1
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, 1999
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 51,696,159 shares of common stock, $.01 par value
outstanding, as of July 31, 1999.
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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, 1998 and June 30, 1999......................... 1
Consolidated Statements of Income
Three and Six Months Ended June 30, 1998
and June 30, 1999........................................... 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998
and June 30, 1999........................................... 3
Notes to Interim Consolidated Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............20
Item 6. Exhibits and Reports on Form 8-K................................20
Signatures .............................................................21
3
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ................................. $ 12,534 $ 11,142
Marketable securities available for sale .................. 12,460 6,270
Accounts receivable, net of reserves ...................... 20,816 26,932
Current portion of mortgages and
notes receivable ...................................... 797 590
Other current assets ...................................... 28,791 20,226
----------- -----------
Total current assets ............................... 75,398 65,160
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization .......... 1,281,378 1,289,545
Mortgages and notes receivable, net of
current portion ........................................... 14,688 14,530
Other assets ................................................... 36,934 25,997
----------- -----------
TOTAL ASSETS ....................................... $ 1,408,398 $ 1,395,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt ................................... $ 15,762 $ 21,701
Other current liabilities ................................. 82,767 81,425
----------- -----------
Total current liabilities .......................... 98,529 103,126
Long-term debt, net of current portion ......................... 582,031 566,174
Other liabilities .............................................. 6,240 5,411
Deferred income ................................................ 80,553 76,044
----------- -----------
Total liabilities .................................. 767,353 750,755
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; 55,202,253 and
55,708,522 shares issued and outstanding
at December 31, 1998 and June 30, 1999,
respectively .......................................... 552 557
Capital in excess of par value ............................ 511,981 516,772
Retained earnings ......................................... 159,584 182,049
Accumulated other comprehensive loss,
net of taxes .......................................... (4,993) (2,049)
Treasury stock (1,470,439 shares at December 31, 1998
and 4,059,678 shares at June 30, 1999) ................ (26,079) (52,852)
----------- -----------
Total stockholders' equity ......................... 641,045 644,477
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 1,408,398 $ 1,395,232
=========== ===========
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, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
--------- --------- --------- ---------
Revenues:
Lodging ................................................. $ 100,394 $ 125,450 $ 186,995 $ 241,763
Food and beverage ....................................... 14,683 15,761 26,325 28,986
Management, franchise and other fees .................... 6,521 4,081 9,990 7,106
Interest on mortgages and
notes receivable .................................... 1,349 729 2,924 1,465
--------- --------- --------- ---------
Total revenues ................................... 122,947 146,021 226,234 279,320
Costs and expenses:
Direct hotel operating expenses:
Lodging ............................................. 24,122 31,172 44,623 59,560
Food and beverage ................................... 10,446 10,556 19,886 19,998
Selling and general ................................. 24,052 28,559 46,203 58,088
Occupancy and other operating ........................... 13,425 18,653 26,013 36,550
General and administrative .............................. 6,399 7,353 12,982 15,540
Depreciation and amortization ........................... 9,862 12,224 20,762 24,904
Other charges ........................................... 10,000 1,411 10,000 3,911
--------- --------- --------- ---------
Total costs and expenses ......................... 98,306 109,928 180,469 218,551
Operating income ............................................. 24,641 36,093 45,765 60,769
Investment income ............................................ 725 198 1,987 721
Interest expense ............................................. (5,701) (10,741) (11,488) (19,383)
Other income ................................................. 18,353 1,112 18,353 3,434
--------- --------- --------- ---------
Income before income taxes
and cumulative effect of a change in accounting principle 38,018 26,662 54,617 45,541
Provision for income taxes ................................... 14,447 10,398 20,754 17,761
--------- --------- --------- ---------
Income before the cumulative effect of a change in
accounting principle .................................... 23,571 16,264 33,863 27,780
Cumulative effect of a change in
accounting principle, net of taxes ...................... -- -- -- (5,315)
--------- --------- --------- ---------
Net income ................................................... $ 23,571 $ 16,264 $ 33,863 $ 22,465
========= ========= ========= =========
Earnings per common share:
Basic:
Income before the cumulative effect of a change in
accounting principle ................................ $ 0.45 $ 0.32 $ 0.68 $ 0.54
Cumulative effect of a change in accounting principle ... -- -- -- (0.10)
--------- --------- --------- ---------
Net earnings ................................................. $ 0.45 $ 0.32 $ 0.68 $ 0.44
========= ========= ========= =========
Diluted:
Income before the cumulative effect of a change in
accounting principle ................................ $ 0.43 $ 0.31 $ 0.63 $ 0.52
Cumulative effect of a change in accounting principle ... -- -- -- (0.10)
--------- --------- --------- ---------
Net earnings ................................................. $ 0.43 $ 0.31 $ 0.63 $ 0.42
========= ========= ========= =========
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, 1998 AND 1999
(IN THOUSANDS)
1998 1999
--------- ---------
Cash flows from operating activities:
Net income .................................... $ 33,863 $ 22,465
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............. 20,762 24,904
Valuation adjustments ...................... 10,000 2,500
Amortization of deferred financing costs ... 1,567 1,553
Utilization of net operating loss
carryforwards .......................... 3,227 1,660
Gain on settlement of notes receivable ..... (18,353) --
Cumulative effect of net accounting change . -- 8,713
Net loss on asset disposals ................ -- 564
Deferred income taxes ...................... -- 1,955
Amortization of deferred gain .............. (4,329) (5,014)
Increase (decrease) from changes in other
operating assets and liabilities:
Accounts receivable .................... (5,693) (6,116)
Other current assets ................... 929 2,842
Other liabilities ...................... 2,426 (5,124)
--------- ---------
Net cash provided by operating
activities ........................... 44,399 50,902
Cash flows from investing activities:
Net proceeds from mortgages and notes
receivable ................................. 24,605 364
Proceeds from sales of property, equipment
and leasehold improvements ................. 211,236 43,041
Construction of new hotels .................... (196,413) (65,586)
Purchases of property, equipment and
leasehold improvements ..................... (21,058) (11,707)
Net proceeds from insurance settlement ........ 3,782 --
(Increase) decrease in restricted cash ........ (5,981) 5,789
Proceeds from sales of marketable securities .. -- 7,725
Purchases of marketable securities ............ (375) (1,652)
Proceeds from officer's life insurance ........ -- 4,706
Other ......................................... (3,654) (572)
--------- ---------
Net cash (used in) provided by investing
activities ........................... 12,142 (17,892)
Cash flows from financing activities:
Net proceeds from issuance of debt ............ 79,926 10,000
Payments of debt .............................. (66,354) (19,918)
Proceeds from the exercise of stock options
and warrants ............................... 2,050 3,137
Treasury stock purchases ...................... (17,777) (26,773)
Other ......................................... -- (848)
--------- ---------
Net cash (used in) financing activities (2,155) (34,402)
--------- ---------
Net increase in cash and cash equivalents ..... 54,386 (1,392)
Cash and cash equivalents at beginning
of period .................................. 5,013 12,534
--------- ---------
Cash and cash equivalents at end of period .... $ 59,399 $ 11,142
========= =========
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 June 30, 1999 and the results of its operations for the three and six
months ended June 30, 1998 and 1999 and cash flows for the six months ended June
30, 1998 and 1999.
The consolidated financial statements for the three and six months
ended June 30, 1998 and 1999 were prepared on a consistent basis with the
audited consolidated financial statements for the year ended December 31, 1998.
Certain reclassifications have been made to the June 30, 1998 consolidated
financial statements to conform them to the June 30, 1999 presentation.
The consolidated results of operations for the three and six months
ended June 30, 1999 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, 1998.
NOTE 2 - ACCOUNTING POLICIES
In 1999, the Company adopted Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). The Company has recorded a $5.3
million charge, net of taxes, for the cumulative effect of a change in
accounting principle to write off any unamortized pre-opening costs that
remained 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.
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 on 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 believes that the adoption of SFAS 133 will not have a
material effect on its financial condition or results of its operations.
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NOTE 3 - HOTEL DISPOSITIONS
During the six months ended June 30, 1999, the Company sold four
AmeriSuites hotels, located in Houston, TX, San Antonio, TX, Portland, ME and
Dublin, CA, for $39.7 million. The transactions generated net gains of $4.1
million and provide for the Company to generate franchise fees under ten-year
franchise agreements.
During the six months ended June 30, 1999, the Company also sold one
HomeGate Studios and Suites hotel located in Grand Prairie, TX and a vacant land
parcel located in Chicago, IL for total proceeds of $3.3 million. The
transactions generated a net gain of $116,000.
The Company also had a contract to sell and lease back nine additional
full-service hotels to MeriStar Hospitality Corp. not later than March 31, 1999.
In February 1999, MeriStar informed the Company that it was unable to fulfill
its contractual obligation. Under the terms of the contract, the Company
received a $4.0 million contract termination fee in February 1999. This fee is
included in other income for the six months ended June 30, 1999.
NOTE 4 - EARNINGS PER COMMON SHARE
Basic earnings per common share was computed based on the weighted
average number of common shares outstanding during each period. The weighted
average number of common shares used in computing basic earnings per share was
52.6 million and 51.3 million for the three months ended June 30, 1998 and 1999,
respectively, and 49.7 million and 51.8 million for the six months ended June
30, 1998 and 1999, respectively.
Diluted earnings per share reflects adjustments to basic earnings per
share for the dilutive effect of stock options and warrants and in 1998, the
elimination of interest expense and the issuance of additional common shares
from the assumed conversion of the Company's 7% convertible subordinated notes.
The weighted average number of common shares used in computing diluted earnings
per share was 55.2 million and 53.0 million for the three months ended June 30,
1998 and 1999, respectively, and 55.3 million and 53.3 million for the six
months ended June 30, 1998 and 1999, respectively.
NOTE 5 - INTEREST EXPENSE
The Company capitalizes interest related to borrowings used to finance
hotel construction. Capitalized interest was $6.6 million and $3.1 million for
the three months ended June 30, 1998 and 1999, respectively, and $13.8 million
and $8.5 million for the six months ended June 30, 1998 and 1999, respectively.
Also included in interest expense is the amortization of deferred financing fees
of $742,000 and $788,000 for the three months ended June 30, 1998 and 1999,
respectively, and $1.6 million for each of the six month periods ended June 30,
1998 and 1999.
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NOTE 6 - TREASURY STOCK
Under its stock repurchase program, in 1999 the Company purchased 2.6
million shares of its common stock at an average price of $10.34 per share.
Under the terms of the Company's $200 Million Revolving Credit Facility (the
"Revolving Credit Facility"), the Company may purchase shares in an aggregate
amount not to exceed $50 million through December 1999.
NOTE 7 - COMPREHENSIVE INCOME
For the three and six months ended June 30, 1998 and 1999,
comprehensive income consisted of the following (in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1999 1998 1999
-------- -------- -------- --------
Net income $ 23,571 $ 16,264 $ 33,863 $ 22,465
Unrealized loss on marketable
securities, net of taxes (2,612) 709 (2,612) (2,049)
-------- -------- -------- --------
Total $ 20,959 $ 16,973 $ 31,251 $ 20,416
======== ======== ======== ========
NOTE 8 - OTHER CHARGES
During the quarter ended June 30, 1999, the Company recorded $1.4
million in severance charges related to costs associated with the Company's
restructuring of its corporate and regional offices.
In March 1999, the Company recorded a $2.5 million valuation reserve
related to 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 these assets to
reflect current market conditions. The Company had previously reserved $10.0
million during the six months ended June 30, 1998 related to these hotels.
NOTE 9 - OTHER INCOME
Other income consists of income from property transactions and other
asset sales and retirements. For the three months ended June 30, 1999, other
income consisted of $1.1 million related to net gains on property transactions.
For the six months ended June 30, 1999, other income consisted of net gains on
property transactions of $4.2 million, losses on the sales of
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marketable securities of $4.8 million and a $4.0 contract termination fee (See
Note 3). For the three and six months ended June 30, 1998, other income
consisted of gains on the settlement of notes receivable of $18.4 million.
NOTE 10 - GEOGRAPHIC AND BUSINESS INFORMATION
The Company's hotels serve four major lodging industry segments: the
all-suites segment, under its AmeriSuites brand; the extended-stay segment,
under its HomeGates brand; the limited-service segment, primarily under its
Wellesley Inns brand; and the full-service segment under major national
franchises. The Company is in the process of converting the majority of its
HomeGate brand to its Wellesley Inn brand and intends to complete the conversion
by November 1999.
The following table presents revenues and other financial information
by business segment for the three and six months ended June 30, 1998 and 1999.
THREE MONTHS ENDED JUNE 30, 1998
EXTENDED- LIMITED- FULL- CONSOLIDATED
ALL-SUITES STAY SERVICE SERVICE SEGMENTS
---------- --------- -------- ------- ------------
Revenues $ 51,003 $ 6,077 $ 11,781 $ 46,215 $115,077
Hotel EBITDA (1) 22,494 2,123 5,148 13,678 43,443
Depreciation and
amortization 5,373 375 1,077 2,876 9,701
Capital expenditures 60,918 50,392 805 2,097 114,212
Total Assets 464,986 173,669 112,902 239,463 991,020
THREE MONTHS ENDED JUNE 30, 1999
EXTENDED- LIMITED- FULL- CONSOLIDATED
ALL-SUITES STAY SERVICE SERVICE SEGMENTS
---------- --------- -------- ------- ------------
Revenues $ 63,623 $ 14,726 $ 11,854 $ 51,008 $ 141,211
Hotel EBITDA (1) 25,717 5,689 4,971 14,130 50,507
Depreciation and
amortization 5,830 1,943 1,451 2,786 12,010
Capital expenditures 15,631 7,281 1,021 2,988 26,921
Total Assets 643,402 317,840 112,001 216,221 1,289,464
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SIX MONTHS ENDED JUNE 30, 1998
EXTENDED- LIMITED- FULL- CONSOLIDATED
ALL-SUITES STAY SERVICE SERVICE SEGMENTS
---------- --------- -------- ------- ------------
Revenues $ 90,565 $ 10,212 $ 24,044 $ 87,499 $213,320
Hotel EBITDA (1) 39,214 3,585 12,070 23,872 78,741
Depreciation and
amortization 10,611 1,371 2,378 6,075 20,435
Capital expenditures 111,111 90,749 1,327 12,861 216,048
Total Assets 464,986 173,669 112,902 239,463 991,020
SIX MONTHS ENDED JUNE 30, 1999
EXTENDED- LIMITED- FULL- CONSOLIDATED
ALL-SUITES STAY SERVICE SERVICE SEGMENTS
---------- --------- -------- ------- ------------
Revenues $ 120,805 $ 28,071 $ 25,082 $ 96,791 $ 270,749
Hotel EBITDA (1) 46,816 11,133 11,401 25,658 95,008
Depreciation and
amortization 11,580 3,925 2,881 6,091 24,477
Capital expenditures 42,484 25,411 2,153 4,796 75,844
Total Assets 643,402 317,840 112,001 216,221 1,289,464
(1) Hotel EBITDA represents earnings before interest, income taxes, depreciation
and amortization from the hotels.
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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
("HomeGate") (extended-stay) and Wellesley Inn & Suites ("Wellesley Inn")
(limited-service). Also within its portfolio are owned and/or managed hotels
operated under franchise agreements with national hotel chains. As of July 31,
1999, the Company owned 159 hotels (the "Owned Hotels"), operated 28 hotels
under lease agreements primarily with real estate investment trusts ("REITS")
(the "Leased Hotels"), managed 16 hotels for third parties (the "Managed
Hotels") and franchised five hotels, which it does not operate (the "Franchised
Hotels"). The Company has significant equity interests in the Owned Hotels and
has economic interests limited to a percentage of revenues (generally between
2.5% to 5.0%) on the Leased Hotels, Managed Hotels and Franchised Hotels. The
Company consolidates the results of operations of its Owned Hotels and Leased
Hotels and records management fees (including incentive management fees) on the
Managed Hotels and franchise revenue on the Franchised Hotels.
The Company's strategy is to develop its proprietary AmeriSuites and
Wellesley Inn brands both through corporate development and franchising.
Through the development of its proprietary brands, the Company is transforming
itself from an owner/operator into a franchisor and manager and has positioned
itself to generate additional revenues with minimal capital investment. Since
it received approval to begin franchising in mid 1998, Prime has executed 19
new franchise agreements (18 AmeriSuites) and has 29 applications pending. In
addition, during the quarter construction began on three of these sites in
Grapevine, TX, Elmhurst, IL and Peoria, IL. Construction is scheduled to begin
on nine additional franchised sites in the third quarter.
The Company is in the process of converting 38 of its 43 extended-stay
HomeGate hotels into its limited-service Wellesley Inn brand. The Company
expects to complete this conversion in the fourth quarter of 1999 and currently
anticipates a conversion cost of approximately $3.0 to $5.0 million. The
conversion will change the hotels' customer base from extended-stay to
transient. The Company believes this will enhance the value of its existing
hotels, create efficiencies by adding critical mass to the Wellesley Inn chain
and improve its franchising prospects for the Wellesley Inn brand.
For the three months ended June 30, 1999, earnings before asset
transactions and other charges decreased from $18.4 million in 1998 to $16.4
million in 1999. The results were impacted by the effect of capitalized interest
which was $2.1 million less during the period than the same period in 1998 due
to the lower levels of construction activity in 1999.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased by 12% to $49.7 million for the three months ended June 30, 1999.
Hotel EBITDA increased by 16.3% to
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$50.5 million for the three 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 changes in EBITDA and Hotel EBITDA
are attributable to the growth at comparable hotels and the addition of new
hotels and are offset by rent expense associated with the sale/leaseback of
hotels.
The Company's hotels currently operate in four segments of the
industry: the upscale all-suites segment, under the Company's proprietary
AmeriSuites brand; the upscale full-service segment, under major national
franchises; the mid-price limited-service segment, primarily under the Company's
proprietary Wellesley Inn & Suites brand; and the mid-price extended-stay
segment, under the Company's proprietary HomeGate Studios & Suites brand. The
following table illustrates the Hotel EBITDA contribution from each segment (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1999 1998 1999
---- ---- ---- ----
% of % of % of % of
Amt. Total Amt. Total Amt. Total Amt. Total
---- ----- ---- ----- ---- ----- ---- -----
ALL-SUITES $22,494 51.8% $25,717 50.9% $39,214 49.8% $46,816 49.3%
FULL-SERVICE 13,678 31.5% 14,130 28.0% 23,872 30.3% 25,658 27.0%
LTD-SERVICE 5,148 11.9% 4,971 9.8% 12,070 15.3% 11,401 12.0%
EXTD-STAY 2,123 4.8% 5,689 11.3% 3,585 4.6% 11,133 11.7%
------- ------ ------- ----- ------- ----- ------- -----
TOTAL $43,443 100.0% $50,507 100.0% $78,741 100.0% $95,008 100.0%
======= ====== ======= ===== ======= ===== ======= =====
Hotel EBITDA for the three and six months ended June 30, 1999 continued to
reflect the shifting mix in the Company's hotel portfolio toward its proprietary
brands. Based on the number of new hotels opened during 1999, Prime expects the
relative contribution from its proprietary brands to continue to increase.
Additionally, with the planned conversion of the majority of its extended-stay
HomeGate hotels into the limited-service Wellesley Inn brand in the fourth
quarter of 1999, the Company's hotels will no longer operate in the
extended-stay segment.
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, 1999
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, 1998 and
1999. The results of the six hotels divested in 1998 and 1999 are not material
to an understanding of the results of the Company's operations in such periods
and, therefore, are not separately discussed.
COMPARABLE HOTELS
TOTAL OWNED (2)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT ADR AND REVPAR) 1998 1999 1998 1999
---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues:
Lodging ................................................. $100,394 $125,450 $ 69,011 $ 71,220
Food and beverage ....................................... 14,683 15,761 7,443 7,312
Management, franchise and other.......................... 6,521 4,081
Interest on mortgages and notes receivable .............. 1,349 729
-------- --------
Total revenues .................................. 122,947 146,021
Direct hotel operating expenses:
Lodging ................................................. 24,122 31,172 16,384 17,643
Food and beverage ....................................... 10,446 10,556 5,546 5,355
Selling and general ..................................... 24,052 28,559 15,544 15,771
Occupancy and other operating ............................. 13,425 18,653
General and administrative ................................ 6,399 7,353
Depreciation and amortization ............................. 9,862 12,224
Other charges.............................................. 10,000 1,411
-------- --------
Total costs and expenses ........................ 98,306 109,928
Operating income .......................................... 24,641 36,093
OPERATING EXPENSE MARGINS:
Direct hotel operating expenses:
Lodging, as a percentage of lodging revenue ............. 24.0% 24.8% 23.7% 24.8%
Food and beverage, as a percentage of food and
beverage revenue ..................................... 71.1% 67.0% 74.5% 73.2%
Selling and general, as a percentage of
lodging and food and beverage revenue ................ 20.9% 20.2% 20.3% 20.1%
Occupancy and other operating, as a percentage
of lodging and food and beverage revenue ................ 11.7% 13.2%
General and administrative, as a percentage of
total revenue ........................................... 5.2% 5.0%
Other Data(1):
Occupancy ................................................. 68.0% 66.6% 69.5% 70.8%
Average daily rate ("ADR") ................................ $ 78.51 $ 78.99 $ 76.32 $ 77.17
Revenue per available room ("REVPAR") ..................... $ 53.37 $ 52.63 $ 53.05 $ 54.61
Gross operating profit .................................... $ 56,457 $ 70,924 $ 38,980 $ 39,763
(1) For purposes of showing operating trends, the six hotels divested in 1998
and 1999 have been excluded from the other data section of the tables.
(2) Comparable Owned Hotels refers to the 106 Owned Hotels which were open for
the full period in both 1998 and 1999, excluding the Frenchman's Reef
property which is currently marketed for sale.
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14
COMPARABLE HOTELS
TOTAL OWNED (2)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT ADR AND REVPAR) 1998 1999 1998 1999
---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues:
Lodging ...................................... $186,995 $241,763 $ 120,945 $ 125,475
Food and beverage ............................ 26,325 28,985 13,030 12,963
Management, franchise and other .............. 9,990 7,107
Interest on mortgages and notes receivable ... 2,924 1,465
-------- --------
Total revenues ....................... 226,234 279,320
Direct hotel operating expenses:
Lodging ...................................... 44,623 59,560 28,823 30,992
Food and beverage ............................ 19,886 19,998 10,132 9,989
Selling and general .......................... 46,203 58,088 28,281 29,227
Occupancy and other operating .................. 26,013 36,550
General and administrative ..................... 12,982 15,540
Depreciation and amortization .................. 20,762 24,904
Other charges .................................. 10,000 3,911
-------- --------
Total costs and expenses ............. 180,469 218,551
Operating income ............................... 45,765 60,769
OPERATING EXPENSE MARGINS:
Direct hotel operating expenses:
Lodging, as a percentage of lodging revenue .. 23.9% 24.6% 23.8% 24.7%
Food and beverage, as a percentage of food and
beverage revenue .......................... 75.5% 69.0% 77.8% 77.1%
Selling and general, as a percentage of
lodging and food and beverage revenue ..... 21.7% 21.5% 21.1% 21.1%
Occupancy and other operating, as a percentage
of lodging and food and beverage revenue ..... 12.2% 13.5%
General and administrative, as a percentage of
total revenue ................................ 5.7% 5.6%
Other Data(1):
Occupancy ...................................... 64.5% 64.3% 66.5% 68.1%
Average daily rate ("ADR") ..................... $ 80.39 $ 80.59 $ 77.08 $ 77.82
Revenue per available room ("REVPAR") .......... $ 51.82 $ 51.79 $ 51.24 $ 53.03
Gross operating profit ......................... $102,608 $133,102 $ 66,739 $ 68,230
(1) For purposes of showing operating trends, the six hotels divested in 1998
and 1999 have been excluded from the other data section of the tables.
(2) Comparable Owned Hotels refers to the 97 Owned Hotels which were open for
the full period in both 1998 and 1999, excluding the Frenchman's Reef
property which is currently marketed for sale.
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15
Lodging revenues, which include room revenues and other related
revenues such as telephone and vending, increased by $25.1 million and $54.8
million, or 25.0% and 29.3%, respectively, for the three and six months ended
June 30, 1999, as compared to the same periods in 1998. Lodging revenues for the
three months ended June 30, 1999 increased due to incremental revenues of $22.8
million from new hotels and higher revenues for comparable Owned Hotels, which
increased by $2.2 million, or 3.2%. Lodging revenues for the six months ended
June 30, 1999 also increased due to incremental revenues of $50.2 million from
new hotels and higher revenues for comparable Owned Hotels, which increased by
$4.5 million or 3.7%.
The following table sets forth hotel operating data for the comparable
Owned Hotels for the three and six months ended June 30, 1999 as compared to the
same periods in 1998, by product type:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 % CHANGE 1998 1999 %CHANGE
---- ---- -------- ---- ---- -------
AMERISUITES
OCCUPANCY 69.2% 72.8% 66.5% 69.4%
ADR $83.37 $82.58 $82.17 $82.12
REVPAR $57.68 $60.14 4.3% $54.66 $57.02 4.3%
FULL-SERVICE
OCCUPANCY 77.7% 76.7% 68.9% 67.9%
ADR $101.33 $104.85 $99.02 $104.02
REVPAR $78.77 $80.38 2.0% $68.20 $70.64 3.6%
WELLESLEY INN
OCCUPANCY 72.6% 74.8% 71.3% 73.6%
ADR $59.09 $57.19 $64.87 $62.74
REVPAR $42.88 $42.78 (0.2%) $46.25 $46.19 (0.1%)
HOMEGATE
OCCUPANCY 57.5% 53.9% 55.4% 56.0%
ADR $43.18 $48.75 $43.71 $47.51
REVPAR $24.84 $26.28 5.0% $24.22 $26.61 10.0%
TOTAL
OCCUPANCY 69.5% 70.8% 66.5% 68.1%
ADR $76.32 $77.17 $77.08 $77.82
REVPAR $53.05 $54.61 3.0% $51.24 $53.03 3.5%
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16
The improvements in REVPAR at comparable Owned Hotels were generated
by higher occupancy percentages which rose by 1.9% and 2.4%, for the three and
six month periods, respectively, and increases in ADR of 1.1% and 1.0% for the
three and six month periods, respectively.
Food and beverage revenues increased by $1.1 million and $2.7 million,
or 7.3% and 10.1%, respectively, for the three and six months ended June 30,
1999 as compared to the same periods in 1998 primarily attributable to increases
of $1.1 million and $2.3 million for the three and six month periods at the
Frenchman's Reef Marriott hotel in St. Thomas U.S.V.I. (the "Frenchman's Reef").
Food and beverage revenues for comparable Owned Hotels decreased slightly for
the three and six month periods, due to decreased lounge and restaurant
business.
Management, franchise and other revenue consists primarily of base,
incentive and other fees earned under management agreements, royalty fees earned
under franchise agreements, rental income and business interruption insurance
revenue in 1998 related to hurricane damage at the Frenchman's Reef. Management,
franchise and other revenue excluding business interruption insurance decreased
by $800,000, or 16.3%, for the three months ended June 30, 1999 as compared to
the same period in 1998 due to decreased fees associated with the Managed
Hotels. Management, franchise and other revenue excluding business interruption
insurance increased by $200,000, or 2.9%, for the six months ended June 30, 1999
as compared to the same period in 1998 primarily due to increased franchise
royalty fees related to the Franchised Hotels. Business interruption insurance
revenue of $1.6 million and $3.1 million were recorded for the three and six
months ended June 30, 1998 and were based on a 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.
Interest on mortgages and notes receivable primarily relate to
mortgages secured by certain Managed Hotels. Interest on mortgages and notes
receivable decreased by $620,000 and $1.5 million or 46.0% and 49.9%,
respectively, for the three and six months ended June 30, 1999 as compared to
the same period in 1998 primarily due to the settlement of various cash flow
mortgages and notes receivable in 1998.
Direct lodging expenses increased by $7.1 million and $14.9 million, or
29.2% and 33.5%, respectively, for the three and six months ended June 30, 1999,
respectively, as compared to the same periods in 1998 due primarily to the
addition of new hotels. Direct lodging expenses, as a percentage of lodging
revenue, increased from 24.0% to 24.8% for the three month period and from 23.9%
to 24.6% for the six month period. For comparable Owned Hotels, direct lodging
expenses as a percentage of lodging revenues increased from 23.7% to 24.8% for
the three month period and from 23.8% to 24.7% for the six month period. The
increases were primarily due to higher travel agent commissions and hotel
payroll.
Direct food and beverage expenses for the three and six months ended
June 30, 1999 increased by approximately $110,000, or 1.1% and 0.6%,
respectively, as compared to the same
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17
periods in 1998. As a percentage of food and beverage revenues, direct food and
beverage expenses decreased from 71.1% to 67.0% for the three month period and
decreased from 75.5% to 69.0% for the six month period. For comparable Owned
Hotels, food and beverage expenses as a percentage of food and beverage revenues
decreased from 74.5% to 73.2% for the three month period and from 77.8% to 77.1%
for the six month period. The decreases were attributed to the higher margins
generated at 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 $4.5 million and $11.9 million, or 18.7% and 25.7%, respectively,
for the three and six months ended June 30, 1999 as compared to the same periods
in 1998 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 20.9% to 20.2% for the three month
period and from 21.7% to 21.5% for the six month period. For the comparable
Owned Hotels, direct hotel selling and general as a percentage of hotel revenues
decreased from 20.3% to 20.1% for the three month period and remained flat at
21.1% for the six month period. The decreases in the total and comparable
expense margins were primarily due to lower liability insurance costs and, in
the first quarter, 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 $5.2 million and $10.5 million, or 38.9% and 40.5%,
respectively, as compared to the same periods in 1998 due to the rent expense
associated with the sale/leaseback of hotels in 1998 and the addition of new
hotels. Occupancy and other operating expenses as a percentage of hotel revenues
increased from 11.7% to 13.2% for the three month period and from 12.2% to 13.5%
for the six month period due to rent expense associated with the
sale/leasebacks.
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 $954,000 and $2.6 million, or 14.9% and 19.7%,
respectively, for the three and six months ended June 30, 1999 as compared to
the same periods in 1998 due to increased advertising, personnel and training
costs associated with opening the new AmeriSuites hotels and costs associated
with the Company's franchising efforts. As a percentage of total revenues,
general and administrative expenses decreased from 5.2% to 5.0% for the three
month period and from 5.7% to 5.6% for the six month period. During the three
months ended June 30, 1999, the Company reduced costs in its corporate and
regional office through the consolidation and elimination of certain operations
management positions.
Depreciation and amortization expense increased by $2.4 million and
$4.1 million, or 23.9% and 20.0%, respectively, for the three and six months
ended June 30, 1999 as compared to the same periods in 1998 due to the impact of
new hotel properties.
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18
Other charges for the three months ended June 30, 1999 consist of $1.4
million for severance related to costs associated with the Company's
restructuring of its corporate and regional offices. For the six months ended
June 30, 1999, other charges also consisted of a reserve of $2.5 million related
to seven non-prototype HomeGate hotels. In accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of," the
Company has reduced the carrying value of the assets to reflect their current
market conditions. For the three and six months ended June 30, 1998, the Company
had previously recorded $10.0 million related to these hotels.
Investment income decreased by $526,000 and $1.3 million, or 72.6% and
63.7%, respectively, for the three and six months ended June 30, 1999 as
compared to the same periods in 1998 due to a decrease in dividend income of
$348,000 and $829,000 attributed to the sales of marketable securities.
Interest expense increased by $5.0 million and $7.9 million, or 88.4%
and 68.7%, respectively, for the three and six months ended June 30, 1999 as
compared to the same periods in 1998 primarily due to a reduction in the amount
of interest capitalized and increased borrowings under the Company's Revolving
Credit Facility. Capitalized interest decreased from $6.6 million to $3.1
million for the three month periods ended June 30, 1998 and 1999, and from $13.8
million to $8.5 million for the six month periods ended June 30, 1998 and 1999
due to the lower levels of construction activity in 1999.
Other income consists of income from property transactions and other
asset sales and retirements. For the three months ended June 30, 1999, other
income consisted of $1.1 million related to net gains on property transactions.
For the six months ended June 30, 1999, other income consisted of net gains
on property transactions of $4.2 million, losses on the sales of marketable
securities of $4.8 million and a $4.0 contract termination fee (See Note 3). For
the three and 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
At June 30, 1999, the Company had cash, cash equivalents and current
marketable securities of $17.9 million. In addition, at June 30, 1999, the
Company had $42.0 million available under the Revolving Credit Facility.
The Company's major sources of cash for the six months ended June 30,
1999 were net proceeds from the sale of four AmeriSuites hotels, one HomeGate
hotel and a vacant land parcel of $43.0 million, borrowings under the Revolving
Credit Facility of $10.0 million and cash flow from operations of $50.9 million.
The Company's principal uses of cash during the period were capital expenditures
of $77.3 million relating primarily to the development of new hotels,
repurchases of its common stock totaling $26.8 million and $19.9 million of debt
repayment, primarily related to the Revolving Credit Facility.
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For the six months ended June 30, 1998 and 1999, cash flow from
operations was positively impacted by the utilization of net operating loss
carryforwards ("NOLs") of $3.2 million and $1.7 million, respectively. At June
30, 1999, the Company had federal NOLs relating primarily to its predecessor,
Prime Motor Inns, Inc. ("PMI"), of approximately $65.5 million which are subject
to annual utilization limitations and will expire in 2006.
Sources of Capital. The Company has undertaken a strategic initiative
to dispose of hotel real estate and to invest the proceeds in the growth of its
proprietary brands. Due to the uncertainty in the hotel divestiture markets, the
Company's business plan does not depend on any material proceeds from asset
sales in 1999. During the six months ended June 30, 1999, Prime sold four
AmeriSuites hotels, one HomeGate hotel and a vacant land parcel and realized
$43.0 million in cash proceeds. In July 1999, the Company sold another
AmeriSuites hotel for $8.6 million. The Company is currently negotiating
additional sales of AmeriSuites hotels and is also exploring the sale of its
Frenchman's Reef hotel.
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. At June 30, 1999, the Company had outstanding borrowings of $158.0
million under the facility and further availability of $42.0 million.
The Company had a contract to sell and lease back nine additional
full-service hotels to MeriStar not later than March 31, 1999. In February 1999,
MeriStar informed the Company that it was unable to fulfill its contractual
obligation. Under the terms of its contract, the Company received a $4.0 million
contract termination fee in February 1999.
Uses of Capital. The Company's capital spending has been focused on the
completion of its 1998 AmeriSuites and HomeGate development pipeline. The
Company has one hotel remaining from its 1998 development plan which it intends
to open in August. For the six months ended June 30, 1999, the Company opened
21 new hotels and spent $65.6 million on new construction. Prime has resumed new
corporate development with the commencement of construction of an AmeriSuites
hotel in the Baltimore market and is reviewing plans to construct AmeriSuites
on sites it already owns in the Detroit, San Jose, San Francisco and Orlando
areas. The Company plans to spend approximately $25 million on these new
AmeriSuites in the second half of 1999. These amounts are to be funded by
borrowings under the Revolving Credit Facility and internally generated cash
flow. In addition, for the six months ended June 30, 1999, the Company spent
approximately $10.8 million on capital improvements at its Owned Hotels.
During the six months ended June 30, 1999, the Company purchased 2.6
million shares of its common stock at an average price of $10.34 per share.
Under the terms of the Revolving Credit Facility, the Company may purchase
shares in an aggregate amount not to exceed $50 million through December 1999.
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20
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, 1999, the Company had advances of approximately
$240.0 million to such third party which advances are classified as property,
equipment and leasehold improvements.
Year 2000 Readiness. The Company has initiated a program to prepare the
Company's computer systems and applications for the year 2000. This is necessary
because certain computer programs have been written using two digits rather than
four digits to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process normal business transactions. In
addition, many of the Company's vendors and service providers are also faced
with similar issues related to the year 2000.
In connection with the Company program related to year 2000, the
Company's management has assessed the Company's information systems, including
its hardware and software systems and embedded systems contained in the
Company's hotels and corporate headquarters. Based on the findings of this
assessment, the Company has commenced a plan to upgrade or replace the Company's
hardware or software for year 2000 readiness as well as to assess the year 2000
readiness of the Company's vendors and service providers. In addition, the
Company's management is currently formulating contingency plans, which, in the
event that the Company is unable to fully achieve year 2000 readiness in a
timely manner, or any of the Company's vendors or service providers fails to
achieve year 2000 readiness, may be implemented to minimize the risks of
interruptions of the Company's business.
Based on its assessment to date of the year 2000 readiness of the
Company's vendors, service providers and other third parties on which the
Company relies for business operations, the Company believes that its principal
vendors, service providers and other third parties are taking action for year
2000 compliance. However, the Company has limited ability to test and control
such third parties' year 2000 readiness, and the Company cannot provide
assurance that failure of such third parties to address the year 2000 issue will
not cause an interruption of the Company's business.
As of June 30, 1999, the Company believes that approximately 75% of its
information systems are year 2000 ready. The Company estimates that the total
costs associated with implementing year 2000 readiness since the project's
commencement will be in the range of $1.0 to $2.0 million. The Company
anticipates that it will finance the cost of its year 2000 remediation using its
existing sources of liquidity.
The Company expects to complete its year 2000 remediation by October
1999. However, the Company's ability to execute its plan in a timely manner may
be adversely affected by a variety of factors, some of which are beyond the
Company's control including turnover of key employees, availability and
continuity of consultants and the potential for unforeseen implementation
problems. The Company's business could be interrupted if the year 2000 plan is
not implemented in a timely manner, if the Company's vendors, service providers
or other third parties are not year 2000 ready
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21
or if the Company's contingency plans are not successful. Based on currently
available information, and although no assurance can be given, the Company does
not believe that any such interruptions are likely to have a material adverse
effect on the Company's results of operations, liquidity or financial condition.
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22
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 19, 1999
(the "Annual Meeting"). The Company's stockholders were asked to take the
following actions at the meeting:
(1) Elect two Class I Directors to serve until the 2002 annual meeting of
stockholders or until their successors shall otherwise be elected (the "Board
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
--- --------
A. F. Petrocelli 40,525,500 1,076,774
Douglas W. Vicari 40,785,991 816,283
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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23
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 6, 1999 By: /s/ A.F. Petrocelli
-------------------------------
A. F. Petrocelli
President and Chief Executive
Officer
Date: August 6, 1999 By: /s/ Douglas Vicari
-------------------------------
Douglas Vicari
Senior Vice President and Chief
Financial Officer
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