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, a former employee of the Company, filed a complaint against the Company in the United States District Court for the Virgin Islands (the "Court"). 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. 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 plaintiff's action is without merit and intends to vigorously defend this case.
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, 2001.
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 15, 2002 there were 44,884,538 shares of common stock outstanding.
The following table sets forth the reported high and low closing sales prices of, and the dividends per share on, the common stock on the NYSE.
As of March 15, 2002, the closing sales price of the common stock on the NYSE was $12.89 per share, and there were approximately 1,643 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, 2001. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
- --------------- (a) 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.
(b) 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 1997 and 1998.
Unaudited selected consolidated quarterly financial data for the years ending December 31, 2001 and 2000 follow (in thousands, except per share amounts):
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 233 hotels in operation containing 29,641 rooms located in 33 states (the "Portfolio") as of December 31, 2001. Prime controls two hotel brands -- AmeriSuites(R) and Wellesley Inns & Suites(R) -- and operates a portfolio of upscale, full-service hotels under franchise agreements with national hotel chains. The Company owns and operates 131 hotels (the "Owned Hotels"), operates 28 hotels under lease agreements primarily with real estate investment trusts (the "Leased Hotels"), manages 38 hotels for third parties (the "Managed Hotels"), and franchises 36 hotels which it does not operate (the "Franchised Hotels"). The Portfolio is comprised of 139 AmeriSuites hotels, 74 Wellesley Inns & Suites hotels and 20 non-proprietary brand hotels.
The Company's strategy is to develop its proprietary AmeriSuites and Wellesley Inns & Suites brands. Through the development of its proprietary brands, the Company is in the process of transforming itself from an owner/operator into a franchisor and manager and has positioned itself to generate additional revenues with minimal capital investment. Prime's strategy is also focused on growing the operating profits of its Portfolio. With nearly 200 hotels in operation, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets.
Operating results for 2001 were impacted by the weakness in the economy which had a significant negative impact on business travel and the demand for hotel rooms beginning in the second quarter of 2001. Results were further impacted by the September 11th terrorist attacks which disrupted airline service and raised concerns about safety. As a result, for the year ended December 31, 2001, revenues from comparable Owned and Leased hotels declined by 7.9% and gross operating profits on these hotels declined by 15.7%. Overall, for the year ended December 31, 2001, revenue declined by 13.0% to $485.4 million and EBITDA decreased by 33.5% to $113.0 million due to the results of the comparable Owned and Leased hotels and the effect of asset sales and lease terminations.
For 2001, net income was $40.2 million or $.88 per diluted share. Excluding the impact of gains on asset sales and lease terminations and provisions for valuation reserves (all of which are included in the caption, other income, net on the income statement), net income was $26.6 million or $.58 per share.
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, 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 $68.7 million, or 12.8%, from $538.4 million in 2000 to $469.7 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 16.1%, 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 and 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 $20.2 million during 2001 to $255.4 million as a result of the decrease in hotel revenue. Hotel operating expenses, as a percentage of hotel revenues, increased from 51.2% in 2000 to 54.4% 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 $4.1 million, or 4.7%, from $84.1 million in 2000 to $88.2 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. As a percentage of total revenues, general and administrative expenses increased from 5.1% in 2000 to 5.9% in 2001.
Depreciation and amortization expense decreased by $3.2 million, or 7.7%, from $41.6 million in 2000 to $38.4 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 $36.2 million, partially offset by losses of $4.2 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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
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 increased by $5.7 million, or 1.1%, from $532.7 million in 1999 to $538.4 million in 2000. The increase was due primarily to incremental revenues of $49.7 million from new and converted hotels added during 1999 and 2000. The new hotels consist primarily of the leasehold interests on 27 Sumner Suites hotels acquired from Sholodge in July 2000 and subsequently converted to AmeriSuites in November 2000. In addition, Prime realized growth in revenues at comparable Owned and Leased Hotels of $11.6 million. These increases were offset by a decrease in revenues of $55.6 million related to properties sold during the year.
The following table illustrates the REVPAR growth, by segment in 2000 for the Owned hotels, which were operated for comparable periods in 2000 and 1999.
The REVPAR increases reflect the results of continued favorable industry trends in the full-service segment, which is concentrated in the Northeast, and growing recognition of AmeriSuites as a leading brand in the fast-growing all-suites segment. The limited-service segment also reflected strong growth over the prior year due primarily to 38 properties converted from HomeGates to Wellesley Inns & Suites in the fourth quarter of 1999. The improvements in REVPAR at comparable Owned Hotels were generated by increases in ADR, which rose by 1.0%, and an increase in occupancy, which rose by 2.5 pts or 3.8%.
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 $1.9 million, or 13.9%, from $13.6 million in 1999 to $15.5 million in 2000. The increase was primarily due to increased base and incentive management fees associated with the Managed Hotels and 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 $2.0 million from $6.3 million in 1999 to $4.3 million in 2000. This decrease is primarily due to the settlement of various cash flow mortgages and notes receivable in 1999 and 2000.
Hotel operating expenses which consist of all direct costs related to the operation of the Company's properties (lodging, food & beverage, administration, selling and advertising, utilities and repairs and maintenance) remained the same at $276.0 million. Hotel operating expenses, as a percentage of hotel revenues, decreased slightly from 51.7% in 1999 to 51.2% in 2000 due to the strong REVPAR increases at the 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 $13.2 million, or 18.7%, from $70.9 million in 1999 to $84.1 million in 2000, primarily due to the addition of the 27 leased hotels acquired from Sholodge in July 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 decreased by $770,000, or 2.6%, from $29.2 million in 1999 to $28.4 million in 2000. As a percentage of total revenues, general and administrative expenses decreased slightly from 5.3% in 1999 to 5.1% in 2000.
Depreciation and amortization expense decreased by $4.2 million, or 9.2%, from $45.8 million in 1999 to $41.6 million in 2000. This decrease was primarily due to the disposal of 22 hotel properties during 2000.
Valuation and other charges in 1999 consisted of a $7.1 million valuation allowance related to five HomeGate properties, a $22.0 million valuation allowance related to the Frenchman's Reef hotel and $1.4 million for severance charges related to a restructuring of the Company's corporate and regional offices.
Investment income increased by $323,000, or 20.0%, from $1.6 million in 1999 to $1.9 million in 2000 primarily due to higher cash balances during the year and interest earned on security deposits on the leased hotels acquired from Sholodge.
Interest expense decreased by $2.3 million, or 5.3%, from $43.6 million in 1999 to $41.3 million in 2000, primarily due to the paydowns of debt resulting from asset sales and operating cash flows. The Company capitalized $2.3 million and $11.0 million of interest in 2000 and 1999, respectively. Excluding the impact of
capitalized interest and the amortization of deferred loan fees, cash interest expense declined by $10.9 million, or 21.2%, from $51.5 million in 1999 to $40.6 million in 2000.
Other income consists of property transactions and other items, which are not part of the Company's recurring operations. Other income in 2000 consisted of $13.9 million of net gains related to the disposition of properties. Other income in 1999 consisted of a $4.0 million fee for the termination of a hotel sale agreement, net gains on disposition of property of $8.0 million and losses of $4.8 million on the sales of marketable securities.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had cash, cash equivalents and current marketable securities of $30.1 million. In addition, at December 31, 2001, the Company had $114.4 million available to it under its Revolving Credit Facility (as defined in the Notes to the Consolidated Financial Statements). The Company expects to utilize its free cash flow to pay down debt, repurchase its shares and/or invest in its brands.
The Company's major sources of cash for 2001 were cash flows from operations of $63.2 million, net proceeds from the sales of hotels of $32.5 million, and borrowings of $12.6 million. The Company's major uses of cash during the period were debt repayments of $38.6 million, capital expenditures of $42.9 and repurchases of its common stock totaling $3.7 million.
Sources of Capital. The Company has undertaken a strategic initiative to dispose of certain hotel real estate while retaining the franchise rights and to invest the proceeds in the reduction of debt, the growth of its proprietary brands and/or the repurchase of the Company's common stock. During 2001, the Company sold assets for gross proceeds of $34.5 million. These were comprised of the sale of an AmeriSuites hotel for $14.0 million, four Wellesley Inns for $15.4 million and two land parcels for $5.1 million. In January 2002, the Company sold a full-service hotel and a Wellesley Inn for $15.0 million.
The Company has a revolving credit facility with borrowing capacity of $125 million, which bears interest at LIBOR plus 2.0% (the "Facility"). In December 2001, the Company exercised its option and extended the maturity of the Facility to December 2002. Borrowings under the Facility are secured by first liens on certain of the Company's hotels with recourse to the Company. Additional properties may be added subject to the approval of the lenders. Availability under the Facility is subject to a borrowing base test and certain other covenants. During 2001, the Company borrowed and repaid $13.0 million and had no amounts outstanding at December 31, 2001, with further availability of $114.4 million under its borrowing base test.
The Facility contains covenants requiring the Company to maintain certain financial ratios and limitations on the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. In October 1999, the Facility was amended to allow an additional $100.0 million of share repurchases to be funded by 50% of the proceeds from asset sales. In April 2000, the Revolving Credit Facility was amended to allow for additional retirements of other debt owed by the Company.
Uses of Capital. The Company utilized the proceeds from asset sales, along with its cash flow from operations, to reduce its debt balance during the year by $25.7 million to $320.0 million at December 31, 2001. This reduction of debt was primarily comprised of gross payments of $15.6 million of mortgage debt on assets sold, and the retirement of $10.0 million of the Company's 9 3/4% Senior Subordinated Notes due 2007. In 2002, the Company retired $9.2 million of mortgage debt, which comprised all of its debt maturities in 2002. The Company now has no significant maturities until 2006.
The Company also purchased approximately 376,200 shares of its common stock during 2001 for $3.6 million at an average cost of $9.86 per share. The Facility limits the purchase of these shares to 50% of
the proceeds from asset sales not to exceed $100 million. As of February 28, 2002, the Company had repurchased $34.7 million of its shares under this covenant and has $65.3 million of availability based on the proceeds from asset sales.
The Company intends to continue the growth of its brands primarily through franchising and, therefore, its corporate development will be limited. The Company spent $20.9 million during 2001 on new construction, opening one new AmeriSuites and converting two hotels to Wellesley Inns. The Company currently has one AmeriSuites hotel under construction and anticipates spending $5.0 million to complete this project in 2002. In addition, in 2001 the Company also spent $22.0 million on maintenance capital at its Owned Hotels and corporate offices and expects to spend a similar amount in 2002. The Company plans to fund its corporate development and capital improvements with internally generated cash flow.
SIGNIFICANT 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.
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.
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 incurred through the balance sheet date and are included in other current liabilities.
Long-Lived Assets. 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.
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 (See Note 3).
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its floating rate debt arrangements. At December 31, 2001, 2000 and 1999 a hypothetical 100 basis point adverse move (increase) in interest rates along the entire rate curve would have an adverse affect on the Company's annual interest cost by approximately $93,000, $175,000 and $1.9 million annually.
The Company has changed its method of disclosure to the above from the December 31, 1999 Form 10-K filed March 28, 2000, due to the $125.0 million reduction in its variable debt balance and the termination of its interest rate protection agreement in October 2000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements included in Item 14.
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.
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.
Allen S. Kaplan has been a Director of the Company since February 2001. 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.
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. Prior to that he had been a Vice President and Treasurer of the Company for more than five years.
Carl J. Garraffo has been a Senior Vice President of the Company since 2000. Prior to that he held the position of Corporate Director of Human Resources for the Lennar Corporation for more than three years.
Dennis R. Hill has been a Senior Vice President of the Company since 2001. From 1998 until joining the Company he held the position of President of ROI Hotel Training Systems. Prior to that he held the position of Vice President of Operations at LaQuinta Inns, Inc. for more than five years.
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 two years.
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 two years.
Terry P. O'Leary has been a Senior Vice President of the Company since 1998. Prior to that he held the position of Vice President of the Company for more than three years.
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 two years.
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."
PART IV
ITEM 14.
ITEM 14. 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
(b) Reports on Form 8-K
None
(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.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(ITEM 14(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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", which required the expensing of unamortized pre-opening costs in 1999.
ERNST & YOUNG LLP
New York, New York February 6, 2002
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999
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 233 hotels in operation containing 29,641 rooms located in 33 states (the "Portfolio") as of December 31, 2001. Prime controls two hotel brands -- AmeriSuites(R) and Wellesley Inn & Suites(R) -- as well as a portfolio of upscale, full-service hotels operated under franchise agreements with national hotel chains. The Portfolio is comprised of 131 Owned and operated hotels (the "Owned Hotels"), 28 hotels operated under lease agreements with real estate investment trusts (the "Leased Hotels"), 38 hotels managed for third parties (the "Managed Hotels"), and 36 franchised hotels which Prime does not operate (the "Franchised Hotels"). There are 139 AmeriSuites hotels, 74 Wellesley Inns & Suites hotels and 20 non-proprietary brand hotels in the Portfolio as of December 31, 2001.
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.
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, 2001 and 2000, cash and cash equivalents were comprised of approximately $28.0 million and $0.2 million, respectively, of cash, and $2.0 million and $1.5 million, respectively, of commercial paper and other cash equivalents.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARKETABLE SECURITIES
Marketable securities consist of equity securities, which are available for sale. Marketable securities are valued at current market value. The differences between the historical cost of the marketable securities available for sale and the current market value are reflected in stockholders' equity, as accumulated other comprehensive losses, net of income taxes. Realized gains and losses are determined using the cost basis of the security recorded at the time of purchase. At December 31, 2000, the Company had marketable securities available for sale of $3.3 million, with an original cost basis of $8.0 million.
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.
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 (See Note 3).
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted for payments and other 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 cash flow mortgages and 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 as of December 31, 2001, 2000 and 1999.
OTHER ASSETS
Other assets consist primarily of deferred issuance costs related to the Company's debt obligations and security deposits. 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
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 incurred through the balance sheet date and are included in other current liabilities.
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.
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
In January 1999, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5"). The Company recorded a $5.3 million charge, net of income taxes, for the cumulative effect of a change in accounting principle to write off the unamortized pre-opening costs that remained on the balance sheet at the date of adoption. Additionally, subsequent to the adoption of this new standard, all future pre-opening costs are being expensed as incurred.
Prior to the Company's adoption of SOP 98-5, non-capital expenditures incurred before the opening of new or renovated hotels, such as payroll and operating supplies, were deferred and expensed within one year after opening.
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.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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" which supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"; however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used". In addition, the Statement provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset or asset group to be disposed of other than by sale (e.g. abandoned) be classified as "held and used" until it is disposed of, and establishes more restrictive criteria to classify an asset or asset group as "held for sale". The Company's management does not anticipate that the adoption of this Statement will have an effect on the earnings or the financial position of the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2000 and 1999 consolidated financial statements to conform them to the December 31, 2001 presentation.
NOTE 2 -- HOTEL ACQUISITIONS
On July 10, 2000, the Company acquired the leasehold interests on 24 Sumner Suites hotels owned by Hospitality Properties Trust ("HPT") from Sholodge, Inc. ("Sholodge") and 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"), formally known as American General Hospitality, Inc., 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, net in the accompanying consolidated financial statement.
The Company also had a contract to sell and lease back nine additional full-service hotels from MeriStar not later than March 31, 1999. MeriStar was unable to fulfill its contractual obligation and the Company received a $4.0 million contract termination fee in 1999. Such amount is included in other income, net in the accompanying consolidated financial statements.
In 1997 and 1998, the Company entered into two separate transactions with Equity Inns, Inc. ("Equity Inns") for the sale and lease back 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
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $20.1 million in aggregate in 2001). The Prime subsidiary's obligations under the management agreement are supported by a guarantee by Prime of $3.4 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, 2001, approximately $22.0 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 regarding the cash flow guarantees under the management agreement.
OTHER DISPOSITIONS
During 2001, the Company sold one AmeriSuites hotel for $14.0 million, four Wellesley Inns hotels 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, net. 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 also 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, net 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.
During 1999, the Company sold eight AmeriSuites, one HomeGate hotel, an apartment building and three vacant land sites for total proceeds of $86.7 million. The transaction generated net gains of $8.0 million. The Company retained the franchise rights on the AmeriSuites sales under franchise agreements generally ranging from ten to twenty years.
In addition to the hotels sold in 2000 and 2001, the Company has four hotels that are currently being marketed for sale with a carrying value of $22.2 million as of December 31, 2001. These hotels consist of three Wellesley Inns and one full-service hotel which contributed $2.4 million and $1.4 million, respectively of operating income for the year ended December 31, 2001. In addition, land parcels with a carrying value of $9.9 million are also for sale. During 2001, the Company recorded a valuation allowance of $6.7 million against various 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, net in
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's consolidated statement of income. Management estimated the fair market value based on comparative land sales in their respective markets. The Company completed the sale of the full-service hotel and one of the Wellesley Inns in January 2002. The realized gross proceeds of approximately $15.4 million on these sales resulted in gains of approximately $700,000. The Company anticipates the sale of the remaining two properties to be completed during 2002. The Company has discontinued depreciating these assets while they are held for sale.
NOTE 4 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in thousands):
- --------------- (a) Included in land at December 31, 2001 and 2000, was $3.8 million and $7.8 million, respectively, of land associated with hotels under construction.
At December 31, 2001, the Company is the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $6.8 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, 2001, and thereafter are as follows:
Depreciation and amortization expense on property, equipment and leasehold improvements was $38.4 million, $41.4 million and $45.4 million for the years ended December 31, 2001, 2000 and 1999, respectively.
During the years ended December 31, 2001, 2000 and 1999, the Company capitalized $1.6 million, $2.3 million and $11.0 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, 2001, the Company had loans of approximately $138.3 million to such third party,
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which represented the total costs to construct and furnish 15 AmeriSuites hotels. These loans are classified as property, equipment and leasehold improvements in the Company's accompanying financial statements.
NOTE 5 -- MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are comprised of the following (in thousands):
- --------------- (a) At December 31, 2001, the Company is the holder of mortgage notes receivable with a book value of $9.5 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, as well as loans secured by hotel properties not currently managed by the Company. Other notes receivable mature through 2011 and bear interest at an approximate effective rate of 8.3%.
NOTE 6 -- DEBT
Debt consists of the following (in thousands):
- --------------- (a) In March 1997, the Company issued $200.0 million 9.75% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes") in reliance upon Rule 144A under the Securities Act of 1933, as amended. Interest on the notes is paid semi-annually on April 1 and October 1. The notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, and transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company on or after April 1, 2002 at premiums to principal, which decline on each anniversary date. As of December 31, 2001, the Company had repurchased and retired $10.0 million of these notes.
(b) The Company established a revolving credit facility (the "Revolving Credit Facility") in 1996 with a group of financial institutions providing for availability of funds up to the lesser of $100.0 million or a borrowing base determined under the agreement. In December 1997, the Revolving Credit Facility was
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amended and the availability of funds was increased to $200.0 million. Pursuant to the terms of the agreements, the aggregate amount of the Revolving Credit Facility was reduced to $175.0 million in December 2000 and was further reduced to $125.0 million in December 2001. The Revolving Credit Facility is secured by first liens on certain of the Company's hotels with recourse to the Company. Availability under the facility is subject to a borrowing base test and certain other covenants. The Revolving Credit Facility bears interest at LIBOR plus 2.0%, which is paid monthly. Under its terms, the Facility was to expire in December 2001 with a one-year renewal option. In December 2001, the Company exercised its option and the Facility is now available through December 2002. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and limitations on the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. In October 1999, the Revolving Credit Facility was amended to allow an additional $100 million of share repurchases. The purchases of these additional shares are limited to 50% of the proceeds from asset sales. In April 2000, the Revolving Credit Facility was amended to allow for additional retirements of other debt owed by the Company.
During 2001, the Company had gross borrowings and subsequent repayments of $13.0 million under the Revolving Credit Facility. As of December 31, 2001, the Company had no outstanding borrowings under this facility and had additional borrowing capacity of $114.4 million under its borrowing base test.
(c) During 1996, the Company issued $120 million of 9.25% First Mortgage Notes due 2006. Interest on the notes is payable semi-annually on January 15 and July 15. At December 31, 2001, the notes are secured by first liens on 17 hotels with net book value of $109.4 million and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, and transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after January 15, 2001 at premiums to principal, which decline on each anniversary date. As of December 31, 2001, the Company had repurchased and retired $16.0 million of these notes.
(d) The Company has mortgage and other notes payable of approximately $26.1 million that are secured by mortgage notes receivable and hotel properties with a book value of $61.3 million. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 2001 these notes bear interest at rates ranging from 6.7% to 8.6%, with a weighted average interest rate of 6.8%, and mature from 2002 through 2009. In February 2002, the Company repaid $9.2 million on these mortgages.
In October 1999, the Company entered into an interest rate protection agreement with a major financial institution, which reduced the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under this agreement, on a monthly basis the Company paid a fixed rate of interest of 6.03% and received a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. Due to the Company's limited exposure to interest rate fluctuations (approximately $9.3 million of floating rate debt at December 31, 2001), the agreement was subsequently terminated in October 2000 and all unamortized costs were recognized in the Company's consolidated financial statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt subsequent to December 31, 2001 are as follows (in thousands):
NOTE 7 -- OTHER CURRENT ASSETS/LIABILITIES
Other current assets consist of the following (in thousands):
Other current liabilities consist of the following (in thousands):
NOTE 8 -- 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.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In September 2001, Prime notified Winston that it would no longer fund rent payments in the event that the hotel's cash flow is insufficient to cover the rent. Winston has notified Prime that it is in default under its lease. Prime's obligations under the lease are limited to its security deposit which approximates $500,000.
All of the lease agreements related to the 27 AmeriSuites hotels maintain restrictions which prevent the Company from operating an AmeriSuites hotel or similar type of hotel with 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 with terms of less than one year, consist of the following for the years ended December 31, 2001, 2000 and 1999 (in thousands):
Such amounts are included in occupancy and other operating expenses in the accompanying consolidated financial statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, a former employee of the Company, filed a complaint against the Company in the United States District Court for the Virgin Islands (the "Court"). 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. 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 the plaintiff's action is without merit and intends to vigorously defend this case.
NOTE 9 -- INCOME TAXES
The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 2001, 2000 and 1999 (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001, 2000 and 1999 (in thousands):
The following is a reconciliation of the statutory Federal tax rate to the Company's effective income tax rate:
At December 31, 2001, 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 $19.3 million against the deferred tax asset at December 31, 2001. 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 years ended December 31, 2001, 2000 and 1999, the Company recognized $0, $3.1 million and $3.1 million per year, respectively, of such benefits as a contribution to stockholders' equity and a corresponding reduction of the valuation allowance associated with the net operating losses.
Additionally, the Company recognized $484,000 as a contribution to stockholders' equity for the year ended December 31, 1999 which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable.
At December 31, 2001, the Company had deferred tax liabilities of $40.1 million relating to the differences in the methods of accounting for the Company's fixed assets.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS
COMMON STOCK
During 2001, the Company repurchased approximately 376,200 shares of its common stock for $3.7 million at average cost of $9.86 per share. In 2000, the Company repurchased 3.9 million shares of its common stock for $31.0 million for a total average cost of $8.00. The Revolving Credit Facility limits the purchase of these shares to 50% of the proceeds from asset sales not to exceed $100 million. Through February 6, 2002, the Company has repurchased $34.7 million of its shares under this covenant and has $65.3 million of availability based on the proceeds from asset sales.
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, 2001, a total of 6.6 million options were outstanding with another 2.7 million options available to be issued. At December 31, 2001, the weighted average contractual life remaining related to these plans is approximately 8.2 years and the weighted average exercise price of the options outstanding is $8.34.
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, 2001, 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, 2001, 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 2001, 2000 and 1999, respectively, options to purchase 268,000, 454,000 and 544,000 shares of common stock, respectively, were granted under this plan. At December 31, 2001, 1,527,000 options were outstanding under this plan. The options are priced from $4.72 to $11.25 and expire from 2005 to 2011.
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 will be fully vested and exercisable one year after the date of grant and will expire ten years after the date of grant, or earlier if the non-employee director ceases to be a director. During 1998 options to purchase 190,000 shares of common stock were granted under this plan. At December 31, 2001, 330,000 options were outstanding under this plan. The options are priced from $9.31 to $10.00 and expire from 2005 to 2008.
Under the Company's 1992 Stock Option and Performance Incentive Plans, options to purchase 81,000 shares of common stock were outstanding at December 31, 2000. The unexercised options relating to this plan expired on December 31, 2001.
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
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Had the fair value method of accounting been applied to the Company's stock plans, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, net income would have been $37.7 million or $.82 per share in 2001, $57.2 million, or $1.22 per share in 2000 and $32.0 million, or $.61 per share in 1999. This pro forma impact only takes into account options granted since January 1, 1998 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The weighted average fair value of options granted during 2001, 2000 and 1999 was $4.83, $4.44 and $5.92, respectively.
The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $9.09 in 2001, $9.16 in 2000, and $11.25 in 1999 and the following weighted average assumptions: risk-free interest rate of 5.05% in 2001 and 5.05% in 2000 and 6.23% in 1999, volatility of 46.1% in 2001 and 39.5% for 2000 and 42.3% in 1999, and dividend yield of 0.0% for 2001, 2000 and 1999.
The following is a summary of the stock options outstanding:
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- EARNINGS PER SHARE
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 outstanding options which represents common stock equivalents.
NOTE 12 -- HOTEL REVENUES
Hotel revenues consist of lodging revenues (which consist primarily of room, telephone and vending revenues) and food and beverage revenues. For the years ended December 31, 2001, 2000 and 1999 hotel revenues were comprised of the following:
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- VALUATION AND OTHER CHARGES -- OPERATING HOTELS
Valuation and other charges in 1999 consist of a $29.1 million valuation allowance related to certain non-prototype HomeGate properties and the Frenchman's Reef hotel and $1.4 million for severance charges. Both the Homegate properties and the Frenchman's Reef hotel were subsequently sold in 2000.
NOTE 14 -- OTHER INCOME, NET
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, 2001, 2000 and 1999 (in thousands):
NOTE 15 -- OTHER COMPREHENSIVE INCOME
For the years ended December 31, 2001, 2000 and 1999, comprehensive income consisted of the following (in thousands):
NOTE 16 -- 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.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's mortgages and other notes receivable (See Note 5) 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 17 -- 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, 2001, 2000 and 1999 (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.
NOTE 18 -- SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes non-cash investing and financing activities for the years ended December 31, 2001, 2000 and 1999 (in thousands):
Cash paid for interest was $32.3 million, $43.0 million and $51.5 million for the years ended December 31, 2001, 2000 and 1999, respectively.
Cash paid for income taxes was $12.5 million, $21.0 million and $31.0 million for the years ended December 31, 2001, 2000 and 1999, respectively.
NOTE 19 -- 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 140 rooms and suites. Non-proprietary brand hotels compete primarily in the upscale full-service 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
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, net are not evaluated at the segment level and therefore, would be necessary in order to reconcile EBITDA to consolidated net income on the consolidated financial statements.
The following table presents revenues and other financial information by business segment for the years ended December 31, 2001, 2000 and 1999 (in thousands):
- --------------- (1) EBITDA represents earnings before interest, income taxes, depreciation and amortization from the hotels.
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: ------------------------------------ A.F. Petrocelli, Chairman of the Board of Directors, President and Chief Executive Officer DATE: March xx, 2002
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 xx, 2002.