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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, 2002
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 56,605,981 shares of common stock, $.01 par value,
outstanding as of August 8, 2002.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2002 (Unaudited) and December 31, 2001 ............................ 1
Consolidated Statements of Operations
For the three months and six months ended June 30, 2002 and 2001 (Unaudited) 2
Consolidated Statements of Cash Flows
For the six months ended June 30, 2002 and 2001 (Unaudited) ................ 3
Notes to Interim Consolidated Financial Statements (Unaudited) ................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................................. 8
Item 3. Quantitative and Qualitative
Disclosures About Market Risk .................................................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................. 13
Item 2. Changes in Securities and Use of Proceeds ...................................... 14
Item 3. Defaults upon Senior Securities ................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ............................ 14
Item 5. Other Information .............................................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................................... 15
Signatures ............................................................................. 16
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 and 2001
(In Thousands, Except Share Data)
June 30, December 31,
2002 2001
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ......................................... $ 36,665 $ 26,475
Accounts receivable (net of allowances of $458 and $1,065
in 2002 and 2001, respectively) .............................. 22,856 19,486
Current portion of mortgages and
notes receivable ............................................. 585 460
Other current assets .............................................. 41,210 37,987
----------- -----------
Total current assets .................................... 101,316 84,408
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization .................. 993,640 1,021,115
Mortgages and notes receivable, net of
current portion ................................................... 12,350 11,953
Other assets ............................................................. 42,054 39,294
----------- -----------
TOTAL ASSETS ............................................ $ 1,149,360 $ 1,156,770
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt ........................................... $ 1,008 $ 10,296
Current portion of deferred income ................................ 3,622 4,022
Other current liabilities ......................................... 49,463 51,123
----------- -----------
Total current liabilities ............................... 54,093 65,441
Long-term debt, net of current portion ................................... 319,189 309,736
Other liabilities ........................................................ 8,300 10,564
Deferred income .......................................................... 16,298 18,468
Deferred income taxes .................................................... 44,621 44,620
----------- -----------
Total liabilities ....................................... 442,501 448,829
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share;
20,000,000 shares authorized; none issued.....................
Common stock, par value $.01 per share;
75,000,000 shares authorized; 56,547,620 and
56,221,567 shares issued and outstanding
at June 30, 2002 and December 31, 2001,
respectively ................................................. 565 562
Capital in excess of par value .................................... 527,692 525,068
Retained earnings ................................................. 293,449 297,159
Accumulated other comprehensive loss,
net of taxes ................................................. -- (1)
Treasury stock (11,507,078 shares at June 30, 2002
and December 31, 2001) ....................................... (114,847) (114,847)
----------- -----------
Total stockholders' equity .............................. 706,859 707,941
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............. $ 1,149,360 $ 1,156,770
=========== ===========
See Accompanying Notes to Interim Consolidated Financial Statements.
-1-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Hotel revenues $ 105,400 $ 126,082 $ 199,599 $ 250,481
Management, franchise and other fees 4,283 4,630 7,033 8,305
Rental and other revenues 993 686 1,605 1,583
--------- --------- --------- ---------
Total revenues 110,676 131,398 208,237 260,369
Costs and expenses:
Hotel operating expenses 54,992 65,155 106,989 130,970
Rent and other occupancy 20,985 21,847 42,339 45,015
General and administrative 7,643 8,778 14,208 16,112
Depreciation and amortization 10,101 9,407 20,038 18,629
--------- --------- --------- ---------
Total costs and expenses 93,721 105,187 183,574 210,726
Operating income 16,955 26,211 24,663 49,643
Investment income 698 588 1,183 1,164
Interest expense (7,613) (8,407) (15,367) (17,315)
Other (loss) income, net (4,513) 14,759 (4,513) 14,759
--------- --------- --------- ---------
Income before income taxes, discontinued operations
and extraordinary loss 5,527 33,151 5,966 48,251
Provision for income taxes 2,155 12,763 2,327 18,577
--------- --------- --------- ---------
Income before discontinued operations
and extraordinary loss 3,372 20,388 3,639 29,674
Discontinued operations:
(Loss) income from discontinued operations,
net of income taxes (1) 344 77 662
Gain on disposal, net of
income taxes 7 -- 436 --
--------- --------- --------- ---------
Income before extraordinary loss 3,378 20,732 4,152 30,336
Extraordinary loss, net of income taxes (7,863) (110) (7,863) (110)
--------- --------- --------- ---------
Net (loss) income $ (4,485) $ 20,622 $ (3,711) $ 30,226
========= ========= ========= =========
Earnings per common share:
Basic:
Income before extraordinary items
and discontinued operations $ 0.07 $ 0.45 $ 0.08 $ 0.66
Discontinued operations, net of income taxes -- 0.01 0.01 0.02
Extraordinary loss, net of income taxes (0.17) -- (0.17) --
--------- --------- --------- ---------
Net (loss) income per common share $ (0.10) $ 0.46 $ (0.08) $ 0.68
========= ========= ========= =========
Diluted:
Income before extraordinary items
and discontinued operations $ 0.07 $ 0.44 $ 0.08 $ 0.65
Discontinued operations, net of income taxes -- 0.01 0.01 0.01
Extraordinary loss, net of income taxes (0.17) -- (0.17) --
--------- --------- --------- ---------
Net (loss) income per common share $ (0.10) $ 0.45 $ (0.08) $ 0.66
========= ========= ========= =========
See Accompanying Notes to Interim Consolidated Financial Statements.
-2-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
2002 2001
-------- -------
Cash flows from operating activities:
Net (loss) income ...................................................................... $ (3,711) $ 30,226
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 20,038 19,042
Extraordinary loss - loss on discharge of indebtedness .............................. 7,863 110
Amortization of deferred financing costs ............................................ 1,616 1,516
Utilization of net operating loss carryforwards ..................................... -- 1,529
Non-cash portion of other income, net ............................................... 4,735 (11,907)
Amortization of deferred income ..................................................... (2,832) (6,821)
(Decrease)/increase from changes in other operating assets and liabilities:
Accounts receivable .............................................................. (3,369) (3,229)
Other current assets ............................................................. (1,961) 1,034
Other liabilities ................................................................ (7,740) (4,176)
--------- --------
Net cash provided by operating activities ........................................ 14,639 27,324
Cash flows from investing activities:
Proceeds from mortgages and notes receivable ........................................... 197 1,554
Disbursements for mortgages and notes receivable ....................................... (792) (201)
Proceeds from sales of property, equipment and leasehold improvements .................. 18,556 10,033
Construction and conversion of hotels .................................................. (3,883) (9,863)
Purchases of equipment and leasehold improvements ...................................... (7,320) (11,151)
Other .................................................................................. (255) 95
--------- --------
Net cash provided by (used in) investing activities .............................. 6,503 (9,533)
Cash flows from financing activities:
Net proceeds from issuance of debt ..................................................... 195,739 8,953
Payments of debt ....................................................................... (199,835) (18,580)
Premium on early redemption of debt .................................................... (9,484) --
Proceeds from the exercise of stock options ............................................ 2,628 1,141
Treasury stock purchases ............................................................... -- (3,710)
--------- --------
Net cash used in financing activities ............................................ (10,952) (12,196)
--------- --------
Net increase in cash and cash equivalents .............................................. 10,190 5,595
Cash and cash equivalents at beginning of period ....................................... 26,475 1,735
--------- --------
Cash and cash equivalents at end of period ............................................. $ 36,665 $ 7,330
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Land acquired in exchange for notes receivable ......................................... $ -- $ 1,952
OTHER CASH FLOW DISCLOSURES:
Interest paid .......................................................................... $ 16,630 $ 17,302
Income taxes paid ...................................................................... $ 141 $ 11,478
See Accompanying Notes to Interim Consolidated Financial Statements.
-3-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying interim unaudited
consolidated financial statements of Prime Hospitality Corp. and subsidiaries
(the "Company" 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, 2002 and the results of its operations for the
three and six months ended June 30, 2002 and 2001 and cash flows for the six
months ended June 30, 2002 and 2001.
The consolidated financial statements for the three and six months ended
June 30, 2002 and 2001 were prepared on a consistent basis with the audited
consolidated financial statements for the year ended December 31, 2001. Certain
reclassifications have been made to the June 30, 2001 and December 31, 2001
consolidated financial statements to conform them to the June 30, 2002
presentation.
The consolidated results of operations for the three and six months ended
June 30, 2002 are not necessarily indicative of the results to be expected for
the full year. These interim unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
NOTE 2 - ACCOUNTING POLICIES
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" which supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Disposed of"; however it
retains the fundamental provisions of that statement related to the recognition
and measurement of the impairment of long-lived assets to be "held and used". In
addition, the Statement provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset or asset
group to be disposed of other than by sale (e.g. abandoned) be classified as
"held and used" until it is disposed of, and establishes more restrictive
criteria to classify an asset or asset group as "held for sale". The Company
adopted this statement on January 1, 2002. The adoption of this Statement did
not have a material effect on earnings or the financial position of the Company.
NOTE 3 - DEBT
On April 29, 2002, the Company completed the issuance of $200 million of
its 8 3/8% Senior Subordinated Notes due 2012 (the "8 3/8% Notes"). The Company
used the proceeds of the issuance of the 8 3/8% Notes, together with available
cash, to fund a tender offer for all of its outstanding 9 3/4% Senior
Subordinated Notes due 2007 (the "9 3/4% Notes"). In connection with the tender
offer, the Company solicited consents from the holders of the 9 3/4% Notes to
eliminate or modify certain covenants and related provisions in the indenture
governing the 9 3/4% Notes. On May 14, 2002, the tender offer and consent
solicitation expired. As of that date, tenders and consents representing
approximately 99.8% of the $190 million aggregate principal amount outstanding
of the 9 3/4% Notes were received by the
-4-
depository and accepted for payment by the Company. On June 14, 2002, the
Company redeemed the remaining $308,000 of the 9 3/4% Notes not tendered.
Prime paid a total consideration of $1,050 per $1,000 principal amount of
the 9 3/4% Notes validly tendered on or prior to April 29, 2002. Prime paid the
face value of the 9 3/4% Notes plus a 4.875% premium, or $1,048.75, for each
$1,000 principal amount of the 9 3/4% Note redeemed subsequent to April 29,
2002.
NOTE 4 - HOTEL DISPOSITIONS
During the six months ended June 30, 2002, the Company sold a Radisson
Hotel in Trevose, PA, a Wellesley Inn in Miami, FL and a Wellesley Inn in
Jupiter, FL for gross proceeds of $19.9 million, realizing gains of
approximately $702,000 (or $436,000 after taxes). These gains and results of
operations through the date of sale are included in "Discontinued operations".
The results of operations of these hotels for the three and six months ended
June 30, 2001 have been reclassified to "Discontinued operations".
NOTE 5 - EXTRAORDINARY LOSS
The extraordinary loss for the three and six months ended June 30, 2002
represents the after tax cost associated with the redemption of the Company's 9
3/4% Senior Subordinated Notes due 2007 which were redeemed during the quarter.
The Company paid a premium related to early redemption of the Notes which
aggregated to approximately $9.5 million. In addition, the Company wrote-off the
unamortized balance of the deferred loan fees (approximately $3.4 million)
associated the issuance of the Notes.
NOTE 6 - OTHER (LOSS) INCOME, NET
On June 28, 2002, the American Arbitration Association rendered a decision
with respect to an action brought by Sholodge Inc. ("Sholodge") against Prime
seeking monetary damages in connection with the termination by Prime of its
contract with Sholodge to use Sholodge's reservation system for Prime's
AmeriSuites and Wellesley Inns and Suites hotels. The decision awarded Sholodge
$8.9 million in damages, which Prime paid on August 2, 2002. This judgement is
not covered by insurance and exceeded Prime's litigation reserve by
approximately $4.5 million. Accordingly, Prime recorded a charge of
approximately $4.5 million against its pre-tax earnings for the second quarter
of 2002.
Other (loss) income, net for the three and six months ended June 30, 2001
consisted primarily of the recognition of deferred gains on the termination of
four hotel leases offset by reserves for certain charges related to contract
disputes.
NOTE 7 - EARNINGS PER COMMON SHARE
Basic earnings per common share was computed based on the weighted average
number of common shares outstanding during each period. The weighted average
number of common shares used in computing basic earnings per common share were
45.0 million and 44.6 million for the three months ended June 30, 2002 and 2001,
respectively, and 44.9 million and 44.8 million for the six months ended June
30, 2002 and 2001, respectively.
-5-
Diluted earnings per common share reflect adjustments to basic earnings
per common share for the dilutive effect of stock options. The weighted average
number of common shares used in computing diluted earnings per common share were
47.2 million and 45.7 million for the three months ended June 30, 2002 and 2001,
respectively, and 47.0 million and 46.0 million for the six months ended June
30, 2002 and 2001, respectively.
NOTE 8 - COMPREHENSIVE INCOME
For the three and six months ended June 30, 2002 and 2001, comprehensive
income consisted of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------- ------- ------- -------
Net (loss) income $(4,485) $20,622 $(3,711) $30,226
Unrealized gain on marketable
securities
available for sale, net of income
taxes -- 584 -- 1,036
------- ------- ------- -------
Total $(4,485) $21,206 $(3,711) $31,262
======= ======= ======= =======
NOTE 9 - GEOGRAPHIC AND BUSINESS INFORMATION
The Company's hotels primarily operate in three major lodging industry
segments: the all-suites segment, under its AmeriSuites brand; the
limited-service segment, primarily under its Wellesley Inns & Suites brand; and
the full-service segment under major national franchises. The Company's 143
AmeriSuites are upscale hotels located in 31 states throughout the United
States. The 74 Wellesley Inns & Suites hotels compete in the mid-price segment,
and are primarily located in the Northeast, Texas and Florida regions of the
United States. The Company also operates 21 non-proprietary brand hotels, which
compete primarily in the upscale full-service segment, with food service and
banquet facilities under franchise agreements with national hotel brands. The
Company's non-proprietary hotels are primarily located in the northeastern
region of the United States.
The Company evaluates the performance of its segments based primarily on
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
generated by the operations of its owned hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized by certain of its hotel properties. The Company's income taxes
are allocated based upon the relative contribution to the Company's consolidated
taxable income/losses and changes in temporary differences. The allocation of
interest expense, taxes and other income (loss), net are not evaluated at the
segment level and therefore the Company does not reconcile EBITDA to
consolidated net income on the consolidated financial statements.
-6-
The following table presents revenues and other financial information for
the owned and leased hotels by business segment for the three and six months
ended June 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED JUNE 30, 2002 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE/OTHER CONSOLIDATED
- -------------------------------- ---------- --------------- ------------ --------------- ------------
Hotel revenues ....................... $ 64,976 $ 19,682 $ 20,787 $ 5,231 $ 110,676
EBITDA (1) .......................... 13,397 4,093 6,035 3,531 27,056
Depreciation and amortization ........ 4,890 3,169 1,424 618 10,101
Capital expenditures ................. 3,093 573 514 3,490 7,670
Total Assets ......................... $577,510 $351,215 $ 96,258 $ 124,377 $1,149,360
THREE MONTHS ENDED JUNE 30, 2001 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE/OTHER CONSOLIDATED
- -------------------------------- ---------- --------------- ------------ --------------- ------------
Hotel revenues ....................... $ 71,851 $ 23,234 $ 31,050 $ 5,263 $ 131,398
EBITDA (1) .......................... 19,667 8,240 8,392 (681) 35,618
Depreciation and amortization ........ 4,615 2,962 1,354 476 9,407
Capital expenditures ................. 10,003 2,728 801 795 14,327
Total Assets ......................... $611,016 $376,650 $112,181 $ 55,784 $1,155,631
SIX MONTHS ENDED JUNE 30, 2002 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE/OTHER CONSOLIDATED
- -------------------------------- ---------- --------------- ------------ --------------- ------------
Hotel revenues ....................... $123,231 $ 39,972 $ 36,485 $ 8,549 $ 208,237
EBITDA (1) .......................... 20,433 8,517 8,470 7,281 44,701
Depreciation and amortization ........ 9,738 6,323 2,842 1,135 20,038
Capital expenditures ................. 4,878 1,447 689 4,189 11,203
Total Assets ......................... $577,510 $351,215 $ 96,258 $ 124,377 $1,149,360
SIX MONTHS ENDED JUNE 30, 2001 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE/OTHER CONSOLIDATED
- -------------------------------- ---------- --------------- ------------ --------------- ------------
Hotel revenues ....................... $139,518 $ 49,303 $ 61,779 $ 9,769 $ 260,369
EBITDA (1) .......................... 36,258 18,943 13,136 (65) 68,272
Depreciation and amortization ........ 9,230 5,859 2,708 832 18,629
Capital expenditures ................. 11,456 6,395 1,506 1,657 21,014
Total Assets ......................... $611,016 $376,650 $112,181 $ 55,784 $1,155,631
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization and includes the EBITDA on properties included in discontinued
operations.
NOTE 10 - SUBSEQUENT EVENTS
On July 22, 2002, Prime executed a $125 million senior revolving credit
facility with a syndicate of financial institutions. The credit facility
consists of a four year, $125 million revolving line of credit, which under
certain circumstances may be increased by an aggregate principal amount not to
exceed $125 million and is secured by the equity interests of certain of Prime's
subsidiaries. Proceeds from the credit facility will be used to redeem Prime's 9
1/4% First Mortgage Notes, to pay associated transaction costs and to provide
financing for working capital and other general corporate purposes.
Prime also notified the trustee that it is calling for redemption on August 21,
2002 all of its outstanding 9 1/4% First Mortgage Notes. The redemption price
will be 103.083% of the principal amount of the 9 1/4% First Mortgage Notes,
plus accrued and unpaid interest, to, but not including, the date of redemption.
In July 2002, Prime borrowed $95.0 million under the new credit facility at
LIBOR +2.25%, or 4.3%, to fund the redemption of the 9 1/4% First Mortgage
Notes.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Prime Hospitality Corp. ("Prime" or the "Company") is an owner, operator
and franchisor of hotels, with 238 hotels in operation containing 30,170 rooms
located in 33 states (the "Portfolio") as of June 30, 2002. Prime controls two
hotel brands -- AmeriSuites (R) and Wellesley Inn & Suites (R) -- as well as a
portfolio of non-proprietary brand hotels which are primarily upscale,
full-service hotels operated under franchise agreements with national hotel
chains.
The following table sets forth information with respect to the Portfolio
as of June 30, 2002:
OWNED LEASED MANAGED FRANCHISED TOTAL
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
AmeriSuites 65 8,383 27 3,291 25 3,222 26 3,209 143 18,105
Wellesley Inns & Suites 53 6,269 6 668 15 1,355 74 8,292
Non-Proprietary Brands 10 1,923 1 160 10 1,690 21 3,773
--- ------ -- ----- -- ----- -- ----- --- ------
Total 128 16,575 28 3,451 41 5,580 41 4,564 238 30,170
=== ====== == ===== == ===== == ===== === ======
In addition to the above, there are also five AmeriSuites and one
Wellesley Inn under construction.
The Company's strategy is to develop its proprietary AmeriSuites and
Wellesley Inns & Suites brands. Through the development of its proprietary
brands, the Company has positioned itself as a diversified hotel operating
company with ownership, franchise and management interests. The Company believes
that this diversification allows it to generate additional revenues with minimal
capital investment. Prime may also consider leveraging its existing franchise
infrastructure by potentially adding new hotel brands. The Company's strategy is
also focused on growing the operating profits of its Portfolio. With over 200
hotels in operation, Prime believes it possesses the hotel management expertise
to maximize the profitability and value of its hotel assets.
Operating results for the three and six months ended June 30, 2002
continued to be impacted by the weakness in the economy, which has had a
significant negative impact on business travel. As a result, revenues for
comparable hotels declined by 10.5% and 11.8% for the three and six month
periods, respectively, and gross operating profits at these hotels decreased by
15.9% and 18.6% over the same periods. Overall, for the three and six months
ended June 30, 2002, revenue declined by 15.5% and 19.7%, respectively, and
EBITDA decreased by 24.0% and 34.5%, respectively, due to the results of the
comparable hotels and the impact of asset sales and lease termination.
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.
Forward-looking statements include the information about Prime's possible
or assumed future results of operations and statements preceded by, followed by
or that include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or similar expressions, or the negative thereof.
-8-
Actual results may differ materially from those expressed in these
forward-looking statements. Readers of this Form 10-Q are cautioned not to
unduly rely on any forward-looking statements.
The following important factors, in addition to those discussed elsewhere
in this Form 10-Q or incorporated herein by reference, could cause results to
differ materially from those expressed in such forward-looking statements:
competition within each of the Company's business segments in areas such as
access, location, quality of accommodations and room rate structures; the
balance between supply of and demand for hotel rooms and accommodations; the
Company's continued ability to obtain new operating contracts and franchise
agreements; the Company's ability to develop and maintain positive relations
with current and potential hotel owners and other industry participants; the
level of rates and occupancy that can be achieved by such properties and the
availability and terms of financing; changes in travel patterns, taxes and
government regulations which influence or determine wages, prices, construction
procedures and costs; the effect of national and regional economic conditions
that will affect, among other things, demand for products and services at the
Company's hotels; the effect of recent terrorist attacks on demand for products
and services at the Company's hotels; government approvals, actions and
initiatives including the need for compliance with environmental and safety
requirements, and change in laws and regulations or the interpretation thereof
and the potential effects of tax legislative action; and other risks described
from time to time in the Company's filings with the SEC, including its Form
10-K.
Although the Company believes the expectations reflected in these
forward-looking statements are based upon reasonable assumptions, no assurance
can be given that Prime will attain these expectations or that any deviations
will not be material. Except as otherwise required by the federal securities
laws, the Company disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in its expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
-9-
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
Hotel revenues consist of lodging revenues (which consist primarily of
room, telephone and vending revenues) and food and beverage revenues. Hotel
revenues decreased by $20.7 million and $50.9 million, or 16.4% and 20.3%,
respectively, for the three and six months ended June 30, 2002 compared to the
same periods in 2001, primarily due to a 10.5% and 11.8% decline, respectively,
in revenues from comparable hotels and the impact of asset sales and lease
terminations in 2001.
The Company operates three product types: its proprietary AmeriSuites
which are upscale all-suites hotels; its proprietary Wellesley Inns & Suites
which are mid-price limited service hotels and its non-proprietary brand hotels
which are primarily upscale full-service hotels.
The following table illustrates the REVPAR ("revenue per available room")
change for the quarter, by segment, for the 156 owned and leased hotels and the
19 hotels managed for Equity Inns, in which Prime has a significant financial
interest, which were open for the comparable three and six month periods in 2002
and 2001.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 % CHANGE 2002 2001 % CHANGE
---- ---- -------- ---- ---- --------
AMERISUITES
Occupancy 66.9% 68.7% 64.0% 64.9%
ADR $73.78 $78.75 $73.72 $80.85
REVPAR $49.38 $54.09 (8.7)% $47.19 $52.49 (10.1)%
WELLESLEY INNS & SUITES
Occupancy 57.1% 62.8% 57.3% 62.0%
ADR $58.89 $60.56 $60.21 $64.41
REVPAR $33.63 $38.05 (11.6)% $34.47 $39.90 (13.6)%
NON-PROPRIETARY BRANDS
Occupancy 70.1% 77.6% 62.5% 69.2%
ADR $105.57 $114.68 $104.59 $114.20
REVPAR $74.00 $88.99 (16.8)% $65.38 $79.02 (17.3)%
TOTAL
Occupancy 64.5% 67.9% 62.1% 64.6%
ADR $73.50 $78.05 $73.33 $79.95
REVPAR $47.43 $53.03 (10.5)% $45.52 $51.62 (11.8)%
The REVPAR at comparable hotels was impacted in both the three and six
month periods by the slowdown in the economy, which has affected business
travel. During the six month period, the decline was primarily driven by a
decrease in average daily rate ("ADR"), while for the three month period ADR and
occupancy contributed evenly to the decline. Key markets which contributed to
the decline were Atlanta, Chicago, Dallas, Northern New Jersey and South
Florida.
Management, franchise and other fees consist primarily of base and
incentive fees earned under management agreements, royalties earned under
franchise agreements and sales commissions earned by the Company's national
sales group. Management, franchise and other fees decreased by $0.3 million and
$1.3 million, or 7.5% and 15.3%, respectively, for the three and six months
ended June 30, 2002
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compared to the same periods in 2001. The decrease was due to a decline in
revenue at comparable managed and franchised hotels and lower incentive
management fees partially offset by franchise royalty fees derived from hotels
sold to franchisees and new hotel openings.
Rental and other revenues consist of rental income, interest on mortgages
and notes receivable and other miscellaneous operating income. Rental and other
revenues increased by $0.3 million for the three months ended June 30, 2002 and
was even for the six months ended June 30, 2002 compared to the same periods in
2001.
Hotel operating expenses consist of all direct costs related to the
operation of the Company's properties (lodging, food & beverage, administration,
selling and advertising, utilities and repairs and maintenance). Hotel operating
expenses decreased by $10.2 million and $24.0 million, or 15.6% and 18.3%,
respectively, for the three and six months ended June 30, 2002 compared to the
same periods in 2001 due to the decline in revenues. For the comparable three
and six month periods, hotel operating expenses, as a percentage of hotel
revenues, increased from 51.7% and 52.3% in 2001 to 52.2% and 53.6% in 2002,
respectively, due to the decline in ADR.
Rent and other occupancy expenses consist primarily of rent expense,
property insurance and real estate and other taxes. Rent and other occupancy
expenses decreased by $0.9 million and $2.7 million, or 4.0% and 5.9%,
respectively, for the three and six months ended June 30, 2002 as compared to
the same periods in 2001, primarily due to the termination of eight hotel leases
with MeriStar Hospitality in 2001.
General and administrative expenses consist primarily of centralized
management expenses associated with operating the hotels, corporate expenses and
national brand advertising expenses. General and administrative expenses
decreased by $1.1 million and $1.9 million, or 12.9% and 11.8%, respectively,
for the three and six months ended June 30, 2002 compared to the same periods in
2001 due primarily to corporate cost containment programs.
Depreciation and amortization expense increased by $0.7 million and $1.4
million, or 7.4% and 7.6%, for the three and six months ended June 30, 2002,
respectively, compared to the same periods in 2001. This increase was due to
depreciation associated with maintenance capital additions in 2001 partially
offset by the impact of asset sales in 2001.
Investment income increased by $0.1 million for the three-months ended
June 30, 2002 and was the same for the six months ended June 30, 2002 compared
to the same periods in 2001.
Interest expense decreased by $0.8 million and $1.9 million, or 9.4% and
11.3%, respectively, for the three and six months ended June 30, 2002 compared
to the same periods in 2001 primarily due to the retirement of debt resulting
from asset sales and operating cash flow and the refinancing of the 9 3/4%
Notes.
Other income (loss) net consists of the $4.5 million impact of the $8.9
million damage award to Sholodge. For the three and six months ended June 30,
2001, other income consisted primarily of the recognition of deferred gains on
the termination of leases offset by reserves for certain charges related to
contract disputes.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash and cash equivalents of $36.7
million. The Company currently has $30.0 million of availability under its
revolving credit facility. The Company intends to utilize its capacity to grow
its brands and brand infrastructure and potentially add new brands.
The Company's major sources of cash for the six months ended June 30, 2001
were new borrowings of $195.7 million, cash flows from operations of $14.6
million and net proceeds from asset sales of $18.6 million. The Company's major
uses of cash during the period were debt repayments of $199.8 million and
capital expenditures of $11.2 million.
Sources of Capital. The Company has undertaken a strategic initiative to
diversify its operations. As part of this strategy, the Company has disposed of
certain hotel real estate while retaining the franchise rights. Prime has used
the proceeds primarily to reduce debt and fund brand growth. Management believes
that the combination of these asset sales and operating cash flow continues to
strengthen the Company's overall financial condition. At June 30, 2002, the
Company's debt to EBITDA ratio was 3.6 times and its debt to book capitalization
was 31.2%.
During the six months ended June 30, 2002, the Company sold a Radisson
Hotel in Trevose, PA and Wellesley Inns in Miami, FL and Jupiter, FL for gross
proceeds of $19.9 million. The Company retained the franchise rights to the
Wellesley Inns under a 20-year franchise agreement.
On April 29, 2002, the Company completed the issuance of $200 million of
its 8 3/8% Senior Subordinated Notes due 2012 (the "8 3/8% Notes"). The Company
used the proceeds of the issuance of the 8 3/8% Notes, together with available
cash, to fund a tender offer for all of its outstanding 9 3/4% Senior
Subordinated Notes due 2007 (the "9 3/4% Notes"). In connection with the tender
offer the Company solicited consents from the holders of the 9 3/4% Notes to
eliminate or modify certain covenants and related provisions in the indenture
governing the 9 3/4% Notes. On May 14, 2002, the tender offer and consent
solicitation expired. As of that date, tenders and consents representing
approximately 99.8% of the $190 million aggregate principal amount outstanding
of the 9 3/4% Notes were received by the depository and accepted for payment by
the Company. On June 14, 2002, the Company redeemed the remaining $308,000 of
the 9 3/4% Notes not tendered.
Prime paid a total consideration of $1,050 per $1,000 principal amount of
the 9 3/4% Notes validly tendered on or prior to April 29, 2002. Prime paid the
face value of the 9 3/4% Notes plus a 4.875% premium, or $1,048.75, for each
$1,000 principal amount of the 9 3/4% Note redeemed subsequent to April 29,
2002.
On July 22, 2002, Prime entered into a $125 million senior revolving
credit facility with a syndicate of financial institutions. The credit facility
consists of a four-year, $125 million revolving line of credit, which under
certain circumstances may be increased by an aggregate principal amount not to
exceed $125 million and is secured by the equity interests of certain of Prime's
subsidiaries.
The credit agreement contains loan covenants customary for a credit
facility of this size and nature, including but not limited to, limitations on
making capital expenditures, selling or transferring assets, making certain
investments (including acquisitions) and incurring additional indebtedness and
liens. In addition, the credit agreement provides for the redemption of Prime's
9 1/4% First Mortgage Notes Due 2006 on or before September 5, 2002. Proceeds
from the credit facility will be used to redeem the 9 1/4% First Mortgage Notes,
to pay associated transaction costs and to provide financing for working capital
and other general corporate purposes. The new credit facility replaces Prime's
former $125.0 million credit facility.
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In connection with the execution of the credit agreement, Prime also
notified the trustee that it is calling for redemption on August 21, 2002 all of
its outstanding 9 1/4% First Mortgage Notes. The redemption price will be
103.083% of the principal amount of the 9 1/4% First Mortgage Notes, plus
accrued and unpaid interest, to, but not including, the date of redemption. In
July 2002, Prime borrowed $95.0 million under the new credit facility at LIBOR +
2.25%, or 4.3% to fund the redemption of the 9 1/4% First Mortgage Notes.
Uses of Capital. During the six months ended June 30, 2002, the Company
retired $9.3 million of debt scheduled to mature in 2002. The Company now has no
significant maturities of debt until 2006.
The Company intends to continue the growth of its brands primarily through
franchising and, therefore, new construction spending will be limited. During
the six months ended June 30, 2002, the Company spent $3.9 million on new
construction and expects to spend an additional $3.0 million to complete the
construction of an AmeriSuites hotel. In addition, during the six month period,
the Company also spent $7.3 million on maintenance capital and expects to spend
a total of $20 million in 2002 on capital improvements at its owned and leased
hotels and related operating systems. The Company plans to fund both its
corporate development and capital improvements primarily with internally
generated cash flow.
On August 2, 2002, the Company paid $8.9 million from cash on hand to
Sholodge due in connection with a damage award decision of the American
Arbitration Association rendered on June 28, 2002. This judgement is not covered
by insurance and exceeded Prime's litigation reserve by approximately $4.5
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not currently exposed to changes in interest rates as it
has no floating rate debt arrangements. Therefore, a hypothetical 100 basis
point adverse move (increase) in interest rates along the entire rate curve
would not affect the Company's annual interest cost.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 28, 2002, the American Arbitration Association rendered a decision
with respect to an action brought by Sholodge Inc. against Prime. See Item 6(b)
below. In addition, the Company is involved in certain legal proceedings
incidental to the normal conduct of its business. The Company does not believe
that its liabilities relating to any of the legal proceedings to which it is a
party are likely to be, individually or in the aggregate, material to its
consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 23, 2002 (the
"Annual Meeting"). The Company's stockholders were asked to take the following
action at the meeting:
1) Elect two Class I Directors to serve until the 2005 Annual Meeting of
Stockholders
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 31,651,579 9,402,677
Douglas Vicari 31,651,870 9,402,377
Each of Lawrence N. Friedland, Howard M. Lorber, Herbert Lust II, Jack
Nusbaum and Allen Kaplan will continue to serve as a director of the Company.
2) Approve an amendment to the 1995 Non-Employee Director Stock Option
Plan. The Amendment passed. Below is the vote count.
FOR WITHHELD ABSTAIN
--- -------- -------
24,179,053 16,080,183 795,020
3) Ratify the Board of Directors selection of Ernst & Young LLP to be the
Company's independent auditors for 2002.
The selection was ratified by the following vote count.
FOR WITHHELD ABSTAIN
--- -------- -------
40,693,981 334,796 25,479
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.1 Credit Agreement, dated July 22, 2002, among
Prime Hospitality Corp., the Lenders,
Canadian Imperial Bank of Commerce (Agent)
Exhibit 99.1 Certification of CEO pursuant to Section 906
of the Sarbanes - Oxley Act of 2002
Exhibit 99.2 Certification of CFO pursuant to Section 906
of the Sarbanes - Oxley Act of 2002
Exhibit 99.3 Certification of VP-Finance pursuant to
Section 906 of the Sarbanes - Oxley Act of
2002
(b) Reports on Form 8-K
On May 8, 2002, the Company filed a current report on Form 8-K
announcing the completion of the issuance of $200 million of
its 8?% Senior Subordinated Notes due 2012 and the retirement
of 99.8% of the $190 million of its outstanding 9 3/4% Senior
Subordinated Notes due 2007.
On July 12, 2002, the Company filed a current report on Form
8-K disclosing the decision of the American Arbitration
Association with respect to an action brought by Sholodge,
Inc. against the Company. The decision awarded Sholodge $8.9
million in damages. The Company announced it would record an
expense of approximately $4.5 million in the 2nd quarter of
2002 as the judgement exceeded its previously provided
litigation reserves by that amount.
On July 31, 2002, the Company filed a current report on Form
8-K announcing that it had executed a $125,000,000 revolving
credit facility with a syndicate of financial institutions. In
connection with the execution of the revolving credit
facility, the Company also notified the trustee of its 9 1/4%
First Mortgage Notes due 2006 that it is calling for
redemption of all these notes on August 21, 2002.
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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 14, 2002 By: /s/ A.F. Petrocelli
---------------------------
A. F. Petrocelli
President and Chief Executive
Officer
Date:August 14, 2002 By: /s/ Douglas Vicari
---------------------------
Douglas Vicari
Senior Vice President and Chief
Financial Officer
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