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FORM 10-Q
SECURITIES AND 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 SEPTEMBER 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 45,093,903 shares of common stock, $.01 par value,
outstanding as of November 6, 2002.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 (Unaudited) and December 31, 2001................................... 1
Consolidated Statements of Operations
For the three months and nine months ended September 30, 2002 and 2001 (Unaudited)..... 2
Consolidated Statements of Cash Flows
For the nine months ended September 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
Item 4. Effectiveness of Disclosure Controls and Procedures...................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 14
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.......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
Signatures ............................................................................................ 16
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002
AND DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .............................................. $ 32,689 $ 26,475
Accounts receivable (net of allowances of $458 and $533
in 2002 and 2001, respectively) .................................... 22,226 19,486
Current portion of mortgages and
notes receivable ................................................... 533 460
Other current assets ................................................... 39,644 37,987
----------- -----------
Total current assets .......................................... 95,092 84,408
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization ....................... 959,149 1,021,115
Mortgages and notes receivable, net of
current portion ........................................................ 12,218 11,953
Other assets ................................................................. 38,389 39,294
----------- -----------
TOTAL ASSETS .................................................. $ 1,104,848 $ 1,156,770
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt ................................................ $ 1,013 $ 10,296
Current portion of deferred income ..................................... 3,622 4,022
Other current liabilities .............................................. 39,402 51,123
----------- -----------
Total current liabilities ..................................... 44,037 65,441
Long-term debt, net of current portion ....................................... 284,927 309,736
Other liabilities ............................................................ 7,291 10,564
Deferred income .............................................................. 14,301 18,468
Deferred income taxes ........................................................ 44,620 44,620
----------- -----------
Total liabilities ............................................. 395,176 448,829
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;
56,600,981 and 56,221,567 shares issued and outstanding at September
30, 2002 and December 31, 2001, respectively ....................... 566 562
Capital in excess of par value ......................................... 527,721 525,068
Retained earnings ...................................................... 296,232 297,159
Accumulated other comprehensive loss,
net of taxes ....................................................... -- (1)
Treasury stock (11,507,078 shares at September 30, 2002
and December 31, 2001) ............................................. (114,847) (114,847)
----------- -----------
Total stockholders' equity .................................... 709,672 707,941
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 1,104,848 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Hotel revenues .............................. $ 97,481 $ 110,195 $ 291,534 $ 354,364
Management, franchise and other fees ........ 3,502 3,083 10,535 10,168
Rental and other revenues ................... 903 699 2,508 2,282
--------- --------- --------- ---------
Total revenues ..................... 101,886 113,977 304,577 366,814
Costs and expenses:
Hotel operating expenses .................... 54,671 61,423 158,875 189,472
Rent and other occupancy .................... 20,592 21,251 62,320 65,789
General and administrative .................. 7,691 7,403 21,899 22,294
Depreciation and amortization ............... 9,640 9,103 29,135 27,237
--------- --------- --------- ---------
Total costs and expenses ........... 92,594 99,180 272,229 304,792
Operating income .................................. 9,292 14,797 32,348 62,022
Investment income ................................. 637 593 1,820 1,757
Interest expense .................................. (6,709) (8,305) (22,076) (25,620)
Other income (loss) ............................... 302 233 (4,199) 14,992
--------- --------- --------- ---------
Income before income taxes, discontinued operations
and extraordinary loss ........................ 3,522 7,318 7,893 53,151
Provision for income taxes ........................ 1,374 2,817 3,078 20,462
--------- --------- --------- ---------
Income before discontinued operations
and extraordinary loss ........................ 2,148 4,501 4,815 32,689
Discontinued operations:
Income from discontinued operations,
net of income taxes ..................... 249 634 1,307 2,783
Gain on disposal, net of
income taxes ............................ 4,320 -- 4,748 --
--------- --------- --------- ---------
Income before extraordinary loss .................. 6,717 5,135 10,870 35,472
Extraordinary gain (loss), net of income taxes .... (3,934) 34 (11,797) (76)
--------- --------- --------- ---------
Net income (loss) ................................. $ 2,783 $ 5,169 $ (927) $ 35,396
========= ========= ========= =========
Earnings per common share:
Basic:
Income before extraordinary items
and discontinued operations ............. $ 0.05 $ 0.10 $ 0.11 $ 0.73
Discontinued operations, net of income taxes 0.10 0.02 0.13 0.06
Extraordinary loss, net of income taxes ..... (0.09) -- (0.26) --
--------- --------- --------- ---------
Net (loss) income per common share ................ $ 0.06 $ 0.12 $ (0.02) $ 0.79
========= ========= ========= =========
Diluted:
Income before extraordinary items
and discontinued operations ............. $ 0.05 $ 0.10 $ 0.10 $ 0.71
Discontinued operations, net of income taxes 0.10 0.01 0.13 0.06
Extraordinary loss, net of income taxes ..... (0.09) -- (0.25) --
--------- --------- --------- ---------
Net (loss) income per common share ................ $ 0.06 $ 0.11 $ (0.02) $ 0.77
========= ========= ========= =========
See Accompanying Notes to Interim Consolidated Financial Statements.
-2-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) income ...................................................................... $ (927) $ 35,396
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization ...................................................... 29,992 28,598
Premium on early redemption of debt ................................................ 12,705 124
Write-off of deferred financing fees ............................................... 6,628 --
Amortization of deferred financing costs ........................................... 1,994 2,269
Utilization of net operating loss carryforwards .................................... -- 2,293
Gains on sales of assets ........................................................... (8,628) (12,571)
Amortization of deferred income .................................................... (2,645) (8,486)
(Decrease)/increase from changes in other operating assets and liabilities:
Accounts receivable ........................................................... (2,740) (2,944)
Other assets .................................................................. (479) 1,230
Other liabilities ............................................................. (15,065) 715
--------- ---------
Net cash provided by operating activities ..................................... 20,835 46,624
Cash flows from investing activities:
Proceeds from mortgages and notes receivable ........................................... 382 1,650
Disbursements for mortgages and notes receivable ....................................... (792) (446)
Net proceeds from sales of property, equipment and leasehold improvements .............. 56,026 15,331
Construction and conversion of hotels .................................................. (5,085) (16,393)
Purchases of equipment and leasehold improvements ...................................... (15,443) (16,319)
Other .................................................................................. 845 282
--------- ---------
Net cash provided by (used in) investing activities ........................... 35,933 (15,895)
Cash flows from financing activities:
Net proceeds from issuance of debt ..................................................... 288,586 12,920
Payments of debt ....................................................................... (329,092) (34,420)
Premium on early redemption of debt .................................................... (12,705) (124)
Proceeds from the exercise of stock options ............................................ 2,657 1,828
Treasury stock purchases ............................................................... -- (3,710)
--------- ---------
Net cash used in financing activities ......................................... (50,554) (23,506)
--------- ---------
Net increase in cash and cash equivalents .............................................. 6,214 7,223
Cash and cash equivalents at beginning of period ....................................... 26,475 1,735
--------- ---------
Cash and cash equivalents at end of period ............................................. $ 32,689 $ 8,958
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Land acquired in exchange for notes receivable ......................................... -- $ 1,952
OTHER CASH FLOW DISCLOSURES:
Interest paid .......................................................................... $ 23,323 $ 23,349
Income taxes paid ...................................................................... $ 190 $ 12,292
See Accompanying Notes to Interim Consolidated Financial Statements.
-3-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, 2002 and the results of its operations for
the three and nine months ended September 30, 2002 and 2001 and cash flows for
the nine months ended September 30, 2002 and 2001.
The consolidated financial statements for the three and nine months ended
September 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 September 30, 2001 and December 31, 2001
consolidated financial statements to conform them to the September 30, 2002
presentation.
The consolidated results of operations for the three and nine months ended
September 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 be 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.
In April 2002, the FASB issued Statement No. 145, which rescinded
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt".
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
The Company will adopt Statement No. 145 on January 1, 2003. The Company will
reclassify extraordinary losses relating to the extinguishment of debt to
interest expense upon adoption.
-4-
NOTE 3 - DEBT
On April 29, 2002, the Company completed the issuance of $200 million of
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 redeem all of its $190.0 million of outstanding 9-3/4% Senior Subordinated
Notes due 2007 (the "9-3/4% Notes"). The redemption price was $1,050 per $1,000
principal amount of the 9-3/4% Notes plus accrued and unpaid interest.
In July 2002, Prime retired its $125 million revolving credit facility
which was to expire in December 2002 and entered into a new $125 million senior
revolving credit facility (the "Credit Facility") with a syndicate of financial
institutions. The Credit Facility consists of a four year, $125 million
revolving line of credit and is secured by the equity interests of certain of
Prime's subsidiaries. In addition, under certain circumstances the Company has
the right to increase the Credit Facility by an aggregate amount up to $100
million either through a term loan or an increase to the revolving line of
credit. 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), repurchasing shares and incurring
additional indebtedness and liens. The Company had borrowings of $70.0 million
under the Credit Facility at LIBOR +2.25%, or approximately 4.1%, as of
September 30, 2002.
In August 2002, Prime redeemed all of its $103.5 million of outstanding
9-1/4% First Mortgage Notes due 2006 (the "9-1/4% Notes"). The redemption price
was 103.083% of the principal amount of the 9-1/4% Notes plus accrued and unpaid
interest. Prime funded the redemption with borrowings under the Credit Facility
plus cash on hand.
NOTE 4 - HOTEL DISPOSITIONS
During the three months ended September 30, 2002, Prime sold three
AmeriSuites hotels and one Wellesley Inn for total proceeds of $39.0 million,
retaining the franchise rights for each hotel under 20-year franchise
agreements. Prime realized gains of approximately $7.1 million, or $4.4 million,
net of income tax, on these transactions.
For the nine months ended September 30, 2002, the Company generated gross
proceeds of approximately $59.0 million from hotel sales comprised of three
AmeriSuites, three Wellesley Inns and a full-service hotel realizing gains of
approximately $7.8 million or $4.8 million, net of income tax.
These gains and results of operations through the date of sale are
included in "discontinued operations" in the 2002 financial statements. The
results of operations of these hotels for the three and nine months ended
September 30, 2001 have also been reclassified to "discontinued operations".
NOTE 5 - EXTRAORDINARY LOSS
The extraordinary loss for the three and nine months ended September 30,
2002 represents the impact, net of income taxes, of premiums paid associated
with the redemption of the 9-3/4% Notes and the 9-1/4% Notes and the write-off
of the unamortized balance of deferred loan fees associated with the 9-3/4%
Notes, the 9-1/4% Notes and the former revolving credit facility.
-5-
NOTE 6 - OTHER INCOME (LOSS)
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 in August 2002. This judgement
exceeded Prime's litigation reserve by approximately $4.5 million and Prime
recorded this charge in the second quarter of 2002.
Other income (loss) for the three and nine months ended September 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 45.1 million and 44.7 million for the three months ended September
30, 2002 and 2001, respectively, and 45.0 million and 44.7 million for the nine
months ended September 30, 2002 and 2001, respectively.
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
46.0 million and 45.8 million for the three months ended September 30, 2002 and
2001, respectively, and 46.7 million and 45.9 million for the nine months ended
September 30, 2002 and 2001, respectively.
NOTE 8 - COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2002 and 2001,
comprehensive income consisted of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 2,783 $ 5,169 $ (927) $ 35,396
Unrealized gain (loss) on marketable
securities available for sale, net of
income taxes -- (669) -- 367
-------- -------- -------- --------
Total $ 2,783 $ 4,500 $ (927) $ 35,763
======== ======== ======== ========
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 144
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. 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
- 6 -
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 and leased 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), are not evaluated
at the segment level and therefore the Company does not reconcile EBITDA to
consolidated net income on the consolidated financial statements.
The following table presents revenues and other financial information from
continuing operations by business segment for the three and nine months ended
September 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2002 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE / OTHER CONSOLIDATED
- ------------------------------------- ---------- --------------- ------------ ----------------- ------------
Revenues ............................ $59,555 $18,075 $19,851 $4,405 $101,886
EBITDA .............................. 10,468 4,336 5,894 (1,766) 18,932
Depreciation and amortization ....... 4,821 3,109 1,302 408 9,640
Capital expenditures ................ 5,305 641 544 2,893 9,383
Total assets ........................ $569,571 $343,082 $96,041 $96,154 $1,104,848
-------- -------- ------- ------- ----------
THREE MONTHS ENDED SEPTEMBER 30, 2001 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE / OTHER CONSOLIDATED
- ------------------------------------- ---------- --------------- ------------ ----------------- ------------
Revenues ............................ $64,180 $20,822 $25,193 $3,782 $113,977
EBITDA .............................. 13,388 6,279 6,017 (1,784) 23,900
Depreciation and amortization ....... 4,392 2,886 1,354 471 9,103
Capital expenditures ................ 2,471 7,439 1,200 588 11,698
Total assets ........................ $608,900 $370,837 $110,196 $62,885 $1,152,818
-------- -------- -------- ------- ----------
NINE MONTHS ENDED SEPTEMBER 30, 2002 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE / OTHER CONSOLIDATED
- ------------------------------------ ---------- --------------- ------------ ----------------- ------------
Revenues ............................. $177,803 $57,466 $56,265 $13,043 $304,577
EBITDA ............................... 34,208 15,707 15,255 (3,687) 61,483
Depreciation and amortization ........ 14,776 9,440 4,140 779 29,135
Capital expenditures ................. 9,908 2,059 1,233 7,328 20,528
Total assets ......................... $569,571 $343,082 $96,041 $96,154 $1,104,848
-------- -------- ------- ------- ----------
NINE MONTHS ENDED SEPTEMBER 30, 2001 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE / OTHER CONSOLIDATED
- ------------------------------------ ---------- --------------- ------------ ----------------- ------------
Revenues ............................. $198,080 $69,473 $86,973 $12,288 $366,814
EBITDA ............................... 48,334 25,759 16,567 (1,401) 89,259
Depreciation and amortization ........ 13,178 8,696 4,062 1,301 27,237
Capital expenditures ................. 13,927 13,834 2,706 2,245 32,712
Total assets ......................... $608,900 $370,837 $110,196 $62,885 $1,152,818
-------- -------- -------- ------- ----------
- 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 240 hotels in operation containing 30,460 rooms
located in 33 states (the "Portfolio") as of September 30, 2002. Prime controls
two hotel brands -- AmeriSuites (R) and Wellesley Inns & 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 September 30, 2002:
OWNED LEASED MANAGED FRANCHISED TOTAL
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
AmeriSuites 62 8,002 27 3,291 27 3,478 28 3,428 144 18,199
Wellesley Inns & Suites 52 6,190 6 668 16 1,434 74 8,292
Non-Proprietary Brands 10 1,923 1 160 11 1,886 22 3,969
--- ------ -- ----- -- ----- -- ----- --- ------
Total 124 16,115 28 3,451 44 6,032 44 4,862 240 30,460
=== ====== == ===== == ===== == ===== === ======
In addition to the above, three AmeriSuites (one owned, one managed and
one franchised) opened in October 2002 and there are also four AmeriSuites and
three Wellesley Inns under construction.
The Company's strategy has focused on the development of 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 and operating infrastructure by adding full or limited
service hotels or additional hotel brands. The Company's strategy is also
focused on growing the operating profits of its Portfolio. With approximately
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 nine months ended September 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 7.2% and 10.5% for the three and nine month
periods, respectively, and gross operating profits at these hotels decreased by
11.7% and 16.6% over the same periods. Overall, for the three and nine months
ended September 30, 2002, revenue declined by 10.6% and 17.0%, respectively, and
EBITDA decreased by 20.8% and 31.6%, respectively, due to the results of the
comparable hotels and the impact of asset sales and lease terminations in 2001.
The cash proceeds generated through asset sales has enabled Prime to reduce its
debt by $34.1 million since December 31, 2001 and has resulted in a decrease in
interest expense of 19.2% and 13.8%, respectively, for the three and nine months
ended September 30, 2002.
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.
- 8 -
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. 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 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.
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 $12.7 million and $63.1 million, or 11.5% and 17.8%,
respectively, for the three and nine months ended September 30, 2002 compared to
the same periods in 2001, primarily due to a 7.1% and 10.3% 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 149 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 nine month
periods in 2002 and 2001.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 % CHANGE 2002 2001 % CHANGE
---- ---- -------- ---- ---- --------
AMERISUITES
Occupancy 64.1% 66.5% 63.8% 65.3%
ADR $71.84 $73.95 $72.67 $77.93
REVPAR $46.05 $49.18 (6.3)% $46.38 $50.89 (8.9)%
WELLESLEY INNS & SUITES
Occupancy 53.6% 61.0% 56.0% 61.7%
ADR $57.61 $56.50 $59.34 $61.69
REVPAR $30.90 $34.45 (10.3)% $33.23 $38.09 (12.8)%
NON-PROPRIETARY BRANDS
Occupancy 70.1% 69.6% 65.1% 69.3%
ADR $110.51 $117.47 $106.74 $115.31
REVPAR $77.45 $81.70 (5.2)% $69.44 $79.93 (13.1)%
TOTAL
Occupancy 61.7% 65.3% 61.8% 64.8%
ADR $72.55 $73.81 $72.84 $77.53
REVPAR $44.76 $48.18 (7.1)% $45.02 $50.21 (10.3)%
REVPAR at comparable hotels was impacted in both the three and nine
month periods by the slowdown in the economy, which has affected business
travel. REVPAR for the three month period was also affected by the anniversary
of the September 11th attacks. During the nine month period, the decline was
driven by a decrease in both occupancy and average daily rate ("ADR"), while for
the three month period occupancy contributed more to the decline. Key markets
affected were Atlanta, Chicago, Dallas, the Northeast 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
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the Company's national sales group. Management, franchise and other fees
increased by $0.4 million for both the three and nine months ended September 30,
2002, or 13.6% and 3.6%, respectively, compared to the same periods in 2001. The
increase was due to increased franchise royalty fees derived from hotels sold to
franchisees and new hotel openings and higher management fees due to new
management agreements.
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 $0.2 million for both the three and nine months ended
September 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 $6.8 million and $30.6 million, or 11.0% and 16.1%,
respectively, for the three and nine months ended September 30, 2002 compared to
the same periods in 2001 due to the decline in revenues. For the comparable
three and nine month periods, hotel operating expenses, as a percentage of hotel
revenues, increased from 55.7% and 53.5% in 2001 to 56.1% and 54.5% 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 $0.7 million and $3.5 million, or 3.1% and 5.3%,
respectively, for the three and nine months ended September 30, 2002 as compared
to the same periods in 2001, primarily due to the termination of eight hotel
leases with MeriStar Hospitality in 2001 and reductions in real estate taxes.
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
increased by $0.3 million, or 3.9%, for the three months ended September 30,
2002 as compared to the same period in 2001 due primarily to increased brand
marketing expenditures. General and administrative expenses decreased by $0.4
million, or 1.8%, for the nine months ended September 30, 2002 compared to the
same period in 2001 due primarily to corporate cost containment programs.
Depreciation and amortization expense increased by $0.5 million and $1.9
million, or 5.9% and 7.0%, for the three and nine months ended September 30,
2002, respectively, compared to the same periods in 2001. This increase was due
to depreciation associated with capital additions partially offset by the impact
of asset sales.
Investment income increased slightly for the three and nine months ended
September 30, 2002 compared to the same periods in 2001 due to higher cash
balances in 2002 offset by lower interest rates.
Interest expense decreased by $1.6 million and $3.5 million, or 19.2% and
13.8%, respectively, for the three and nine months ended September 30, 2002
compared to the same periods in 2001 primarily due to asset sales and operating
cash flow used to reduce debt, the refinancing of the 9-3/4% Notes and the
retirement of the 9-1/4% Notes funded primarily by the Credit Facility.
Other income (loss) for the three and nine months ended September 30, 2002
and 2001 consists of litigation related charges (see Note 6). For the three and
nine months ended September 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 September 30, 2002, the Company had cash and cash equivalents of $32.7
million. The Company also had $55.0 million of availability under its Credit
Facility. The Company intends to utilize its capacity to grow its brands and
brand infrastructure and may consider acquiring full-service or limited service
hotels or hotel brands.
The Company's major sources of cash for the nine months ended September
30, 2002 were net borrowings of $288.6 million, cash flows from operations of
$20.8 million and net proceeds from asset sales of $56.0 million. The Company's
major uses of cash during the period were debt repayments of $329.1 million and
capital expenditures of $20.5 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 asset sales and operating cash flow continues to
strengthen the Company's overall financial condition. At September 30, 2002, the
Company's debt to the last twelve months EBITDA ratio was 3.5 times and its debt
to book capitalization was 28.7%.
During the nine months ended September 30, 2002, the Company sold three
AmeriSuites, three Wellesley Inns and a full-service hotel for gross proceeds of
$59.0 million. The Company retained the franchise rights to the AmeriSuites and
Wellesley Inns under 20-year franchise agreements.
On April 29, 2002, the Company completed the issuance of $200 million of
the 8-3/8% Notes. The Company used the proceeds of the issuance of the 8-3/8%
Notes, together with available cash, to redeem all of its $190.0 million of
outstanding 9-3/4% Notes. The redemption price was $1,050 per $1,000 principal
amount of the 9-3/4% Notes plus accrued and unpaid interest.
In July, 2002, Prime retired its $125 million revolving credit facility
which was to expire in December 2002 and entered into a new $125 million Credit
Facility with a syndicate of financial institutions. The Credit Facility
consists of a four year, $125 million revolving line of credit and is secured by
the equity interests of certain of Prime's subsidiaries. In addition, under
certain circumstances the Company has the right to increase the Credit Facility
by an aggregate amount up to $100 million either through a term loan or an
increase in the revolving line of credit. The credit agreement contains loan
covenants customary for a credit facility of this size and nature, including but
not limited to, limitation on making capital expenditures, selling or
transferring assets, making certain investments (including acquisitions),
repurchasing shares and incurring additional indebtedness and liens. The Company
had borrowings of $70.0 million under the Credit Facility at LIBOR +2.25%, or
approximately 4.1%, as of September 30, 2002.
In August 2002, Prime redeemed all of its $103.5 million of outstanding
9-1/4% Notes. The redemption price was 103.083% of the principal amount of the
9-1/4% Notes, plus accrued and unpaid interest. Prime funded the redemption with
borrowings under the Credit Facility plus cash on hand.
Uses of Capital. During the nine months ended September 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 nine months ended September 30,
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2002, the Company spent $5.1 million to complete the construction of an
AmeriSuites hotel. There are currently no new construction projects underway. In
addition, during this nine month period, the Company also spent $15.4 million on
other capital additions and expects to spend a total of $20 million in 2002
which primarily consists of capital improvements at its owned and leased hotels,
a new reservation system for Prime's proprietary brands and a new purchasing and
accounting system. The Company plans to fund both its corporate development and
capital improvements primarily with internally generated cash flow.
In August 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates from its floating rate
debt arrangements. At September 30, 2002, the Company had $285.9 million of debt
outstanding of which $215.9 million bears interest at fixed rates. The interest
rate on the Company's Credit Facility, under which $70 million was outstanding
at September 30, 2002, is variable at a rate of LIBOR + 2.25%. A hypothetical
100 basis point adverse move (increase) on short-term interest rates on the
floating rate debt outstanding at September 30, 2002 would adversely affect
Prime's annual interest cost by approximately $0.7 million assuming borrowed
amounts under the Credit Facility remained at $70 million.
ITEM 4. EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on
Form 10-Q, the Company under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 under the Exchange Act). Based
upon that evaluation, the Company's Chief Executive and the Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to timely alert them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in Company's
Exchange Act filings.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 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.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification of CEO pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
Exhibit 99.2 Certification of CFO pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
Exhibit 99.3 Certification of VP-Finance pursuant to Section 302
of the Sarbanes - Oxley Act of 2002
Exhibit 99.4 Certification of CEO pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
Exhibit 99.5 Certification of CFO pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
Exhibit 99.6 Certification of VP-Finance pursuant to Section 906
of the Sarbanes - Oxley Act of 2002
(b) Reports on Form 8-K
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
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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 was calling for
redemption of all these notes on August 21, 2002.
On August 22, 2002, the Company filed a current report on Form
8-K announcing that it had redeemed all of its 9-1/4% First
Mortgage Notes due 2006.
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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:November 12, 2002 By: /s/ A.F. Petrocelli
-----------------------------
A.F. Petrocelli
President and Chief Executive
Officer
Date:November 12, 2002 By: /s/ Douglas Vicari
-----------------------------
Douglas Vicari
Senior Vice President and Chief
Financial Officer
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