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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 MARCH 31, 2004
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 is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). 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 44,973,082 shares of common stock, $.01 par value,
outstanding as of May 3, 2004.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 (Unaudited) and December 31, 2003................................ 1
Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003 (Unaudited) ......................... 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 (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..................................................... 14
Item 4. Disclosure
Controls and Procedures........................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 15
Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases
of Equity Securities............................................................. 15
Item 3. Defaults upon Senior Securities................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............................... 15
Item 5. Other Information................................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................................. 16
Signatures .................................................................................. 17
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 14,372 $ 12,901
Accounts receivable (net of allowances of $1,432 and $1,463
in 2004 and 2003, respectively) ....................................................... 21,299 18,165
Restricted cash ........................................................................ 1,677 2,272
Hotel inventories ...................................................................... 10,326 11,570
Income tax receivable .................................................................. 1,627 568
Other current assets ................................................................... 4,976 4,988
---------- ----------
Total current assets ................................................................ 54,277 50,464
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization ........................................ 909,212 916,594
Assets held for sale ..................................................................... 8,787 8,787
Investments in unconsolidated joint ventures ............................................. 12,619 12,595
Mortgages and notes receivable, net of current portion ................................... 12,012 12,293
Other assets ............................................................................. 7,331 6,572
---------- ----------
TOTAL ASSETS ........................................................................ $1,004,238 $1,007,305
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................................. $ 14,628 $ 21,577
Current portion of debt ................................................................ 1,129 1,067
Current portion of deferred income ..................................................... 3,115 3,115
Other current liabilities .............................................................. 26,520 19,411
---------- ----------
Total current liabilities ........................................................... 45,392 45,170
Long-term debt, net of current portion ................................................... 226,561 227,535
Deferred income, net of current portion .................................................. 9,527 10,306
Deferred income taxes .................................................................... 39,633 39,633
Other liabilities ........................................................................ 3,090 3,647
---------- ----------
Total liabilities ................................................................... 324,203 326,291
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;
56,838,897 and 56,632,904 shares issued and outstanding in 2004
and 2003, respectively ................................................................ 568 566
Capital in excess of par value ......................................................... 529,965 528,055
Retained earnings ...................................................................... 265,956 268,817
Accumulated other comprehensive income, net of taxes of $338 and $357
respectively .......................................................................... 530 560
Treasury stock at cost (11,880,878 shares) ............................................. (116,984) (116,984)
---------- ----------
Total stockholders' equity .......................................................... 680,035 681,014
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $1,004,238 $1,007,305
========== ==========
See Accompanying Notes to Interim Consolidated Financial Statements.
-1-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003
-------- -------
Revenues:
Owned hotels ........................................................ $ 61,187 $62,268
Cash flow hotels .................................................... 35,258 20,799
Management, franchise and other fees ................................ 6,330 5,494
-------- -------
Total revenue before cost reimbursements ......................... 102,775 88,561
Cost reimbursements ................................................. 7,895 7,206
-------- -------
Total revenues ................................................... 110,670 95,767
Costs and expenses:
Owned hotels ....................................................... 43,649 45,243
Cash flow hotels ................................................... 37,013 25,470
Brand operating .................................................... 4,206 3,531
General and administrative ......................................... 7,231 6,900
Depreciation and amortization ...................................... 10,255 10,633
-------- -------
Total costs and expenses before reimbursable costs ............... 102,354 91,777
Reimbursable costs ................................................. 7,895 7,206
-------- -------
Total costs ...................................................... 110,249 98,983
Operating income (loss) ............................................... 421 (3,216)
Investment income ..................................................... 25 442
Interest expense ...................................................... (4,818) (5,628)
Gains on retirement of debt ........................................... - 800
Other income .......................................................... 11 -
-------- -------
Loss before equity in earnings of unconsolidated joint
ventures, income taxes and discontinued operations ................... (4,361) (7,602)
Equity in earnings of unconsolidated joint ventures ................... 74 190
-------- -------
Loss before income taxes and discontinued operations .................. (4,287) (7,412)
Provision (benefit) for income taxes .................................. (1,672) (2,891)
-------- -------
Loss before discontinued operations ................................... (2,615) (4,521)
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes (126) (565)
Gain (loss) on disposal, net of income taxes ........................ (121) (1,546)
-------- -------
Net income (loss) ..................................................... ($ 2,862) ($6,632)
======== =======
Earnings (loss) per common share:
Basic:
Income (loss) before discontinued operations ........................ ($ 0.06) ($ 0.10)
Income (loss) from discontinued operations .......................... - (0.05)
-------- -------
Net income (loss) ..................................................... ($ 0.06) ($ 0.15)
======== =======
Diluted:
Income (loss) before discontinued operations ........................ ($ 0.06) ($ 0.10)
Income (loss) from discontinued operations .......................... - (0.05)
-------- -------
Net income (loss) ..................................................... ($ 0.06) ($ 0.15)
======== =======
See Accompanying Notes to Interim Consolidated Financial Statements.
-2-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS)
2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) ........................................................................ $(2,862) $(6,632)
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization .......................................................... 10,255 10,654
Valuation adjustment ................................................................... - 2,534
Amortization of deferred financing costs ............................................... 299 294
Income tax benefit ..................................................................... (1,830) -
(Gains) losses on retirement of debt ................................................... - (800)
Equity in earnings of unconsolidated joint ventures .................................... (74) (190)
Gains (losses) on disposals of discontinued operations ................................. (199) -
Net (gains) losses on sales of assets .................................................. (31) -
Amortization of deferred income ........................................................ (779) (950)
Increase (decrease) from changes in other operating assets and liabilities:
Accounts receivable .................................................................... (3,134) (4,355)
Other assets ........................................................................... 1,871 (2,281)
Other liabilities ...................................................................... (398) (1,043)
------- -------
Net cash provided by (used in) operating activities .................................. 3,118 (2,769)
Cash flows from investing activities:
Net proceeds from mortgages and notes receivable ....................................... 352 310
Disbursements for mortgages and notes receivable ....................................... (86) (205)
Purchases of property, equipment and leasehold improvements ............................ (3,356) (8,100)
Proceeds from sales of property, equipment and leasehold improvements .................. 443 -
Investments in unconsolidated joint ventures ........................................... - (6,630)
Proceeds from sales and financings of interests in unconsolidated joint ventures ....... - 5,859
Other .................................................................................. - 822
------- -------
Net cash used in investing activities ................................................ (2,647) (7,944)
Cash flows from financing activities:
Net proceeds from issuance of debt ..................................................... 5,000 5,000
Payments of debt ....................................................................... (5,912) (10,068)
Proceeds from the exercise of stock options ............................................ 1,912 -
Purchase of treasury stock ............................................................. - (1,961)
------- -------
Net cash provided by (used in) financing activities .................................. 1,000 (7,029)
Net increase (decrease) in cash and cash equivalents ................................... 1,471 (17,742)
Cash and cash equivalents at beginning of period ....................................... 12,901 25,850
------- -------
Cash and cash equivalents at end of period ............................................. $14,372 $ 8,108
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .......................................................................... $ 913 $ 1,146
Income taxes paid ...................................................................... $ 25 $ -
See Accompanying Notes to Interim Consolidated Financial Statements.
-3-
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying interim unaudited
consolidated financial statements of Prime Hospitality Corp. and its
subsidiaries ("Prime" or the "Company") contain all material adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of March 31, 2004 and the results of its
operations for the three months ended March 31, 2004 and 2003 and cash flows for
the three months ended March 31, 2004 and 2003.
The consolidated financial statements for the three months ended March 31,
2004 and 2003 were prepared on a consistent basis with the audited consolidated
financial statements for the year ended December 31, 2003. Certain
reclassifications have been made to the March 31, 2003 consolidated financial
statements to conform them to the March 31, 2004 presentation.
The consolidated results of operations for the three months ended March 31,
2004 are not necessarily indicative of the results to be expected for the full
year. The hotel and leisure industry is seasonal in nature; however, the periods
during which the Company's properties experience higher hotel revenue activities
vary from property to property and depend principally upon location. The
Company's revenues historically have generally been lower in the first and
fourth quarters than in the second and third quarters. 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, 2003.
The balance sheet at December 31, 2003 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
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In December 2003,
a revision was issued (46R) to clarify some of the original provisions. The
provisions of the Interpretation were effective in the first quarter of 2004 for
all variable interests in variable interest entities. This Interpretation did
not have a material impact on the Company's financial statements.
In response to a FASB staff announcement in November 2001, and in
accordance with the Emerging Issues Task Force ("EITF") Abstract 01-14 "Income
Statement Characterization of Reimbursements received for "Out-Of-Pocket
Expenses incurred" which was issued in January 2002, the Company began recording
the reimbursements of costs incurred on behalf of managed hotel properties and
franchisees received as other revenues from managed
-4-
and franchised properties and the costs incurred on behalf of managed hotel
property owners and franchisees as other expenses from managed and franchised
properties in the first quarter of 2002. These costs relate primarily to payroll
costs at managed properties where the Company is the employer. Since the
reimbursements are made based upon the costs incurred with no added margin, the
adoption of this guidance has no effect on the operating income, total or per
share net income, cash flows or financial position of the Company.
NOTE 3 - ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued Statement No. 148 to amend alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement No. 148
amends the disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. However, the Company has continued to account
for options in accordance with the provision of APB Opinion No. 25, "Accounting
for Stock Issues to Employees" and related interpretations. Accordingly, no
compensation expense has been recognized for stock option plans.
The following table sets forth the Company's pro forma information for its
common stockholders for the three months ended March 31, 2004 and 2003 (in
thousands except earnings per share data):
THREE MONTHS ENDED,
MARCH 31,
--------------------
2004 2003
------- -------
Net income (loss) as reported $(2,862) $(6,632)
Add: Stock option expense included in net income
(loss)......................................... - -
Less: Stock option expense determined under fair
value recognition method for all awards....... (949) (981)
------- -------
Pro forma net income (loss).......................... $(3,811) $(7,613)
------- -------
Net income (loss) per share as reported:
Basic.............................................. $ (0.06) $ (0.15)
------- -------
Diluted............................................ $ (0.06) $ (0.15)
------- -------
Pro forma net income (loss) per share:
Basic.............................................. $ (0.08) $ (0.17)
------- -------
Diluted............................................ $ (0.08) $ (0.17)
------- -------
The fair value for those options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the three months ended March 31, 2004 and 2003: risk-free
interest rate of 4.93%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 42.7% and a
weighted-average expected life of the option of 4.7 years.
For purposes of pro forma disclosures, the estimated fair value of stock
options is amortized to expense over the options' vesting period.
NOTE 4 - HOTEL DISPOSITIONS
During the three months ended March 31, 2004, the Company terminated the
lease on one non-proprietary brand hotel. The results of operations, and loss on
the lease termination, net of tax, are included in the Consolidated Statements
of Operations as discontinued operations.
In April of 2004, we sold a parcel of vacant land for net proceeds of $1.6
million, which resulted in a gain of approximately $350,000.
-5-
NOTE 5 - DEBT
During the three months ended March 31, 2003, Prime purchased $8.0 million
of its 8 3/8% Senior Subordinated Notes due 2012 the ("Senior Subordinated
Notes") for $7.2 million realizing a gain of $800,000.
NOTE 6 - 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 was
44.8 million and 44.9 million for the three months ended March 31, 2004 and
2003.
Diluted earnings per common share reflect adjustments to basic earnings per
common share for the dilutive effect of stock options. For the three months
ended March 31, 2004 and 2003, stock options were antidilutive and were not
included in the calculation of diluted earnings per share.
NOTE 7 - DISCONTINUED OPERATIONS
On April 3, 2003, a wholly owned subsidiary of the Company terminated lease
agreements on three hotels owned by ShoLodge, Inc. ("ShoLodge") due to operating
shortfalls which approximated $1.1 million in the previous twelve months. In
accordance with the lease termination, Prime forfeited its rights to receive a
$3.1 million payment in 2011 which was due at the end of the lease as
compensation for executing the lease agreement. ShoLodge has assumed management
of the hotels and is operating the hotels under new ten-year franchise
agreements with Prime, under the AmeriSuites flag. These franchise agreements
permit ShoLodge to terminate the agreements without termination fees upon proper
notice. The results of operations for these hotels are reflected in discontinued
operations, net of tax, in the accompanying financial statements. In addition, a
loss of $1.5 million, net of tax, was recorded in the three months ended March
31, 2003 in gain (loss) on disposal from discontinued operations for the net
assets associated with the lease.
NOTE 8 - GEOGRAPHIC AND BUSINESS INFORMATION
Our hotels primarily operate in three major lodging industry segments: the
all-suites segment, under our AmeriSuites brand; the limited-service segment,
primarily under our Wellesley Inns & Suites brand and the full-service segment
under major national franchises and the Prime Hotels and Resorts brand. The
AmeriSuites are upscale, all-suite limited service hotels containing
approximately 128 suites and are located in 32 states throughout the United
States. The 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. A Wellesley Inn & Suites hotel has between 100 to 130 rooms and suites.
Full-service hotels compete primarily in the upscale segment, with food and
beverage service and banquet facilities under franchise agreements with national
hotel brands. Our full-service hotels are primarily located in the northeastern
region of the United States.
We evaluate the performance of each segment based primarily on operating
earnings before depreciation and amortization generated by our owned hotels
("Owned Hotels"). Interest expense is primarily related to debt incurred by the
Company through our corporate obligations and collateralized by certain of our
hotel properties. The hotel operations are included in the consolidated Federal
income tax return of the Company and the taxes are allocated based upon the
relative contribution to the Company's consolidated taxable income/losses and
changes in temporary differences. Other income consists of property
transactions, which are not part of the recurring operation of the Company. The
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allocation of interest expense, taxes and other income, are not evaluated at the
segment level.
The following table presents revenues and other financial information for
the owned and leased hotels by business segment for the three months ended March
31, 2004 and 2003 (in thousands):
THREE MONTHS ENDED MARCH 31, 2004 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE/OTHER CONSOLIDATED
- --------------------------------- ---------------------------------------------------------------------------
Revenues before cost reimbursements..... $ 50,946 $ 22,631 $22,868 $ 6,330 $ 102,775
Operating income before depreciation.... 6,508 3,454 595 119 10,676
Depreciation and amortization........... 4,651 3,513 1,119 972 10,255
Capital expenditures.................... 797 1,061 903 595 3,356
Total assets............................ 490,754 341,992 75,165 96,327 1,004,238
THREE MONTHS ENDED MARCH 31, 2003 ALL-SUITES LIMITED-SERVICE FULL-SERVICE CORPORATE/OTHER CONSOLIDATED
- --------------------------------- ---------------------------------------------------------------------------
Revenues before cost reimbursements..... $ 49,539 $ 20,044 $14,243 $ 4,735 $ 88,561
Operating income before depreciation.... 1,806 4,723 1,705 (787) 7,447
Depreciation and amortization........... 4,874 3,207 1,473 1,079 10,633
Capital expenditures.................... 3,309 673 555 3,563 8,100
Total assets............................ 557,343 335,677 78,994 132,310 1,104,324
NOTE 9 - LITIGATION
Currently and from time to time we are involved in litigation arising in
the ordinary course of business. We do not believe that we are involved in
any litigation, that is likely, individually or in the aggregate, to have a
material adverse effect on our financial condition or results of operations or
cash flows.
On August 18, 1999, plaintiff Nick Pourzal, a former employee of Prime,
filed a complaint against the Company in the United States District Court for
the Virgin Islands. The complaint alleges that the Company contracted in 1978 to
pay plaintiff ten percent of the pre-tax earnings on any use or sale of a
16.354-acre property on St. Thomas, U.S. Virgin Islands known as the "Gilbert
Land," and that the Company breached this contract by making commercial use of
the Gilbert Land without paying the plaintiff. On January 13, 2003, plaintiff
filed a motion for leave to file a second amended complaint, to add claims for
(i) conspiracy to violate the Virgin Islands Plant Closing Act, (ii) prima facie
tort and (iii) to confirm an arbitration award relating to the Company's
termination of plaintiff's employment in 1999. The complaint seeks compensatory,
incidental and consequential damages, interest and costs, a declaratory judgment
that the Company is liable for payment of ten percent of pre-tax earnings on use
or sale of the Gilbert Land, and attorneys' fees and expenses. We believe that
the plantiff's action is without merit and intend to vigorously defend this
case.
On June 13, 2003, Southeast Texas Inns, Inc. ("Southeast Texas Inns") filed
a Complaint against the Company, May-Ridge, L.P. ("May-Ridge") and Ridgewood
Holdings Corp. ("Ridgewood"), which is now pending before the United States
District Court for the Middle District of Tennessee. The Complaint alleges that
May-Ridge has defaulted under a Lease Agreement, dated as of July 9, 2000, with
Southeast Texas Inns pursuant to which May-Ridge leased three properties located
in Texas that were operated as AmeriSuites Hotels. On April 2, 2003, Southeast
Texas Inns, as landlord, terminated the Lease Agreement for default and
May-Ridge surrendered the three properties to Southeast Texas Inns. In the
Complaint, Southeast Texas Inns seeks actual and liquidated damages in an amount
in excess of $10 million against May-Ridge and Ridgewood, which is the sole
general partner of May-Ridge. Southeast Texas Inns also seeks to hold Prime
jointly liable for all damages under the Lease Agreement, to which the Company
is not a party. We filed a motion to dismiss the Complaint against the Company
on August 19, 2003, which was granted subject to no new evidence being brought
by Southeast Texas Inns. On April 21, 2004, Southeast Texas Inns filed a second
complaint against the Company seeking to reinstate its claim for damages under
the Lease Agreement.
-7-
NOTE 10 - OTHER COMPREHENSIVE INCOME
For the three month periods ended March 31, 2004 and 2003, comprehensive
income consisted of the following (in thousands):
Three months ended:
March 31,
2004 2003
Net Income (loss) $(2,862) $(6,632)
Unrealized gain (loss) on foreign currency translation,
net of tax of $20 (30) -
---------------------
Total $(2,892) $(6,632)
=====================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
We are an owner, manager and franchisor of limited-service and full-service
hotels. We have 258 hotels in operation containing 33,995 rooms located in 36
states and Canada (the "Portfolio") as of March 31, 2004. We control three hotel
brands -- AmeriSuites (R), Wellesley Inns & Suites (R) and Prime Hotels and
Resorts (R) -- and operate a portfolio of full-service hotels under franchise
agreements with national hotel chains. We operate and have ownership or
leasehold interests in 123 hotels (the "Owned Hotels"), operate 54 hotels for
real estate investment trusts which have cash flow guarantees and participations
(the "Cash Flow Hotels"), manage 24 hotels for third parties (the "Managed
Hotels"), and franchise 55 hotels which we do not operate (the "Franchised
Hotels"). The Portfolio is comprised of 148 AmeriSuites hotels, 81 Wellesley
Inns & Suites hotels, three Prime Hotels and Resorts hotels and 26
non-proprietary brand hotels. As of March 31, 2004, 12 non-proprietary brand
hotels were in the process of being converted to the Prime Hotels & Resorts
brand. Prime was incorporated under the laws of Delaware in 1985.
The following table sets forth information with respect to the Portfolio as
of March 31, 2004:
AMERISUITES HOTELS ROOMS
----------- ------ ------
Owned 62 8,024
Managed Cash Flow 42 5,214
Managed 8 1,077
Franchised 36 4,196
--- ------
Total 148 18,511
WELLESLEY INNS & SUITES
Owned 56 6,901
Managed 6 668
Franchised 19 1,895
--- ------
Total 81 9,464
PRIME HOTELS & RESORTS
Owned 3 595
--- ------
Total 3 595
NON-PROPRIETARY BRANDS
Owned 2 505
Managed Cash Flow 12 2,321
Managed 10 1,934
Joint Venture 2 665
--- ------
Total 26 5,425
TOTAL PORTFOLIO
Owned 123 16,025
Managed Cash Flow 54 7,535
Managed 24 3,679
Franchised 55 6,091
Joint Venture 2 665
--- ------
Total 258 33,995
Our growth has been focused on the development of our proprietary brands.
Through the development of our proprietary brands, we have has transformed our
Company from an owner/operator into a more diversified company with ownership,
franchise and management interests, and have positioned the Company to generate
additional revenues with minimal capital investment.
The hotel and leisure industry is seasonal in nature; however, the periods
during which the Company's properties experience higher hotel revenue activities
vary from property to property and depend principally upon location. The
Company's revenues historically have generally been lower in the first and
fourth quarters than in the second and third quarters.
-8-
Operating results for the three months ended March 31, 2004 were impacted
by improvements in the economy. This has enabled us to implement a strategy of
increasing the average daily room rate ("ADR") by better yield management and
less reliance on discount distribution channels. Although this had a slightly
negative impact on occupancy, it resulted in higher margins and profitability.
As a result, for the three months ended March 31, 2004, revenues from comparable
hotels increased by 1.4% and gross operating profits on these hotels increased
by 6.6%. Overall, for the three months ended March 31, 2004, operating income
increased by $3.6 million, primarily due to the termination of our leases with
Hospitality Properties Trust ("HPT") and operating improvements. See below for a
reconciliation of EBITDA to net income (loss) from continuing operations.
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," "except," "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 or 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; 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 MONTHS ENDED MARCH 31, 2004 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2003
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 full-service hotels which are upscale
hotels operated under our Prime Hotels and Resorts brand and national franchise
agreements.
Owned and cash flow hotel revenues consist of lodging revenues (which
consist primarily of room, telephone and vending revenues) and food and beverage
revenues. Cash flow hotels are those that are managed and operated by Prime
under management agreements which provide for a guaranteed minimum cash flow to
the owners. At March 31, 2004, Cash flow hotels include 36 HPT properties (see
Note 8) and 18 hotels managed for Equity Inns.
Revenues from owned hotels decreased by $1.1 million or 1.7%, for the three
months ended March 31, 2004 compared to the same period in 2003, due to the sale
of hotels in 2003 partially offset by a 1.0% increase in revenue per available
room ("REVPAR") of comparable hotels.
Revenues from cash flow hotels increased by $14.5 million or 69.5% due to
the addition of twelve full service hotels.
The following table illustrates the REVPAR change, by segment for all owned
and managed-cash flow hotels which were operated for comparable three month
periods in 2004 and 2003.
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2004 2003 % CHANGE
------- ------- --------
AMERISUITES
Occupancy 58.4% 57.4%
ADR $ 69.89 $ 68.63
REVPAR $ 40.84 $ 39.42 3.6%
WELLESLEY INNS & SUITES
Occupancy 57.5% 62.7%
ADR $ 60.08 $ 56.09
REVPAR $ 34.55 $ 35.19 (1.8%)
FULL-SERVICE
Occupancy 52.0% 54.1%
ADR $114.13 $112.33
REVPAR $ 59.40 $ 60.79 (2.3%)
TOTAL
Occupancy 57.7% 58.9%
ADR $ 69.59 $ 67.21
REVPAR $ 40.14 $ 39.59 1.4%
For the first quarter of 2004, we reported a 3.6% REVPAR increase at our
comparable AmeriSuites hotels, as occupancy increased by 1.0 percentage point to
58.4% and ADR increased by 1.8% to $69.89. Increases were reported in Dallas,
Miami, Orlando and Phoenix while decreases were posted in Chicago and Nashville.
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For the first quarter of 2004, we reported a 1.8% REVPAR decrease at our
comparable Wellesley Inns & Suites hotels, ADR increased by 7.1% to $60.08 and
occupancy decreased by 5.2 percentage points to 57.5%. The South Florida and
Phoenix markets reported increases while revenues decreased in Austin and the
Northeast.
Prime's upscale full-service hotels, which are located in the Northeast,
reported a 2.3% REVPAR decrease for the first quarter of 2004 as occupancy
decreased by 2.1 percentage points to 52.0% and ADR increased by 1.6% to
$114.13. The full-service hotels were impacted by a decrease in group business
at the Saratoga Springs, NY hotel.
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 increased by $0.8 million or
15.2% for the three months ended March 31, 2004 compared to the same period in
2003. The increase was due to the conversion of additional franchised hotels to
Prime brands, termination fees on one Wellesley Inn and the timing of
pass-through fees from global distribution service providers ("GDS") charged to
franchisees.
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). Operating
expenses for our Owned Hotels decreased by $1.6 million or 3.5%, for the three
months ended March 31, 2004 compared to the same period in 2003. Hotel operating
expenses, as a percentage of hotel revenues, for the Owned Hotels were 71.3% in
2004 and 72.7% in 2003. Margins improved due to the increase in ADR and
operating cost efficiencies.
Operating expenses for cash-flow hotels increased by $11.5 million or 45.3%
due to the addition of twelve full service hotels.
Brand operating expenses consist primarily of national brand advertising
expenses, reservation costs, costs of our frequent guest program and franchise
sales and support. Brand operating expenses increased by $0.7 million or 19.1%,
for the three months ended March 31, 2004 compared to the same period in 2003,
due primarily to the timing of pass-through GDS expenses.
General and administrative expense consists primarily of centralized
management expenses associated with operating the hotels, and corporate expense.
General and administrative expense increased by $0.3 million or 4.8% over the
same period in 2003 primarily due to normal inflationary increases.
Depreciation and amortization decreased by $0.4 million or 3.6%, for the
three months ended March 31, 2004 compared to the same period in the prior year
due to hotel sales.
Investment income decreased by $0.4 million or 94.3%, for the three months
ended March 31, 2004 compared to the same period in 2003 due to the forfeiture
of security deposits upon termination of the HPT leases in December 2003.
Interest expense decreased by $0.8 million or 14.4%, for the three months
ended March 31, 2004 compared to the same periods in 2003 due to debt reductions
and lower borrowings under the Company's $125 Million Revolving Credit Facility
(the "Credit Facility") than in the comparable period last year.
For the three months ended, March 31, 2003, gains on retirement of debt
related to the retirement of 8 3/8% Senior Subordinated Notes.
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Equity in earnings from joint ventures for the three months ended March 31,
2004 and 2003 related to the Meadowlands Venture and the Quebec Venture.
Discontinued operations for the three months ended March 31, 2004 and 2003
reflect the operations of hotels no longer operated by Prime and the associated
gain or loss on the disposal of these hotels.
EBITDA represents earnings before extraordinary items, interest expense,
provision for income taxes and depreciation and amortization and excludes
interest income on cash investments, other income and income from equity in
unconsolidated subsidiaries. EBITDA is used by the Company for the purpose of
analyzing its operating performance, leverage and liquidity. Hotel EBITDA
represents EBITDA generated from the operations of owned hotels. Hotel EBITDA
excludes management fee income, interest income from mortgages and notes
receivable, general and administrative expenses and other revenues and expenses
which do not directly relate to operations of owned hotels. EBITDA and Hotel
EBITDA are not measures of financial performance under accounting principles
generally accepted in the United States and should not be considered as
alternatives to net income as an indicator of the Company's operating
performance or as alternatives to cash flows as a measure of liquidity.
The following table reconciles income (loss) before discontinued operations to
EBITDA for the three months ended March 31, 2004 and 2003 (in thousands):
THREE MONTHS ENDED
MARCH 31
2004 2003
------- -------
Loss before discontinued operations .......... $(2,615) $(4,521)
Provision (benefit) for income taxes ......... (1,672) (2,891)
Equity in earnings of joint ventures ......... (74) (190)
Other (income) loss .......................... (11) -
(Gains) losses on retirement of debt ......... - (800)
Interest expense ............................. 4,818 5,628
Investment income ............................ (25) (442)
Depreciation and amortization ................ 10,255 10,633
------- -------
EBITDA ....................................... $10,676 $ 7,417
======= =======
The Company believes that the effect of inflation has not been material
during the three month periods ended March 31, 2003 and 2004.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had cash and cash equivalents of $14.4 million. We
may utilize any excess cash flow to grow our brands either through acquisitions
or new construction, to retire debt and/or repurchase shares.
Our major sources of cash for the three months ended March 31, 2004 were
operating cash flow of $3.1 million, borrowings of $5.0 million and proceeds
from the exercise of stock options of $1.9 million. Our major uses of cash
during the period were debt payments of $5.9 million, and capital expenditures
of $3.3 million.
As of March 31, 2004, we had borrowings of $35.0 million under our Credit
Facility at LIBOR +2.50%, or approximately 3.7%. The Credit Facility consists of
a $125 million revolving line of credit which expires in 2006 and is secured by
the equity interests of certain of Prime's subsidiaries. The Credit Facility
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 liens. In addition, the Credit
Facility requires that the Company must maintain a debt to EBITDA ratio of 4.25
times and an EBITDA to interest ratio of 2.50 times. As of March 31, 2004, our
debt to last twelve months EBITDA ratio was 3.75 times, our EBITDA to interest
ratio was 3.21 times and the Company was in compliance
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with these covenants. However, there can be no assurance that the Company will
continue to be in compliance with these covenants.
In April of 2004, we sold a parcel of vacant land for net proceeds of $1.6
million, which resulted in a gain of approximately $350,000.
The Company intends to continue the growth of its brands primarily through
franchising and, therefore, new construction spending will be limited. There are
currently no new construction projects underway. During the three months ended
March 31, 2004, we spent $3.3 million on capital additions which primarily
consisted of capital improvements at our owned hotels. We plan to fund capital
improvements at existing hotels primarily with internally generated cash flow.
At March 31, 2004, the Company has net operating loss carry forwards of
approximately $91.0 million which expire in the years 2006 through 2023 and are
available to offset future Federal taxable income. Included in the net operating
loss carry forwards at December 31, 2003, the Company has approximately $52.4
million relating to PMI, which expires in the year 2006 and is subject to an
annual limitation of $8.7 million under the Internal Revenue Code due to a
change in ownership of the Company upon consummation of the Plan.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes to the Company's off-balance sheet
arrangements and aggregate contractual obligations since the filing of the
Company's 2003 Form 10-K Annual Report.
CONTRACTUAL OBLIGATIONS
On April 3, 2003, a wholly owned subsidiary of the Company terminated lease
agreements on three hotels owned by ShoLodge, Inc. ("ShoLodge") due to operating
shortfalls which approximated $1.1 million in the previous twelve months. In
accordance with the lease termination, Prime forfeited its rights to receive a
$3.1 million payment in 2011 which was due at the end of the lease as
compensation for executing the lease agreement. ShoLodge has assumed management
of the hotels and is operating the hotels under new ten-year franchise
agreements with Prime, under the AmeriSuites flag. These franchise agreements
permit ShoLodge to terminate the agreements without termination fees upon proper
notice. The results of operations for these hotels are reflected in discontinued
operations, net of tax, in the accompanying financial statements. In addition, a
loss of $1.5 million, net of tax, was recorded in the three months ended March
31, 2003 in gain (loss) on disposal from discontinued operations for the net
assets associated with the lease.
In July 2003, a subsidiary of the Company did not make its scheduled July 1
rent payment of approximately $2.0 million on 24 AmeriSuites hotels and received
a default notice from Hospitality Properties Trust ("HPT"). Over the previous
twelve months, cash flow was negatively impacted by $11.5 million as rent
payments exceeded operating cash flow by $9.0 million and approximately $2.5
million was required to be set aside for capital improvements. In December 2003,
we terminated our lease agreement for 24 AmeriSuites hotels with HPT and entered
into a management agreement with HPT for the 24 AmeriSuites hotels and 12
full-service hotels to be re-branded under our Prime Hotels & Resorts chain. We
recorded a $33.7 million loss due to the write-off of assets associated with the
HPT lease agreement. The management agreement became effective on January 1,
2004 for the AmeriSuites hotels and February 1, 2004 for the Prime Hotels &
Resorts hotels. The term is 15 years and we have two renewal options of 15 years
each.
Under the agreement, HPT will receive an owner's priority return of $26
million per year. This
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return is guaranteed by Prime under a limited guarantee which caps the maximum
cash outlay by Prime over the life of the agreement at $30 million. Based on the
guaranteed amount and other facts and circumstances, the fair value of the
obligation was not material. Cash flow generated by the hotels in excess of $26
million per year will be split 50/50 between HPT and Prime with Prime's share
counting as its royalty and management fee. Also, as part of the agreement, HPT
will provide $25 million during the first two years to pay for re-branding and
other capital improvements on the 36 hotels.
SUMMARY OF INDEBTEDNESS
Combined aggregate principal maturities of debt as of March 31, 2004, are as
follows (in thousands):
8 3/8% CREDIT SCHEDULED
NOTES FACILITY AMORTIZATION TOTAL
-----------------------------------------------
2004 155 155
2005 1,144 1,144
2006 35,000 250 35,250
2007 272 272
2008 294 294
THEREAFTER 178,725 11,850 190,575
-----------------------------------------------
$178,725 $35,000 $13,965 $227,690
===============================================
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 March 31, 2004, the Company had $227.7 million of debt
outstanding of which $192.7 million bears interest at fixed rates. The interest
rate on the Company's Credit Facility, under which $35.0 million was outstanding
at March 31, 2004, is variable at a rate of LIBOR + 2.50%. A hypothetical 100
basis point adverse move (increase) on short-term interest rates on the floating
rate debt outstanding at March 31, 2004 would adversely affect Prime's annual
interest cost by approximately $0.4 million assuming borrowed amounts under the
Credit Facility remained at $35.0 million.
ITEM 4. CONTROLS AND PROCEDURES
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-15(e) and 15d-15(e) under the Exchange Act), as of the end
of the period covered by this report. 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.
There have been no changes in our internal control over financial reporting
during the last fiscal quarter that have materially affected, or are reasonably
likely to affect, the Company's internal control over financial reporting.
-14-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Currently and from time to time we are involved in litigation arising in
the ordinary course of its business. We do not believe that we are involved in
any litigation, that is likely, individually or in the aggregate, to have a
material adverse effect on our financial condition or results of operations or
cash flows.
On August 18, 1999, plaintiff Nick Pourzal, a former employee of Prime,
filed a complaint against the Company in the United States District Court for
the Virgin Islands. The complaint alleges that the Company contracted in 1978 to
pay plaintiff ten percent of the pre-tax earnings on any use or sale of a
16.354-acre property on St. Thomas, U.S. Virgin Islands known as the "Gilbert
Land," and that the Company breached this contract by making commercial use of
the Gilbert Land without paying the plaintiff. On January 13, 2003, plaintiff
filed a motion for leave to file a second amended compliant, to add claims for
(i) conspiracy to violate the Virgin Islands Plant Closing Act, (ii) prima facie
tort and (iii) to confirm an arbitration award relating to the Company's
termination of plaintiff's employment in 1999. The complaint seeks compensatory,
incidental and consequential damages, interest and costs, a declaratory judgment
that the Company is liable for payment of ten percent of pre-tax earnings on use
or sale of the Gilbert Land, and attorneys' fees and expenses. We believe that
the plantiff's action is without merit and intend to vigorously defend this
case.
On June 13, 2003, Southeast Texas Inns, Inc. ("Southeast Texas Inns") filed
a Complaint against the Company, May-Ridge, L.P. ("May-Ridge") and Ridgewood
Holdings Corp. ("Ridgewood"), which is now pending before the United States
District Court for the Middle District of Tennessee. The Complaint alleges that
May-Ridge has defaulted under a Lease Agreement, dated as of July 9, 2000, with
Southeast Texas Inns pursuant to which May-Ridge leased three properties located
in Texas (the "Three Properties") that were operated as AmeriSuites Hotels. On
April 2, 2003, Southeast Texas Inns, as landlord, terminated the Lease Agreement
for default and May-Ridge surrendered the three properties to Southeast Texas
Inns. In the Complaint, Southeast Texas Inns seeks actual and liquidated damages
in an amount in excess of $10 million against May-Ridge and Ridgewood, which is
the sole general partner of May-Ridge. Southeast Texas Inns also seeks to hold
Prime jointly liable for all damages under the Lease Agreement, to which the
Company is not a party. We filed a motion to dismiss the Complaint against the
Company on August 19, 2003, which was granted subject to no new evidence being
brought by Southeast Texas Inns. On April 21, 2004, Southeast Texas filed a
second complaint against the Company seeking to reinstate its claim for damages
under the Lease Agreement.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
Exhibit 31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
Exhibit 32.1 Certification of CEO pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
Exhibit 32.2 Certification of CFO pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
(b) Reports on Form 8-K
On April 29, 2004, the Company issued a press release regarding
earnings for the first quarter of 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME HOSPITALITY CORP.
Date: May 10, 2004 By: /s/ A.F. Petrocelli
-------------------
A.F. Petrocelli
President and Chief Executive
Officer
Date: May 10, 2004 By: /s/ Richard T. Szymanski
------------------------
Richard T. Szymanski
Senior Vice President and Chief
Financial Officer
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