 31,1998, the Company owned 124 hotels (the
"Owned Hotels"), operated 28 hotels under lease agreements with real estate
investment trusts (the "Leased Hotels") and managed 10 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 Leased Hotels and the Managed Hotels.
The Company consolidates the results of operations of its Owned Hotels and
Leased Hotels and records management fees (including incentive management fees)
and interest income, where applicable, on the Managed Hotels.
The Company's strategy is to develop proprietary brands in growing market
segments. The Company's growth focuses on the new construction of AmeriSuites
and HomeGate hotels which are being developed both directly by the Company and
by franchisees. Through the development of its proprietary brands, the Company
is transforming itself from an owner/operator into a franchisor and manager of
quality brands. As a result, the Company is also reducing its dependence on
investment in real estate which is more cyclical and capital intensive.
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 and six months ended June 30, 1998, earnings from recurring
operations increased by 61% and 47%, respectively, over the same periods in
1997. The earnings gains result from strong growth in revenue per available room
("REVPAR") and profit margins at comparable Owned Hotels, and significant new
AmeriSuites unit growth. For the comparable Owned Hotels, REVPAR increased by
8.8% and 8.0% for the three and six month periods, respectively. The combination
of strong REVPAR increases and effective expense controls resulted in increases
in gross operating profits of 10.6% and 11.2% for the three and six month
periods and improvements in gross operating margins from 49.5% to 50.5% for the
three month period and from 47.0% to 48.5% for the six month period. The
earnings growth was also favorably affected by the net addition of 66 hotels
since January 1, 1997, primarily through the development of new AmeriSuites
hotels.
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Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased by 32.3% to $44.5 million for the three months ended June 30, 1998 and
by 28.8 % to $76.5 million for the six months ended June 30, 1998. Hotel EBITDA
increased by 24.2% to $43.3 million for the three month period and by 25.9% to
$78.6 million for the six month period. Hotel EBITDA represents EBITDA generated
from the operations of Owned Hotels and 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 proprietary Wellesley Inns brand. The following table illustrates the
Hotel EBITDA contribution from each segment (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
---- ---- ---- ----
Amount % of Total Amount % of Total Amount % of Total Amount % of Total
------- ---------- ------- ---------- ------- ---------- ------- ----------
All-suites .......... $14,286 41.3 $22,494 51.9% $22,964 36.8% $39,214 49.9%
Full-service ........ 14,727 42.6 13,678 31.6% 26,779 42.9% 23,872 30.4%
Limited-service ..... 5,236 15.1 5,033 11.6% 12,061 19.3% 11,945 15.2%
Extended-Stay ....... 323 1.0 2,123 4.9% 603 1.0% 3,585 4.5%
------- ----- ------- ----- ------- ----- ------- -----
Total ..... $34,572 100.0% $43,328 100.0% $62,407 100.0% $78,616 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Hotel EBITDA for the three and six months ended June 30, 1998 reflects the
shifting mix in the Company's hotel portfolio toward its proprietary AmeriSuites
brand. Based on the Company's development plans, Prime expects the relative
contribution from its all-suites AmeriSuites hotels and extended-stay HomeGate
hotels to increase in 1998 with the full-service hotels' 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 and Six Months Ended June 30, 1998 Compared
to the Three and Six Months Ended June 30, 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 and six months ended June 30, 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
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
(In thousands, except ADR and REVPAR)
Income Statement Data:
Revenues:
Lodging............................................ $ 68,591 $100,394 $48,488 $52,542
Food and beverage.................................. 11,257 14,683 6,823 7,443
Management, franchise and other.................... 4,137 6,521
Interest on mortgages and notes receivable 1,574 1,349
-------- --------
Total revenues............................. 85,559 122,947
-------- --------
Direct hotel operating expenses:
Lodging............................................ 16,182 24,122 11,571 12,418
Food and beverage.................................. 7,691 10,446 4,924 5,546
Selling and general................................ 16,366 24,052 11,191 11,728
Occupancy and other operating........................ 5,935 13,425
General and administrative........................... 5,758 6,399
Depreciation and amortization........................ 8,035 19,862
-------- --------
Total costs and expenses................... 59,967 98,306
-------- --------
Operating income..................................... 25,592 24,641
Operating Expense Margins:
Direct hotel operating expenses:
Lodging, as a percentage of lodging revenue 23.6% 24.0% 23.9% 23.6%
Food and beverage, as a percentage of food and
beverage revenue................................ 68.3% 71.1% 72.2% 74.5%
Selling and general, as a percentage of
lodging and food and beverage revenue 20.5% 20.9% 20.2% 19.6%
Occupancy and other operating, as a percentage
of lodging and food and beverage revenue 7.4% 11.7%
General and administrative, as a percentage of
total revenue...................................... 6.7% 5.2%
Other Data(1):
Occupancy............................................ 72.4% 68.0% 74.7% 74.4%
Average daily rate ("ADR")........................... $ 70.51 $ 78.51 $ 73.57 $ 80.32
Revenue per available room ("REVPAR")................ $ 51.04 $ 53.37 $ 54.95 $ 59.77
Gross operating profit............................... $39,609 $56,457 $27,625 $29,116
(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 72 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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Comparable Owned
Total Hotels(2)
Six Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
(In thousands, except ADR and REVPAR)
Income Statement Data:
Revenues:
Lodging............................................. $ 128,628 $186,995 $77,986 $83,865
Food and beverage................................... 20,706 26,325 10,577 11,584
Management, franchise and other..................... 10,976 9,990
Interest on mortgages and notes receivable.......... 3,303 2,924
-------- --------
Total revenues.............................. 163,613 226,234
-------- --------
Direct hotel operating expenses:
Lodging............................................. 31,306 44,623 19,171 20,185
Food and beverage................................... 15,656 19,886 8,198 9,115
Selling and general................................. 34,001 46,203 19,528 19,830
Occupancy and other operating......................... 11,728 26,013
General and administrative............................ 11,521 12,982
Depreciation and amortization......................... 15,724 30,762
-------- --------
Total costs and expenses.................... 119,936 180,469
-------- --------
Operating income...................................... 43,677 45,765
Operating Expense Margins:
Direct hotel operating expenses:
Lodging, as a percentage of lodging revenue 24.3% 23.9% 24.6% 24.1%
Food and beverage, as a percentage of food and
beverage revenue................................. 75.6% 75.5% 77.5% 78.7%
Selling and general, as a percentage of
lodging and food and beverage revenue 22.8% 21.7% 22.0% 20.8%
Occupancy and other operating, as a percentage
of lodging and food and beverage revenue 7.9% 12.2%
General and administrative, as a percentage of
total revenue....................................... 7.0% 5.7%
Other Data(1):
Occupancy............................................. 66.2% 64.5% 69.7% 69.7%
Average daily rate ("ADR")............................ $ 72.74 $ 80.39 $ 73.70 $ 79.54
Revenue per available room ("REVPAR")................. $ 48.15 $ 51.82 $ 51.34 $ 55.43
Gross operating profit................................ $68,371 $102,608 $41,666 $46,317
(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 $31.8 and $58.4 million, or 46.4%
and 45.4%, respectively, for the three and six months ended June 30, 1998, as
compared to the same periods in 1997. Lodging revenues for the three months
ended June 30, 1998 increased due to incremental revenues of $27.7 million from
new hotels and higher revenues for comparable Owned Hotels, which increased by
$4.1 million, or 8.4%. Lodging revenues for the six months ended June 30, 1997
increased due to incremental revenues of $54.5 million from new hotels and
higher revenues for comparable Owned Hotels, which increased by $5.9 million or
7.5%. The reopening of the Frenchmen's Reef, which was closed for renovations
from April 1997 to December 1997, accounted for increases of $4.5 million and
$7.9 million respectively, for the three and six months ended June 30, 1998 as
compared to the same periods in 1997.
The following table sets forth hotel operating data for the comparable
Owned Hotels for the three and six months ended June 30, 1998 as compared to the
same periods in 1997, by product type:
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 %Change 1997 1998 %Change
---- ---- ------- ---- ---- -------
AmeriSuites
Occupancy 70.6% 74.0% 67.2% 69.5%
ADR $76.73 $81.90 $74.88 $79.69
REVPAR $54.14 $60.57 11.9% $50.35 $55.37 10.0%
Full-Service
Occupancy 78.8% 77.9% 68.6% 68.7%
ADR $90.79 $101.13 $89.16 $98.52
REVPAR $71.57 $78.77 10.1% $61.14 $67.71 10.8%
Wellesley Inns
Occupancy 77.1% 72.6% 73.3% 71.3%
ADR $54.67 $59.09 $61.25 $64.87
REVPAR $42.13 $42.88 1.8% $44.89 $46.25 3.0%
Total
Occupancy 74.7% 74.4% 69.7% 69.7%
ADR $73.57 $80.32 $73.70 $79.54
REVPAR $54.95 $59.77 8.8% $51.34 $55.43 8.0%
The Company achieved solid revenue growth in all of its industry segments.
The REVPAR increases reflect the growing recognition of AmeriSuites as a
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leading brand in the fast-growing all-suites segment and favorable industry
trends in the full service segment with concentration in the Northeast. The
improvements in REVPAR at comparable Owned Hotels were generated by increases
in ADR, which rose by 9.2% and 7.9%, for the three and six month periods.
Occupancy was relatively stable at approximately 74% for the three month period
and approximately 70% for the six month period.
Food and beverage revenues increased by $3.4 million and $5.6 million, or
30.4% and 27.1%, respectively, for the three and six months ended June 30, 1998
as compared to the same periods in 1997 primarily attributable to increases of
$2.8 million and $4.4 million, respectively, for the three and six month periods
at the Frenchmen's Reef. Food and beverage revenues for comparable Owned Hotels
increased by $620,000 and $1.0 million, or 9.1% and 9.5%, respectively, for the
three and six months periods, due to increased banquet business.
Management, franchise and other revenue consists primarily of base,
incentive and other fees earned under management agreements, royalty fees
earned under franchise agreements, business interruption insurance revenue
related to hurricane damage at the Frenchman's Reef, and rental income.
Management, franchise and other revenue increased by $2.4 million, or 57.6%,
for the three months ended June 30, 1998 as compared to the same period in 1997
due to increased fees associated with the Managed Hotels, franchise royalty
fees derived from the sale of hotels in December 1997 and increased business
interruption insurance revenue. Management, franchise and other revenue
decreased by $1.0 million, or 9.0%, for the six months ended June 30, 1998 as
compared to the same period in 1997 primarily due to lower business
interruption insurance revenue. Business interruption insurance revenue is
based on the settlement in March 1998 of the Company's claim related to the
damage at the Frenchmen's Reef caused by Hurricane Bertha in July 1996. The
Company expects franchise revenues to increase as a result of several franchise
initiatives implemented by the Company including the formation of a franchise
sales team. The Company has also received the necessary statutory approvals to
begin franchising AmeriSuites and expects to begin franchising HomeGates and
Wellesley Inns by the end of August.
Interest on mortgages and notes receivable primarily relate to mortgages
secured by certain Managed Hotels. Interest on mortgages and notes receivable
decreased by $225,000 and $379,000 or 14.3% and 11.5%, respectively, for the
three and six months ended June 30, 1998 as compared to the same period in 1997
primarily due to conversions of notes receivable into operating hotel assets.
Direct lodging expenses increased by $7.9 million and $13.3 million, or
49.1% and 42.5%, respectively, for the three and six months ended June 30, 1998
as compared to the same periods in 1997 due primarily to the addition of new
hotels. Direct lodging expenses, as a percentage of lodging revenue were
relatively even, increasing from 23.6% to 24.0% for the three month period and
decreasing from 24.3% to 23.9% for the six month period. For comparable Owned
Hotels, direct lodging expenses as a percentage of lodging revenues decreased
from 23.9% to 23.6% for the three month period and from 24.6% to 24.1% for the
six month period primarily due to ADR increases and lower corresponding
increases in expenses.
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Direct food and beverage expenses for the three and six months ended June
30, 1998 increased by $2.8 million and $4.2 million, or 35.8% and 27.0%
respectively, as compared to the same periods in 1997 primarily due to the
Frenchman's Reef reopening. As a percentage of food and beverage revenues,
direct food and beverage expenses increased from 68.3% to 71.1% for the three
month period and decreased from 75.6% to 75.5% for the six month period. For
comparable Owned Hotels, food and beverage expenses as a percentage of food and
beverage revenues increased from 72.2% to 74.5% for the three month period and
from 77.5% to 78.7% for the six month period. The increases were primarily due
to the impact of the Frenchman's Reef. .
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 $7.7 million and $12.2 million, or 47.0% and 35.9%, respectively,
for the three and six months ended June 30, 1998 as compared to the same periods
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 increased from 20.5% to 20.9% for the three month
period due to increased expenses at the Frenchmen's Reef. For the six month
period, direct hotel selling and general expenses as a percentage of hotel
revenue decreased from 22.8% to 21.7%. For the comparable Owned Hotels, direct
hotel selling and general as a percentage of hotel revenues decreased from 20.2%
to 19.6% for the three month period and from 22.0% to 20.8% for the six month
period. The decreases in the total and comparable expense margins were primarily
due to ADR improvements, effective expense controls and decreases in
weather-related costs.
Occupancy and other operating expenses consist primarily of insurance,
real estate and other taxes and rent expense. Occupancy and other operating
expenses increased by $7.5 million and $14.3 million, or 126.2% and 121.8%,
respectively, as compared to the same periods in 1997 due to the rent expense
associated with the sale/leaseback of hotels to American General and Equity Inns
and the addition of new hotels. Occupancy and other operating expenses as a
percentage of hotel revenues increased from 7.4% to 11.7% for the three month
period and from 7.9% to 12.2% for the six 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.
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 $641,000 and $1.5 million, or 11.1% and 12.7%,
respectively, for the three and six months ended June 30, 1998 as compared to
the same periods 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 6.7% to 5.2%
for the three month period and from 7.0% to 5.7% for the six month period due to
increased operating leverage.
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Depreciation and amortization expense increased by $11.8 million and $15.0
million, or 147.2% and 95.6%, respectively, for the three and six months ended
June 30, 1998 as compared to the same periods in 1997 due to the impact of new
hotel properties and a valuation reserve of $10 million related to the intended
disposition of seven non-prototype HomeGate hotels.
Investment income decreased by $893,000 and $244,000, or 55.2% and 10.9%,
respectively, for the three and six months ended June 30, 1998 as compared to
the same periods in 1997 due to changes in the weighted average cash balances.
Interest expense decreased by $2.2 million and $1.2 million, or 28.1% and
9.1%, respectively, for the three and six months ended June 30, 1998 as compared
to the same periods in 1997 primarily due to a favorable interest rate
environment and capitalized interest related to new hotels. The Company
capitalized interest of $3.9 million and $6.6 million for the three months ended
June 30, 1997 and 1998, and $7.7 million and $13.8 million for the six months
ended June 30, 1997 and 1998.
Other income consists of property transactions and other asset sales and
retirements. For the six months ended June 30, 1997, other income consisted of
net gains on property transactions of $1.9 million. For the six months ended
June 30, 1998 other income consisted of gains on the settlement of notes
receivable of $18.4 million.
Liquidity and Capital Resources
Prime's external growth focuses on the accelerated expansion of its
proprietary AmeriSuites and HomeGate brands through new construction both
directly by the Company and by franchisees. As of July 31, 1998, Prime had 74
AmeriSuites and 20 HomeGates in operation, (excluding seven hotels the Company
intends to divest), with plans to have a total of 90 to 95 AmeriSuites and 30 to
35 HomeGates opened 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 sales of properties including sale/
leaseback transactions and; (iii) internally generated cash flow. The Company
may also from time to time seek additional debt or equity financing.
At June 30, 1998, the Company had cash, cash equivalents and current
marketable securities of $78.9 million. In addition, at June 30, 1998, the
Company had $159.4 million available under the Revolving Credit Facility.
The Company's major sources of cash for the six months end June 30, 1998
were net proceeds from the sale/leaseback of hotels of $210.3 million,
borrowings under the Revolving Credit Facility of $57.5 million and cash flow
from operations of $44.4 million. The Company's major uses of cash during the
period were capital expenditures of $217.5 million relating primarily to the
development of new hotels and debt repayments of $66.4 million.
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For the six months ended June 30, 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 $1.8 million and $3.2 million,
respectively. At June 30, 1998, the Company had federal NOLs relating primarily
to its predecessor, Prime Motor Inns, Inc. ("PMI"), of approximately $75.1
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 part of this initiative, Prime has entered
into two strategic alliances with real estate investment trusts ("REITs").
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 nine additional full-service hotels to American General not later than March
31, 1999.
In June 1998, the Company agreed to sell and lease back nine AmeriSuites
to Equity Inns for $97.0 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.
During the quarter, the common stock prices of publicly traded REITs
declined to an extent which may impact their ability to raise equity capital. In
the event that the capital constraints cause REITs to reduce their hotel
acquisitions, the Company intends to finance its development through the sale of
properties to private sources including key franchisees or through the issuance
of debt. The Company's business plan also calls for the reduction of AmeriSuites
capital requirements by transferring certain corporate development sites to
franchisees.
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 the Company. 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 July 31, 1998, the Company had outstanding borrowings of $40.6
million under the facility and further availability of $159.4 million.
Uses of Capital. The Company's capital spending is focused primarily on
the development of its AmeriSuites and HomeGate hotel chains. For the six months
ended June 30, 1998, the
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Company spent $108.7 million on new construction of AmeriSuites and $87.7
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 sales of hotels
and internally generated cash flow.
On March 12, 1998, the Company settled its insurance claim for $16.4
million related to 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 six months ended June 30, 1998, the Company spent approximately
$21.1 million on capital improvements at its Owned Hotels of which approximately
$8.3 million related to the refurbishment of the Frenchman's Reef.
In December 1997, the Company approved a program to purchase from time to
time up to one million shares of its common stock at various prices. The Company
completed this common stock purchase program over the six months ended June 30,
1998 at an average price of $17.78 per share. In July 1998, the Company also
announced that it has authorized the repurchase of an additional two million
shares of stock at various prices from time to time. The Company is currently
limited to the purchase of approximately 400,000 shares under the terms of its
$200 million Revolving Credit Facility. The Company has requested a waiver of
these restrictive covenants in order to fully implement its new repurchase
program.
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 June 30, 1998, the Company had advances of approximately $104.4 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 believes
that its systems will be year 2000 compliant no later than December 1999 and
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 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 13, 1998 (the
"Annual Meeting"). The Company's stockholders were asked to take the following
actions at the meeting:
(1) Elect two Class III Directors to serve until the 2001 annual meeting of
stockholders or until their successors shall otherwise be elected (the "Board
Proposal");
(2) Approve an amendment to the Company's 1995 Employee Stock Option Plan to (1)
increase the number of shares of common stock that may be issued pursuant to the
exercise of options to purchase common stock and (ii) increase the total number
of shares of common stock with respect to which options may be granted to any
one individual during any calendar year (the "Incentive Plan Proposal");
(3) Approve an amendment to the Company's 1995 Non-Employee Director Stock
Option Plan to (i) allow for the discretionary grants of options and (ii) modify
the termination and amendment provisions thereof (the "Stock Purchase Plan
Proposal"); and
(4) Ratify the Board of Directors' selection of Arthur Andersen LLP to serve as
the Company's independent auditors for the fiscal year ending December 31,1998
(the "Auditors Proposal").
With respect to the Board Proposal, the two individuals nominated for director
were both elected by the affirmative vote of a majority of shares of common
stock present at the Annual Meeting. The nominees and the votes received by each
are as follows:
FOR WITHHELD
--- -------
Howard M. Lorber 36,968,390 350,590
A. F. Petrocelli 36,833,581 485,399
The Incentive Plan Proposal, Stock Purchase Plan Proposal and Auditors Proposal
were also approved by affirmative vote of a majority of shares of common stock
present at the Annual Meeting. Each of the proposals received the following
votes:
FOR AGAINST ABSTENTIONS
--- ------- -----------
Incentive Plan Proposal 35,948,506 1,276,982 93,492
Stock Purchase Plan Proposal 31,517,579 5,699,769 101,632
Auditors Proposal 37,287,737 14,168 17,075
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Item 6. Exhibits and Reports on Form 8-K.
(a) 10.1 Purchase and Sale Agreement between Prime Hospitality
Corp., as seller, and Equity Inns Partnership, L.P., as
purchaser, dated June 26, 1998.
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: August 12, 1998 By: /s/ David A. Simon
----------------------------
David A. Simon, President and
Chief Executive Officer
Date: August 12, 1998 By: /s/ John M. Elwood
----------------------------
John M. Elwood, Executive
Vice President and Chief
Financial Officer
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