10-Q 1 y65615e10vq.txt PRIME HOSPITALITY CORP. 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. - 9 - 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 - 10 - 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. - 11 - 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, - 12 - 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. - 13 - 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 - 14 - 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. - 15 - 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 - 16 -