10-Q 1 0001.txt QUARTERLY REPORT FORM 10-Q SECURITIES EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 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 45,097,305 shares of common stock, $.01 par value outstanding, as of August 9, 2000. PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION NUMBER Item 1. Financial Statements Consolidated Balance Sheets December 31, 1999 and June 30, 2000 ............................1 Consolidated Statements of Income Three and Six Months Ended June 30, 1999 and June 30, 2000 .....2 Consolidated Statements of Cash Flows Six Months Ended June 30, 1999 and June 30, 2000 ...............3 Notes to Interim Consolidated Financial Statements..................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................9 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................17 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................18 Item 2. Changes in Securities and Use of Proceeds..........................18 Item 3. Defaults upon Senior Securities....................................18 Item 4. Submission of Matters to a Vote of Security Holders................18 Item 5. Other Information..................................................19 Item 6. Exhibits and Reports on Form 8-K...................................19 Signatures .................................................................20 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
December 31, June 30, 1999 2000 -------------------- --------------------- ASSETS (Unaudited) ------ Current assets: Cash and cash equivalents ....................................... $7,240 $27,045 Marketable securities available for sale ........................ 8,262 4,831 Accounts receivable, net of reserves ............................ 21,379 28,278 Current portion of mortgages and notes receivable ............................................ 1,920 4,285 Other current assets ............................................ 16,879 16,622 -------------------- --------------------- Total current assets ..................................... 55,680 81,061 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization ................ 1,093,123 1,035,573 Properties held for sale ............................................. 134,596 38,318 Mortgages and notes receivable, net of current portion ................................................. 11,750 12,228 Other assets ......................................................... 33,630 32,701 -------------------- --------------------- TOTAL ASSETS ............................................. $1,328,779 $1,199,881 ==================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt ......................................... $5,547 $2,021 Current portion of deferred income .............................. 10,322 12,769 Other current liabilities ....................................... 61,225 68,224 -------------------- --------------------- Total current liabilities ................................ 77,094 83,014 Long-term debt, net of current portion ............................... 543,485 403,818 Other liabilities .................................................... 5,223 7,087 Deferred income ...................................................... 70,977 66,849 -------------------- --------------------- Total liabilities ........................................ 696,779 560,768 Commitments and contingencies ----- ----- Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued ................... ----- ----- Common stock, par value $.01 per share; 75,000,000 shares authorized; 55,757,340 and 55,792,218 shares issued and outstanding at December 31, 1999 and June 30, 2000, respectively ................................................ 557 558 Capital in excess of par value .................................. 519,834 521,638 Retained earnings ............................................... 194,466 229,319 Accumulated other comprehensive loss, net of taxes ................................................ (2,694) (2,927) Treasury stock (7,263,578 shares at December 31, 1999 and 10,972,478 shares at June 30, 2000) ..................... (80,163) (109,475) -------------------- --------------------- Total stockholders' equity ............................... 632,000 639,113 -------------------- --------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $1,328,779 $1,199,881 ==================== =====================
SEE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -1- PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 2000 1999 2000 ------------ ------------- ------------ ------------ Revenues: Lodging ...................................................... $125,450 $121,860 $241,763 $242,885 Food and beverage ............................................ 15,761 11,864 28,986 24,971 Management, franchise and other fees ......................... 4,081 6,611 7,106 10,069 Interest on mortgages and notes receivable .......................................... 729 306 1,465 607 ------------ ------------- ------------ ------------ Total revenues ........................................ 146,021 140,641 279,320 278,532 Costs and expenses: Direct hotel operating expenses: Lodging ................................................... 31,172 30,884 59,560 62,068 Food and beverage ......................................... 10,556 8,147 19,998 17,397 Selling and general ....................................... 28,559 25,630 58,088 55,883 Occupancy and other operating ................................ 18,653 19,026 36,550 37,613 General and administrative ................................... 7,353 9,120 15,540 17,266 Depreciation and amortization ................................ 12,224 11,083 24,904 21,781 Other charges ................................................ 1,411 -- 3,911 -- ------------ ------------- ------------ ------------ Total costs and expenses .............................. 109,928 103,890 218,551 212,008 Operating income .................................................. 36,093 36,751 60,769 66,524 Investment income ................................................. 198 325 721 565 Interest expense .................................................. (10,741) (10,562) (19,383) (23,292) Other income ...................................................... 1,112 13,481 3,434 13,833 ------------ ------------- ------------ ------------ Income before income taxes and cumulative effect of a change in accounting principle .... 26,662 39,995 45,541 57,630 Provision for income taxes ........................................ 10,398 15,598 17,761 22,476 ------------ ------------- ------------ ------------ Income before the cumulative effect of a change in accounting principle ......................................... 16,264 24,397 27,780 35,154 Cumulative effect of a change in accounting principle, net of taxes ........................... -- -- (5,315) -- Extraordinary items - loss on discharge of indebtedness .............................................. -- -- -- (302) ------------ ------------- ------------ ------------ Net income . ...................................................... $ 16,264 $ 24,397 $ 22,465 $ 34,852 ============ ============= ============ ============ Earnings per common share: Basic: Income before the cumulative effect of a change in accounting principle ...................................... $ 0.32 $ 0.54 $ 0.54 $ 0.75 Cumulative effect of a change in accounting principle ........ -- -- (0.10) -- Extraordinary items - loss on discharge of indebtedness ........................................... -- -- -- -- ------------ ------------- ------------ ------------ Net earnings. ..................................................... $ 0.32 $ 0.54 $ 0.44 $ 0.75 ============ ============= ============ ============ Diluted: Income before the cumulative effect of a change in accounting principle ...................................... $ 0.31 $ 0.53 $ 0.52 $ 0.74 Cumulative effect of a change in accounting principle ........ -- -- (0.10) -- Extraordinary items - loss on discharge of indebtedness ........................................... -- -- -- -- ------------ ------------- ------------ ------------ Net earnings ...................................................... $ 0.31 $ 0.53 $ 0.42 $ 0.74 ============ ============= ============ ============
SEE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -2- PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (IN THOUSANDS)
1999 2000 ------------- ------------ Cash flows from operating activities: Net income ............................................................ $22,465 $34,852 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................................... 24,904 21,781 Extraordinary item - loss on discharge of indebtedness ............. -- 496 Valuation adjustments .............................................. 2,500 -- Amortization of deferred financing costs ........................... 1,553 1,699 Utilization of net operating loss carryforwards .................... 1,660 1,529 Cumulative effect from a change in accounting principle ............ 8,713 -- Net loss (gain) on asset disposals ................................. 564 (13,833) Deferred income taxes .............................................. 1,955 1,947 Amortization of deferred gain ...................................... (5,014) (4,992) Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable ............................................ (6,116) (6,898) Other current assets ........................................... 2,842 310 Other liabilities .............................................. (5,124) (777) ------------- ------------ Net cash provided by operating activities ...................... 50,902 36,114 Cash flows from investing activities: Proceeds from mortgages and notes receivable .......................... 364 184 Disbursements for mortgages and notes receivable ...................... -- (355) Proceeds from sales of property, equipment and leasehold improvements . 43,041 157,849 Construction of new hotels ............................................ (65,586) (11,271) Purchases of property, equipment and leasehold improvements ........... (11,707) (8,555) Decrease in restricted cash ........................................... 5,789 -- Proceeds from sales of marketable securities .......................... 7,725 -- Purchases of marketable securities .................................... (1,652) -- Proceeds from officer's life insurance ................................ 4,706 -- Other ................................................................. (1,420) (2,183) ------------- ------------ Net cash (used in) provided by investing activities ............ (18,740) 135,669 Cash flows from financing activities: Net proceeds from issuance of debt .................................... 10,000 30,835 Payments of debt ...................................................... (19,918) (153,778) Proceeds from the exercise of stock options ........................... 3,137 276 Treasury stock purchases .............................................. (26,773) (29,311) ------------- ------------ Net cash (used in) financing activities ........................ (33,554) (151,978) ------------- ------------ Net (decrease) increase in cash and cash equivalents .................. (1,392) 19,805 Cash and cash equivalents at beginning of period ...................... 12,534 7,240 ------------- ------------ Cash and cash equivalents at end of period ............................ $11,142 $27,045 ============= ============ SUPPLEMENTAL CASH FLOW DISCLOSURES OF NON-CASH ACTIVITIES: Hotels sold in exchange for assumption of debt ........................ -- $17,364 Note receivable and equity interest received from the sale of hotels .. -- $3,348 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid ......................................................... $19,580 $24,323 Income taxes paid ..................................................... $14,361 $13,698
SEE ACCOMPANYING NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS. -3- PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION In the opinion of management, the accompanying interim unaudited consolidated financial statements of Prime Hospitality Corp. and subsidiaries (the "Company") contain all material adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2000 and the results of its operations for the three and six months ended June 30, 1999 and 2000 and cash flows for the six months ended June 30, 1999 and 2000. The consolidated financial statements for the three and six months ended June 30, 1999 and 2000 were prepared on a consistent basis with the audited consolidated financial statements for the year ended December 31, 1999. Certain reclassifications have been made to the June 30, 1999 consolidated financial statements to conform them to the June 30, 2000 presentation. The consolidated results of operations for the three and six months ended June 30, 2000 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, 1999. NOTE 2 - ACCOUNTING POLICIES In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137, amending Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which extended the required date of adoption to fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not yet quantified the impact of adopting SFAS 133 on its financial statements, however, the Company expects the impact to be immaterial due to its limited derivative activity. In January 1999, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). The Company recorded a $5.3 million charge, net of taxes, for the cumulative effect of a change in accounting principle to write off any unamortized pre-opening costs that remained on the balance sheet at the date of adoption. Additionally, subsequent to the adoption of this new standard, all future pre-opening costs are expensed as incurred. -4- NOTE 3 - HOTEL DISPOSITIONS In February 2000, the Company's five remaining HomeGate hotels and the Company's rights to the HomeGate brand name were sold for approximately $17.7 million, including the assumption of debt by the purchaser of approximately $17.4 million related to these properties. In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during the six months ended June 30, 1999, the Company had reduced the carrying value of the assets by $2.5 million, to reflect the estimated fair value of the hotels. In March 2000, the Company sold its Frenchman's Reef hotel in St. Thomas, U.S.V.I. ("Frenchman's Reef") for $73.0 million. The Company utilized $40.0 million of the proceeds to retire debt encumbering the hotel and the remainder was used for the repayment of other debt and the repurchase of the Company's common stock. Upon repayment of the debt associated with this hotel, the Company also expensed unamortized deferred financing costs of approximately $546,000, which is included in extraordinary items, net of income taxes, in the accompanying consolidated financial statements. During the six months ended June 30, 2000, the Company sold four AmeriSuites hotels, for $46.6 million five Wellesley Inns for $25.5 million, one full-service hotel for $18.2 million and three land parcels for $3.2 million. The asset sales transactions generated net gains of approximately $13.8 million for the six months ended June 30, 2000, which are included other income, net in the accompanying consolidated financial statements. The Company also retained the franchise rights on the four AmeriSuites and five Wellesley Inn sales under 20 year franchise agreements. In addition, the Company entered into management agreements on one of the sold AmeriSuites and three of the sold Wellesley Inns. NOTE 4 - DEBT During the six months ended June 30, 2000 the Company retired $15.2 million of its $120 million First Mortgage Notes due 2006 ("First Mortgage Notes"). Included in the accompanying consolidated financial statements is an extraordinary gain on the discharge of indebtedness of approximately $51,000 related to this retirement. NOTE 5 - 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 51.3 million and 45.1 million for the three months ended June 30, 1999 and 2000, respectively, and 51.8 million and 46.5 million for the six months ended June 30, 1999 and 2000, respectively. -5- Diluted earnings per common share reflect adjustments to basic earnings per common share for the dilutive effect of stock options. The weighted average number of common shares used in computing diluted earnings per common share was 53.0 million and 45.9 million for the three months ended June 30, 1999 and 2000, respectively, and 53.3 million and 47.2 million for the six months ended June 30, 1999 and 2000, respectively. NOTE 6 - TREASURY STOCK Under its stock repurchase program, the Company purchased approximately 3.7 million shares of its common stock during the six months ended June 30, 2000 for $29.3 million for a total average cost of $7.90 per share. The Company's $200 Million Revolving Credit Facility (the "Revolving Credit Facility"), allows for stock repurchases equal to 50% of net proceeds from asset sales with repurchases not to exceed $100.0 million. As of August 10, 2000, the Company has repurchased $32.1 million of its shares under this covenant and has $24.8 million of availability based on the proceeds from asset sales. NOTE 7 - INTEREST EXPENSE The Company capitalizes interest related to borrowings used to finance hotel construction. Capitalized interest was approximately $3.1 million and $559,000 for the three months ended June 30, 1999 and 2000, respectively, and $8.5 million and $1.0 million for the six months ended June 30, 1999 and 2000, respectively. Also included in interest expense is the amortization of deferred financing fees of $788,000 and $835,000 for the three months ended June 30, 1999 and 2000, respectively, and $1.6 million and $1.7 million for the six months ended June 30, 1999 and 2000, respectively. Note 8 - Comprehensive Income For the three and six months ended June 30, 1999 and 2000, comprehensive income consisted of the following (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 1999 2000 1999 2000 ----------- ----------- ------------ ---------- Net income $16,264 $24,397 $22,465 $34,852 Unrealized gain (loss) on marketable securities available for sale, net of income taxes 709 (235) (2,049) (233) ----------- ----------- ------------ ---------- Total $16,973 $24,162 $20,416 $34,619 =========== =========== ============ ==========
Note 9 - Geographic and Business Information The Company's hotels currently service three major lodging industry segments: the all-suites segment, under its AmeriSuites brand; the limited-service segment, primarily under its Wellesley Inn & Suites brand; and the full-service segment under major national franchises. The Company's 101 AmeriSuites are upscale hotels located in 30 states throughout the United States. The 66 Wellesley Inn & Suites ("Wellesley Inn") hotels compete in the mid-price -6- segment, and are primarily located in the Northeast, Texas and Florida regions of the United States. The Company's full-service hotels are primarily located in the northeastern region of the United States. On November 1, 1999, the Company converted 38 of its 43 extended-stay HomeGate hotels into its limited-service Wellesley Inn & Suites brand. The conversion changed the customer base from extended-stay to transient. In March 2000, the Company sold the remaining five HomeGate hotels and its rights to the HomeGate brand name and no longer operates in the extended-stay segment. As a result, segment information for the prior period has been restated to conform to this change. The Company evaluates the performance of its segments based primarily on earnings before interest, taxes and depreciation and amortization ("Hotel EBITDA") generated by the operations of its owned hotels. Interest expense is primarily related to debt incurred by the Company through its corporate obligations and collateralized by certain of its hotel properties. The Company files a consolidated Federal income tax return and therefore 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 and taxes is not evaluated at the segment level and is not believed to be material to these consolidated statements. The difference between segment data and consolidated financial information relates to corporate activity not specific to the Company's reportable segments. The following table presents revenues and other financial information for the owned hotels by business segment for the three and six months ended June 30, 1999 and 2000 (in thousands):
Three Months Ended June 30, 1999 All-suites Limited-Service Full-Service Consolidated -------------------------------- ---------- --------------- ------------ ------------ Revenues (1)......................... $63,623 $26,580 $51,008 $141,211 Hotel EBITDA (2)..................... 25,717 10,660 14,130 50,507 Depreciation and amortization........ 5,830 3,394 2,786 12,010 Capital expenditures................. 15,631 8,302 2,988 26,921 Total Assets......................... 643,402 429,841 216,221 1,289,464 ------------------------------------- Three Months Ended June 30, 2000 All-suites Limited-Service Full-Service Consolidated --------------------------------- ---------- --------------- ------------ ------------ Revenues (1)......................... $61,499 $28,637 $43,588 $133,724 Hotel EBITDA (2)..................... 22,961 11,598 12,253 46,812 Depreciation and amortization........ 5,215 3,488 2,126 10,829 Capital expenditures................. 5,788 1,805 963 8,556 Total Assets......................... 548,899 393,681 119,885 1,062,465 Six Months Ended June 30, 1999 All-suites Limited-Service Full-Service Consolidated ------------------------------ ---------- --------------- ------------ ------------ Revenues (1)......................... $120,805 $53,153 $96,791 $270,749 Hotel EBITDA (2)..................... 46,816 22,534 25,658 95,008 Depreciation and amortization........ 11,580 6,806 6,091 24,477 Capital expenditures................. 42,484 27,564 4,796 74,844 Total Assets......................... 643,402 429,841 216,221 1,289,464 ------------------------------------- Six Months Ended June 30, 2000 All-suites Limited-Service Full-Service Consolidated ------------------------------- ---------- --------------- ------------ ------------ Revenues (1)......................... $119,356 $58,587 $89,913 $267,856 Hotel EBITDA (2)..................... 43,217 23,882 22,212 89,311 Depreciation and amortization........ 10,161 6,739 4,359 21,259 Capital expenditures................. 11,065 4,119 3,027 18,211 Total Assets......................... 548,899 393,681 119,885 1,062,465
((1))Revenues represent lodging and food & beverage related revenues, only. ((2))Hotel EBITDA represents earnings before interest, income taxes, depreciation and amortization from the hotels. -7- NOTE 10 - SUBSEQUENT EVENTS In July 2000, the Company sold one Wellesley Inn hotel located in Orlando, FL for $3.3 million. In addition, the Company will receive franchise fees under a 20-year franchise agreement. In July 2000, the Company acquired the leasehold interests on 27 Sumner Suites hotels from Sholodge, Inc. ("Sholodge") with the intention of converting them to AmeriSuites. In addition, three additional AmeriSuites will be built, two of which will be funded by Sholodge and one by Prime. The hotels are located in 12 states primarily in the Southeast, Midwest and Southwest regions of the United States and have an average age of approximately three years. Prime will operate the hotels as Sumner Suites until the conversion date which is projected to be November 1. The transaction increases the AmeriSuites brand by 30% over its current level. -8- PART I. FINANCIAL INFORMATION 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, manager and franchisor of hotels, with 231 hotels in operation containing 29,879 rooms located in 33 states (the "Portfolio") as of August 10, 2000. Prime controls two hotel brands -- AmeriSuites (R) and Wellesley Inn & Suites (R) -- as well as a portfolio of upscale, full-service hotels operated under franchise agreements with national hotel chains. As of August 10, 2000, the Company owned and operated 142 hotels (the "Owned Hotels"), operated 52 hotels under lease agreements with real estate investment trusts (the "Leased Hotels"), managed 20 hotels for third parties (the "Managed Hotels"), and franchised 17 hotels which it does not operate (the "Franchised Hotels"). Included in the Portfolio are 36 AmeriSuites and six Wellesley Inn & Suites hotels owned by third parties, operated pursuant to franchise agreements, 25 of which are operated by Prime under lease or management agreements. Prime's portfolio consists primarily of new, well-maintained hotels, with an average age of approximately 7 years. The Company's strategy is to develop its proprietary AmeriSuites and Wellesley Inn & Suites brands primarily through franchising. The Company currently has 101 AmeriSuites and 66 Wellesley Inn & Suites in operation. Through the development of its proprietary brands, the Company is transforming itself from an owner/operator into a franchisor and manager and has positioned itself to generate additional revenues with minimal capital investment. In addition to the current 36 franchised AmeriSuites and 6 franchised Wellesley Inn & Suites, the Company currently has 62 executed franchise agreements for new AmeriSuites to be built. In 2000, the first four franchisee constructed AmeriSuites were opened. All other franchise agreements related to opened hotels were generated pursuant to asset sales. Prime's strategy is also focused on growing the operating profits of its Portfolio. With over 200 hotels in operation, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets. On November 1, 1999, the Company converted 38 of its 43 extended-stay HomeGate hotels into its limited-service Wellesley Inn & Suites brand. In 2000, the Company sold the remaining five HomeGate hotels and the Company's rights to the HomeGate brand name. The conversion changed the hotels' customer base from extended-stay to transient. The Company believes this will enhance the value of its existing hotels, create efficiencies by adding critical mass to the chain and improve its franchising prospects for the Wellesley Inn & Suites brand. For the first six months of 2000, revenue per available room (REVPAR) increased by 4.4% over the comparable period of the prior year for the hotel. -9- In July 2000, the Company acquired the leasehold interests on 27 Sumner Suites hotels from Sholodge, Inc. ("Sholodge") with the intention of converting them to AmeriSuites. In addition, three additional AmeriSuites will be built, two of which will be funded by Sholodge and one by Prime. The hotels are located in 12 states primarily in the Southeast, Midwest and Southwest regions of the United States and have an average age of approximately three years. Prime will operate the hotels as Sumner Suites until the conversion date which is projected to be November 1. The transaction increases the AmeriSuites brand by 30% over its current level. For the three months ended June 30, 2000, net income increased by 50.0% from $16.3 million in 1999 to $24.4 million for the same three-month period in 2000. These results were impacted by the effect of hotel divestitures, reserves and other charges and capitalized interest. Earnings before asset transactions and other charges for the three months ended June 30, 2000 grew by 49.7% over the same three-month period in the prior year to $24.4 million. The Company's earnings before interest, taxes and depreciation and amortization ("EBITDA") decreased by 3.8% to $47.8 million for the three months ended June 30, 2000. Hotel EBITDA also decreased by 7.3% to $46.8 million during the same three-month period. The decreases are attributable to the Company's continual effort to divest of its hotel assets, utilizing the proceeds from such sales to reduce its existing debt and repurchase its outstanding shares of common stock. Excluding the impact from hotel divestitures in the past year, revenues grew over the same three and six-month periods in the prior year by 10.0% and 10.7%, respectively. Hotel EBITDA also grew during the same periods by 9.6% and 10.7%, respectively. EBITDA represents earnings before extraordinary items, interest, taxes, depreciation and amortization. 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 the operations of Owned Hotels. The Company's hotels operate in three segments of the industry: the upscale all-suites segment, under the Company's proprietary AmeriSuites brand and the mid-price limited-service segment, primarily under the Company's proprietary Wellesley Inn & Suites brand; the upscale full-service segment, under major national franchises. The following table illustrates the Hotel EBITDA contribution from each segment (in thousands) for the three and six months ended June 30, 1999 and 2000:
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------- --------------------------------------------- 1999 2000 1999 2000 -------------------- --------------------- --------------------- --------------------- % Of % Of % Of % Of Amount Total Amount Total Amount Total Amount Total --------- -------- --------- --------- --------- --------- --------- --------- All-suites $25,717 50.9% $22,961 49.0% $46,816 49.3% $43,217 48.4% Limited-service 10,660 21.1% 11,598 24.8% 22,534 23.7% 23,882 26.7% Full-service 14,130 28.0% 12,253 26.2% 25,658 27.0% 22,212 24.9% ------- ----- ------- ----- ------- ----- ------- --- $50,507 100.0% $46,812 100.0% $95,008 100.0% $89,311 100.0% Total ======= ===== ======= ===== ======= ===== ======= =====
Hotel EBITDA reflects the growth of the Company's proprietary brands. The Company expects the relative contribution from its proprietary brands to continue to increase. -10- The Company evaluates the performance of its segments based primarily on EBITDA generated by the operations of its 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. 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. 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. -11- RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 Lodging revenues, which include room revenues and other related revenues such as telephone and vending, decreased by $3.6 million, or 2.9%, for the three months ended June 30, 2000, as compared to the same period in 1999. The decrease was primarily due to loss revenues attributed to the disposal of 22 properties sold subsequent to June 30, 1999. Incremental revenues of $5.6 million from new and the converted Wellesley Inn & Suites hotels and higher revenues for comparable Owned Hotels, which increased by $3.5 million, or 5.0%, offset this decrease. Lodging revenues for the six months ended June 30, 2000 increased by $1.1 million or .5%, as compared to the same period in 1999. Lodging revenues for the six months ended June 30, 2000 increased due to incremental revenues of $14.1 million from new and converted hotels and higher revenues from comparable Owned Hotels, which increased by $5.0 million, or 4.0%. Revenues associated with hotels sold subsequent to June 30, 1999 offset this increase. The following table sets forth hotel operating data for the comparable Owned Hotels for the three and six months ended June 30, 2000 as compared to the same period in 1999, by product type:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1999 2000 %Change 1999 2000 %Change ---- ---- ------- ---- ---- ------- AMERISUITES OCCUPANCY 68.4% 72.4% 66.4% 70.0% ADR $82.60 $81.69 $82.99 $81.95 REVPAR $56.50 $59.14 4.7% $55.08 $57.33 4.1% FULL-SERVICE OCCUPANCY 76.7% 79.0% 68.3% 70.5% ADR $105.29 $110.50 $104.43 $108.24 REVPAR $80.81 $87.26 8.0% $71.27 $76.36 7.1% WELLESLEY INN OCCUPANCY 75.3% 74.2% 75.1% 72.8% ADR $55.81 $58.51 $62.66 $65.19 REVPAR $42.04 $43.41 3.2% $47.07 $47.48 .9% TOTAL OCCUPANCY 71.0% 73.9% 68.2% 70.5% ADR $81.58 $82.69 $82.52 $83.32 REVPAR $57.93 $61.07 5.4% $56.29 $58.75 4.4%
-12- The improvements in REVPAR at comparable Owned Hotels were generated by higher occupancy percentages, which rose by approximately 4.1% and 3.4%, for the three and six month periods, respectively, and ADR growth of 1.4% and 1.0% for the three and six month periods, respectively. The REVPAR increases reflect the growing recognition of the AmeriSuites and Wellesley brands and favorable industry trends in the Northeast where the full-service hotels are located. The Company's 38 Wellesley Inn & Suites, which were converted from the HomeGate brand and are classified as non-comparable, achieved a 64.7% and 61.7% occupancy rate, respectively, and a $59.31 and $59.71 ADR, respectively for the three and six months ended June 30, 2000, which reflects a 24.0% and 17.3% increase from the comparable periods of 1999. Food and beverage revenues for the three and six months ended June 30, 2000 decreased by $3.9 million and $4.0 million, or 24.7% and 13.8%, respectively, as compared to the same period in the prior year primarily due to the sale of the Frenchman's Reef Marriott hotel, which was sold on March 15, 2000. Food and beverage revenues at comparable hotels for the three month period decreased slightly due to renovations at two restaurants, while food and beverage revenues at comparable hotels for the six-month period increased by $300,000, or 2.6%, to $11.8 million, due to increased banquet business. Management, franchise and other fees consists primarily of base, incentive and other fees earned under management agreements, royalty fees earned under franchise agreements, sales commissions earned by the Company's national sales group and rental income. Management, franchise and other fees increased by $2.5 million and $3.0 million, or 62.0% and 41.7%, respectively, for the three and six months ended June 30, 2000 as compared to the same period in 1999, due to additional Managed and Franchised Hotels. Interest on mortgages and notes receivable primarily relates to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $423,000 and $858,000, respectively, for the three and six months ended June 30, 2000 as compared to the same period in 1999 due to the settlement of various cash flow notes during 1999. Direct lodging expenses decreased by $288,000, or .9%, for the three months ended June 30, 2000, as compared to the same period in 1999, due primarily to hotel divestitures. For the six months ended June 30, 2000, direct lodging expenses increased by $2.5 million, or 4.2%, as compared to the same period in 1999. As a percentage of lodging revenue, direct lodging expenses also increased from 24.8% to 25.3% and from 24.6% to 25.6% for the three and six-month periods, respectively. The increases are primarily due to higher travel agent commissions and hotel payroll costs, particularly at the staff level. Direct food and beverage expenses for the three and six months ended June 30, 2000 decreased by $2.4 million and $2.6 million, or 22.8% and 13.0%, respectively, as compared to the same period in 1999, due primarily to the sale of the Frenchman's Reef. As a percentage of food and beverage revenues, direct food and beverage expenses increased from 67.0% to 68.7% for the three-month period and from 69.0% to 69.7% for the six-month period as compared to the -13- same periods in the prior year. The increases were attributed to the higher margins at the Frenchman's Reef. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels, which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses decreased by $2.9 million and $2.2 million, or 10.3% and 3.8%, respectively, for the three and six months ended June 30, 2000, as compared to the same periods in 1999, due primarily to hotel divestitures. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses decreased slightly from 20.2% to 19.2% for the three-month period and from 21.5% to 20.9% for the six-month period due to lower liability insurance costs. Occupancy and other operating expenses consist primarily of property insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses for the three and six months ended June 30, 2000 increased by $373,000 and $1.1 million or 2.0% and 2.9%, respectively, as compared to the same period in 1999 due to percentage rent at the Leased Hotel. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating the Owned, Leased and Managed Hotels and general corporate expenses. General and administrative expenses increased by $1.8 million and $1.7 million, or 24.0% and 11.1%, respectively, for the three and six months ended June 30, 2000 as compared to the same period in 1999, primarily due to increased advertising and other costs associated with the Company's franchising efforts. Depreciation and amortization expense decreased by $1.1 million and $3.1 million, or 9.3% and 12.5%, respectively, for the three and six months ended June 30, 2000 as compared to the same period in 1999 due to asset dispositions. Valuations and other charges for the six months ended June 30, 1999 consisted of a $2.5 million valuation reserve related to certain non-prototype HomeGate hotels. In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in 1999, the Company reduced the carrying value of the assets to reflect the estimated fair value of the hotels and subsequently sold the assets in 2000. Investment income increased by $127,000, or 64.0%, for the three months ended June 30, 2000 as compared to the same period in 1999, due to an overall increase in the Company's weighted average cash balances due to proceeds from the increased number of hotel divestitures during the three-month period. Investment income for the six months ended June 30, 2000 decreased by $156,000 due to an overall decrease in the Company's weighted average cash balances due to the Company's utilization of its proceeds from its hotel divestitures to reduce its debt balance and repurchase its common stock. Interest expense decreased by $179,000, or 1.7%, for the three months ended June 30, 2000 as compared to the same period in 1999, primarily due to a lower weighted average debt -14- balance offset by a reduction in the amount of interest capitalized during the three-month period as compared to the same period in 1999. Interest expense increased by $3.9 million or 20.2% for the six months ended June 30, 2000 as compared to the same period in 1999 primarily due to a reduction in the amount of interest capitalized. Capitalized interest decreased from $3.1 million to $500,000 for the three-month period ended June 30, 1999 and 2000, respectively, and from $8.5 million to $1.0 million for the six-month period ended June 30, 2000, respectively. Other income, net consists of income and losses from property transactions and other asset sales and retirements. For the three and six months ended June 30, 2000, other income, net consisted of $13.5 and $13.8 million, respectively, related to net gains on property transactions. For the three months ended June 30, 1999, other income, net consisted of $1.1 million related to net gains on property transactions. For the six months ended June 30, 1999, other income, net consisted of net gains on property transactions of $4.2 million, losses on the sales of marketable securities of $4.8 million and income from a contract termination fee of $4.0 million. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, the Company had cash, cash equivalents and current marketable securities of $31.9 million. In addition, at June 30, 2000, the Company had $92.1 million available under the Revolving Credit Facility. The Company's major sources of cash for the six months ended June 30, 2000 were net proceeds from the sales of hotels of $157.8 million, borrowings of $30.8 million and cash flow from operations of $36.1 million. The Company's principal uses of cash during the period were $153.8 million of debt repayments, primarily related to the Revolving Credit Facility and the retirement of debt related to the Frenchman's Reef, repurchases of its common stock totaling $29.3 million and capital expenditures of $19.8 million. For the six months ended June 30, 1999 and 2000, cash flow from operations was positively impacted by the utilization of net operating loss carry forwards ("NOLs") of $1.7 million and $1.5 million, respectively. At June 30, 2000, the Company had federal NOLs relating primarily to its predecessor, Prime Motor Inns, Inc., of approximately $56.8 million, which are subject to annual utilization limitations and will expire in 2006. SOURCES OF CAPITAL. The Company has undertaken a strategic initiative to dispose of certain hotel real estate while retaining the franchise rights and to invest the proceeds in the growth of its proprietary brands, the repurchase of the Company's common stock or the reduction of debt. During the six months ended June 30, 2000, the Company sold the Frenchman's Reef hotel for $73.0 million, the remaining five HomeGate hotels and all rights to the HomeGate brand name for $17.7 million, four AmeriSuites for $46.6 million, five Wellesley Inn and Suites for $25.3 million and one full service property for $18.2 million. The Company also sold three land parcels for $3.2 million. Subsequent to June 30, 2000, the Company sold one Wellesley Inn and Suites for $3.3 million. -15- The Company has a $200.0 million Revolving Credit Facility, which bears interest at LIBOR plus 2%. The facility is available through 2001 and may be extended for an additional year. The aggregate amount of the Revolving Credit Facility will be reduced to $175.0 million in December 2000 and to $125.0 million in December 2001. Borrowings under the facility are secured by first liens on certain of the Company's hotels with recourse to the Company. Additional properties may be added subject to the approval of the lenders. Availability under the facility is subject to a borrowing base test and certain other covenants. During the six months ended June 30, 2000, the Company had gross borrowings of $31.0 million related to this facility. During the six months ended, June 30, 2000, the Company had reduced the outstanding borrowings related to this facility from $125 million to $59.0 million with further availability of $92.1 million. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and limitations on the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. In October 1999, the Revolving Credit Facility was amended to allow an additional $100.0 million of share repurchases to be funded by 50% of the proceeds from asset sales. In April 2000, the Revolving Credit Facility was amended to allow for additional retirements of other debt owed by the Company. USES OF CAPITAL. The Company utilized the proceeds from asset sales along with its cash flow from operations, to reduce its debt balance during the year by $143.2 million to $405.8 million at June 30, 2000. This reduction of debt was primarily comprised of the gross payments or transfers of $62.0 million of mortgage debt on assets sold, the reduction in outstanding the Revolving Credit Facility debt of $97.0 million and the retirement of $15.3 million of the Company's $120 million First Mortgage Notes due 2006 ("First Mortgage Notes"). The Company had repurchased $12.2 million of these notes during the first quarter ended June 30, 2000 at a purchase price, which approximated the par value of the notes. In December 1999, the Company had repurchased $3.1 million of these notes for a purchase price of $3.0 million and subsequently retired these notes during 2000. Gross borrowing related to the Revolving Credit Facility of $31.0 million offset the reductions. The Company also purchased approximately 3.7 million shares of its common stock during the six months ended June 30, 2000 for $29.3 million at a total average cost of $7.90 per share. The purchases of these shares are limited by the Revolving Credit Facility to 50% of the proceeds from asset sales not to exceed $100 million. As of August 10, 2000, the Company has repurchased $32.1 million of its shares under this covenant and has $24.8 million of availability based on the proceeds from asset sales. The Company intends to continue the growth of its brands primarily through franchising and therefore, its corporate development will be limited. The Company spent $11.3 million during the six months ended June 30, 2000 on development spending and plans to spend an additional $20.0 million on five new AmeriSuites during the remainder of 2000. In addition, during the six months ended June 30, 2000, the Company also spent approximately $8.6 million on capital improvements at its Owned Hotels and expects to spend an additional $10-12 million on its Owned Hotels during the remainder of the year. This spending will include the conversion -16- of three limited-service hotels to Wellesley Inn & Suites and approximately $2.5 million for the conversion of the 27 Sumner Suites to the AmeriSuites brand. The Company plans to fund its corporate development and capital improvements with internally generated cash flow. In order to facilitate future tax-deferred exchanges of hotel properties, the Company from time to time enters into arrangements with an unaffiliated third party under Section 1031 of the Internal Revenue Code of 1986, as amended. As of June 30, 2000 , the Company had advances of approximately $143.8 million to such third party, which advances are classified as property, equipment and leasehold improvements in the Company's accompanying financial statements. YEAR 2000 READINESS. In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $1.0 million during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000, and will work to promptly address any latent year 2000 matters that may arise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates primarily from its floating rate debt arrangements. A hypothetical 100 basis point adverse move (increase) in interest rates along the entire rate curve would adversey affect the Company's annual interest cost by approximately $762,000 annually. In October 1999, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.03% and receives a floatinig interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement commenced in October 1999 and expires in October 2001. -17- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in certain legal proceedings incidental to the normal conduct of its business. The company does not believe that any liabilities relating to any of the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to its consolidated financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on May 23, 2000 (the "Annual Meeting"). The Company's stockholders were asked to take the following actions at the meeting: (1) Elect three Class II Directors to serve until the 2003 annual meeting of stockholders or until their successors shall otherwise be elected (the "Board Proposal"); and (2) To ratify the Board of Directors selection of Ernst & Young to serve as the Company's independent auditors for the fiscal year ending December 31, 2000 (the "Ratification"); With respect to the Board Proposal, the three individuals nominated for director were all elected by the affirmative vote of a majority of shares of common stock present at the Annual Meeting. The nominees and the votes received by each are as follows: FOR WITHHELD --- -------- Herbert Lust, II 43,004,049 576,093 Jack H. Nusbaum 43,010,229 569,913 Lawrence N. Friedland 43,005,185 574,957 With respect to the Ratification, Ernst & Young LLP was elected by the affirmative vote of a majority of shares of common stock present at the Annual Meeting. The votes received were as follows: FOR WITHHELD ABSTAIN --- -------- ------- 43,540,842 31,650 7,650 -18- ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 11 Computation of Earnings Per Share Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None. -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRIME HOSPITALITY CORP. Date: August 14, 2000 By: /s/ A.F. Petrocelli ----------------------------- A.F. Petrocelli President and Chief Executive Officer Date: August 14, 2000 By: /s/ Douglas Vicari ----------------------------- Douglas Vicari Senior Vice President and Chief Financial Officer -20-