ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation, that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows.
On August 18, 1999, plaintiff Nick Pourzal, a former employee of the Company, filed a complaint against the Company in the United States District Court for the Virgin Islands. The complaint alleges that the Company contracted in 1978 to pay plaintiff ten percent of the pre-tax earnings on any use or sale of a 16.354-acre property on St. Thomas, U.S. Virgin Islands known as the "Gilbert Land," and that the Company breached this contract by making commercial use of the Gilbert Land without paying the plaintiff. On January 13, 2003, plaintiff filed a motion for leave to file a second amended compliant, to add claims for (i) conspiracy to violate the Virgin Islands Plant Closing Act, (ii) prima facie tort and (iii) to confirm an arbitration award relating to the Company's termination of plaintiff's employment in 1999. The complaint seeks compensatory, incidental and consequential damages, interest and costs, a declaratory judgment that the Company is liable for payment of ten percent of pre-tax earnings on use or sale of the Gilbert Land, and attorneys' fees and expenses. Prime believes that the plantiff's action is without merit and intends to vigorously defend this case.
In August 2002, the Company paid $8.9 million from cash on hand to Sholodge due in connection with a damage award decision by the American Arbitration Association rendered on June 26, 2002.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company during the quarter ended December 31, 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share, trades on the New York Stock Exchange (the "NYSE") under the symbol "PDQ." As of March 14, 2003 there were 45,083,503 shares of common stock outstanding.
The following table sets forth the reported high and low closing sales prices of the common stock on the NYSE.
As of March 14, 2003, the closing sales price of the common stock on the NYSE was $5.25 per share, and there were approximately 1,614 holders of record of common stock.
The Company has not declared any cash dividends on its common stock during the two prior fiscal years and does not currently anticipate paying any dividends on the common stock in the foreseeable future. The Company currently anticipates that it will retain any future earnings for use in its business. In addition, the Company is prohibited by the terms of certain debt agreements from paying cash dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The table below presents selected consolidated financial data derived from the Company's historical financial statements for the five years ended December 31, 2002. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
(a) During 2002, in compliance with SFAS 144 the Company has reported revenues and expenses from assets sold during 2002 as discontinued operations for each period presented in this Annual Report on Form 10-K.
(b) Cumulative effect of a change in accounting principle of $5.3 million (net of income taxes) in 1999, relates to the adoption by the Company of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). The Company adopted SOP 98-5 on January 1, 1999, and was required to write-off any unamortized pre-opening costs that remained on the balance sheet.
(c) Pro-forma amounts reflect the effect on net income and earnings per share had the Company written off pre-opening costs pursuant to SOP-98-5 in 1998.
Unaudited selected consolidated quarterly financial data for the years ending December 31, 2002 and 2001 follow (in thousands, except per share amounts):
(a) Amounts were restated from previously reported amounts due to the accounting for discontinued operations in compliance with SFAS 144.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Prime is an owner, manager and franchisor of hotels, with 245 hotels in operation containing 31,426 rooms located in 33 states (the "Portfolio") as of December 31, 2002. Prime controls three hotel brands -- AmeriSuites (R), Wellesley Inns & Suites (R) and Prime Hotels and Resorts (R) -- and operates a portfolio of full-service hotels under franchise agreements with national hotel chains. The Company operates and has ownership interests in 126 hotels (the "Owned Hotels"), operates 28 hotels under lease agreements primarily with real estate investment trusts (the "Leased Hotels"), manages 45 hotels for third parties (the "Managed Hotels"), and franchises 46 hotels which it does not operate (the "Franchised Hotels"). The Portfolio is comprised of 149 AmeriSuites hotels, 73 Wellesley Inns & Suites hotels, one Prime Hotels and Resorts hotel and 22 non-proprietary brand hotels.
The Company's growth has been focused on the development of its proprietary brands. Through the development of its proprietary brands, Prime has transformed itself from an owner/operator into a more diversified company with ownership, franchise and management interests and has positioned itself to generate additional revenues with minimal capital investment. Prime's strategy is also focused on opportunistic hotel acquisitions to take advantage of depressed values while leveraging the Company's operating infrastructure. With approximately 200 hotels under management, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets.
Operating results for 2002 were impacted by the weakness in the economy which had a significant negative impact on business travel and the demand for hotel rooms. Results were further impacted by concerns about airline safety and inconvenience. As a result, for the year ended December 31, 2002, revenues from comparable Owned and Leased hotels declined by 9.2% and gross operating profits on these hotels declined by 16.7%. Overall, for the year ended December 31, 2002, revenue declined by 15.3% to $399.0 million and EBITDA decreased by 32.9% to $73.3 million due to the results of the comparable Owned and Leased hotels and the effect of asset sales and lease terminations.
Certain statements in this Form 10-K 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-K 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-K 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; the ability of the Company or its franchisees to maintain the properties in a first-class manner, including meeting capital expenditure requirements; changes in travel patterns, taxes and government regulations which influence or determine wages, prices, construction procedures and costs; the effect of international, 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 our 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 our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Hotel revenues consist of lodging revenues (which consist primarily of room, telephone and vending revenues) and food and beverage revenues. Hotel revenues for the year ended December 31, 2002 decreased by $73.1 million, or 16.1%, from $455.3 million in 2001 to $382.2 million in 2002. The decrease was due primarily to a 9.2% decline in revenues from comparable Owned and Leased hotels, and the impact of asset sales and lease terminations.
The Company operates three product types: its proprietary AmeriSuites which are upscale all-suites hotels; its proprietary Wellesley Inns & Suites which are mid-price limited service hotels and its full-service hotels which are primarily upscale hotels operated under national franchises.
The following table illustrates the REVPAR ("Revenue Per Available Room") change, by segment in 2002 for the Owned and Leased hotels, which were operated for comparable periods in 2002 and 2001.
The REVPAR decreases reflect the weak economy compounded by the effects of travel safety concerns. The decline was comprised of a decrease in both occupancy and average daily rate ("ADR"). 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 the Company's national sales group. Management, franchise and other fees increased by $1.3 million, or 9.8%, from $13.0 million in 2001 to $14.3 million in 2002. The increase was primarily due to an increase in franchise royalty fees derived from hotels sold
to franchisees and new hotel openings and an increase in management fees due to new management agreements.
Rental and other consists of rental income, interest on mortgages and notes receivable and other miscellaneous operating income. Rental and other decreased by $0.2 million, or 9.0% from $2.7 million in 2001 to $2.5 million in 2002 due to reductions in miscellaneous income.
Hotel operating expenses which consist of all direct costs related to the operation of the Company's properties (lodging, food & beverage, administration, selling & advertising, utilities and repairs & maintenance) decreased by $31.5 million or 12.8% in 2002 from $246.0 million to $214.5 million as a result of the decrease in hotel revenue. Hotel operating expenses, as a percentage of hotel revenues, increased from 54.0% in 2001 to 56.1% in 2002 due to the decline in revenues.
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 $4.8 million, or 5.5%, from $87.1 million in 2001 to $82.3 million in 2002 due primarily to the termination of leases on eight hotels with MeriStar Hospitality.
General and administrative expenses consist primarily of centralized management expenses associated with operating the hotels, brand marketing expenses, franchise sales and support costs and general corporate expenses. General and administrative expenses were relatively stable increasing by just $0.1 million, from $28.8 million in 2001 to $28.9 million in 2002.
Depreciation and amortization expense increased by $2.1 million, or 5.7%, from $37.5 million in 2001 to $39.7 million in 2002 primarily due to capital additions at existing hotels partially offset by the disposal of hotel properties during 2002.
Investment income increased by $0.6 million, or 27.6%, from $2.2 million in 2001 to $2.9 million in 2002 primarily due to higher cash balances offset by lower interest rates.
Interest expense decreased by $6.1 million, or 18.0%, from $33.6 million in 2001 to $27.6 million in 2002, primarily due to the paydowns of debt resulting from asset sales and operating cash flows, the refinancing of the 9 3/4% Notes with the new 8 3/8% Notes and the retirement of the 9 1/4% Notes funded primarily by the new credit facility.
Other income consists of property transactions and other items which are not part of the Company's recurring operations. Other income for 2002 consisted of gains on property sales on hotels where the Company retained management partially offset by a $4.5 million litigation charge. Other income in 2001 consisted of net gains related to the disposition of properties and recognition of the remaining unamortized portion of the deferred gain related to the termination of the MeriStar hotel leases totaling $36.3 million, partially offset by losses of $4.3 million on the sale of marketable securities and valuation adjustments relating primarily to vacant land parcels of $6.7 million.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Hotel revenues consist of lodging revenues (which consist primarily of room, telephone and vending revenues) and food and beverage revenues. Hotel revenues for the year ended December 31, 2001 decreased by $66.6 million, or 12.8%, from $521.9 million in 2000 to $455.3 million in 2001. The decrease was due primarily to a 7.9% decline in revenues from comparable Owned and Leased hotels, and the impact of asset sales and lease terminations.
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, by segment in 2001 for the Owned and Leased hotels, which were operated for comparable periods in 2001 and 2000.
The REVPAR decreases reflect the weak economy compounded by the effects of the September 11th terrorist attacks. The decline was comprised of a decrease in occupancy of 4.1 percentage points and a decrease in average daily rate ("ADR") of 2.0%.
Management, franchise and other fees consist primarily of base and incentive fees earned under management agreements, royalties earned under franchise agreements and sales commissions earned by the Company's national sales group. Management, franchise and other fees decreased by $2.5 million, or 16.3%, from $15.5 million in 2000 to $13.0 million in 2001. The decrease was primarily due to decreased base and incentive management fees associated with the Managed Hotels partially offset by an increase in franchise royalty fees derived from hotels sold to franchisees and new hotel openings.
Rental and other consists of rental income, interest on mortgages and notes receivable and other miscellaneous operating income. Rental and other decreased by $1.6 million from $4.3 million in 2000 to $2.7 million in 2001. This decrease is primarily due to the settlement of various cash flow mortgages and notes receivable in 2000.
Hotel operating expenses which consist of all direct costs related to the operation of the Company's properties (lodging, food & beverage, administration, selling & advertising, utilities and repairs & maintenance) decreased by $19.9 million during 2001 to $246.0 million as a result of the decrease in hotel revenue. Hotel operating expenses, as a percentage of hotel revenues, increased from 50.9% in 2000 to 54.0% in 2001 due to the decline in revenues at our hotels.
Rent and other occupancy expenses consist primarily of rent expense, property insurance and real estate and other taxes. Rent and other occupancy expenses increased by $4.2 million, or 5.0%, from $82.9 million in 2000 to $87.1 million in 2001 due primarily to the impact of operating 27 leased properties for a full year in 2001 versus six months in 2000.
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 hotels and general corporate expenses. General and administrative expenses increased by $344,000, or 1.2%, from $28.4 million in 2000 to $28.8 million in 2001, due primarily to increased brand advertising, which rose from $6.3 million in 2000 to $7.3 million in 2001 partially offset by decreases due to cost containment programs.
Depreciation and amortization expense decreased by $2.6 million, or 6.4%, from $40.1 million in 2000 to $37.5 million in 2001. This decrease was primarily due to the disposal of five hotel properties during 2001 and the full year effect of the properties sold in 2000.
Investment income increased by $308,000, or 15.9%, from $1.9 million in 2000 to $2.2 million in 2001 primarily due to higher cash balances and interest earned on security deposits on the leased hotels acquired from Sholodge in July 2000.
Interest expense decreased by $7.7 million, or 18.6%, from $41.3 million in 2000 to $33.6 million in 2001, primarily due to the paydowns of debt resulting from asset sales and operating cash flows. The Company capitalized $1.6 million and $2.3 million of interest in 2001 and 2000, respectively. Excluding the impact of capitalized interest and the amortization of deferred loan fees, cash interest expense declined by $10.7 million, or 24.9%, from $43.0 million in 2000 to $32.3 million in 2001.
Other income consists of property transactions and other items, which are not part of the Company's recurring operations. Other income in 2001 consisted of net gains related to the disposition of properties and recognition of the remaining unamortized portion of the deferred gain related to the termination of the MeriStar hotel leases totaling $36.3 million, partially offset by losses of $4.3 million on the sale of marketable securities and valuation adjustments relating primarily to vacant land parcels of $6.7 million. Other income in 2000 consisted of net gains on disposition of property of $13.9 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and cash equivalents of $25.9 million. The Company also had $46.9 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 2002 were net borrowings of $303.6 million, cash flows from operations of $54.0 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 $345.0 million, capital expenditures of $33.6 million and an investment in a joint venture of $23.1 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 and, in some cases, management rights. Prime has used the proceeds primarily to reduce debt and fund brand growth. At December 2002, the Company's debt to the last twelve months EBITDA ratio was 3.9 times and its debt to book capitalization was 29.0%.
In 2002, the Company sold three AmeriSuites, three Wellesley Inns and a full-service hotel for gross proceeds of $60.0 million. The Company retained the franchise rights to the AmeriSuites and Wellesley Inns under 20-year franchise agreements. The Company also entered into agreements to manage two AmeriSuites hotels which were sold.
On April 29, 2002, the Company completed the issuance of $200 million of the 8 3/8% Notes. The Company used the net 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. The 8 3/8% Notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The 8 3/8% Notes mature in April 2012.
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") which expires in August 2006. The Company had borrowings of $70.0 million under the Credit Facility at LIBOR +2.25%, or approximately 4.1%, as of December 31, 2002. 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 Facility 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 liens. In addition, the Company must maintain a debt to EBITDA ratio of 4.5 times (4.25 times after June 30, 2003) and an EBITDA to interest ratio of 2.35 times (2.50 times after June 30, 2003). The Company was in compliance with all covenants at December 31, 2002. However,
there can be no assurance that the Company will continue to be in compliance with these covenants.
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 2002, the Company retired $9.3 million of debt scheduled to mature in 2002. The Company 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 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, the Company also spent $28.5 million on other capital additions in 2002 which primarily consisted 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 capital improvements at existing hotels primarily with internally generated cash flow.
As part of its growth, the Company will look to acquire hotels where values are temporarily depressed and potential upside exists. In December 2002, Prime Meadowlands, L.L.C., an entity in which Prime held a 50% interest, acquired the Sheraton Meadowlands Hotel and Conference Center in East Rutherford, NJ. The hotel is managed by Prime and will continue to operate under the Sheraton brand name.
In January 2003, Nova Scotia Company, an entity in which Prime held a 50% interest, acquired the Quebec City Holiday Inn Select. Located in the Lower Town district of Quebec City, the hotel is managed by Prime and will continue to operate under the Holiday Inn brand name.
Prime's partner in both acquisitions is United Capital Corp., an entity in which A.F. Petrocelli, Prime's chairman and chief executive officer, has a controlling ownership interest. Under the operating agreement, all significant operating and capital decisions are made jointly and operating profits and losses are allocated based on ownership interest. In March 2003, Ark Meadowlands, Inc., an unrelated third party, purchased a 20% interest at cost in Prime Meadowlands, LLC and Ark Quebec, Inc., an unrelated third party, purchased a 20% interest at cost in Nova Scotia Company. The purchase reduced Prime and United Capital's ownership interest to 40% each in both entities. Non-recourse mortgage debt may also be added to both entities. There is currently no debt in either joint venture.
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.
CRITICAL ACCOUNTING POLICIES
Prime's discussion and analysis of its financial condition and results of operations are based upon Prime's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Prime to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. Prime bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Prime believes the following critical accounting policies affect more significant judgements and estimates used in the preparation of its consolidated financial statements.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized.
Construction in progress represents costs incurred in the development of hotels. Such costs include construction costs and capitalized interest.
The Company reviews each of its assets held for use for which indicators of impairment are present to determine whether the carrying amount of the asset will be recovered. The Company recognizes impairment if the future undiscounted cash flows (before interest charges) are less than the carrying amount.
Assets held for sale are recorded at the lower of carrying value or fair value less costs to sell.
LONG-LIVED ASSETS
In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" SFAS 144, 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". SFAS 144 superseded APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Transactions. SFAS 144 extended the reporting of a discontinued operation to a "component of an entity". Therefore, the operations of assets held for sale or assets sold are required to be presented as discontinued operations in the Company's statement of operations.
The Company adopted this pronouncement on January 1, 2002. This resulted in the Company having to reclassify certain revenues and expenses to discontinued operations for sold properties where the Company did not retain management. This adoption had no impact on the Company's net income or financial position.
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in earnings (loss) and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet of the Company and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 40 years. As of December 31, 2002, investments in unconsolidated joint ventures consisted of the Company's 50% ownership interest in one hotel. There is no joint venture debt as of December 31, 2002.
INSURANCE PROGRAMS
The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay.
The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents, which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company.
Provisions have been made in the consolidated financial statements which represent the expected future payments based on the estimated ultimate cost for incidents, less insured amounts, incurred through the balance sheet date and are included in other current and other long-term liabilities based on the expected payment dates.
REVENUE RECOGNITION
Room revenue and other revenues are recognized when earned. Management and franchise fee revenues are recognized when all material services or conditions relating to the respective property or franchisee have been substantially performed or satisfied by the Company. Such
revenues, when recognized, are included in management, franchise and other fees on the accompanying consolidated financial statements.
Gains and losses resulting from sales of hotels are recorded in full when title is conveyed to the buyer and when various criteria are met relating to the buyer's financial commitment and any subsequent involvement by the Company with respect to the hotels being sold.
The Company's sales of hotels are sometimes accompanied by a leaseback of the facilities under operating lease arrangements. Such sales are recognized when the above sales criteria are met and certain specific criteria are met relating to the lease terms. Related profit is deferred and is recognized as income over the remaining lease term.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November of 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Company's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently in the process of evaluating the impact that this Interpretation will have on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than September 30, 2003. The Company does not believe that this Interpretation will have a significant impact on the Company's financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates from its floating rate debt arrangements. At December 31, 2002, the Company had $285.1 million of debt outstanding of which $215.1 million bears interest at fixed rates. The interest rate on the Company's Credit Facility, under which $70 million was outstanding at December 31, 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 December 31, 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.
SUMMARY OF INDEBTEDNESS
Combined aggregate principal maturities of debt as of December 31, 2002, are as follows (in thousands):
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements in Item 15.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and executive officers of the Company:
(1) Member of the Compensation and Audit Committee.
The following is a biographical summary of the experience of the directors and executive officers of the Company:
A.F. Petrocelli has been a Director since 1992 and was a member of the Compensation and Audit Committee from 1993 to 1998. Mr. Petrocelli has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since 1998. Mr. Petrocelli has been Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years. He is also a director of Nathan's Famous, Inc., Boyar Value Fund, Inc. and Philips International Realty Corp.
Lawrence N. Friedland has been a Director of the Company and a member of the Compensation and Audit Committee since 1998. Mr. Friedland has been of counsel to the law firm of Olshan Grundman Frome Rosenzweig and Wolosky since 2001. Prior to that he had been a partner in the law firm of Hoffinger Friedland Dobrish & Stern, P.C. for more than the past 25 years. He has been a director of the Apple Bank for Savings since 1990, a director of Lutron Electronics Co., Inc. since 1961, a member of the Advisory Committee of Brown Harris Stevens, LLC since 1995 and a general partner, manager or director of numerous real estate entities.
Allen S. Kaplan has been a Director of the Company since February 2001 and a member of the Compensation and Audit Committee since 2002. Mr. Kaplan has been Vice President and Chief Operating Officer of Team Systems, Inc. for more than the past five years. He also is currently Vice President of the Metropolitan Taxicab Board of Trade and a director of Ameritrans Capital Corp.
Howard M. Lorber has been a Director of the Company and a member since 1994 and Chairman since 1998 of the Compensation and Audit Committee. Mr. Lorber has been Chairman of the Board and Chief Executive Officer of Nathan's Famous, Inc. for more than the past five years and Chairman of the Board of Directors and Chief Executive Officer of Hallman & Lorber Associates, Inc., for over five years. He has been a director, President and Chief Operating Officer of New Valley Corporation for more than five years. He has been a director of and member of the Audit Committee of United Capital Corp. for more than the past five years. Since 2001, he is a Director of and President and Chief Operating Officer of Vector Group Ltd. Mr. Lorber is also the Chairman of Ladenburg Thalmann Financial Services and serves as a member of the Compensation Committee of that company.
Herbert Lust, II has been a Director since 1992 and a member of the Compensation and Audit Committee of the Company since 1993. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust.
Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman of the law firm of Willkie Farr & Gallagher, where he has been a partner for more than twenty-five years. He also is a director of W.R. Berkley Corporation, Neuberger Berman, Inc., Strategic Distribution, Inc. and The Topps Company, Inc.
Douglas W. Vicari has been a Director of the Company since 1999 and Senior Vice President and Chief Financial Officer of the Company since 1998.
Stephen M. Kronick has been a Senior Vice President of the Company since 1999. Prior to that he held the position of Vice President of the Company for more than one year.
Chester Reed became a Senior Vice President of the Company in 2002. From 2000 until joining the Company he served as President and Chief Operating Officer of Presidian Destinations, Ltd. From 1999 until 2000 he served as Vice President of Operations for Bristol Hotel & Resorts. Prior to that he served as a Regional Manager for LaQuinta Inns, Inc. for more than one year.
Terry P. O'Leary has been a Senior Vice President of the Company since 1998.
Vito Stellato became a Senior Vice President of the Company in 2003. In 2003, he was a business consultant with Turtle Creek Consulting Group, LLC from 1998 through 2001 he was the Senior Vice President of Human Resources for LaQuinta Inns, Inc.
Jeffrey T. Williams became a Senior Vice President of the Company in 2001. From 2000 until joining the Company, he held the position of Senior Vice President of Global Development for Meineke. In June 1998, he founded JTW Global Franchise Systems and serves as its President. Prior to that he held the position of Senior Vice President and Managing Director of International development for Cendant Corporation (HFS, Inc.) for more than one year.
John Capone has been a Vice President of Hotel Operations since February 2003. Prior to that, he was a Regional Vice President of Operations from April of 1999 to February 2003, and Regional Vice President of Sales from March 1998 to April 1999.
Richard T. Szymanski has been a Vice President of the Company for more than five years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
There are incorporated in this Item 11 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Executive Compensation," "Compensation Pursuant to Plans," "Other Compensation," "Compensation of Directors," and "Termination of Employment and Change of Control Agreements".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are incorporated in this Item 12 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Principal Shareholders" and "Security Ownership of Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are incorporated in this Item 13 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the caption "Certain Relationships and Related Transactions."
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Annual Report on Form 10-K, 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 Officer 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.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Financial Statements listed in the accompanying index to financial statements are filed as part of this Form 10-K.
2. Exhibits
2(a) Reference is made to the Contract of Purchase and Sale between Hillsborough Associates, Meriden Hotel Associates, L.P., Wellesley I, L.P., Multi-Wellesley Limited Partnership and the Company, dated March 6, 1996, filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference.
(b) Reference is made to Consent of the Holders Thereof to the Purchase by the Company of the Outstanding First Mortgage Notes filed as an Exhibit to the Company's 8-K, dated March 21, 1996, which is incorporated herein by reference.
(c) Reference is made to the Agreement and Plan of Merger as of July 25, 1997 by and among Prime Hospitality Corp., PH Sub Corporation and Homegate Hospitality, Inc. filed as an Exhibit to the Company's Form S-4, dated October 24, 1997, which is incorporated herein by reference.
(d) Reference is made to the form of Amended and Restated Purchase and Sale Agreement between Prime Hospitality Corp., as seller and Equity Inns Partnership, L.P., as purchaser, dated December 2, 1997, filed as an Exhibit to the Company's Form 8-K dated December 11, 1997, which is incorporated herein by reference.
(e) Reference is made to the form of Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and Equity Inns Partnership, L.P., as purchaser, dated June 26, 1998, filed as an Exhibit to Company's Form 10-Q, dated June 30, 1998, which is incorporated herein by reference.
(f) Reference is made to the Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and Marriott International, Inc. as purchaser, dated September 15, 1999 which is incorporated herein by reference.
(g) Reference is made to the First Amendment dated December 18, 1999, to Purchase and Sale Agreement between Prime Hospitality Corp. and Marriott International, Inc., dated September 15, 1999 which is incorporated herein by reference.
(h) Reference is made to the Sale and Purchase Agreement between Prime Hospitality Inc. and Sholodge, Inc., dated March 16, 2000 which is incorporated herein by reference.
(i) First Amendment to Sale and Purchase Agreement dated July 9, 2000, by and between Sholodge, Inc. and Prime Hospitality Corp. filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference.
(j) Lease Agreement Dated as of November 19, 1997 by and between HPT Suite Properties Trust as Landlord, and Suite Tenant, Inc. as Tenant, filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference.
(k) First Amendment to Lease Agreement entered March 5, 1999 by and between HPT Suite Properties Trust as landlord and Suite Tenant, Inc. filed as an Exhibit to the Company's. Form 10-K dated March 28, 2000, which is incorporated herein by reference.
(l) Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated June 29, 1999 by and between Hospitality Properties Trust as landlord HPT Suites Properties Trust and Sholodge, Inc., Suite Tenant, as tenant filed as an Exhibit to the Company's. Form 10-K, dated March 28, 2000, which is incorporated herein by reference.
(m) Third Amendment to Lease Agreement dated March 3, 2000, by and between HPT Suite Properties Trust as Landlord, and Suite Tenant, Tenant, filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference.
(n) Fourth Amendment to Lease Agreement and Amendment to Incidental Documents dated May 11, 2000 by and between HPT Suite Properties Trust as Landlord and Suite Tenant, Tenant, filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference.
(o) Consent to Assignment, Fifth Amendment to Lease Agreement and Amendment to Incidental Documents dated July 9, 2000 by and among HPT Suites Properties, Suite Tenant, Inc. and Glen Rock Holding Corp. filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference.
(p) Operating Agreement of East Rutherford Group, L.L.C., dated as of December 19, 2002, by and among Prime-Meadowlands, L.L.C. and AFP Eighteen Corp.
(q) Management Agreement for East Rutherford Sheraton dated December 19, 2002 by and between East Rutherford Group, L.L.C., Owner , and Prime Hospitality Corp., Manager
(r) Assignment of Membership Interest dated March 14, 2003 by and between Prime-Meadowlands, L.L.C. and Ark-Meadowlands, Inc.
(s) Agreement of Members of 3072929 Nova Scotia Company, dated as of January 8, 2003, by and among 3072929 Nova Scotia Company, Quebec City, Inc., and AFP Nineteen Corp.
(t) Assignment of Membership Interest dated March 26, 2003 by and between Quebec City, Inc. and Ark Quebec, Inc.
3(a) Reference is made to the Restated Certificate of Incorporation of the Company, dated June 5, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(b) Reference is made to the restated Certificate of Incorporation, As Amended, filed as an Exhibit to the Company's Form 10-QA, dated April 30, 1996, which is incorporated herein by reference.
(c) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference.
4(a) Reference is made to a Form 8-A of the Company as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference.
(b) Reference is made to the 8 3/8% Senior Secured Subordinated Notes due 2012, dated April 21, 2002, filed as an exhibit to the Company's Form 10-Q, dated May 2002, which is incorporated herein by reference.
(c) Reference is made to Credit Agreement, dated as of July 22, 2002, among the Prime Hospitality Corp., the Lenders and Canadian Imperial Bank of Commerce (Agent) filed as an Exhibit to Form 10-Q dated August 14, 2002.
10(a) Reference is made to the 1992 Performance Incentive Stock Option Plan of the Company, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(b) Reference is made to the 1992 Stock Option Plan of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference.
(c) Reference is made to an Amendment regarding the 1995 Employee and Non-Employee Stock Option Plans, incorporated in the Company's proxy statement dated April 13, 1998, whereby 1.8 million shares were made available for distribution which is incorporated herein by reference.
(d) Reference is made to Change of Control Agreement, dated May 14, 1998, between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999 which is incorporated herein by reference.
(e) Reference is made to Change of Control Agreement, dated May 14, 1998, between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999 which is incorporated herein by reference.
(f) Reference is made to Employment Agreement, dated September 14, 1998, between Attilio F. Petrocelli and the Company which is incorporated herein by reference.
(g) Reference is made to Change of Control Agreement, dated September 14, 1998, between Atillio F. Petrocelli and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999 which is incorporated herein by reference.
(h) Reference is made to the Nonqualified Stock Option Agreement dated October 14, 1998 between A.F. Petrocelli and the Company which is incorporated herein by reference.
(j) Reference is made to the Change in Control Agreement, dated October 25, 1999, between Stephen Kronick and the Company which is incorporated herein by reference.
(k) Reference is made to the Amendment to Change in Control Agreement, dated March 18, 1999, between A.F. Petrocelli and the Company which is incorporated herein by reference.
(l) Reference is made to the Nonqualified Stock Option Agreement dated October 23, 2001 between A.F. Petrocelli and the Company which is incorporated by reference.
(21) Subsidiaries of the Company are as follows:
(23) Consent of independent auditors.
Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have not been filed in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish a copy of such instruments to the Commission upon request.
99.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of VP-Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(ITEM 15(A))
All schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Prime Hospitality Corp.:
We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Hospitality Corp. and Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
ERNST & YOUNG LLP
New York, New York February 11, 2003, except for Note 21, as to which the date is March 26, 2003.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
Prime Hospitality Corp. ("Prime" or "the Company") is an owner, manager and franchisor of hotels, with 245 hotels in operation containing 31,426 rooms located in 33 states (the "Portfolio") as of December 31, 2002. Prime controls three hotel brands -- AmeriSuites (R), Wellesley Inns & Suites (R) and Prime Hotels and Resorts (R). -- and operates a portfolio of full-service hotels under franchise agreements with national hotel chains. The Company operates and has ownership interests in 126 hotels (the "Owned Hotels"), operates 28 hotels under lease agreements primarily with real estate investment trusts (the "Leased Hotels"), manages 45 hotels for third parties (the "Managed Hotels"), and franchises 46 hotels which it does not operate (the "Franchised Hotels"). The Portfolio is comprised of 149 AmeriSuites hotels, 73 Wellesley Inns & Suites hotels, one Prime Hotels and Resorts hotel and 22 non-proprietary brand hotels.
BASIS OF PRESENTATION
The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992.
Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximated the present values of amounts to be paid, determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The Company's investment in a less than majority owned joint venture has been accounted for using the equity method.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents are highly liquid, unrestricted investments with a maturity of three months or less when acquired. At December 31, 2002 and 2001, cash and cash equivalents were comprised of approximately $25.9 million and $24.5 million, respectively, of cash and money market funds and $0.0 million and $2.0 million, respectively, of commercial paper.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized.
Construction in progress represents costs incurred in the development of hotels. Such costs include construction costs and capitalized interest.
The Company reviews each of its assets held for use for which indicators of impairment are present to determine whether the carrying amount of the asset will be recovered. The Company recognizes impairment if the future undiscounted cash flows (before interest charges) are less than the carrying amount.
Assets held for sale are recorded at the lower of carrying value or fair value less costs to sell.
LONG-LIVED ASSETS
In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", SFAS 144, 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". SFAS 144 superseded APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Transactions. SFAS 144 extended the reporting of a discontinued operation to a "component of an entity". Therefore, the operations of assets held for sale or assets sold are required to be presented as discontinued operations in the Company's statement of operations.
The Company adopted this pronouncement on January 1, 2002. This resulted in the Company having to reclassify certain revenues and expenses to discontinued operations for sold properties where the Company did not retain management. This adoption had no impact on the Company's net income or financial position.
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in earnings (loss) and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet of the Company and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 40 years. As of December 31, 2002, investments in unconsolidated joint ventures consisted of the Company's 50% ownership interest in one hotel. There is no joint venture debt as of December 31, 2002.
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are reflected at fair value as of July 31, 1992, plus the cost of advances since that date. The amount of interest income recognized on mortgages and notes receivable is generally based on the stated interest rate and the carrying value of the notes. Interest income on delinquent notes receivable is generally recognized when cash is received.
The Company measures impairment of its mortgages and notes receivable based on the present value of expected future cash flows discounted at the effective interest rate. Impairment can also be measured based on observable market price or the fair value of collateral, if the mortgages and notes receivable are collateral dependent. If the measure of the impaired mortgage or note receivable is less than the recorded investment, the Company will establish a valuation allowance, or adjust existing valuation allowances, with a corresponding charge or credit to operations. Based upon its evaluation, the Company determined that no impairment of the mortgage and notes receivable had occurred.
OTHER ASSETS
Other assets consist primarily of security deposits under the Company's operating lease agreements and deferred issuance costs related to the Company's debt obligations. Deferred issuance costs are amortized over the respective terms of the loans.
INSURANCE PROGRAMS
The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay.
The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents, which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company.
Provisions have been made in the consolidated financial statements which represent the expected future payments based on the estimated ultimate cost for incidents, less insured amounts, incurred through the balance sheet date and are included in other current and other long-term liabilities based on the expected payment dates.
REVENUE RECOGNITION
Room revenue and other revenues are recognized when earned. Management and franchise fee revenues are recognized when all material services or conditions relating to the respective property or franchisee have been substantially performed or satisfied by the Company. Such revenues, when recognized, are included in management, franchise and other fees on the accompanying consolidated financial statements.
Gains and losses resulting from sales of hotels are recorded in full when title is conveyed to the buyer and when various criteria are met relating to the buyer's financial commitment and any subsequent involvement by the Company with respect to the hotels being sold.
The Company's sales of hotels are sometimes accompanied by a leaseback of the facilities under operating lease arrangements. Such sales are recognized when the above sales criteria are met and certain specific criteria are met relating to the lease terms. Related profit is deferred and is recognized as income over the remaining lease term.
ADVERTISING COSTS
The Company expenses all costs, including production costs, of print, radio, television and other advertisements as incurred. Advertising expenses included in general and administrative expenses were $6.7 million, $7.3 million and $6.3 million for the years ended December 31, 2002, 2001 and 2000, respectively.
INCOME TAXES
The Company files a consolidated Federal income tax return. In accordance with SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized.
Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences of revenue and expense items for financial statement and income tax purposes.
PRE-OPENING COSTS
Under Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", all pre-opening costs are being expensed as incurred.
DEFERRED INCOME
Deferred income consists of gains on properties which were sold and where the Company has continuing involvement with regard to minimum cash flow returns to the buyers either in the form of a lease or management agreement. Deferred income is amortized over the life of the respective agreements, either
as a reduction of rent or other funding expense or as an addition to management, franchise and other fees when such fees are below market levels.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement No. 148 to amend alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. However, the Company has continued to account for options in accordance with the provision of APB Opinion No. 25, "Accounting for Stock Issues to Employees" and related interpretations. Accordingly, no compensation expense has been recognized for stock option plans (See Note 11).
The following table sets forth the Company's pro forma information for its common stockholders for the years ended December 31 (in thousands except earnings per share data):
The fair value for those options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rate of 5%, 5.05% and 5.05%; dividend yields of 0% for 2002, 2001, and 2000; volatility factors of the expected market price of the Company's common stock of 46.6% in 2002 and a weighted-average expected life of the option of 6.5 years.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT
In April 2002, the Financial Accounting Standards Board issued Statement No. 145 which rescinded Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt". The Statement requires, among other things, the reporting of gains and losses from the early extinguishments of debt as an addition to or a reduction of interest expense. The Statement will be effective for the Company in 2003 at which time the Company will reclassify extraordinary gains and losses from early extinguishments of debt to interest expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November of 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Company's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently in the process of evaluating the impact that this Interpretation will have on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than September 30, 2003. The Company does not believe that this Interpretation will have a significant impact on the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2001 and 2000 consolidated financial statements to conform them to the December 31, 2002 presentation.
NOTE 2 -- HOTEL ACQUISITIONS
In December 2002, Prime Meadowlands, L.L.C., an entity in which Prime held a 50% interest, acquired the Sheraton Meadowlands Hotel and Conference Center in East Rutherford, NJ. The hotel is managed by Prime and will continue to operate under the Sheraton brand name.
In January 2003, Nova Scotia Company, an entity in which Prime held a 50% interest, acquired the Quebec City Holiday Inn Select. The hotel is managed by Prime and will continue to operate under the Holiday Inn brand name.
Prime's partner in both acquisitions is United Capital Corp., an entity in which A.F. Petrocelli, Prime's chairman and chief executive officer, has a controlling ownership interest. Under the operating agreement, all significant operating and capital decisions are made jointly and operating profits and losses are allocated based on ownership interest. There is currently no debt in either joint venture (See Note 21).
On July 10, 2000, the Company acquired the leasehold interests in 24 Sumner Suites hotels owned by Hospitality Properties Trust ("HPT") from Sholodge, Inc. ("Sholodge") and subsidiaries of the Company entered into lease agreements on three additional Sumner Suites hotels owned by Sholodge for $1.6 million. On November 1, 2000, the Company converted all 27 hotels to its AmeriSuites brand. The leases provide for a fixed annual minimum rent of approximately $27 million plus 8% of revenues in excess of base levels. The leases with HPT and Sholodge expire in 2013 and 2011, respectively, and are renewable at the
Company's option for various periods through 2048 and 2061, respectively. Under the terms of the lease with HPT, the Company posted a $16.5 million cash deposit which will be returned to the Company at the earliest of the end of the lease term or when the hotels achieve a 1.3 to 1.0 cash flow coverage. The Company also received the rights to $28.5 million of other security deposits due upon the expiration of the leases. These other security deposits are recorded at their present value on the Company's financial statements and are being accreted over the term of the lease.
NOTE 3 -- HOTEL DISPOSITIONS
SALE/LEASEBACK TRANSACTIONS
In January 1998, the Company completed the sale/leaseback of eight full-service hotels to MeriStar Hospitality Corp. ("MeriStar") for total consideration of $138.4 million. The Company was operating the hotels under an operating lease agreement, which had a term of ten years. The transaction generated a net gain of approximately $64.9 million, which was deferred and was being recognized as a reduction of rent expense over the life of the lease. In 2001, MeriStar and Prime terminated the leases. The Company received a net termination fee of $1.0 million and recognized the remaining unamortized portion of the deferred gain of $36 million into income. Such amounts are included in other income in the accompanying consolidated financial statement.
In 1997 and 1998, the Company entered into two separate transactions with Equity Inns, Inc. ("Equity Inns") for the sale and leaseback of 19 AmeriSuites hotels. The transactions generated gross proceeds of $184 million and all 19 hotels were operated by Prime under lease agreements with Equity Inns through December 2001. Effective January 1, 2002, the leases were converted into management agreements and Equity Inns also signed franchise agreements with Prime to license the AmeriSuites name. Both the management and franchise agreements expire on various dates in 2007 and 2008.
The management agreements have terms similar to the lease agreements and provide for a subsidiary of Prime to share in the cash flow above and to fund deficits below certain thresholds. The agreements also require the Prime subsidiary to guarantee a minimum return to Equity Inns equal to the minimum rents under the prior lease agreements (approximately $20.7 million in aggregate in 2002). The Prime subsidiary's obligations under the management agreements are supported by a guarantee by Prime of approximately $4.0 million.
The sales of the hotels in 1997 and 1998 generated gains of $36.0 million. Such gains were deferred and amortized over the life of the initial lease (ten years). As of December 31, 2002, approximately $16.9 million remained in deferred income. This amount will continue to be amortized over the remaining life of the management agreement due to Prime's continuing involvement under the management agreement.
OTHER DISPOSITIONS
In 2002, the Company sold three AmeriSuites, three Wellesley Inns and a full-service hotel for gross proceeds of $60.0 million. The Company retained the franchise rights to the AmeriSuites and Wellesley Inns under 20-year franchise agreements. The Company also entered into agreements to manage two of the AmeriSuites hotels which were sold. The gains on the sales of the hotels are recorded in discontinued operations, net of tax, except for the two hotels managed by Prime which are recorded in other income.
During 2001, the Company sold one AmeriSuites hotel for $14.0 million, four Wellesley Inns for $15.4 million and two parcels of land for $5.1 million. The Company recognized a net gain of $3.1 million in these dispositions. The net gain is included in other income. The Company retained the franchise rights
on the AmeriSuites and Wellesley Inns properties pursuant to 20-year franchise agreements. The Company also entered into an agreement to manage the AmeriSuites property it sold.
During 2000, the Company sold five AmeriSuites hotels for $56.0 million, ten Wellesley Inns for $45.0 million, one full-service hotel for $18.2 million and five land parcels for $4.8 million. In addition, the Company sold its Frenchman's Reef hotel in St. Thomas, U.S.V.I. ("Frenchman's Reef") for $73.0 million. During 1999, the Company had reduced the carrying value of this asset by $24.5 million to reflect the estimated fair value less the costs to sell the hotel.
In February 2000, the Company's five remaining HomeGate hotels and the Company's rights to the HomeGate brand name were also sold for approximately $17.7 million, including the assumption of debt by the purchaser of approximately $17.4 million related to these properties. During 1999, the Company had reduced the carrying value of the assets by $2.5 million to reflect the estimated fair value less the costs to sell the hotels.
Asset sales generated net gains of approximately $13.9 million during 2000, which are included in other income in the accompanying consolidated financial statements. The Company also retained the franchise rights on the AmeriSuites and Wellesley Inns under 20-year franchise agreements. In addition, the Company entered into management agreements on one of the sold AmeriSuites and four of the sold Wellesley Inns.
NOTE 4 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in thousands):
At December 31, 2002, the Company is the lessor of land and certain restaurant facilities primarily in Company-owned hotels with an approximate aggregate book value of $6.5 million pursuant to noncancelable operating leases expiring on various dates through 2010. Minimum future rent under such leases for each of the next 5 years subsequent to December 31, 2002, and thereafter are as follows:
Depreciation and amortization expense on property, equipment and leasehold improvements, including amounts for discontinued operations, was $40.0 million, $38.4 million and $41.6 million for the years ended December 31, 2002, 2001 and 2000, respectively.
During the years ended December 31, 2002, 2001 and 2000, the Company capitalized $1.3 million, $1.6 million and $2.3 million, respectively, of interest related to borrowings used to finance hotel construction.
In order to facilitate future tax-deferred exchanges of hotel properties, the Company entered into arrangements with an unaffiliated third party under Section 1031 of the Internal Revenue Code of 1986, as amended. At December 31, 2002, the Company had loans of approximately $59.7 million to such third party, which represented the total costs to construct and furnish five AmeriSuites hotels. These loans are classified as property, equipment and leasehold improvements in the Company's accompanying financial statements.
NOTE 5 -- ASSETS HELD FOR SALE
As of December 31, 2002, assets held for sale consist of land parcels which the Company no longer intends to develop. These parcels are being actively marketed for sale and it is the Company's intention to dispose of these assets in the next year. At December 31, 2001, assets held for sale consisted of these land parcels and hotels which were sold in 2002.
During 2001, the Company recorded a valuation allowance of $6.7 million against the land parcels held for sale. The adjustment represented the difference between the carrying cost of the assets and the fair market value, less the costs to sell the assets and is recorded in other income in the Company's consolidated statement of operations. Management estimated the fair market value based on comparative land sales in their respective markets.
NOTE 6 -- MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are comprised of the following (in thousands):
(a) At December 31, 2002, the Company is the holder of mortgage notes receivable with a book value of $9.1 million secured by the Company's leasehold positions in three hotels. These notes bear interest at rates ranging from 8.5% to 13.0% and mature on various dates from 2008 through 2015. The mortgages were derived from the sales of hotel properties.
(b) Other notes receivable consist primarily of mezzanine loans issued to franchisees, secured by hotel properties managed by the Company and development loans to franchisees. Other notes receivable mature through 2012 and bear interest at an approximate effective rate of 8.3 %.
NOTE 7 -- DEBT
Debt consists of the following (in thousands):
(a) On April 29, 2002, the Company completed the issuance of $200 million of 8 3/8% Senior Subordinated Notes (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 (See Note 15). The 8 3/8% Notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The 8 3/8% Notes mature in April 2012.
(b) 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 (the "Credit Facility") with a syndicate of financial institutions which is available until August 2006. The Company had borrowings of $70.0 million under the Credit Facility at LIBOR +2.25%, or approximately 4.1%, as of December 31, 2002. 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, limitations on making capital expenditures, selling or transferring assets, making certain investments (including acquisitions), repurchasing shares and liens. In addition, the Company must maintain a debt to EBITDA ratio of 4.5 times (4.25 times after June 30, 2003) and an EBITDA to interest ratio of 2.35 times (2.50 times after June 30, 2003). The Company was in compliance with all covenants at December 31, 2002. However, there can be no assurance that the Company will continue to be in compliance with these covenants.
(c) 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 (See Note 15). Prime funded the redemption with borrowings under the Credit Facility plus cash on hand.
(d) The Company has two mortgage notes payable that are secured by hotel properties with a book value of $33.0 million. At December 31, 2002 these notes bear interest at 6.7% and 8.6%, and mature in 2004 and 2009.
Maturities of long-term debt subsequent to December 31, 2002 are as follows (in thousands):
NOTE 8 -- OTHER CURRENT ASSETS/LIABILITIES
Other current assets consist of the following (in thousands):
Other current liabilities consist of the following (in thousands):
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various hotels under lease agreements with initial terms expiring at various dates from 2003 through 2061. The Company has options to renew certain of the leases for periods ranging from 1 to 99 years. Rental payments are based on minimum rentals plus a percentage of the hotel properties' revenues in excess of stipulated amounts.
The Company operates 28 hotels under lease agreements, primarily with Real Estate Investment Trusts ("REITs"). These are comprised of 24 AmeriSuites owned by Hospitality Properties Trust (HPT), three AmeriSuites owned by Sholodge and one full-service hotel owned by Winston Hotels ("Winston"). The leases are with subsidiaries of Prime and have terms ranging from 10 to 13 years expiring from 2007 to 2013 with certain renewal options. The 27 hotels leased from HPT and Sholodge provide for a fixed annual minimum rent plus eight percent of revenue in excess of a base year. The hotel leased from Winston provides for rent equal to the greater of base rent, which increases annually by the inflation rate, or percentage rent based on a percentage of room, food and beverage and other revenue.
All of the lease agreements related to the 27 AmeriSuites hotels contain restrictions which prevent the Company from operating an AmeriSuites hotel or similar type of hotel within a restricted area.
On January 1, 2002, the Company converted its leases on 19 AmeriSuites it leased from Equity Inns into management agreements. These management agreements run for the unexpired term of the leases they replaced and require Prime to guarantee a certain minimum level of cash flow (See Note 3).
Below is a schedule of the future guaranteed minimum cash flow levels (in thousands):
Rental expense for all operating leases, including those agreements with terms of less than one year, and owner's return for the Equity Inns management agreements consist of the following for the years ended December 31, 2002, 2001 and 2000 (in thousands):
Such amounts are included in occupancy and other operating expenses in the accompanying consolidated financial statements.
EMPLOYEE BENEFITS
The Company does not provide any material post employment benefits.
LITIGATION
The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation, that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows.
On August 18, 1999, plaintiff Nick Pourzal, a former employee of the Company, filed a complaint against the Company in the United States District Court for the Virgin Islands. The complaint alleges that the Company contracted in 1978 to pay plaintiff ten percent of the pre-tax earnings on any use or sale of a 16.354-acre property on St. Thomas, U.S. Virgin Islands known as the "Gilbert Land," and that the Company breached this contract by making commercial use of the Gilbert Land without paying the plaintiff. On January 13, 2003, plaintiff filed a motion for leave to file a second amended compliant, to add claims for (i) conspiracy to violate the Virgin Islands Plant Closing Act, (ii) prima facie tort and (iii) to confirm an arbitration award relating to the Company's termination of plaintiff's employment in 1999. The complaint seeks compensatory, incidental and consequential damages, interest and costs, a declaratory judgment that the Company is liable for payment of ten percent of pre-tax earnings on use or sale of the Gilbert Land, and attorneys' fees and expenses. Prime believes that the plantiff's action is without merit and intends to vigorously defend this case.
In August 2002, the Company paid $8.9 million from cash on hand to Sholodge due in connection with a damage award decision by the American Arbitration Association rendered on June 26, 2002.
NOTE 10 -- INCOME TAXES (BENEFITS)
The provision (benefit) for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 2002, 2001 and 2000 (in thousands):
Income taxes are provided at the applicable federal and state statutory rates. The tax effects of the changes in the temporary differences in the areas listed below resulted in deferred income tax provisions for the years ended December 31, 2002, 2001 and 2000 (in thousands):
The following is a reconciliation of the statutory Federal tax (benefit) rate to the Company's effective income tax rate:
At December 31, 2002, the Company had available federal net operating loss carry forwards related to PMI of approximately $52.4 million, which will expire in 2006. This amount is subject to an annual utilization limitation of $8.7 million under the Internal Revenue Code due to a change in ownership of the Company upon consummation of the Plan.
The Company has not recognized the future tax benefits associated with the net operating loss carryforwards. Accordingly, the Company has provided a valuation allowance of approximately $18.3 million against the deferred tax asset at December 31, 2002. To the extent any available carry forwards or other tax benefits related to PMI are utilized, the amount of tax benefit realized will be treated as a contribution to stockholders' equity and will have no effect on the income tax provision for financial
reporting purposes. For the year ended December 31, 2000, the Company recognized $3.1 million of such benefits as a contribution to stockholders' equity and a corresponding reduction of the valuation allowance associated with the net operating losses.
At December 31, 2002, the Company had deferred tax liabilities of $57.3 million relating to the differences in the methods of accounting for the Company's fixed assets.
NOTE 11 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS
COMMON STOCK
During 2002, 2001 and 2000, the Company repurchased approximately 15,800, 376,200 and 3.9 million shares of its common stock at average cost of $7.72, $9.86 and $8.00 per share, respectively. The Revolving Credit Facility contains covenants which limit the purchase of these shares to $25.0 million per year.
STOCK OPTIONS
The Company has adopted various stock option and performance incentive plans under which options to purchase shares of common stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. At December 31, 2002, a total of 6.4 million options were outstanding with another 2.6 million options available to be issued. At December 31, 2002, the weighted average contractual life remaining related to these options outstanding is approximately 7.5 years and the weighted average exercise price of the options outstanding is $8.50.
In October 2001, the Company granted options to purchase 3,000,000 shares of common stock to the Company's president and CEO. These options vest ratably over a three year period. The options are priced at $9.12 per share, which reflects the market value at the date of grant, and expire in 2011. At December 31, 2002, all of these options were outstanding.
In October 1998, the Board of Directors granted options to purchase 1,750,000 shares of common stock to the Company's president and CEO. These options vest ratably over a five-year period with respect to 1,000,000 of the options. The additional 750,000 options vest as certain performance criteria are met or, if the criteria are not met, the options vest eight years after the original grant date. At December 31, 2002, 1,750,000 options were outstanding under this plan. The options are priced at $5.91 per share, which reflects the market value at the date of grant, and expire in 2008.
Under the 1995 Employee Stock Option Plan, options to purchase shares of common stock may be granted at the fair market value of the common stock at the date of grant. Options can generally be exercised during a participant's employment with the Company in equal annual installments over a three-year period from the date of grant and expire ten years from the date of grant. During 2002, 2001 and 2000, respectively, options to purchase 332,000, 268,000 and 454,000 shares of common stock, respectively, were granted under this plan. At December 31, 2002, 1,202,000 options were outstanding under this plan. The options are priced from $8.45 to $11.25 and expire from 2005 to 2012.
Under the 1995 Non-Employee Director Stock Option Plan, options to purchase 10,000 shares of common stock are automatically granted to each non-employee director at the fair market value of the common stock at the date of grant. All options are fully vested and exercisable one year after the date of grant and expire ten years after the date of grant, or earlier if the non-employee director ceases to be a
director. At December 31, 2002, 400,000 options were outstanding under this plan. The options are priced from $8.63 to $12.49 and expire from 2005 to 2012.
Effective January 1, 1996, the Company adopted the provisions of FASB 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards, which was not significant.
The following is a summary of the stock options outstanding:
NOTE 12 -- EARNINGS PER SHARE
(a) Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Dilutive earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year adjusted for the incremented shares attributed to dilutive outstanding options which represents common stock equivalents. Common stock equivalents outstanding for 2002 of 1.4 million were anti-dilutive and were not included in the calculation of diluted earnings per share.
NOTE 13 - HOTEL REVENUES
Hotel revenues consist of lodging revenues (which consist primarily of room, telephone, movies and vending revenues) and food and beverage revenues. For the years ended December 31, 2002, 2001 and 2000 hotel revenues were comprised of the following:
NOTE 14 -- OTHER INCOME
Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following for the years ended December 31, 2002, 2001 and 2000 (in thousands):
NOTE 15 -- EXTRAORDINARY ITEMS
In 2002, extraordinary items consisted of the impact, net of income taxes, of premiums paid in connection with the redemption of the 9 3/4% Notes and the 9 1/4% Notes and the write-off of unamortized deferred loan fees associated with the 9 3/4% Notes, the 9 1/4% Notes and the former revolving credit facility.
NOTE 16 -- OTHER COMPREHENSIVE INCOME
For the years ended December 31, 2002, 2001 and 2000, comprehensive income consisted of the following (in thousands):
NOTE 17 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The fair values of non-current financial assets and liabilities and other financial instruments are shown below (in thousands). The fair values of current assets and current liabilities approximate their reported carrying amounts.
The fair value for mortgages and notes receivable is based on discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or current rates available to the Company for debt of the same maturities.
The Company's mortgages and other notes receivable (See Note 6) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many of the same risks as the Company's operating hotel assets. A significant portion of the collateral is located in the Northeastern United States.
NOTE 18 -- RELATED PARTY TRANSACTIONS
The following summarizes significant financial information with respect to transactions with present officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 2002, 2001 and 2000 (in thousands):
The amounts above relate to two hotels managed by the Company for an entity controlled by the Company's chairman and chief executive officer.
As disclosed in Note 2, the Company acquired a 50% interest in two hotels with United Capital Corp., an entity controlled by the Company's chairman and chief executive officer (one acquired in December 2002 and the other in January 2003). The impact on the statement of operations in 2002 was a loss of $2,000 (See Note 21).
NOTE 19 -- SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes non-cash investing and financing activities for the years ended December 31, 2002, 2001 and 2000 (in thousands):
Cash paid for interest was $28.5 million, $32.3 million and $43.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Cash paid for income taxes was $0.6 million, $12.5 million and $21.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 20 -- 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 AmeriSuites are upscale, all-suite limited service hotels containing approximately 128 suites and are located in 31 states throughout the United States. The Wellesley Inns & Suites hotels compete in the mid-price segment, and are primarily located in the Northeast, Texas and Florida regions of the United States. A Wellesley Inn & Suites hotel has between 100 to 130 rooms and suites. Full-service hotels compete primarily in the upscale segment, with food and beverage service and banquet facilities under franchise agreements with national hotel brands. The Company's full-service hotels are primarily located in the northeastern region of the United States.
The Company evaluates the performance of its segments based primarily on earnings before interest, taxes and depreciation and amortization ("EBITDA") generated by the operations of its Owned Hotels. Interest expense is primarily related to debt incurred by the Company through its corporate obligations and collateralized by certain of its hotel properties. The Company's taxes are included in the consolidated Federal income tax return of the Company and are allocated based upon the relative contribution to the Company's consolidated taxable income/losses and changes in temporary differences. Other income, net consist of property transactions, which are not part of the recurring operation of the Company. The allocation of interest expense, taxes and other income, are not evaluated at the segment level.
The following table presents revenues and other financial information by business segment for the years ended December 31, 2002, 2001 and 2000 (in thousands):
The following table reconciles income before discontinued operations and extraordinary items to EBITDA for the years ended December 31, 2002, 2001 and 2000 (in thousands):
NOTE 21 - SUBSEQUENT EVENTS
In March 2003, Ark Meadowlands, Inc, an unrelated third party, purchased a 20% interest at cost in Prime Meadowlands, LLC and Ark Quebec, Inc. an unrelated third party, purchased a 20% interest at cost in Nova Scotia Company. The purchases reduced Prime's and United Capital Corp's ownership to 40% each in both entities.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ A.F. Petrocelli ------------------------------------- A.F. Petrocelli, Chairman of the Board of Directors, President and Chief Executive Officer
DATE: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2003.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Prime Hospitality Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, A.F. Petrocelli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ A.F. Petrocelli - ----------------------- A.F. Petrocelli Chief Executive Officer
March 28, 2003
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Prime Hospitality Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas W. Vicari, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Douglas W. Vicari - ----------------------- Douglas W. Vicari Chief Financial Officer
March 28, 2003
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Prime Hospitality Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas W. Vicari, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Richard T. Szymanski - ------------------------ Richard T. Szymanski Vice President - Finance
March 28, 2003