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Liquidity and Capital Resources Net cash provided by operating activities was $99.0 million for the year ended December 31, 2002, representing a slight decrease of $2.7 million from $101.7 million for the year ended December 31, 2001. The decrease in cash provided by operating activities was primarily due to lower repayments related to marketing and reservation activities offset by improved management of working capital. As of December 31, 2002, the total long-term debt outstanding for the Company was $307.8 million, $23.8 million of which matures in the next twelve months. During each of the past three years, the Company has realigned its corporate structure to increase its strategic focus on delivering value-added services and support to franchisees, including centralizing the Company's franchise service and sales operations, consolidating its brand management functions and realigning its call center operations. The Company recorded a $1.6 million restructuring charge in 2002 of which approximately $0.4 million was paid in 2002. The restructuring charges represented employee severance and termination benefits. The restructuring was initiated and completed in 2002 and the Company expects the remaining liability to be paid during 2003. The Company paid $3.1 million related to the 2001 restructuring liability during the year ended December 31, 2002, and expects the remaining $0.6 million liability to be substantially paid in 2003. The Company paid $0.2 million related to the 2000 restructuring liability for the year ended December 31, 2002, which completed the restructuring. The Company received net cash repayments related to marketing and reservation activities totaling $17.2 million and $20.3 million during the years ended December 31, 2002 and 2001, respectively. The 2002 and 2001 net repayments are associated with cost reductions from restructured operations, growth in fees from normal operations and increases in property and yield management fees. The Company expects marketing and reservation activities to generate positive cash flows between $16.0 million and $19.0 million in 2003. Cash (utilized in) provided by investing activities for the years ended December 31, 2002, 2001 and 2000, was ($14.7 million), $87.7 million and ($16.6 million), respectively. During the years ended December 31, 2002, 2001 and 2000, capital expenditures totaled $12.2 million, $13.5 million and $16.6 million, respectively. Capital expenditures include the installation of system-wide property and yield management systems, upgrades to financial and reservation systems, computer hardware and renovations to the Company's corporate headquarters (including a franchisee learning and training center). During 2001, the Company received a cash payment of $101.9 million from Sunburst related to a note receivable due to the Company. On September 1, 2000, the Company monetized $16.3 million in principal and interest of the $115 million principal, five-year Subordinated Term Note (the "Old Note") to Sunburst issued in October 1997. The Company received three MainStay Suites properties through the monetization transaction. In connection with an amendment of the strategic alliance agreement between the Company and Sunburst, effective October 15, 2000, interest payable on the Old Note accrued at a rate of 11% per annum compounded daily. The Company implemented this amendment prospectively beginning on January 1, 1999, and recognized interest on the outstanding principal and accrued interest amounts at an effective rate of 10.58%. Total interest accrued at December 31, 2000 was $42.2 million. On January 5, 2001, the Company received $101.9 million, a parcel of land valued at approximately $1.5 million and a $35 million seven-year senior subordinated note bearing interest at 11 3/8% (the "New Note") in settlement of the balance of the Old Note. In 2000, the Company recognized a pre-tax loss of $3.5 million resulting from this transaction. The New Note accrued interest up until June 2002, at which point interest became payable semi-annually in arrears. As of December 31, 2002, the Company's balance sheet includes an interest receivable from Sunburst of $2.3 million which is included in other current assets in the accompanying consolidated balance sheets and was paid to the Company by Sunburst in January 2003. Financing cash flows relate primarily to the
Company's borrowings under its credit lines and treasury stock purchases.
In June 2001, the Company entered into a five-year $265 million competitive
advance and multi- currency credit facility. The credit facility provides
for a term loan of $115 million and a revolving credit facility of $150
million, $37 million of which is available in foreign currency borrowings.
As of December 31, 2002, the Company had $98.7 million of term loans and
$102.0 million of revolving loans outstanding. The term loan is payable
over the next four years, $17.3 million of which is due in 2003. The credit
facility includes customary financial and other covenants that require
the maintenance of certain ratios including maximum leverage and interest
coverage and restrict the Company's ability to make certain investments,
incur debt and dispose of assets. Borrowings under the credit facility
are, at the option of the borrower, at one of several rates including
LIBOR plus .60% to 2.0% basis points, based upon the credit rating of
the Company and the loan type. In addition, the Company has the option
to request participating banks to bid on loan participation at lower rates
than those contractually provided by the credit facility. The credit facility
requires the Company to pay annual fees of
In 1998, the Company completed a $100 million senior unsecured note offering ("the Notes"), bearing a coupon rate of 7.13% with an effective rate of 7.22%. The Notes will mature on May 1, 2008, with interest on the Notes to be paid semi-annually. The Company used the net proceeds from the offering of approximately $99 million to repay amounts outstanding under the Company's previous credit facility. In August 2002, the Company entered into a new $10.0 million revolving line of credit with a maturity of August 2003. The new line of credit includes customary financial and other covenants that require the maintenance of certain ratios identical to those included in the Company's existing senior credit facility. Borrowings under the line of credit bear interest at rates established at the time of borrowing based on prime minus 175 basis points. The Company had $6.4 million outstanding at December 31, 2002 under this line of credit. Through December 31, 2002, the Company had repurchased 26.5 million shares of its common stock at a total cost of $434.9 million, including 5.4 million shares at a cost of $120.9 million during the year ended December 31, 2002. Subsequent to December 31, 2002 and through March 11, 2003, the Company repurchased 1.3 million shares of common stock at a total cost of $30.3 million. The Company believes that cash flows from operations and available financing capacity are adequate to meet expected future operating, investing and financing needs of the business. Impact of Recently Issued Accounting Standards In April 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when the related liability is incurred rather than at the date of a commitment to an exit or disposal plan as previously required. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an activity being exited or long-lived assets being disposed. As permitted by SFAS No. 146, we adopted SFAS No. 146 in 2002. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees 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. The initial recognition and measurement provisions of this Interpretation apply to guarantees issued or modified after December 31, 2002. We will adopt these provisions on January 1, 2003. The disclosure provisions of this Interpretation are effective for financial statements with annual periods ending after December 15, 2002. We have applied the disclosure provisions of this Interpretation as of December 31, 2002, as required (See Note 19 to the Consolidated Financial Statements). On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure." This standard amends SFAS No. 123, "Accounting for Stock-Based Compensation,"to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This standard also requires prominent 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. We have applied the disclosure provisions of SFAS No. 148 as of December 31, 2002. (See Note 1 to the Consolidated Financial Statements). As permitted by SFAS No. 123, during 2002, we measured stock-based compensation using the intrinsic value approach under Accounting Principles Board Opinion No. 25. Accordingly, we did not recognize compensation expense upon the issuance of our stock options because the option terms were fixed and the exercise price equaled the market price of the underlying common stock on the grant date. We complied with the provisions of SFAS No. 123 by providing pro forma disclosures of net income and related per share data giving consideration to the fair value method provisions of SFAS No. 123. On January 1, 2003, we adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123, which is considered by the FASB to be the preferable accounting method for stock- based employee compensation, and have elected to use the prospective method permitted by SFAS No. 148. Therefore, the transition provisions of SFAS No. 148 will be adopted concurrently with the fair value based recognition provisions of SFAS No. 123 on January 1, 2003. Subsequently, we will expense all future employee stock awards over the vesting period based on the fair value of the award on the date of grant in accordance with the prospective transition method. Forward-Looking Statements Certain statements in this report that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. Words such as "believes," "anticipates," "expects,""intends," "estimates," "projects," and other similar expressions, which are predictions of or indicate future events and trends, typically identify forward-looking statements. Such statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those projected, including: competition within each of our business segments; business strategies and their intended results; the balance between supply of and demand for hotel rooms; our ability to obtain new franchise agreements; our ability to develop and maintain positive relations with current and potential hotel owners; the effect of international, national and regional economic conditions and geopolitical events such as acts of war or terrorism; the availability of capital to allow us and potential hotel owners to fund investments in and construction of hotels; the cost and other effects of legal proceedings; and other risks described from time to time in our filings with the Securities and Exchange Commission, including those set forth under the heading "Risk Factors" in our Report on Form 10-Q for the period ended September 30, 2001. Given these uncertainties, you are cautioned not to place undue reliance on such statements. We also undertake no obligation to publicly update or revise any forward- looking statement to reflect current or future events or circumstances. |
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of 1% to ½ of 1% based
upon the credit rating of the Company. The proceeds from the credit facility
are used for general corporate purposes, including working capital, debt
repayment, stock repurchases, investments and acquisitions.