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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11903
MERISTAR HOSPITALITY CORPORATION
(Exact name of issuer as specified in its charter)
MARYLAND 75-2648842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 POTOMAC ST., N.W. 20007
SUITE 300
WASHINGTON, D.C. (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 295-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
Based on the average sale price at March 5, 2001, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$853,835,175.
The number of shares of the Registrant's common stock outstanding as of
March 5, 2001 was 44,507,904.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III--Those portions of the Registrant's definitive proxy statement
relating to Registrant's 2001 Annual Meeting of Stockholders which are
incorporated into Items 10, 11, 12, and 13.
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PART I
ITEM 1. BUSINESS
MERISTAR HOSPITALITY CORPORATION
MeriStar Hospitality Corporation is a real estate investment trust which
owns a portfolio of primarily upscale, full-service hotels, diversified
geographically as well as by franchise and brand affiliations, in the United
States and Canada. As of December 31, 2000, we owned 114 hotels with 29,090
rooms. The hotels are located in major metropolitan areas or rapidly growing
secondary markets and are well located within these markets. A majority of the
hotels are operated under nationally recognized brand names such as Hilton(R),
Sheraton(R), Westin(R), Marriott(R), Radisson(R), Doubletree(R) and Embassy
Suites(R).
We believe that the upscale, full-service segment of the lodging industry
is the most attractive segment in which to own hotels. The upscale, full-
service segment is attractive for several reasons. First, the real estate
market has recently experienced a significant slowdown in the construction of
upscale, full-service hotels. Second, upscale, full-service hotels appeal to a
wide variety of customers, thus reducing the risk of decreasing demand from
any particular customer group. Additionally, these hotels have particular
appeal to both business executives and upscale leisure travelers, customers
who are generally less price sensitive than travelers who use limited-service
hotels.
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, and
its associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American General,
MeriStar Hotels & Resorts, Inc., a separate publicly traded company, was
created to be the lessee and manager of nearly all of our hotels. On December
31, 2000, MeriStar Hotels & Resorts leased and managed 106 of our hotels. The
eight Hotels not leased by MeriStar Hotels & Resorts are leased by affiliates
of Prime Hospitality Corporation. We share certain key officers and four board
members with MeriStar Hotels & Resorts and an intercompany agreement aligns
our interests with the interests of MeriStar Hotels & Resorts, with the
objective of benefiting both companies' shareholders.
Changes to the federal tax laws governing REITs were enacted in 1999 and
became effective on January 1, 2001. Under those changes, we are permitted to
create subsidiaries that lease the property we currently own, and these
subsidiaries are taxable in a manner similar to subchapter C corporations.
Because of these changes in the tax laws, we have formed a number of wholly-
owned taxable subsidiaries to which subsidiaries of MeriStar Hotels & Resorts
have assigned the participating leases. In connection with the assignment, the
taxable subsidiaries executed new management agreements with a subsidiary of
MeriStar Hotels & Resorts to manage our hotels. Under these management
agreements, the taxable subsidiaries pay MeriStar Hotels & Resorts a
management fee for each property that was previously leased by them. The
taxable subsidiaries in turn make rental payments to us under the
participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases.
BUSINESS
Our business strategy is to opportunistically acquire hotel properties and
related businesses with the potential for cash flow growth and to renovate and
reposition each hotel according to the characteristics of the hotel and its
market. During the year ended December 31, 2000, we acquired one hotel for
$19.4 million and spent a total of $63.2 million on property capital
expenditures at our owned hotels.
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The Intercompany Agreement
We are party to an intercompany agreement with MeriStar Hotels & Resorts.
The intercompany agreement provides that, for so long as the agreement remains
in effect, MeriStar Hotels & Resorts is prohibited from making real property
investments that a real estate investment trust could make unless:
. we are first given the opportunity, but elect not to pursue the
activities or investments;
. it is on land already owned or leased by them or subject to a lease or
purchase option in favor of them;
. they will operate the property under a trade name owned by them; or
. it is a minority investment made as part of a lease or management
agreement arrangement.
The intercompany agreement will generally grant MeriStar Hotels & Resorts
the right of first refusal to become the manager of any real property acquired
by us. This opportunity will be made available to MeriStar Hotels & Resorts
only if we determine that:
. consistent with our status as a real estate investment trust, we must
enter into a management agreement with an unaffiliated third party with
respect to the property;
. they are qualified to be the manager of that property; and
. we decide not to have the property operated by the owner of a hospitality
trade name under that trade name.
Because of the provisions of the intercompany agreement, the nature of our
business and the opportunities we may pursue will be restricted.
Provision of Services
MeriStar Hotels & Resorts may provide us with certain services as we may
reasonably request from time to time, including administrative, renovation
supervision, corporate, accounting, financial, insurance, legal, tax,
information technology, human resources, acquisition identification and due
diligence, and operational services. We compensate MeriStar Hotels & Resorts
for services provided in an amount determined in good faith by MeriStar Hotels
& Resorts as the amount a third party would charge us for comparable services.
Equity Offerings
If either we or MeriStar Hotels & Resorts desire to engage in a securities
issuance, such issuing party will give notice to such other party as promptly
as practicable of its desire to engage in a securities issuance. Any such
notice will include the proposed material terms of such issuance, to the
extent determined by the issuing party, including whether such issuance is
proposed to be pursuant to public or private offering, the amount of
securities proposed to be issued and the manner of determining the offering
price and other terms thereof. The non-issuing party will cooperate with the
issuing party in every way to effect any securities issuance of the issuing
party by assisting in the preparation of any registration statement or other
document required in connection with such issuance and, in connection
therewith, providing the issuing party with such information as may be
required to be included in such registration statement or other document.
Term
The intercompany agreement will terminate upon the earlier of August 3,
2008, and the date of a change in ownership or control of MeriStar Hotels &
Resorts.
We may lend MeriStar Hotels & Resorts up to $50 million for general
corporate purposes pursuant to a revolving credit agreement. On March 1, 2000,
MeriStar Hotels & Resorts prepaid the remaining balance of $57.1 million on
its revolving credit agreement with us. At the same time, the revolving credit
agreement was
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amended to reduce the maximum borrowing limit from $75 million to $50 million
and the interest rate was increased from 350 basis points over the 30-day
London Interbank Offered Rate to 650 basis points over the 30-day London
Interbank Offered Rate. As of December 31, 2000, there were no amounts
outstanding under this revolving credit agreement.
Other Recent Developments
Approval of Plan of Merger between MeriStar Hotels & Resorts and American
Skiing Company to create Doral International
On December 11, 2000, MeriStar Hotels & Resorts announced that it had
signed a merger agreement with American Skiing Company, a company that owns,
develops and operates ski resort properties. Under that merger agreement,
MeriStar Hotels & Resorts will become a wholly-owned subsidiary of American
Skiing. In connection with the merger, American Skiing will be renamed "Doral
International, Inc." MeriStar Hotels & Resorts has stated that it intends to
continue to manage our hotels as a subsidiary of Doral. American Skiing and
MeriStar Hotels & Resorts have stated that they expect the merger to be
completed during the first quarter of 2001. For more information relating to
this merger, please consult the Securities and Exchange Commission filings of
American Skiing and MeriStar Hotels & Resorts.
Our Board of Directors has consented to the merger and the change of
control under the terms of our management agreements and the intercompany
agreement as amended will remain in effect. In connection with the merger, our
$50 million revolving credit agreement with MeriStar Hotels & Resorts will
terminate. Our Board of Directors has approved up to a $25 million loan to
Doral to be used exclusively for specified real estate development projects.
$500,000,000 Offering
On January 26, 2001, our operating partnership and MeriStar Hospitality
Finance Corp., a wholly owed subsidiary of our operating partnership, closed
the sale of $300 million of 9% senior notes due 2008 and $200 million of 9.13%
senior notes due 2011 to "Qualified Institutional Buyers" as defined in Rule
144A under the Securities Act of 1933.
The notes are unsecured obligations of our operating partnership and the
wholly owned subsidiary. We and a number of our direct and indirect
subsidiaries guarantee payments of principal and interest on the notes on a
senior unsecured basis. The net proceeds of the offering, which are
approximately $492 million, was used to:
. repay a portion of outstanding term loans and to repay revolving
indebtedness, under our senior secured credit facility; and
. to make payments to terminate some swap agreements that hedged variable
interest rate risk on term loans that were repaid.
The revolving indebtedness repaid matured July 2001 and we have two one-
year optional extensions through July 2003. The term loans repaid matured in
July 2003 and July 2004 and have no optional extensions.
Stock Repurchase
In 1999, our Board of Directors approved the repurchase of up to 5,000,000
shares of our outstanding common stock. From December 1999 through December
31, 2000 we repurchased approximately 4.1 million shares of common stock at an
average price of $17.74 per share.
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REIT Modernization Act
Until January 1, 2001, in order to maintain our tax status as a REIT, we
were not permitted to engage in the operations of our hotel properties. To
comply with this requirement, we leased all of our real property to third-
party lessee/managers--MeriStar Hotels & Resorts and Prime Hospitality. On
January 1, 2001, changes to the U.S. federal tax laws governing REITs,
commonly known as the "REIT Modernization Act" became effective and as a
result, we are now permitted to create taxable subsidiaries, which are subject
to taxation similar to a C-Corporation and are permitted to lease our real
property.
Although a taxable subsidiary may lease real property, the REIT
Modernization Act restricts our taxable subsidiary from being involved in the
following activities:
. it may not manage the properties itself; it must enter into an "arms
length" management agreement with an independent third-party manager
that is actively involved in the trade or business of hotel management
and manages properties on behalf of other owners;
. it may not lease a property that contains gambling operations; and
. it may not own a brand or franchise.
We believe that establishing taxable subsidiaries to lease our properties
provides a more efficient alignment of and ability to capture the economic
interests of property ownership. In 2000, we established a subcommittee of
independent members of the Board of Directors to negotiate the transfer of our
existing leases with subsidiaries of MeriStar Hotels & Resorts to our taxable
subsidiaries. Accordingly, effective January 1, 2001, our taxable subsidiaries
executed agreements with subsidiaries of MeriStar Hotels & Resorts which
assigned our existing leases to our taxable subsidiaries. In connection with
the assignment, the taxable subsidiaries executed new management agreements
with a subsidiary of MeriStar Hotels & Resorts for each property that was
previously leased by them. The management agreements were structured to
substantially mirror the economics of the former lease agreements. However,
since this structure is a significant change from the business structure we
have maintained, it is not currently possible to predict the outcome of this
restructuring.
As of March 2, 2001, twelve states, including California, Texas and Florida
have not enacted legislation that would permit a REIT to lease properties to a
taxable REIT subsidiary. It is expected that each state will ultimately enact
legislation, during 2001 that will be retroactive to January 1, 2001,
conforming its law to the federal law. However, if conforming legislation is
not enacted, we could lose our status as a REIT in those states and would be
taxed as a C-Corporation. Accordingly, we may be required to provide for
current and deferred taxes.
Acquisition Strategy
We focus our attention on investments in hotels located in markets with
economic, demographic and supply dynamics favorable to hotel owners. Through
an extensive due diligence process, we select those acquisition targets where
we believe selective capital improvements and well selected third-party
management will increase the hotel's ability to attract key demand segments,
enhance hotel operations and increase long-term value. In order to evaluate
the relative merits of each investment opportunity, our senior management
together with MeriStar Hotels & Resorts create detailed plans covering all
areas of renovation and operation. These plans serve as the basis for the our
acquisition decisions and guide subsequent renovation and operating plans
which will be carried out by a third-party hotel operator.
Until January 1, 2001, in order to maintain our qualification as a REIT, we
were required to make annual distributions to our stockholders of at least 95%
of our real estate investment trust taxable income, determined without regard
to the deduction for dividends paid and by excluding net capital gains. After
January 1, 2001, pursuant to the REIT Modernization Act, the percentage of
required annual distributions is reduced to 90%. As a result of this annual
distribution requirement, to complete acquisitions and renovations, we rely
heavily on our ability to raise new capital through debt and equity offerings.
That ability is dependent on the then-current status of the capital markets.
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Although we are not currently pursuing direct acquisition opportunities due
to the current economic environment and the current cost of our equity
capital, we continue to be aware of acquisition opportunities in the upscale,
full-service hotel market. We may make investments in hotels through co-
investments with strategic partners if such investments offer current cash
returns.
Competition
We compete primarily in the upscale and mid-priced sectors of the full-
service segment of the lodging industry. In each geographic market in which
our hotels are located, there are other full- and limited-service hotels that
compete with our hotels. Competition in the U.S. lodging industry is based
generally on convenience of location, brand affiliation, price, range of
services and guest amenities offered, and quality of customer service and
overall product.
Employees
As of December 31, 2000, we employed 14 persons, all of whom work at the
corporate headquarters.
Franchises
We employ a flexible branding strategy based on a particular hotel's market
environment and the hotel's unique characteristics. Accordingly, we use
various national trade names pursuant to licensing arrangements with national
franchisors.
Governmental Regulation
Americans with Disabilities Act--Under the Americans with Disabilities Act
(the "ADA"), all public accommodations are required to meet certain
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Although significant amounts have been and continue
to be invested in ADA required upgrades to our hotels, a determination that we
are not in compliance with the ADA could result in a judicial order requiring
compliance, imposition of fines or an award of damages to private litigants.
We are likely to incur additional costs of complying with the ADA; however,
such costs are not expected to have a material adverse effect on our results
of operations or financial condition.
Environmental Laws--Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of
hazardous or toxic substances on, under or in property. Laws often impose
liability whether or not the owner or operator knew of, or was responsible
for, the presence of hazardous or toxic substances. In addition, the presence
of contamination from hazardous or toxic substances, or the failure to
properly remediate contaminated property, may adversely affect the owner's
ability to sell or rent real property or to borrow funds using real property
as collateral. Persons who arrange for the disposal or treatment of hazardous
or toxic substances may also be liable for the costs of removal or remediation
of these substances at the disposal or treatment facility, whether or not the
facility is or ever was owned or operated by those persons.
The operation and removal of underground storage tanks are also regulated
by federal and state laws. In connection with the ownership and operation of
the hotels, we could be held liable for the costs of remedial action with
respect to the regulated substances and storage tanks and claims related
thereto. Activities have been undertaken to close or remove storage tanks
located on the property of several of the hotels.
All of our hotels have undergone Phase I environmental site assessments,
which generally provide a nonintrusive physical inspection and database
search, but not soil or groundwater analyses, by a qualified independent
environmental engineer. The purpose of a Phase I is to identify potential
sources of contamination for which the hotels may be responsible and to assess
the status of environmental regulatory compliance. The Phase Is have not
revealed any environmental liability or compliance concerns that we believe
would have a
6
material adverse effect on our results of operation or financial condition,
nor are we aware of any environmental liability or concerns. Nevertheless, it
is possible that these environmental site assessments did not reveal all
environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which we are
currently unaware.
In addition, our hotels have been inspected to determine the presence of
asbestos. Federal, state and local environmental laws, ordinances and
regulations also require abatement or removal of asbestos-containing materials
and govern emissions of and exposure to asbestos fibers in the air. Asbestos-
containing materials are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
hotels. Operations and maintenance programs for maintaining asbestos-
containing materials have been or are in the process of being designed and
implemented, or the asbestos-containing materials have been scheduled to be or
have been abated, at these hotels. Any liability resulting from non-compliance
or other claims relating to environmental matters are not expected to have a
material adverse effect on our results of operations or financial condition.
THE OPERATING PARTNERSHIPS
The following summary information is qualified in its entirety by the
provisions of the MeriStar Hospitality Operating Partnership, L.P. limited
partnership agreement, a copy of which has been filed as an exhibit to this
Form 10-K.
Substantially all of our assets are held indirectly by MeriStar Hospitality
Operating Partnership, L.P., our subsidiary operating partnership. We are the
sole general partner of our operating partnership, and we and approximately
110 other persons and entities are limited partners of the operating
partnership. The partnership agreement of the operating partnership gives the
general partner full control over the business and affairs of the operating
partnership. The general partner is also given the right, in connection with
the contribution of property to the operating partnership or otherwise, to
issue additional partnership interests in the operating partnership in one or
more classes or series, with such designations, preferences and participating
or other special rights and powers, including rights and powers senior to
those of the existing partners, as the general partner may determine.
Our operating partnership's partnership agreement provides for four classes
of partnership interests: Common OP Units, Class B OP Units, Class C OP Units,
Class D OP Units and Profits-Only OP Units. As of March 5, 2001, the partners
of the operating partnership own the following aggregate numbers of OP Units:
. we and our wholly-owned subsidiaries own a number of Common OP Units
equal to the number of issued and outstanding shares of our common stock,
par value $0.01;
. independent third parties own 4,321,408 OP Units (consisting of 2,958,962
Common OP Units, 970,289 Class C OP Units and 392,157 Class D OP Units).
. Certain of our executive officers and executive officers of MeriStar
Hotels & Resorts, Inc. own 462,500 Profits-Only OP Units.
Common OP Units and Class B OP Units receive quarterly distributions per OP
Unit equal to the dividend paid on each of our common shares. Class C OP Units
receive a non-cumulative, quarterly distribution equal to $0.5575 per Class C
OP Unit until such time as the dividend rate on our common shares exceeds
$0.5575 whereupon the Class C OP Units automatically convert into Common OP
Units. Class D OP Units pay a 6.5% cumulative annual preferred return based on
an assumed price per common share of $22.16, compounded quarterly to the
extent not paid on a current basis, and are entitled to a liquidation
preference of $22.16 per Class D OP Unit. All net income and capital proceeds
earned by the operating partnership, after payment of the annual preferred
return and, if applicable, the liquidation preference, will be shared by the
holders of the
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Common OP Units in proportion to the number of Common OP Units in the relevant
operating partnership owned by each such holder.
Each Common OP Unit, Class B OP Unit, Class C OP unit and Class D OP Unit
held by independent third-parties is redeemable by the holder for one share of
our common stock or, at our option, for cash in an amount equal to the market
value of a share of common stock. In addition, we have the option to redeem
the Class D OP Units at any time after April 1, 2000 at a price of $22.16 per
share for cash or, at our option, for shares of common stock having a value
equal to the redemption price. The holders have the option to redeem the Class
D OP Units at any time after April 1, 2004 for cash or, at the holders option,
for shares of common stock having a value equal to $22.16.
Profits-only OP Units are issued pursuant to our Profits-Only Operating
Partnership Units Plan which is filed as an exhibit to the Form 10-K. Profits-
Only OP Units did not receive quarterly distributions during calendar year
2000.
RISK FACTORS
We believe that we are subject to the following risks:
Financing Risks
Our significant amount of debt could limit our operational flexibility or
otherwise adversely affect our financial condition.
We have a significant amount of debt, and we are subject to the risks
normally associated with debt financing, including the risks that:
. our cash flow from operations will be insufficient to make required
payments of principal and interest;
. existing indebtedness, including secured indebtedness, may not be
refinanced; and
. the terms of any refinancing will not be as favorable as the terms of
existing indebtedness.
We may be required to refinance our indebtedness, and the failure to
refinance our indebtedness may have an adverse effect on us.
If we do not have sufficient funds to repay our indebtedness at maturity,
it may be necessary to refinance the indebtedness through additional debt
financing, private or public offerings of debt securities or additional equity
offerings. If, at the time of any refinancing, prevailing interest rates or
other factors result in higher interest rates on refinancings, increases in
interest expense could adversely affect our cash flow, and, consequently, cash
available for payments on our indebtedness. If we are unable to refinance our
indebtedness on acceptable terms, we might be forced to dispose of hotels or
other assets on disadvantageous terms, potentially resulting in losses and
adverse effects on cash flow from operating activities. If we are unable to
make required payments of principal and interest on indebtedness secured by
our hotels, these properties could be foreclosed upon by the lender with a
consequent loss of income and asset value.
Our senior secured credit facility and other debt instruments have
restrictive covenants that could affect our financial condition.
We have in place a senior secured credit facility, dated August 3, 1998,
that at inception, provided for a maximum borrowing amount of up to $1.0
billion. The credit facility is structured as a $300 million, five-year term
loan facility; a $200 million, five-and-a-half year term loan facility; and a
$500 million, three-year revolving credit facility with two one-year optional
extensions. As of December 31, 2000, we had approximately $898 million
outstanding under our senior secured credit facility. Our ability to borrow
under the credit facility is
8
subject to financial covenants, including leverage and interest rate coverage
ratios and minimum net worth requirements. Our credit facility limits our
ability to effect mergers, asset sales and change of control events and limits
dividends to the lesser of 90% of funds from operations and 100% of funds from
operations less a capital reserve equal to 4% of gross room revenues. The
credit facility also contains a cross-default provision which would be
triggered by a default or acceleration of $20 million or more of indebtedness
secured by our assets or $5 million or more of any other indebtedness.
As of December 31, 2000, we also had outstanding $202.4 million of senior
subordinated unsecured notes due 2007 that bear interest at a weighted-average
annual rate of 8.71% and $154.3 million of outstanding convertible notes due
2004 that bear interest at 4.75%. The indentures relating to these notes
contain limitations on our ability to effect mergers and change of control
events, as well as other limitations, including:
. limitations on incurring additional indebtedness and the issuance of
capital stock unless an interest coverage ratio is met;
. limitations on the declaration and payment of dividends;
. limitations on the sale of our assets;
. limitations on transactions with our affiliates; and
. limitations on liens.
Debt instruments issued in future offerings will likely contain similar
restrictive covenants.
Rising interest rates could have an adverse affect on our cash flow and
interest expense.
Some of our borrowings bear interest at a variable rate, including amounts
outstanding under our credit facility. In addition, we may incur indebtedness
in the future that bears interest at a variable rate or we may be required to
retain our existing indebtedness at higher interest rates. Accordingly,
increases in interest rates could increase our interest expense and adversely
affect our cash flow, reducing the amounts available to make payments on our
other indebtedness.
Our results of operations are dependent on revenues generated by our hotels,
which are subject to a number of risks related to the lodging industry.
If the hotel industry is negatively affected by one or more particular
risks, our results of operating could suffer.
Various factors could adversely affect our hotel revenues, which are
subject to all of the operating risks inherent in the lodging industry. These
risks include the following:
. changes in general and local economic conditions;
. cyclical overbuilding in the lodging industry;
. varying levels of demand for rooms and related services;
. competition from other hotels, motels and recreational properties, some
of which may be owned or operated by companies having greater marketing
and financial resources than we do;
. dependence on business and commercial travelers and tourism, which may
fluctuate and be seasonal;
. the recurring costs of necessary renovations, refurbishment and
improvements of hotel properties;
. changes in governmental regulations that influence or determine wages,
prices and construction and maintenance costs; and
. changes in interest rates and the availability of credit.
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In addition, demographic, geographic or other changes in one or more of the
markets of our hotels could impact the convenience or desirability of the
sites of some hotels, which would in turn affect their operations.
Furthermore, due to the level of fixed costs required to operate full-service
hotels, significant expenditures necessary for the operation of hotels
generally cannot be reduced when circumstances cause a reduction in revenue.
The lodging business is seasonal in nature.
Generally, hotel revenues are greater in the second and third calendar
quarters than in the first and fourth calendar quarters although this may not
be true for hotels in major tourist destinations. Revenues for hotels in
tourist areas generally are substantially greater during tourist season than
other times of the year. Seasonal variations in revenue at our hotels can be
expected to cause quarterly fluctuations in our revenues. Quarterly earnings
also may be adversely affected by events beyond our control, such as extreme
weather conditions, economic factors and other considerations affecting
travel.
We may be adversely affected by the limitations in our franchise and
licensing agreements and possible additional capital expenditures associated
with franchising and licensing.
Substantially all of our hotels are operated pursuant to existing franchise
or license agreements with nationally recognized hotel brands. The franchise
agreements generally contain specific standards for, and restrictions and
limitations on, the operation and maintenance of a hotel in order to maintain
uniformity within the franchisor system. Those limitations may conflict with
our philosophy, shared with MeriStar Hotels & Resorts, of creating specific
business plans tailored to each hotel and to each market. Standards are often
subject to change over time, in some cases at the discretion of the
franchisor, and may restrict a franchisee's ability to make improvements or
modifications to a hotel without the consent of the franchisor. In addition,
compliance with standards could require a franchisee to incur significant
expenses or capital expenditures. Action or inaction on our part or by our
third-party operators, could result in a breach of standards or other terms
and conditions of the franchise agreements and could result in the loss or
cancellation of a franchise license. Loss of franchise licenses without
replacement would likely have an adverse effect on our hotel revenues.
In connection with terminating or changing the franchise affiliation of a
hotel or a subsequently acquired hotel, we may be required to incur
significant expenses or capital expenditures. Moreover, the loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the hotel covered by the franchise because of the loss
of associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. The franchise agreements covering the
hotels expire or terminate, without specified renewal rights, at various times
and have differing remaining terms. As a condition to renewal, the franchise
agreements frequently contemplate a renewal application process, which may
require substantial capital improvements to be made to the hotel. Unexpected
capital expenditures could adversely affect our results of operations and our
ability to make payments on our indebtedness.
The lodging industry is highly competitive.
We have no single competitor or small number of competitors that are
considered to be dominant in the industry. We operate in areas that contain
numerous competitors, some of which may have substantially greater resources
than us. Competition in the lodging industry is based generally on location,
availability, room rates or accommodations price, range and quality of
services and guest amenities offered. New or existing competitors could
significantly lower rates or offer greater conveniences, services or amenities
or significantly expand, improve or introduce new facilities in markets in
which we compete, thereby adversely affecting our operations and the number of
suitable business opportunities.
Costs of compliance with environmental laws could adversely affect our
results of operation.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
10
substances on, under or in property. Laws often impose liability whether or
not the owner or operator knew of, or was responsible for, the presence of
hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to properly remediate
contaminated property, may adversely affect the owner's ability to sell or
rent real property or to borrow funds using real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of these
substances at the disposal or treatment facility, whether or not the facility
is or ever was owned or operated by those persons.
The operation and removal of underground storage tanks are also regulated
by federal and state laws. In connection with the ownership and operation of
the hotels, we could be held liable for the costs of remedial action with
respect to the regulated substances and storage tanks and claims related
thereto. Activities have been undertaken to close or remove storage tanks
located on the property of several of the hotels.
All of our hotels have undergone Phase I environmental site assessments,
which generally provide a nonintrusive physical inspection and database
search, but not soil or groundwater analyses, by a qualified independent
environmental engineer. The purpose of a Phase I is to identify potential
sources of contamination for which the hotels may be responsible and to assess
the status of environmental regulatory compliance. The Phase Is have not
revealed any environmental liability or compliance concerns that we believe
would have a material adverse effect on our results of operation or financial
condition, nor are we aware of any environmental liability or concerns.
Nevertheless, it is possible that these environmental site assessments did not
reveal all environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which we are
currently unaware.
In addition, our hotels have been inspected to determine the presence of
asbestos. Federal, state and local environmental laws, ordinances and
regulations also require abatement or removal of asbestos-containing materials
and govern emissions of and exposure to asbestos fibers in the air. Asbestos-
containing materials are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
hotels. Operations and maintenance programs for maintaining asbestos-
containing materials have been or are in the process of being designed and
implemented, or the asbestos-containing materials have been scheduled to be or
have been abated, at these hotels. Any liability resulting from non-compliance
or other claims relating to environmental matters could have a material
adverse effect on our results of operations or financial condition.
Aspects of our operations are subject to government regulation, and changes
in that regulation may have significant effects on our business.
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. MeriStar
Hotels & Resorts believes that our hotels are substantially in compliance with
these requirements or, in the case of liquor licenses, that they have or will
promptly obtain the appropriate licenses. Compliance with, or changes in,
these laws could reduce the revenue and profitability of our hotels and could
otherwise adversely affect our revenues, results of operations and financial
condition.
Under the Americans with Disabilities Act, or ADA, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA required
upgrades to our hotels, a determination that our hotels are not in compliance
with the ADA could result in a judicial order requiring compliance, imposition
of fines or an award of damages to private litigants.
We invest in a single industry.
Our current strategy is to acquire interests only in hospitality and
lodging. As a result, we are subject to the risks inherent in investing in a
single industry. The effects on cash available for distribution resulting from
a downturn in the hotel industry may be more pronounced than if we had
diversified our investments.
11
Our relationship with MeriStar Hotels & Resorts may involve conflicts of
interest.
General Conflicts of Interest
We share four of the nine members of our boards of directors, as well as
two senior executives, with MeriStar Hotels & Resorts. Our relationship with
MeriStar Hotels & Resorts is governed by an intercompany agreement, which
restricts each party from taking advantage of business opportunities without
first presenting those opportunities to the other party. We may have
conflicting views with MeriStar Hotels & Resorts on the manner in which our
hotels are operated and managed, and with respect to lease arrangements,
acquisitions and dispositions. As a result, our directors and senior
executives who serve in similar capacities at MeriStar Hotels & Resorts may
well be presented with several decisions which provide them the opportunity to
benefit us to the detriment of MeriStar Hotels & Resorts or benefit MeriStar
Hotels & Resorts to our detriment. Inherent potential conflicts of interest
will be present in all of the numerous transactions between us and MeriStar
Hotels & Resorts.
Restrictions on our business, that of MeriStar Hotels & Resorts and on our
future opportunities.
We are a party to an intercompany agreement with MeriStar Hotels & Resorts.
The intercompany agreement provides that, for so long as the agreement remains
in effect, Meristar Hotels & Resorts is prohibited from making real property
investments that a real estate investment trust could make unless:
. we are first given the opportunity, but elect not to pursue the
activities or investments;
. it is on land already owned or leased by it or subject to a lease or
purchase option in favor of them;
. they will not operate the property under a trade name owned by them; or
. it is a minority investment made as part of a lease or management
agreement.
The intercompany agreement will generally grant MeriStar Hotels & Resorts
the right of first refusal to become the manager of any real property acquired
by us. This opportunity will be made available to MeriStar Hotels & Resorts
only if we determine that:
. consistent with our status as a real estate investment trust, we must
enter into a management agreement with an unaffiliated third party with
respect to the property;
. MeriStar Hotels & Resorts is qualified to be the manager of that
property; and
. we decide to have the property operated by the owner of a hospitality
trade name under that trade name.
Because of the provisions of the intercompany agreement, the nature of our
business and the opportunities we may pursue will be restricted.
Conflicts relating to sale of hotels subject to management agreements.
We generally will be obligated under each of our management agreements with
MeriStar Hotels & Resorts to pay a termination fee to MeriStar Hotels &
Resorts if we elect to sell a hotel or if we elect not to restore a hotel
after a casualty and do not replace it with another hotel subject to a
management agreement with a fair market value equal to the fair market value
of MeriStar Hotels & Resorts' remaining management fee due under the
management agreement to be terminated. Where applicable, the termination fee
is equal to the present value, using a discount rate of 10%, of the remaining
payments under the agreement, assuming that MeriStar Hotels & Resorts would
have been paid a management fee under the agreement to be terminated, based on
the operating results for the 12 months preceding termination. A decision to
sell a hotel may, therefore, have significantly different consequences for us
and MeriStar Hotels & Resorts.
Lack of control over management and operations of the hotels.
We are dependent on the ability of MeriStar Hotels & Resorts and other
managers of hotels to operate and manage our hotels. In order to maintain our
real estate investment trust status, we cannot operate our hotels or any
subsequently acquired hotels. As a result, we are unable to directly implement
strategic business decisions for the operation and marketing of our hotels,
such as decisions with respect to the setting of room rates, food and beverage
operations and similar matters.
12
Potential negative impact on our acquisitions.
Our relationship with MeriStar Hotels & Resorts could negatively impact our
ability to acquire additional hotels because hotel management companies,
franchisees and others who would have approached us with acquisition
opportunities in hopes of establishing lessee or management relationships may
not do so knowing that we will rely primarily on MeriStar Hotels & Resorts to
manage the acquired properties. These persons may instead provide acquisition
opportunities to hotel companies that will allow them to manage the properties
following the sale. This could have a negative impact on our acquisition
activities in the future.
There are potential conflicts of interest relating to our relationship with
MeriStar Hotels and Resorts.
The terms of the intercompany agreement were not negotiated on an arm's-
length basis. Because the two companies share some of the same executive
officers and directors, there is a potential conflict of interest with respect
to the enforcement and termination of the intercompany agreement to our
benefit to the detriment of MeriStar Hotels & Resorts or to the benefit of
MeriStar Hotels & Resorts to our detriment. Furthermore, because of the
independent trading of the two companies, stockholders in each company may
develop divergent interests which could lead to conflicts of interest. The
divergence of interests could also reduce the anticipated benefits of our
"paper clip" real estate investment trust structure.
Real Estate Investment Trust Tax Risks
We are a real estate trust, and failure to qualify as a real estate
investment trust will result in additional tax liability and will likely
reduce the amount available for payment on our indebtedness.
We have operated and intend to continue to operate in a manner designed to
permit us to qualify as a real estate investment trust for federal income tax
purposes. Qualification as a real estate investment trust involves the
application of highly technical and complex provisions of the Internal Revenue
Code of 1986 for which there are only limited judicial or administrative
interpretations. In addition, there are no judicial or administrative
interpretations with respect to the REIT Modernization Act. The determination
of various factual matters and circumstances not entirely within our control
may affect our ability to continue to qualify as a real estate investment
trust. The complexity of these provisions and of the applicable income tax
regulations that have been promulgated under the Internal Revenue Code is
greater in the case of a real estate investment trust that holds its assets
through a partnership, such as we do. Moreover, no assurance can be given that
legislation, new regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a real
estate investment trust or the federal income tax consequences of that
qualification.
If we fail to qualify as a real estate investment trust in any taxable
year, we will not be allowed a deduction for distributions to our stockholders
in computing our taxable income and will be subject to federal income tax,
including any applicable alternative minimum tax, on our taxable income at the
applicable corporate rate. In addition, unless we were entitled to relief
under statutory provisions, we would be disqualified from treatment as a real
estate investment trust for the four taxable years following the year during
which qualification is lost. This disqualification would reduce our funds
available for payments on our indebtedness because of our additional tax
liability for the year or years involved.
If the Internal Revenue Service were successfully to determine that
MeriStar Hospitality Operating Partnership, L.P. should properly be treated
for federal income tax purposes as a corporation, we would likely cease to
qualify as a real estate investment trust. In addition, if the Internal
Revenue Service were successfully to determine that any of the other
partnerships or the joint ventures or limited liability companies in which we
or the operating partnership hold an interest is properly treated for federal
income tax purposes as a corporation, we normally would cease to qualify as a
real estate investment trust. The imposition of a corporate tax on any of
these entities, with a concomitant loss of our real estate investment trust
status, could substantially reduce the amount of cash available for payment on
our indebtedness.
If we were to fail to qualify as a real estate investment trust, we no
longer would be subject to the distribution requirements of the Internal
Revenue Code. To the extent that distributions to stockholders would
13
have been made in anticipation of our qualifying as a real estate investment
trust, we might be required to borrow funds or to liquidate assets to pay the
applicable corporate income tax. Although we currently operate in a manner
designed to qualify as a real estate investment trust, it is possible that
future economic, market, legal, tax or other considerations may cause us to
decide to revoke the real estate investment trust election.
Because we are a real estate investment trust, we are required to distribute
most of our taxable income, which may have an effect on our ability to make
payments on our indebtedness.
To obtain the favorable tax treatment accorded to real estate investment
trusts under the Internal Revenue Code, we generally will be required each
year to distribute to our stockholders at least 90% of our real estate
investment trust taxable income, determined without regard to the deduction
for dividends paid and by excluding net capital gains. We will be subject to
income tax on any undistributed real estate investment trust taxable income
and net capital gain, and to a 4% nondeductible excise tax on the amount, if
any, by which distributions we pay with respect to any calendar year are less
than the sum of:
. 85% of our ordinary income for the calendar year;
. 95% of our capital gain net income for that year; and
. 100% of our undistributed income from prior years.
The requirement to distribute a substantial portion of our net taxable
income could cause us to distribute amounts that otherwise would be spent on
future acquisitions, unanticipated capital expenditures or repayment of debt
which would require us to borrow funds or to sell assets to fund the cost of
these items.
We intend to make distributions to our stockholders to comply with the
distribution provisions of the Internal Revenue Code and generally to avoid
federal income taxes and the nondeductible 4% excise tax. Our income will
consist primarily of our share of income of MeriStar Hospitality Operating
Partnership, L.P. and our cash flow will consist primarily of our share of
distributions from the operating partnership. It is possible, however, that
differences in timing between the receipt of income and the payment of
expenses in arriving at our taxable income or the taxable income of the
operating partnership and the effect of nondeductible capital expenditures,
the creation of reserves or required debt amortization payments could in the
future require us to borrow funds directly or through the operating
partnership on a short or long-term basis to meet the distribution
requirements that are necessary to continue to qualify as a real estate
investment trust and avoid federal income taxes and the 4% nondeductible
excise tax. In these circumstances, we might need to borrow funds directly in
order to avoid adverse tax consequences even if we believe that the then
prevailing market conditions generally are not favorable for those borrowings
or that those borrowings are not advisable in the absence of those tax
considerations.
Distributions by the operating partnership will be determined by us and are
dependent on a number of factors, including:
. the amount of cash available for distribution;
. the operating partnership's financial condition;
. our decision to reinvest funds rather than to distribute the funds;
. restrictions in our debt instruments;
. the operating partnership's capital expenditure requirements;
. the annual distribution requirements under the real estate investment
trust provisions of the Internal Revenue Code; and
. other factors as we deem relevant.
Although we intend to continue to satisfy the annual distribution requirement
to avoid corporate income taxation on the earnings that we distribute, we may
not be able to do so.
14
We rely on the knowledge and experience of some key personnel, and the loss of
these personnel may have a material adverse effect on our operations.
We place substantial reliance on the lodging industry knowledge and
experience and the continued services of our senior management, led by Paul W.
Whetsell and John Emery. While we believe that, if necessary, we could find
replacements for these key personnel, the loss of their services could have a
material adverse effect on our operations. In addition, Messrs. Whetsell and
Emery are currently engaged, and in the future will continue to engage, in the
management of MeriStar Hotels & Resorts. Messrs. Whetsell and Emery may
experience conflicts of interest in allocating management time, services and
functions between us and MeriStar Hotels & Resorts.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information both included and incorporated by reference in this supplemental
information may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of our company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Forward-
looking statements, which are based on certain assumptions and describe our
future plans, strategies and expectations, are generally identifiable by use of
the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative thereof or other variations
thereon or comparable terminology. Factors which could have a material adverse
effect on our operations and future prospects include, but are not limited to,
changes in:
. economic conditions generally and the real estate market specifically;
. legislative/regulatory changes, including changes to laws governing the
taxation of real estate investment trusts;
. availability of capital;
. interest rates;
. competition;
. supply and demand for hotel rooms in our current and proposed market
areas; and
. general accounting principles, policies and guidelines applicable to real
estate investment trusts.
These risks and uncertainties, along with the risk factors discussed above
under "Risk Factors", should be considered in evaluating any forward-looking
statements contained in this supplemental information.
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events, or otherwise,
other than required by law.
15
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Washington, D.C. and own hotel
properties throughout the United States and Canada. As of December 31, 2000,
we owned 114 hotels. We lease land for seven of our hotels: Hilton Hotel,
Washington, DC; Hilton Hotel, San Pedro, California; Doral Palm Springs, Palm
Springs, California; Jekyll Inn, Jekyll Island, Georgia; Hilton Hotel,
Clearwater, Florida; Courtyard by Marriott, Lake Buena Vista, Florida; and
Radisson Hotel, Rochester, New York. We also lease part of the land for six of
our hotels: Westin Morristown, Morristown, New Jersey; Courtyard by Marriott
Meadowlands, Secaucus, New Jersey; Wyndham Hotel Albuquerque, Albuquerque, New
Mexico; Hilton Hotel Toledo, Toledo, Ohio; Wyndham Airport Hotel, San Jose,
California; and Westin Resort Key Largo, Key Largo, Florida. No one hotel
property is material to our operations. A typical hotel has meeting and
banquet facilities, food and beverage facilities and guest rooms and suites.
The hotels generally feature comfortable, modern guest rooms, extensive
meeting and convention facilities and full-service restaurant and catering
facilities that attract meeting and convention functions from groups and
associations, upscale business and vacation travelers as well as banquets and
receptions from the local community.
The following table sets forth certain information with respect to the
hotels for the year ended December 31, 2000:
Guest
Hotel Location Rooms
- ----- -------- -----
Sheraton Hotel....................................... Mesa, AZ 273
Crowne Plaza Hotel................................... Phoenix, AZ 250
Embassy Suites....................................... Tucson, AZ 204
Courtyard by Marriott................................ Century City, CA 134
Hilton Hotel......................................... Irvine, CA 289
Marriott Hotel....................................... Los Angeles, CA 469
Courtyard by Marriott................................ Marina Del Rey, CA 276
Hilton Hotel......................................... Monterey, CA 204
Doral Palm Springs................................... Palm Springs, CA 285
Hilton Hotel......................................... Sacramento, CA 331
Holiday Inn Select................................... San Diego, CA 317
Sheraton Hotel....................................... San Francisco, CA 525
Crowne Plaza Hotel................................... San Jose, CA 239
Wyndham Hotel........................................ San Jose, CA 355
Hilton Hotel......................................... San Pedro, CA 226
Santa Barbara Inn.................................... Santa Barbara, CA 71
Holiday Inn.......................................... Colorado Springs, CO 200
Sheraton Hotel....................................... Colorado Springs, CO 500
Embassy Suites....................................... Englewood, CO 236
Hilton Hotel......................................... Hartford, CT 388
Ramada Hotel......................................... Meriden, CT 150
Ramada Hotel......................................... Shelton, CT 155
Doubletree Bradley Airport........................... Windsor Locks, CT 200
Embassy Row Hilton Hotel............................. Washington, DC 193
Georgetown Inn....................................... Washington, DC 96
The Latham Hotel..................................... Washington, DC 143
South Seas Plantation................................ Captiva, FL 579
Hilton Hotel......................................... Clearwater, FL 426
Ramada Hotel......................................... Clearwater, FL 289
Hilton Hotel......................................... Cocoa Beach, FL 296
Holiday Inn.......................................... Ft. Lauderdale, FL 240
16
Guest
Hotel Location Rooms
- ----- -------- -----
Howard Johnson Resort............................... Key Largo, FL 100
Westin Hotel........................................ Key Largo, FL 200
Courtyard by Marriott............................... Lake Buena Vista, FL 314
Sheraton Hotel...................................... Lake Buena Vista, FL 489
Radisson Hotel...................................... Marco Island, FL 268
Holiday Inn......................................... Madeira Beach, FL 149
Radisson Hotel...................................... Orlando, FL 742
Best Western Hotel.................................. Sanibel Island, FL 46
Safety Harbor Resort and Spa (1).................... Sanibel Island, FL 193
Sanibel Inn......................................... Sanibel Island, FL 96
Seaside Inn......................................... Sanibel Island, FL 32
Song of the Sea..................................... Sanibel Island, FL 30
Sundial Beach Resort................................ Sanibel Island, FL 243
Doubletree Hotel.................................... Tampa, FL 496
Doubletree Guest Suites............................. Atlanta, GA 155
Westin Atlanta Airport.............................. Atlanta, GA 495
Jekyll Inn.......................................... Jekyll Island, GA 262
Wyndham Hotel....................................... Marietta, GA 218
Radisson Hotel...................................... Arlington Heights, IL 201
Radisson Hotel & Suites............................. Chicago, IL 350
Holiday Inn......................................... Rosemont, IL 507
Radisson Hotel...................................... Schaumburg, IL 200
Doubletree Guest Suites............................. Indianapolis, IN 137
Radisson Plaza...................................... Lexington, KY 367
Hilton Hotel........................................ Louisville, KY 321
Holiday Inn Select.................................. Kenner, LA 303
Hilton & Towers..................................... Lafayette, LA 327
Maison de Ville..................................... New Orleans, LA 23
Radisson Hotel...................................... Annapolis, MD 219
Radisson Hotel...................................... Baltimore, MD 148
Sheraton Hotel...................................... Columbia, MD 287
Hilton Hotel........................................ Detroit, MI 151
Hilton Hotel........................................ Grand Rapids, MI 224
Holiday Inn Sports Complex.......................... Kansas City, MO 163
Sheraton Airport Plaza.............................. Charlotte, NC 222
Hilton Hotel........................................ Durham, NC 194
Courtyard by Marriott............................... Durham, NC 146
Four Points Hotel................................... Cherry Hill, NJ 213
Ramada Hotel........................................ Mahwah, NJ 128
Sheraton Hotel...................................... Mahwah, NJ 225
Westin Hotel........................................ Morristown, NJ 199
Four Points Hotel................................... Mt. Arlington, NJ 124
Doral Forrestal..................................... Princeton, NJ 290
Courtyard by Marriott............................... Secaucus, NJ 165
Marriott Hotel...................................... Somerset, NJ 440
Doubletree Hotel.................................... Albuquerque, NM 295
Wyndham Hotel....................................... Albuquerque, NM 276
Crowne Plaza Hotel.................................. Las Vegas, NV 201
St. Tropez Suites................................... Las Vegas, NV 149
Radisson Hotel...................................... Rochester, NY 171
17
Guest
Hotel Location Rooms
- ----- -------- ------
Radisson Hotel.................................. Middleburg Heights, OH 237
Hilton Hotel.................................... Toledo, OH 213
Westin Hotel.................................... Oklahoma City, OK 395
Crowne Plaza Hotel.............................. Lake Oswego, OR 161
Sheraton Hotel.................................. Frazer, PA 198
Embassy Suites.................................. Philadelphia, PA 288
Holiday Inn Select.............................. Trevose, PA 215
Hilton Hotel.................................... Arlington, TX 309
Doubletree Hotel................................ Austin, TX 350
Hilton & Towers................................. Austin, TX 320
Holiday Inn Select.............................. Bedford, TX 243
Radisson Hotel.................................. Dallas, TX 304
Renaissance Hotel............................... Dallas, TX 289
Sheraton Hotel.................................. Dallas, TX 348
Hilton Hotel.................................... Houston, TX 292
Marriott Hotel.................................. Houston, TX 302
Hilton Hotel.................................... Houston, TX 295
Sheraton Hotel.................................. Houston, TX 382
Holiday Inn Select.............................. Irving, TX 409
Hilton Hotel.................................... Midland, TX 249
Hilton Hotel.................................... Salt Lake City, UT 287
Holiday Inn..................................... Alexandria, VA 178
Radisson Hotel.................................. Alexandria, VA 253
Hilton Hotel.................................... Arlington, VA 209
Hilton Hotel.................................... Arlington, VA 386
Richmond Hotel and Conference Center............ Richmond, VA 280
Hilton Hotel.................................... Bellevue, WA 179
Crowne Plaza Hotel.............................. Madison, WI 226
Holiday Inn..................................... Madison, WI 194
Holiday Inn..................................... Calgary, Alberta, Canada 170
Sheraton Hotel.................................. Guildford, B.C., Canada 278
Holiday Inn..................................... Vancouver, B.C., Canada 100
Ramada Hotel.................................... Vancouver, B.C., Canada 118
------
Total Rooms................................... 29,090
======
- --------
(1) Acquired on May 31, 2000.
18
THE LEASES
Until January 1, 2001, subsidiaries of MeriStar Hotels & Resorts leased 106
of the 114 hotels. Each lease provided for an initial term of 12 years. Each
lease provided MeriStar Hotels & Resorts with three renewal options of five
years each (except in the case of properties with ground leases having a
remaining term of less than 40 years), provided that:
. MeriStar Hotels & Resorts would not have the right to a renewal if a
change in the tax law has occurred that would permit us to operate the
hotel directly;
. if MeriStar Hotels & Resorts elected not to renew a lease for any
applicable hotel, then we had the right to reject the exercise of a
renewal right on a lease of a comparable hotel; and
. the rent for each renewal term would be adjusted to reflect the then fair
market rental value of the hotel.
If we and MeriStar Hotels & Resorts were unable to agree upon the then fair
market rental value of a hotel, the lease would have terminated upon the
expiration of the then current term and MeriStar Hotels & Resorts then would
have had a right of first refusal to lease the hotel from us on such terms as
we may have agreed upon with a third-party lessee.
Base Rent; Participating Rent; Additional Charges
Each lease required MeriStar Hotels & Resorts to pay:
. fixed monthly base rent,
. participating rent, which was payable monthly and based on certain
percentages of room revenue, food and beverage revenue and telephone and
other revenue at each hotel in excess of base rent, and
. certain other amounts, including interest accrued on any late payments or
charges.
Base rent and participating rent departmental thresholds (departmental
revenue on which the rent percentage is based) were increased annually by a
percentage equal to the percentage increase in the Consumer Price Index (CPI
percentage increase plus 0.75% in the case of the participating rent
departmental revenue threshold) compared to the prior year. In addition, under
certain circumstances, a reduced percentage rate would apply to the revenues
attributable to certain "discounted rates" that MeriStar Hotels & Resorts may
offer. Base rent was payable monthly in arrears. Participating rent was payable
in arrears based on a monthly schedule adjusted to reflect the seasonal
variations in the hotel's revenue.
The leases required MeriStar Hotels & Resorts to pay rent, liability
insurance, all costs and expenses and all utility and other charges incurred in
the operation of the hotels. We are responsible for real estate and personal
property taxes and assessments, rent payable under ground leases, casualty
insurance, including loss of income insurance, capital impositions and capital
replacements and refurbishments (determined in accordance with generally
accepted accounting principles). The leases also provided for rent reductions
and abatements in the event of damage or destruction or a partial taking of any
hotel.
The leases also provided for a rental adjustment under certain circumstances
in the event of (a) a major renovation of the hotel, or (b) a change in the
franchisor of the hotel.
Lessee Capitalization
The leases required MeriStar Hotels & Resorts, as guarantor of the leases,
to maintain a book net worth of not less than $40 million. Further, as of
January 1, 1999, for so long as the tangible net worth of MeriStar Hotels &
Resort was less than 17.5% of the aggregate rents payable under the leases for
the prior calendar year, MeriStar Hotels & Resorts was prohibited from paying
dividends or making distributions other than dividends or distributions made
for the purpose of permitting the partners of the operating partnership to pay
taxes on the
19
taxable income of the operating partnership attributable to its partners plus
any required preferred distributions existing to partners.
Termination
We had the right to terminate the applicable lease upon the sale of a hotel
to a third party or, upon our determination not to rebuild after a casualty,
upon payment to MeriStar Hotels & Resorts of the fair market value of the
leasehold estate (except for properties initially identified by MeriStar Hotels
& Resorts and ourselves as properties slated to be sold). The fair market value
of the leasehold estate was determined by discounting to present value at a
discount rate of 10% per annum the cash flow for each remaining year of the
then current lease term, which cash flow would be deemed to be the cash flow
realized by MeriStar Hotels & Resorts under the applicable lease for the 12-
month period preceding the termination date. We were to receive as a credit
against any such termination payments an amount equal to any outstanding "New
Lease Credits," which means the projected cash flow, determined on the same
basis as the termination payment, of any new leases entered into between
MeriStar Hotels & Resort and ourselves after the effective date for the initial
term of such new lease amortized on a straight-line basis over the initial term
of the new lease.
Performance Standards
We had the right to terminate the applicable lease if, in any calendar year,
the gross revenues from a hotel are less than 95% of the projected gross
revenues for such year as set forth in the applicable budget unless:
. MeriStar Hotels & Resorts could reasonably demonstrate that the gross
revenue shortfall was caused by general market conditions beyond its
control, or
. MeriStar Hotels & Resorts "cured" the shortfall by paying to us the
difference between the rent that would have been paid to us had the
property achieved gross revenues of 95% of the budgeted amounts and the
rent paid based on actual gross revenues.
MeriStar Hotels & Resorts did not have such a cure right for more than two
consecutive years.
The leases also required that MeriStar Hotels & Resorts spend in each
calendar year at least 95% of the amounts budgeted for marketing expenses and
for repair and maintenance expenses.
Assignment and Subleasing
MeriStar Hotels & Resorts did not have the right to assign a lease or sublet
a hotel without our prior written consent. For purposes of the lease, a change
in control of MeriStar Hotels & Resorts would have been deemed an assignment of
the lease and would require our consent, which may be granted or withheld in
our sole discretion.
On December 11, 2000, MeriStar Hotels & Resorts announced that it had signed
a merger agreement with American Skiing Company, a company that owns, develops
and operates ski resort properties. Under that merger agreement, MeriStar
Hotels & Resorts will become a wholly-owned subsidiary of American Skiing. In
connection with the merger, American Skiing will be renamed "Doral
International, Inc." MeriStar Hotels & Resorts has stated that it intends to
continue to manage our hotels as a subsidiary of Doral. Our Board of Directors
has consented to the merger and the change of control under the terms of our
management agreements.
THE MANAGEMENT AGREEMENTS
Effective January 1, 2001, our taxable subsidiaries executed agreements with
subsidiaries of MeriStar Hotels & Resorts which assigned our existing leases
with MeriStar Hotels & Resorts to our taxable subsidiaries.
20
In connection with the assignment, the taxable subsidiaries executed new
management agreements with a subsidiary of MeriStar Hotels & Resorts for each
property that was previously leased by them.
Management Fees and Performance Standards
Each taxable subsidiary will pay MeriStar Hotels & Resorts a management fee
for each hotel equal to a specified percentage of aggregate hotel operating
revenues, increased or reduced, as the case may be, by 20% of the positive or
negative difference between:
. the actual excess of total operating revenues over total operating
expenses; and
. the projected excess of total operating revenues over total operating
expenses.
The total management fee for a hotel in any fiscal year will not be less than
2.5% or greater than 4.0% of aggregate hotel operating revenues.
Term and Termination
The management agreements with MeriStar Hotels & Resorts have initial terms
of 10 years with three renewal periods of five years each. A renewal will not
go into effect if a change in the federal tax laws permits us or one of our
subsidiaries to operate the hotel directly without adversely affecting our
ability to qualify as a REIT or if MeriStar Hotels & Resorts elects not to
renew the agreement. We may elect not to renew the management agreements only
as provided below.
Our taxable subsidiaries have the right to terminate a management agreement
for a hotel upon the sale of the hotel to a third party or if the hotel is
destroyed and not rebuilt after a casualty. Upon that termination, our taxable
subsidiary will be required to pay MeriStar Hotels & Resorts the fair market
value of the management agreement. That fair market value will be equal to the
present value, using a discount rate of 10%, of the remaining payments under
the agreement, assuming that MeriStar Hotels & Resorts would have been paid
management fees under the agreement based on the operating results for the 12
months preceding the termination. Our taxable subsidiaries will be able to
credit against any termination payments the projected fees, discounted to
present value at a discount rate of 10%, under any management agreements or
leases entered into between our subsidiaries and subsidiaries of MeriStar
Hotels & Resorts following August 3, 1998.
If gross operating profit from a hotel is less than 85% of the amount
projected in the hotel's budget in any fiscal year and gross operating profit
from that hotel is less than 90% of the projected amount in the next fiscal
year, our taxable subsidiaries will have the right to terminate the management
agreement for the hotel, unless:
. we did not materially comply with the capital expenditures contemplated
by the budget for either or both of the applicable fiscal years; or
. MeriStar Hotels & Resorts cures the shortfall by agreeing to reduce its
management fee for the next fiscal year by the amount of the shortfall
between the actual operating profit for the second fiscal year and 90% of
the projected gross operating profit for that year.
MeriStar Hotels & Resorts can only use the cure right once during the term of
the management agreement.
Assignment
MeriStar Hotels & Resorts does not have the right to assign a management
agreement without the prior written consent of the relevant taxable subsidiary.
A change in control of MeriStar Hotels & Resorts will require our consent which
may be granted or withheld in our sole discretion.
21
ITEM 3. LEGAL PROCEEDINGS
In the course of our normal business activities, various lawsuits, claims
and proceedings have been or may be instituted or asserted against us. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during the
fourth quarter of 2000.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "MHX." The following table sets forth for the periods indicated the
high and low closing sale prices for our common stock on the NYSE.
Price
------------------
High Low
--------- --------
2001:
First Quarter (through March 5, 2001)...................... $22 $19 7/8
2000:
Fourth Quarter (ended December 31, 2000)................... 20 5/8 18 3/8
Third Quarter (ended September 30, 2000)................... 22 13/16 20 1/4
Second Quarter (ended June 30, 2000)....................... 21 1/64 17 5/8
First Quarter (ended March 31, 2000)....................... 17 7/16 15 1/16
1999:
Fourth Quarter (ended December 31, 1999)................... 16 3/4 14 3/4
Third Quarter (ended September 30, 1999)................... 22 5/16 15 1/4
Second Quarter (ended June 30, 1999)....................... 24 1/16 18 7/16
First Quarter (ended March 31, 1999)....................... 19 3/8 16 1/6
- --------
The last reported sale price of our common stock on the NYSE on March 5,
2001 was $19 57/64. As of March 5, 2001, there were approximately 348 holders
of record of our common stock.
On December 20, 2000, we declared a dividend of $0.505 per share relating
to the fourth quarter of 2000 that was paid on January 31, 2001 to
stockholders of record as of December 29, 2000.
On December 6, 1999, we declared a dividend of $0.505 per share relating to
the fourth quarter of 1999 that was paid on January 31, 2000 to stockholders
of record as of December 31, 2000.
We intend to make regular quarterly distributions to our stockholders.
Future distributions will be at the discretion of our Board of Directors and
will depend on our financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Internal Revenue
Code and such other factors as our Board of Directors deems relevant. There
can be no assurance that any such distributions will be made in the future.
In order to maintain our qualification as a REIT, we were required to make
annual distributions to our stockholders of at least 95% of our taxable income
(excluding net capital gains) for the year 2000. As of January 1, 2001, under
the REIT Modernization Act, we will be required to make annual distributions
to our stockholders of at least 90% of our taxable income. Under certain
circumstances, we may be required to make distributions in excess of cash
available for distribution in order to meet these distribution requirements.
In that event, we would seek to borrow the amount to obtain the cash necessary
to make distributions to retain our qualification as a REIT for Federal income
tax purposes. The distributions made in 2000 represent a 0% return of capital.
Recent Sales of Unregistered Securities
American General Hospitality Corporation
Each of American General Hospitality's private issuances of shares of
common stock and operating partnership's private issuances of OP Units was in
reliance on exemptions from registration under Section 4(2) of the Act in the
amounts and for the consideration set forth below.
23
On January 2, 1998, American General Hospitality privately sold an
additional 420,106 shares of common stock to certain investment funds and
separate accounts advised by ABKB/LaSalle Securities Limited Partnership and
LaSalle Advisors Limited Partnership.
On January 8, 1998, American General Hospitality privately issued 439,375
Class B OP Units as part of the purchase price of a portfolio hotels owned by
Prime Hospitality. On April 16, 1998 the Class B OP Units converted into
Common OP Units.
On January 15, 1998, American General Hospitality privately sold the
balance of 100,829 shares of its common stock to certain investment funds and
separate accounts advised by ABKB/LaSalle Securities Limited Partnership and
LaSalle Advisors Limited Partnership.
On February 3, 1998, American General Hospitality privately issued
1,108,874 Class C OP Units as part of the purchase price of the Holiday Inn
O'Hare International Hotel. The Class C OP Units bear a preferred annual
distribution rate of $2.23 per Class C OP Unit until such time as the dividend
distribution rate for the Class C OP Units will equal the distribution rate on
our common stock. In addition, the holders of the Class C OP Units received an
additional 974,588 Class A OP Units due to the fact that the fair market value
of the common stock, as reported on the New York Stock Exchange, Inc., was
trading below $35 per share on the anniversary date of the closing of the
acquisition.
MeriStar Hospitality Corporation
On August 21, 1998, we privately issued 46,628 Class B OP Units as part of
the purchase of the land under the Four Points Hotel in Mt. Arlington, New
Jersey. On October 14, 1998 the Class B OP Units automatically converted into
Common OP Units.
On October 1, 1998, we privately issued 916,230 Common OP Units as part of
the purchase of a portfolio of assets from South Seas Properties Company
Limited Partnership and its affiliates.
On January 7, 1999, we privately issued 65,875 Common OP Units as part of
the purchase of the Holiday Inn Madison, Wisconsin.
On March 29, 2000, we issued 462,500 Profits-Only OP Units to certain of
our executive officers and executive officers of MeriStar Hotels & Resorts,
Inc. pursuant to our Profits-Only Operating Partnership Units Plan which is
filed as an exhibit to this Form 10-K.
24
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information
for MeriStar Hospitality Corporation. The selected operating results and
balance sheet data have been extracted from the consolidated financial
statements for each of the periods presented. The following information should
be read in conjunction with the consolidated financial statements and notes
thereto for MeriStar Hospitality Corporation and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Annual Report on Form 10-K.
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- --------
(dollars and shares in thousands, except per share
amounts)
Revenue:
Hotel operations:
Participating lease
revenue............... $ 391,729 $ 368,012 $ 135,994 $ -- $ --
Rooms.................. -- -- 275,610 207,736 68,498
Food, beverage, office
rental and other...... 9,049 6,892 110,519 103,521 36,949
Management services
and other revenues.... -- -- 3,174 5,136 4,345
---------- ---------- ---------- --------- --------
Total revenues....... 400,778 374,904 525,297 316,393 109,792
---------- ---------- ---------- --------- --------
Operating expenses:
Departmental expenses:
Rooms.................. -- -- 65,048 51,075 17,509
Food, beverage and
other................. 2,731 1,964 80,327 77,373 27,102
Undistributed operating
expenses:
Administrative and
general............... 9,445 5,749 62,350 50,332 20,448
Property and other
operating costs....... 47,481 47,027 122,963 55,111 17,151
Depreciation and
amortization.......... 111,947 103,099 60,703 20,990 8,248
---------- ---------- ---------- --------- --------
Total operating
expenses............ 171,604 157,839 391,391 254,881 90,458
---------- ---------- ---------- --------- --------
Net operating income.... 229,174 217,065 133,906 61,512 19,334
Interest expense, net... 117,524 100,398 64,378 21,024 12,346
Minority interests...... 10,240 11,069 5,121 1,425 (39)
Provision for income
taxes.................. 2,028 2,102 15,699 14,911 2,674
---------- ---------- ---------- --------- --------
Income before gain on
sale of assets,
extraordinary gain
(loss) and cumulative
effect of accounting
change................. 99,382 103,496 48,708 24,152 4,353
Gain on sale of assets,
net of tax (A)......... 3,425 -- -- -- --
Extraordinary gain
(loss), net of tax
(B).................... 3,054 (4,532) (4,080) (4,092) (1,956)
Cumulative effect of
accounting change, net
of tax (C)............. -- -- (921) -- --
---------- ---------- ---------- --------- --------
Net income........... $ 105,861 $ 98,964 $ 43,707 $ 20,060 $ 2,397
========== ========== ========== ========= ========
Basic earnings per share
before extraordinary
gain (loss) (D)........ $ 2.21 $ 2.19 $ 1.45 $ 1.29 $ 0.31
Diluted earnings per
share before
extraordinary gain
(loss) (D)............. $ 2.14 $ 2.11 $ 1.40 $ 1.27 $ 0.31
Dividends per common
share (E).............. $ 2.02 $ 2.02 $ 0.82 $ -- $ --
Number of shares of
common stock issued and
outstanding (F)........ 44,380 47,257 46,718 24,867 12,754
Other Financial Data:
EBITDA (G).............. $ 341,121 $ 320,164 $ 194,609 $ 82,502 $ 27,582
Net cash provided by
operating activities... 224,037 229,193 162,796 59,882 13,373
Net cash used in
investing activities... (14,286) (187,952) (785,505) (586,259) (225,251)
Net cash (used in)
provided by financing
activities............. (212,121) (42,812) 543,256 588,428 226,830
Balance Sheet Data:
Investments in hotel
properties, gross...... $3,193,730 $3,118,723 $2,957,543 $ 950,052 $343,092
Total assets............ 3,013,008 3,094,201 2,998,460 1,124,642 379,161
Long-term debt.......... 1,638,319 1,676,771 1,602,352 492,771 200,361
25
Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars and shares in thousands, except per
share amounts)
Operating Data:
Owned Hotels and Properties:
Number of hotels (F)....... 114 116 117 47 19
Number of guest rooms (F).. 29,090 29,348 29,351 12,019 5,166
Total revenues (in
thousands)................ $400,778 $374,904 $522,123 $311,257 $105,447
Average occupancy (H)...... 72.2% 71.6% 71.5% 72.0% 71.6%
ADR (I).................... $ 107.60 $ 101.14 $ 95.00 $ 86.87 $ 82.84
RevPAR (J)................. $ 77.71 $ 72.44 $ 67.90 $ 62.55 $ 59.31
- --------
(A) During 2000, we sold three limited service hotels that resulted in a gain
on sales of assets.
(B) During 1996, 1997, 1998, and 1999 some loan facilities were refinanced and
the write-offs of deferred costs associated with these facilities were
recorded as extraordinary losses in accordance with generally accepted
accounting principles. During 2000, we repurchased some of our convertible
notes at a discount, which resulted in an extraordinary gain.
(C) Pursuant to AICPA Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities" which we adopted on July 1, 1998, the
cumulative effect of this accounting change was a pre-tax reduction of
income for the year ended December 31, 1998 of $1,485 ($921 net of tax
effect).
(D) Basic and diluted earnings per share before extraordinary loss for the
year ended December 31, 1996 is based on earnings for the period from
August 20, 1996 (date of our initial public offering) through December 31,
1996.
(E) No dividends were declared prior to August 3, 1998 (date of the merger).
(F) As of December 31 for the periods presented.
(G) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a useful
measure of operating performance because (i) it is industry practice to
evaluate hotel properties based on operating income before interest,
depreciation and amortization and minority interests of common and
preferred OP Unit holders, which is generally equivalent to EBITDA, and
(ii) EBITDA is unaffected by the debt and equity structure of the entity.
EBITDA does not represent cash flow from operations as defined by
generally accepted accounting principles ("GAAP"), is not necessarily
indicative of cash available to fund all cash flow needs, and should not
be considered as an alternative to net income under GAAP for purposes of
evaluating our results of operations and may not be comparable to other
similarly titled measures used by other companies.
(H) Represents total number of rooms occupied by hotel guests on a paid basis
divided by total available rooms.
(I) Represents total room revenues divided by total number of rooms occupied
by hotel guests on a paid basis.
(J) Represents total room revenues divided by total available rooms.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We own a portfolio of primarily upscale, full-service hotels in the United
States and Canada. Our portfolio is diversified by franchise and brand
affiliations. During 2000 and 1999, substantially all of our hotels were
leased to and operated by MeriStar Hotels & Resorts, Inc. As of December 31,
2000, we owned 114 hotels, with 29,090 rooms, 106 of which were leased and
operated by MeriStar Hotels & Resorts.
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, and
its associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American General,
MeriStar Hotels & Resorts, Inc., a separate publicly traded company, was
created to be the lessee and manager of nearly all of our hotels. The eight
hotels not leased by MeriStar Hotels & Resorts are leased by affiliates of
Prime Hospitality Corporation. We share certain key officers and four board
members with MeriStar Hotels & Resorts and an intercompany agreement aligns
our interests with the interests of MeriStar Hotels & Resorts, with the
objective of benefiting both companies' shareholders.
In order to maintain our tax status as a real estate investment trust, we
have not been permitted to participate in the operations of our hotel
properties. To comply with this requirement through December 31, 2000, all of
our properties were subject to leases involving two third-party lessees,
MeriStar Hotels & Resorts and Prime Hospitality Corporation.
On January 1, 2001, changes to the federal tax laws governing real estate
investment trusts, commonly know as the REIT Modernization Act or RMA became
effective. The REIT Modernization Act permits real estate investment trusts to
create a taxable subsidiary on or after January 1, 2001, which will be subject
to taxation similar to a C-Corporation. The taxable subsidiary will allow us
to lease our real property. The REIT Modernization Act prohibits our taxable
subsidiary from engaging in the following activities:
. it may not manage the properties itself; it will need to enter into an
"arms length" management agreement with an independent third-party
manager that is actively involved in the trade or business of hotel
management and manages properties on behalf of other owners;
. it may not lease a property that contains gambling operations; and
. it may not own a brand or franchise.
We believe that establishing a taxable subsidiary to lease our properties
provides a more efficient alignment of and ability to capture the economic
interests of property ownership.
Because of these changes in the tax laws, we have formed a number of
wholly-owned taxable subsidiaries to which subsidiaries of MeriStar Hotels &
Resorts have assigned the participating leases. In connection with the
assignment, the taxable subsidiaries executed new management agreements with a
subsidiary of MeriStar Hotels & Resorts to manage our hotels. Under these
management agreements, the taxable subsidiaries pay a management fee to
MeriStar Hotels & Resorts for each property. The taxable subsidiaries in turn
make rental payments to us under the participating leases. The management
agreements have been structured to substantially mirror the economics of the
former leases. The transactions did not result in any cash consideration to be
exchanged among the parties. Under the new management agreements, the base
management fee is 2.5% of total hotel revenue plus incentives payments, based
on meeting performance thresholds, that could total up to 1.5% of total hotel
revenue. The agreements have an initial term of 10 years with three renewal
periods of five years each at the option of MeriStar Hotels & Resorts, subject
to some exceptions. Because of these changes, we now bear the operating risk
associated with our hotels effective January 1, 2001.
27
Financial Condition
December 31, 2000 compared with December 31, 1999
Our total assets decreased by $81.2 million to $3,013.0 million at December
31, 2000 from $3,094.2 million at December 31, 1999 primarily due to:
. MeriStar Hotels & Resorts repayment of a $57.1 million note receivable
(proceeds were used to pay down debt);
. the sale of three limited service hotels and use of the sale proceeds of
$24.1 million to repay debt;
. depreciation on hotel assets; partially offset by
. capital expenditures at the hotels;
. the purchase of a full service hotel for $19.4 million; and
. the $10.7 million increase in amounts due from lessee.
Total liabilities decreased by $25.5 million to $1,777.0 million at
December 31, 2000 from $1,802.5 million at December 31, 1999 due mainly to:
. net repayments of long-term debt; partially offset by
. a $16.4 million increase in accounts payable, accrued expenses and other
liabilities due to the timing of payments, which include $8.0 million in
deferred purchase price related to the purchase of a full service hotel.
Long-term debt decreased by $38.5 million to $1,638.3 million at December 31,
2000 from $1,676.8 million at December 31, 1999 due primarily to net
repayments of long-term debt using proceeds from the repayment of the note
receivable and proceeds from the sale of the three limited service hotels.
Minority interests decreased $6.3 million to $101.5 million at December 31,
2000 from $107.8 million at December 31, 1999, due to:
. current year distributions to minority interest holders; partially offset
by
. current year net income allocated to minority interest holders; and
. the net redemption of operating partnership units.
Stockholders' equity decreased $49.3 million to $1,134.6 at December 31,
2000 from $1,183.9 million at December 31,1999 due primarily to:
. the repurchase of 3.7 million common shares for $66.1 million; and
. the payment of dividends; partially offset by
. net income for 2000.
Results of Operations
Year Ended December 31, 2000 compared with the Year Ended December 31, 1999
Until January 1, 2001 substantially all of our hotels were leased to and
operated by MeriStar Hotels & Resorts. Participating lease revenue represents
lease payments from the lessees pursuant to the participating lease
agreements. Total revenue increased by $25.9 million to $400.8 million in 2000
compared to $374.9 million in 1999. This increase was primarily attributable
to an increase of $23.7 million in participating lease revenue
28
resulting from an increase in room revenue at our hotels under lease. The
following table provides our hotels' operating statistics on a same-store
basis for the year:
2000 1999 Change
------- ------- ------
Revenue per available room.......................... $ 77.71 $ 73.51 5.71%
Average daily rate.................................. $107.60 $101.92 5.57%
Occupancy........................................... 72.2% 72.1% 0.14%
Operating expenses increased to $171.6 million for the year ended December
31, 2000 from $157.8 million for the same period in 1999 due primarily to:
. to an increase in depreciation on hotel assets;
. an increase in administrative costs, as we added personnel during 2000 to
address the operating changes associated with RMA; and
. increased insurance costs.
Net interest expense increased $17.1 million to $117.5 million for the year
ended December 31, 2000, from $100.4 million in 1999 due mainly to:
. lower capitalized interest due to a decrease in capital expenditures in
2000;
. an increase in variable interest rates during 2000 and higher interest
rates on swap arrangements executed in 2000; partially offset by
. a lower average debt balance during 2000.
Minority interests decreased $0.9 million to $10.2 million in 2000 from
$11.1 million in 1999 due to:
. the net redemption of operating partnership units; partially offset by
. the increase in the allocation of income to minority interest holders.
In 2000, we repurchased $18.2 million of our convertible notes at a
discount. This resulted in an extraordinary gain of $3.1 million ($3.1
million, net of tax effect).
In 2000, we sold three limited service hotels and received $24.1 million.
This resulted in a gain on sale of assets of $3.5 million ($3.4 million, net
of tax).
Earnings before interest expense, income taxes, depreciation and
amortization or EBITDA grew $20.9 million to $341.1 million in 2000 from
$320.2 million in 1999. This growth is due to:
. the increase in participating lease revenue; partially offset by
. the increase in administrative and insurance costs.
The White Paper on Funds From Operations or FFO approved by the Board of
Governors of the National Association of Real Estate Investment Trusts or
NAREIT in October 1999 defines FFO as net income (loss), computed in
accordance with generally accepted accounting principles or GAAP, excluding
gains (or losses) from sales of properties, plus real estate related
depreciation and amortization and after comparable adjustments for our portion
of these items related to unconsolidated partnerships and joint ventures.
Extraordinary items under GAAP are excluded from the calculation of FFO. We
believe that FFO is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication
of our ability to incur and service debt, to make capital expenditures and to
fund other cash needs. FFO does not represent cash generated from operating
activities determined by GAAP and should not be considered as an alternative
to net income determined in accordance with GAAP as an indication of our
financial performance or to cash flow from operating activities determined in
accordance with GAAP as a measure of our liquidity, nor is it indicative of
funds available to fund our cash needs, including our ability to make cash
distributions. FFO may include funds that may not be available for
management's discretionary use due to functional requirements to conserve
funds for capital expenditures and property acquisitions, and other
commitments and uncertainties.
29
The following is a reconciliation between income before gain on the sale of
assets, extraordinary gain(loss) and diluted FFO for the year ended December
31 (in thousands):
2000 1999
-------- --------
Income before gain on sale of assets and extraordinary
gain(loss)............................................. $ 99,382 $103,496
Minority interest to Common OP Unit Holders............. 9,675 10,504
Interest on convertible debt............................ 7,488 8,303
Hotel depreciation and amortization..................... 109,538 99,955
-------- --------
Diluted FFO............................................. $226,083 $222,258
======== ========
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin or SAB No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 addresses lessor revenue recognition in interim
periods related to rental agreements which provide for minimum rental
payments, plus contingent rents based on the lessee's operations, such as a
percentage of sales in excess of an annual specified revenue target. SAB No.
101 requires the deferral of contingent rental income until specified targets
are met. This SAB relates only to the recognition of our lease revenue in
interim periods for financial reporting purposes; it has no effect on the
timing of rent payments under our leases. The effect of SAB No. 101 was to
recognize additional contingent rental income of $40,290 and $45,894 for the
three months ended December 31, 2000 and 1999, respectively. There is no year-
to-date effect of SAB No. 101.
The effect of SAB No. 101 on the Company's financial statements is as
follows:
Three Months Ended
December 31, 2000
-----------------------------------
Prior to After
Effect of Effect of Effect of
SAB No. 101 SAB No. 101 SAB No. 101
----------- ----------- -----------
Net operating income..................... $ 50,449 $40,290 $ 90,739
Interest expense......................... (29,999) -- (29,999)
Minority interests....................... (1,797) (3,280) (5,077)
Income taxes............................. (373) (740) (1,113)
-------- ------- --------
Net income............................... $ 18,280 $36,270 $ 54,550
======== ======= ========
Diluted Funds from Operations............ $ 49,580 $39,550 $ 89,130
======== ======= ========
Three Months Ended
December 31, 1999
-----------------------------------
Prior to After
Effect of Effect of Effect of
SAB No. 101 SAB No. 101 SAB No. 101
----------- ----------- -----------
Net operating income..................... $ 45,744 $45,894 $ 91,638
Interest expense......................... (25,777) -- (25,777)
Minority interests....................... (1,865) (4,382) (6,247)
Income taxes............................. (385) (888) (1,273)
-------- ------- --------
Net income............................... $ 17,717 $40,624 $ 58,341
======== ======= ========
Diluted Funds from Operations............ $ 50,549 $45,006 $ 95,555
======== ======= ========
Year Ended December 31, 1999 compared with the Year Ended December 31, 1998
Substantially all of our hotels were leased to and operated by MeriStar
Hotels & Resorts. Participating lease revenue represents lease payments from
the lessees pursuant to the participating lease agreements. Total revenue
decreased by $150.4 million to $374.9 million in 1999 compared to $525.3
million in 1998. This decrease was
30
primarily attributable to the change in the types of revenues recorded in our
financial statements in periods before and after August 2, 1998, the date of
the merger of CapStar Hotel Company and American General Hospitality
Corporation and the spin-off of MeriStar Hotels & Resorts.
The following table provides our hotels' operating statistics on a same-
store basis for the year:
1999 1998 Change
------- ------- ------
Revenue per available room.......................... $ 74.05 $ 71.80 3.1%
Average daily rate.................................. $102.39 $100.96 1.4%
Occupancy........................................... 72.3% 71.1% 1.7%
Hotel department operating expenses were $0 in 1999 compared to $142.7
million in 1998. This decrease was the result of the hotel operations being
leased to MeriStar Hotels & Resorts after August 2, 1998, in conjunction with
the merger and spin-off of MeriStar Hotels & Resorts.
Undistributed operating expenses decreased significantly in 1999 as a
result of the merger. Prior to the spin-off of MeriStar Hotels & Resorts, we
were responsible for all hotel operating expenses. Subsequent to August 3,
1998, we, as owner, are only responsible for real estate taxes, property
insurance and various other undistributed expenses. Depreciation and
amortization increased $42.4 million to $103.1 million in 1999 from $60.7
million in 1998 as a result of the assets acquired in the merger.
Net interest expense increased $36.0 million to $100.4 million for the year
ended December 31, 1999, from $64.4 million in 1998. This increase was
attributable to:
. the borrowings used to finance the acquisition of hotels during 1998;
. the borrowings used to finance renovations of hotels during 1998 and
1999;
. the new debt associated with the merger;
. higher average interest rates; and
. 1999 borrowings made to finance real estate ventures.
Minority interests increased $6.0 million to $11.1 million in 1999 from
$5.1 million in 1998 due to:
. the issuance of OP Units in conjunction with the merger;
. the issuances of OP Units in acquiring certain hotels; and
. a higher amount of income before minority interests in 1999 allocated to
minority interest holders.
Income taxes decreased $13.6 million in 1999 to $2.1 million from $15.7
million in 1998. In 1999, our overall effective tax rate decreased to 2% as a
result of the effective elimination of federal income taxes when we became a
real estate investment trust. Prior to the merger, our overall effective tax
rate was 38.2% in 1998.
In 1999, we recognized extraordinary losses of $4.5 million, net of a tax
benefit of $0.1 million, due to the write-off of unamortized deferred
financing fees in conjunction with refinancing certain credit facilities.
Earnings before interest expense, income taxes, depreciation and
amortization or EBITDA grew $125.6 million to $320.2 million in 1999 from
$194.6 million in 1998. This growth is due to:
. the merger;
. other hotel acquisitions which occurred during 1998; partially offset by
. the spin-off of MeriStar Hotels & Resorts.
Liquidity and Capital Resources
Sources of Cash
Our principal sources of liquidity are cash on hand, cash generated from
operations, and funds from external borrowings and debt and equity offerings.
We expect to fund our continuing operations through cash generated
31
by our hotels. We also expect to finance hotel acquisitions, hotel renovations
and joint venture investments through a combination of internally generated
cash, external borrowings, and the issuance of OP Units and/or common stock.
Additionally, we must distribute to stockholders at least 90% of our taxable
income, excluding net capital gains, to preserve the favorable tax treatment
accorded to real estate investment trusts under the Internal Revenue Code. We
expect to fund such distributions through cash generated from operations,
borrowings on our credit facilities or through our preferred return on our
investment in Meristar Investment Partners. We generated $224.0 million of
cash from operations during 2000.
Uses of Cash
We used $14.3 million of cash in investing activities during the year 2000,
primarily for:
. capital expenditures; partially offset by
. proceeds from selling three limited service hotels; and
. MeriStar Hotels & Resorts repayment of our note receivable from them.
We used $212.1 million of cash in financing activities during the year 2000
primarily from:
. payment of dividends and distributions;
. the repurchase of our common stock; and
. net repayments of borrowings under our credit facilities.
The weighted average interest rate on borrowings outstanding under the
senior secured credit facility as of December 31, 2000 was 8.29%. As of
December 31, 2000, we had $98.0 million available under the senior secured
credit facility.
During 2000, we repurchased $18.2 million of our convertible notes at a
discount. This resulted in an extraordinary gain of $3.1 million ($3.1
million, net of tax effect).
In January, 2001, we sold $500 million of senior unsecured notes. The
senior unsecured notes are structured as:
. $300 million in notes with a 9.0% interest rate which mature on January
15, 2008; and
. $200 million in notes with a 9.13% interest rate which mature on January
15, 2011.
The proceeds were used to repay outstanding debt under our revolving credit
facility and to reduce the outstanding debt under our term loans.
During 2000, we sold three limited service hotels and received proceeds of
$24.1 million. This resulted in a gain on sale of assets of $3.5 million, $3.4
million, net of tax. We also purchased a full service hotel for $19.4 million.
Of the $19.4 million, $11.4 million was paid in cash and $8.0 million will be
paid from the hotel's future cash flow within the next five years. The
acquisition was funded using existing cash and borrowings on the senior
secured credit facility.
Capital for renovation work is expected to be provided by a combination of
internally generated cash and external borrowings. Initial renovation programs
for most of our hotels are complete or nearing completion. Once initial
renovation programs for a hotel are completed, we expect to spend
approximately 4% annually of hotel revenues for ongoing capital expenditure
programs, including room and facilities refurbishments, renovations, and
furniture and equipment replacements. For the year ended December 31, 2000, we
spent $63.2 million on initial renovation and ongoing property capital
expenditure programs. We intend to spend an additional $67.0 million during
2001 to complete our renovation programs and for our ongoing capital
expenditure programs.
In 1999, our board of directors approved the repurchase of up to five
million shares of our common stock from time to time in open market or
privately negotiated transactions. Stock repurchases are subject to prevailing
market conditions and other considerations. Through December 31, 2000, the
program has been funded primarily
32
through proceeds from asset sales and the repayment of the note receivable
from MeriStar Hotels & Resorts. As of December 31, 2000, we have repurchased a
total of 4,083,204 for $72.4 million at an average price of $17.74 per share.
We do not expect to repurchase any more shares.
We believe cash generated by operations, together with anticipated
borrowing capacity under the credit facilities, will be sufficient to fund our
existing working capital requirements, ongoing capital expenditures, and debt
service requirements. We believe, however, that our future capital decisions
will also be made in response to specific acquisition and/or investment
opportunities, depending on conditions in the capital and/or other financial
markets. Accordingly, we may consider increasing our borrowing capacity or
issuing additional debt or equity securities. These proceeds could be used to
finance acquisitions or investments, refinance existing debt, or repurchase
common stock.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns.
For non-resort properties, demand is lower in the winter months due to
decreased travel and higher in the spring and summer months during peak travel
season. For resort properties, demand is generally higher in winter and early
spring. Since the majority of our hotels are non-resort properties, our
operations generally reflect non-resort seasonality patterns. We have lower
revenue, operating income and cash flow in the first and fourth quarters and
higher revenue, operating income and cash flow in the second and third
quarters.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on long-term
debt obligations that impact the fair value of these obligations. Our policy
is to manage interest rates through the use of a combination of fixed and
variable rate debt. Our interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower
our overall borrowing costs. To achieve our objectives, we borrow at a
combination of fixed and variable rates, and may enter into derivative
financial instruments such as interest rate swaps, caps and treasury locks in
order to mitigate our interest rate risk on a related financial instrument. We
do not enter into derivative or interest rate transactions for speculative
purposes. We have no cash flow exposure due to general interest rate changes
for our fixed long-term debt obligations.
The table below, as of December 31, 2000, presents the principal amounts
(in thousands of dollars) for our fixed and variable rate debt instruments,
weighted-average interest rates, and fair values by year of expected maturity
to evaluate the expected cash flows and sensitivity to interest rate changes.
Long-term Debt
-----------------------------------
Average Average
Fixed Interest Variable Interest
Expected Maturity Rate Rate Rate Rate
- ----------------- -------- -------- -------- --------
2001....................................... $ 11,288 8.5% $ 17,000 8.6%
2002....................................... 15,897 8.6% 32,000 8.6%
2003....................................... 8,589 8.2% 659,000 8.2%
2004....................................... 171,168 5.1% 190,000 8.2%
2005....................................... 9,265 8.1% -- N/A
Thereafter................................. 524,112 8.2% -- N/A
-------- --- -------- ---
Total...................................... $740,319 7.5% $898,000 8.2%
======== === ======== ===
Fair Value at 12/31/00..................... $691,311 $898,000
======== ========
As of December 31, 2000, we have seven swap agreements with notional
principal amounts totaling $700 million. These swap agreements provide hedges
against the impact future interest rates have on our floating London Interbank
Offered Rate or LIBOR rate debt instruments. The swap agreements effectively
fix the 30-day LIBOR between 6.0% and 7.2%. The swap agreements expire between
September 2001 and July 2003. For the year ended December 31, 2000, we have
received net payments of $3.1 million on these swaps and other similar swaps
that expired during the year.
In anticipation of the August 1999 completion of our mortgage-backed
secured facility, we entered into two separate hedge transactions during July
1999. Upon completion of the secured facility, we terminated the underlying
treasury lock agreements, resulting in a net payment of $5.1 million. This
amount was deferred and is being recognized as a reduction to interest expense
over the life of the underlying debt. As a result, the effective interest rate
on the secured facility is 7.76%.
Additionally, in anticipation of the August 1997 offering of $150 million
aggregate principal amount of its 8.75% senior subordinated notes due 2007, we
entered into separate hedge transactions during June and July 1997. Upon
completion of the subordinated notes offering, we terminated the underlying
swap agreements, resulting in a net payment of $836,000. This amount was
deferred and is being recognized as a reduction to interest expense over the
life of the underlying debt. As a result, the effective interest rate on the
subordinated notes is 8.69%.
As of December 31, 2000, after consideration of the hedge agreements
described above, 88% of our debt was fixed and our overall weighted average
interest rate was 7.93%.
Upon the sale of our $500 million senior unsecured notes, in January 2001,
we reduced the term loans under our senior secured credit facility by $300
million. At that time, we terminated three swap agreements with a
34
notional amount of $300 million that were designated to hedge interest rates
on the term loans that were repaid. We made net payments totaling $9.3 million
to our counter parties to terminate these swap agreements.
Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows during the years ended December 31, 2000 and 1999. Additionally, foreign
currency transaction gains and losses were not material to our results of
operations for the years ended December 31, 2000 and 1999. Accordingly, we
were not subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currencies would have on our
future costs or on future cash flows we would receive from our foreign
subsidiaries. To date, we have not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments
to hedge the effects of adverse fluctuations in foreign currency exchange
rates.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, Supplementary Data and
Financial Statement Schedules are filed as part of this Annual Report on Form
10-K:
MeriStar Hospitality Corporation
Independent Auditors' Report.............................................. 37
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 38
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998...................................................... 39
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998......................................... 40
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998...................................................... 41
Notes to the Consolidated Financial Statements............................ 42
Schedule III--Real Estate and Accumulated Depreciation.................... 58
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
Notes thereto.
36
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hospitality Corporation:
We have audited the accompanying consolidated balance sheets of MeriStar
Hospitality Corporation and subsidiaries (the "Company) as of December 31,
2000 and 1999 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedule of real estate and accumulated depreciation. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MeriStar
Hospitality Corporation and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Washington, D.C.
February 2, 2001
37
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(in thousands, except per share amounts)
2000 1999
---------- ----------
ASSETS
Investments in hotel properties....................... $3,193,730 $3,118,723
Accumulated depreciation.............................. (287,229) (182,430)
---------- ----------
2,906,501 2,936,293
Cash and cash equivalents............................. 250 2,556
Accounts receivable, net.............................. 2,833 1,328
Prepaid expenses and other............................ 2,767 9,137
Note receivable from Lessee........................... -- 57,110
Due from Lessee....................................... 22,221 11,476
Investments in and advances to affiliates............. 42,196 40,085
Restricted cash....................................... 19,918 17,188
Intangible assets, net of accumulated amortization of
$9,729 and $5,742.................................... 16,322 19,028
---------- ----------
$3,013,008 $3,094,201
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other
liabilities.......................................... $ 74,420 $ 58,055
Accrued interest...................................... 28,365 31,380
Income taxes payable.................................. 1,151 730
Dividends and distributions payable................... 24,581 26,263
Deferred income taxes................................. 10,140 9,345
Long-term debt........................................ 1,638,319 1,676,771
---------- ----------
Total liabilities..................................... 1,776,976 1,802,544
---------- ----------
Minority interests.................................... 101,477 107,761
Stockholders' Equity:
Common stock, par value $0.01 per share
Authorized-- 250,000 shares
Issued--48,463 and 47,664 shares................... 485 477
Additional paid-in capital.......................... 1,177,218 1,164,750
Retained earnings................................... 42,837 30,168
Accumulated other comprehensive income.............. (6,081) (5,247)
Unearned stock-based compensation................... (7,550) --
Less common stock held in treasury--4,083 and 407
shares............................................. (72,354) (6,252)
---------- ----------
Total stockholders' equity........................ 1,134,555 1,183,896
---------- ----------
$3,013,008 $3,094,201
========== ==========
See accompanying notes to consolidated financial statements.
38
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except per share amounts)
2000 1999 1998
-------- -------- --------
Revenue:
Participating lease revenue.................... $391,729 $368,012 $135,994
Hotel operations:
Rooms......................................... -- -- 275,610
Food and beverage............................. -- -- 85,374
Other operating departments................... -- -- 19,496
Office rental, parking and other revenue....... 9,049 6,892 5,649
Hotel management and other fees................ -- -- 3,174
-------- -------- --------
Total revenue............................... 400,778 374,904 525,297
-------- -------- --------
Hotel operating expenses by department:
Rooms......................................... -- -- 65,048
Food and beverage............................. -- -- 67,493
Other operating departments................... -- -- 10,121
Office rental, parking and other operating
expenses...................................... 2,731 1,964 2,713
Undistributed operating expenses:
Administrative and general.................... 9,445 5,749 62,350
Property operating costs...................... -- -- 50,027
Property taxes, insurance and other........... 47,481 47,027 29,814
Lease expense................................. -- -- 34,641
Depreciation and amortization................. 111,947 103,099 60,703
Spin-off costs................................ -- -- 8,481
-------- -------- --------
Total operating expenses.................... 171,604 157,839 391,391
-------- -------- --------
Net operating income............................. 229,174 217,065 133,906
Interest expense, net............................ 117,524 100,398 64,378
-------- -------- --------
Income before minority interests, income taxes,
gain on sale of assets, extraordinary gain(loss)
and cumulative effect of accounting change...... 111,650 116,667 69,528
Minority interests............................... 10,240 11,069 5,121
-------- -------- --------
Income before income taxes, gain on sale of
assets, extraordinary gain(loss) and cumulative
effect of accounting change..................... 101,410 105,598 64,407
Income taxes..................................... 2,028 2,102 15,699
-------- -------- --------
Income before gain on sale of assets,
extraordinary gain(loss) and cumulative effect
of accounting change............................ 99,382 103,496 48,708
Gain on sale of assets, net of tax effect of
$70............................................. 3,425 -- --
Extraordinary gain(loss) on early extinguishment
of debt, net of tax effect of $62 in 2000, ($93)
in 1999, and ($2,083) in 1998................... 3,054 (4,532) (4,080)
Cumulative effect of accounting change, net of
tax effect of ($564)............................ -- -- (921)
-------- -------- --------
Net income....................................... $105,861 $ 98,964 $ 43,707
======== ======== ========
Earnings per share:
Basic:
Income before extraordinary gain(loss) and
cumulative effect of accounting change...... $ 2.21 $ 2.19 $ 1.45
Extraordinary gain(loss)..................... 0.07 (0.10) (0.12)
Cumulative effect of accounting change....... -- -- (0.03)
-------- -------- --------
Net income..................................... $ 2.28 $ 2.09 $ 1.30
======== ======== ========
Diluted:
Income before extraordinary gain(loss) and
cumulative effect of accounting change...... $ 2.14 $ 2.11 $ 1.40
Extraordinary gain(loss)..................... 0.06 (0.08) (0.11)
Cumulative effect of accounting change....... -- -- (0.03)
-------- -------- --------
Net income..................................... $ 2.20 $ 2.03 $ 1.26
======== ======== ========
See accompanying notes to consolidated financial statements.
39
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
Common Stock
------------------------------ Accumulated
Issued Treasury Additional Other Unearned
------------- ---------------- Paid In Retained Comprehensive Stock-Based
Shares Amount Shares Amount Capital Earnings Income Compensation Total
------ ------ ------ -------- ---------- -------- ------------- ------------ ----------
Balance, January 1,
1998................... 24,867 $249 -- $ -- $ 499,576 $ 22,114 $(2,527) $ -- $ 519,412
Net income for the
year.................. -- -- -- -- -- 43,707 -- -- 43,707
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (3,960) -- (3,960)
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Comprehensive income.... 39,747
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Issuances of common
stock.................. 20,839 208 -- -- 654,671 -- -- -- 654,879
Distribution to spun-off
affiliate.............. -- -- -- -- (52,310) -- -- -- (52,310)
Redemption of OP Units.. 1,012 10 -- -- 31,420 -- -- -- 31,430
Dividends declared...... -- -- -- -- -- (38,599) -- -- (38,599)
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Balance, December 31,
1998................... 46,718 467 -- -- 1,133,357 27,222 (6,487) -- 1,154,559
Net income for the
year.................. -- -- -- -- -- 98,964 -- -- 98,964
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 1,240 -- 1,240
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Comprehensive income.... 100,204
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Issuances of common
stock.................. 95 1 -- -- 1,990 -- -- -- 1,991
Shares repurchased...... -- -- (407) (6,252) -- -- -- -- (6,252)
Redemption of OP Units.. 851 9 -- -- 29,403 -- -- -- 29,412
Dividends declared...... -- -- -- -- -- (96,018) -- -- (96,018)
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Balance, December 31,
1999................... 47,664 477 (407) (6,252) 1,164,750 30,168 (5,247) -- 1,183,896
Net income for the
year.................. -- -- -- -- -- 105,861 -- -- 105,861
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (834) -- (834)
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Comprehensive income.... 105,027
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Issuances of common
stock.................. 133 1 -- -- 1,831 -- -- -- 1,832
Issuances of restricted
stock.................. 589 6 -- -- 10,614 -- -- (10,620) --
Amortization on unearned
stock-based
compensation........... -- -- -- -- -- -- -- 3,070 3,070
Shares repurchased...... -- -- (3,676) (66,102) -- -- -- -- (66,102)
Redemption of OP Units.. 77 1 -- -- 23 -- -- -- 24
Dividends declared...... -- -- -- -- -- (93,192) -- -- (93,192)
------ ---- ------ -------- ---------- -------- ------- -------- ----------
Balance, December 31,
2000................... 48,463 $485 (4,083) $(72,354) $1,177,218 $ 42,837 $(6,081) $ (7,550) $1,134,555
====== ==== ====== ======== ========== ======== ======= ======== ==========
See accompanying notes to the consolidated financial statements.
40
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
2000 1999 1998
--------- --------- ----------
Operating activities:
Net income.................................. $ 105,861 $ 98,964 $ 43,707
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 111,947 103,099 60,703
Gain on assets sold, before tax effect..... (3,495) -- --
Extraordinary (gain)loss on early
extinguishment of debt, before tax
effect.................................... (3,116) 4,625 6,163
Cumulative effect of accounting change,
before tax effect......................... -- -- 1,485
Minority interests......................... 10,240 11,069 5,121
Non-cash spin-off costs.................... -- -- 3,205
Amortization of unearned stock based
compensation.............................. 3,070 -- --
Deferred income taxes...................... 795 892 (4,445)
Changes in operating assets and
liabilities:
Accounts receivable, net................. (1,505) 1,716 29,673
Prepaid expenses and other............... 6,370 (5,260) 24,760
Income tax receivable.................... -- 339 --
Intangible assets, net................... -- (245) --
Due from Lessee.......................... (10,745) (4,039) (7,437)
Accounts payable, accrued expenses,
accrued interest and other liabilities.. 4,194 17,303 765
Income taxes payable....................... 421 730 (904)
--------- --------- ----------
Net cash provided by operating activities.... 224,037 229,193 162,796
--------- --------- ----------
Investing activities:
Investment in hotel properties, net......... (90,703) (170,063) (701,710)
Proceeds from disposition of assets......... 24,148 8,900 --
Purchases of intangible assets.............. -- -- (5,584)
Investments in and advances to affiliates,
net........................................ (2,111) (31,298) (2,320)
Purchases of minority interests............. -- (72) (44)
Repayments of notes receivable.............. 57,110 9,890 (67,000)
Change in restricted cash................... (2,730) (5,309) (8,847)
--------- --------- ----------
Net cash used in investing activities........ (14,286) (187,952) (785,505)
--------- --------- ----------
Financing activities:
Deferred financing costs.................... (1,615) (6,899) (4,251)
Proceeds from issuance of long-term debt.... 179,388 484,924 1,407,261
Principal payments on long-term debt........ (214,724) (410,217) (821,051)
Proceeds from issuances of common stock,
net........................................ 1,741 1,991 1,870
Purchase of OP units........................ (7,535) -- --
Purchases of treasury stock................. (66,102) (6,252) --
Spin-off to stockholders.................... -- -- (23,745)
Dividends paid to stockholders.............. (94,062) (94,774) (16,178)
Distributions to minority investors......... (9,212) (11,585) (650)
--------- --------- ----------
Net cash (used in) provided by financing
activities.................................. (212,121) (42,812) 543,256
--------- --------- ----------
Effect of exchange rate changes on cash and
cash equivalents............................ 64 (53) 204
Net decrease in cash and cash equivalents.... (2,306) (1,624) (79,249)
Cash and cash equivalents, beginning of
year........................................ 2,556 4,180 83,429
--------- --------- ----------
Cash and cash equivalents, end of year....... $ 250 $ 2,556 $ 4,180
========= ========= ==========
See accompanying notes to consolidated financial statements.
41
MERISTAR HOSPITALITY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(dollars in thousands, except share and per share amounts)
1. Organization
MeriStar Hospitality Corporation (the "Company") owns a portfolio of
primarily upscale, full-service hotels, diversified by franchise and brand
affiliations, in the United States and Canada. Substantially all of the
Company's hotels are leased to and operated by MeriStar Hotel & Resorts, Inc.
("OpCo"), an affiliated entity. As of December 31, 2000, the Company owned 114
hotels with 29,090 rooms, 106 of which are leased and operated by OpCo.
On August 3, 1998, CapStar Hotel Company ("CapStar") merged (the "Merger")
with and into American General Hospitality Corporation ("AGH"), with the
surviving entity being named MeriStar Hospitality Corporation. In conjunction
with the Merger, CapStar also distributed on a pro rata basis to its
stockholders all of the capital stock of OpCo, which consisted of CapStar's
hotel operations (including leased hotels) and management business (the "Spin-
Off").
In order to maintain its tax status as a Real Estate Investment Trust
("REIT"), the Company has not been permitted to engage in the operations of
its hotel properties. To comply with this requirement, the Company has leased
all of its real property to third-party lessee/managers--OpCo and Prime
Hospitality Corporation.
On January 1, 2001, the REIT Modernization Act (the "RMA") became law. The
RMA permits the Company to create a wholly-owned taxable REIT subsidiary (the
"TRS") on or after January 1, 2001, which will be subject to taxation similar
to a C-Corporation. The TRS will be allowed to lease the real property owned
by the Company. Also, the RMA prohibits the TRS from engaging in certain
activities. First, a TRS may not manage the properties itself; it will need to
enter into an "arms length" management agreement with an independent third-
party manager that is actively involved in the trade or business of hotel
management and manages properties on behalf of other owners. Second, a TRS may
not lease a property that contains gambling operations. Third, a TRS may not
own a brand or franchise. The Company believes that establishing a TRS to
lease its properties will provide a more efficient alignment of and ability to
capture the economic interests of property ownership.
Until January 1, 2001, the Company leased 106 hotels to OpCo. Each of the
leases was a 12-year participating lease under which OpCo paid the Company a
fixed base rent plus participating rent based on a percentage of hotel
revenues. Because of the RMA, the Company has created a TRS. The Company and
OpCo have also agreed to assign the leases for the 106 hotels to the TRS. The
new management agreements have been structured to mirror the current economics
of the existing leases. The transactions did not result in any cash
consideration exchanged among the parties. Under the new management
agreements, the base management fee is 2.5 percent of total hotel operating
revenue with incentives up to an additional 1.5 percent of total revenue if
certain operating thresholds are achieved. The agreements have an initial term
of 10 years with three renewal periods of five years each at OpCo's option,
subject to some exceptions. Because of these changes, the Company now bears
the operating risk associated with its properties.
As of February 2, 2001, twelve states, including California, Texas and
Florida have not enacted legislation that would permit a REIT to lease
properties to a TRS. It is expected that each state will ultimately enact
legislation, during 2001 that will be retroactive to January 1, 2001,
conforming its law to the federal law. However, if conforming legislation is
not enacted, the Company could lose its status as a REIT in those states and
would be taxed as a C-Corporation. Accordingly, the Company may be required to
provide for current and deferred taxes.
42
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
2. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and all of its majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated joint ventures and affiliated companies in
which the Company holds a voting interest of 50% or less and exercises
significant influence are accounted for using the equity method. The Company
uses the cost method to account for its investment in entities in which it
does not have the ability to exercise significant influence.
Cash Equivalents and Restricted Cash--The Company considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents. Restricted cash represents amounts required to be maintained
in escrow under certain of the Company's credit facilities.
Investments in Hotel Properties--Investments in hotel properties are
recorded at cost, which includes the allocated purchase price for hotel
acquisitions, or at fair value at the time of contribution for contributed
property. Property and equipment balances are depreciated using the straight-
line method over lives ranging from five to 40 years. For the years ended
December 31, 2000, 1999 and 1998, the Company capitalized interest of $8,613,
$12,540, and $5,182, respectively. Properties held for sale are carried at the
lower of their carrying values or estimated fair values less costs to sell.
Depreciation of these properties is discontinued when an operating property is
classified as held for sale. Properties held for sale are not material and,
therefore, are included in investments in hotel properties.
Intangible Assets--Intangible assets consist primarily of deferred
financing fees. These deferred fees are amortized on a straight-line basis
over the lives of the related borrowings for up to 10 years. Total accumulated
amortization at December 31, 2000 and 1999 was $9,729 and $5,742,
respectively. In 1999 and 1998, the Company recognized extraordinary losses of
$4,532 and $4,080, (net of tax effect of $93 and $2,083), respectively, due to
the write-off of unamortized deferred financing fees in conjunction with
refinancing certain credit facilities.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of--
The carrying values of long-lived assets, which include property and equipment
and all intangibles, are evaluated periodically in relation to the operating
performance and future undiscounted cash flows of the underlying assets.
Adjustments are made if the sum of expected undiscounted future net cash flows
is less than book value. No impairment losses were recorded during 2000, 1999
or 1998.
Income Taxes--The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred income taxes reflect the tax
consequences on future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts.
In conjunction with the Merger on August 3, 1998, the Company became a REIT
and is therefore no longer subject to federal income taxes, provided that it
complies with various requirements necessary to maintain REIT status. The
Company is subject to state and local taxes in certain jurisdictions.
Foreign Currency Translation--Results of operations for the Company's
Canadian hotels are maintained in Canadian dollars and translated using the
average exchange rates during the period. Assets and liabilities are
translated to U.S. dollars using the exchange rate in effect at the balance
sheet date. Resulting translation adjustments are reflected in accumulated
other compensation income.
43
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Revenue Recognition--Prior to the Merger, revenue was earned through the
operations and management of the hotel properties and was recognized when
earned. Subsequent to the Merger, the Company earns participating lease
revenue. Participating lease revenue represents lease payments from lessees
pursuant to participating lease agreements. Office, retail and parking rental
is generally recognized on a straight-line basis over the terms of the
respective leases.
Participating Lease Agreements--The Company's participating leases have
non-cancelable remaining terms ranging from 8 to 10 years, subject to earlier
termination on the occurrence of certain contingencies, as defined. The rent
due under each percentage lease is the greater of base rent or percentage
rent, as defined. Percentage rent applicable to room and food and beverage
revenue varies by lease and is calculated by multiplying fixed percentages by
the total amounts of such revenues over specified threshold amounts. Both the
minimum rent and the revenue thresholds used in computing percentage rents are
subject to annual adjustments based on increases in the United States Consumer
Price Index. Percentage rent applicable to other revenues is calculated by
multiplying fixed percentages by the total amounts of such revenues. During
interim reporting periods, the Company defers recognition of revenue for lease
payments considered to be contingent until specified percentage rent
thresholds are met.
Changes to the federal tax laws governing REITs were enacted in 1999 and
became effective on January 1, 2001. Under those changes, the Company is
permitted to create subsidiaries that lease the property the Company currently
owns and are taxable, similar to a subchapter C-Corporation. The Company's
taxable subsidiaries are wholly-owned. Accordingly, the Company and OpCo
assigned the participating leases to the taxable subsidiaries and the taxable
subsidiaries entered into management agreements with OpCo to manage the
Company's properties. Under these management agreements, the taxable
subsidiaries pay OpCo a management fee. The taxable subsidiaries in turn make
rental payments to the Company under the participating leases. The management
agreements have been structured to substantially mirror the economics of the
former leases.
Financial Instruments--From time to time the Company enters into swap and
collar agreements that are designated as, and are effective as, hedges against
the impact of interest rate fluctuation on certain of the Company's existing
and probable future long-term debt instruments. Because these agreements
qualify for hedge accounting treatment, any gains or losses are recognized as
adjustments to interest expense over the lives of the underlying debt
instruments. For hedge agreements associated with anticipated future debt
instruments, gains or losses are deferred until those debt instruments are
entered into. If the Company determines it is no longer probable that the
Company will enter into an anticipated debt instrument, any related deferred
gains or losses are recognized in the current period.
Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
Segment Information--SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" requires a public entity to report
selected information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
product and services, geographic areas and major customers. Based on the
guidance provided in the standard, the Company has determined that its
business is conducted in one operating segment.
44
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The following table summarizes geographic information required to be
disclosed under SFAS No. 131:
2000 1999 1998
---------- ---------- --------
Revenue:
U.S. ........................................ $ 394,257 $ 367,893 $510,344
Foreign...................................... 6,521 7,011 14,953
---------- ---------- --------
$ 400,778 $ 374,904 $525,297
========== ========== ========
Investments in hotel properties, net:
U.S.......................................... $2,850,348 $2,876,909
Foreign...................................... 56,153 59,384
---------- ----------
$2,906,501 $2,936,293
========== ==========
Comprehensive Income--FAS No. 130, "Reporting Comprehensive Income,"
requires an enterprise to display comprehensive income and its components in a
financial statement to be included in an enterprise's full set of annual
financial statements or in the notes to financial statements. Comprehensive
income represents a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events for the period
other than transactions with owners in their capacity as owners. Comprehensive
income of the Company includes net income and other comprehensive income from
foreign currency items.
Cumulative Effect of Accounting Change--In April 1998, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires that
all non-governmental entities expense costs of start-up activities, including
organizational costs, as those costs are incurred and requires the write-off
of any unamortized balances upon implementation. SOP No. 98-5 is effective for
financial statements issued for periods beginning after December 15, 1998. The
Company chose to adopt SOP No.98-5 effective July 1, 1998. The cumulative
effect of this accounting change was a charge against income for the year
ended December 31, 1998 of $921 (net of tax benefit of $564).
New Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity recognize
all derivatives as either assets or liabilities in statements of financial
position and measure those instruments at fair value. In June 1999, the FASB
issued SFAS No. 137 which amended SFAS No. 133 to defer the effective date to
all fiscal quarters of fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS No. 138 which provides additional guidance and
amendments to SFAS No. 133. The Company does not believe this new accounting
standard will have a material effect on its financial statements.
Reclassifications--Certain 1999 and 1998 amounts have been reclassified to
conform to 2000 presentation.
For the years ended December 31, 1999 and 1998, the Company has
reclassified distributions to common OP Unit holders as a component of
minority interest, resulting in an increase to retained earnings and a
corresponding decrease to minority interests of $13,294 and $3,567 as of
December 31, 1999 and 1998, respectively. This reclassification also results
in a decrease in dividends declared in the consolidated statements of
stockholders' equity of $9,727 and $3,567 for the years ended December 31,
1999 and 1998, respectively.
45
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
3. Investments in Hotel Properties
Investments in hotel properties consists of the following:
December 31,
---------------------
2000 1999
---------- ----------
Land.................................................. $ 317,072 $ 318,360
Buildings............................................. 2,461,089 2,378,318
Furniture, fixtures and equipment..................... 338,350 320,787
Construction-in-progress.............................. 77,219 101,258
---------- ----------
Total............................................... $3,193,730 $3,118,723
========== ==========
4. Investments in and Advances to Affiliates
The Company has ownership interests in certain unconsolidated joint ventures
and affiliated companies.
In 2000, the Company invested $2,100 in STS Hotel Net, a company that
provides high-speed internet portals to guest rooms. This investment is
accounted for using the cost method.
In 1999, the Company invested $40,000 in MeriStar Investment Partners, LP
("MIP"), a joint venture established to acquire upscale, full-service hotels.
The Company's investment is in the form of a preferred partnership interest.
The Company receives a 16% preferred return on its investment.
5. Note Receivable with Lessee
On March 1, 2000, OpCo repaid the remaining balance of $57,100 on its
revolving credit agreement with the Company upon closing its bank revolving
credit facility. At that time, OpCo's revolving credit agreement with the
Company was also amended to reduce the maximum borrowing limit from $75,000 to
$50,000. Any amounts outstanding will bear interest at the rate of the 30-day
London Interbank Offered Rate plus 650 basis points.
6. Long-Term Debt
Long-term debt consists of the following:
December 31,
---------------------
2000 1999
---------- ----------
New Credit Facility................................... $ 898,000 $ 908,000
New Secured Facility.................................. 324,554 328,954
Subordinated Notes.................................... 202,429 202,041
Convertible Notes..................................... 154,300 172,500
Mortgage Debt and Other............................... 59,036 65,276
---------- ----------
$1,638,319 $1,676,771
========== ==========
New Credit Facility--In conjunction with the Merger, the Company entered
into a $1,000,000 senior secured credit facility (the "New Credit Facility").
The New Credit Facility is structured as a $300,000, five-year term loan
facility; a $200,000, five-and-a-half year term loan facility; and a $500,000,
three-year revolving credit facility with two one-year optional extensions. The
New Credit Facility is secured by the Company's
46
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Common Stock and its general partnership, limited partnership and limited
liability company ownership interests in its subsidiaries. The interest rate
on the term loans and revolving facility ranges from 100 to 200 basis points
over the 30-day London Interbank Offered Rate ("LIBOR"), depending on certain
financial performance covenants and long-term senior unsecured debt ratings.
The weighted average interest rate on borrowings outstanding under the New
Credit Facility as of December 31, 2000 and 1999 was 8.3% and 8.4%,
respectively. As of December 31, 2000, the Company had $98.0 million available
under the New Credit Facility's revolving facility.
New Secured Facility--In 1999, the Company completed a $330,000 10-year
non-recourse financing ("New Secured Facility") secured by a portfolio of 19
hotels. The loan bears a fixed interest rate of 8.01% and matures in 2009. The
Company used most of the net proceeds to repay the amounts outstanding under
prior credit facilities.
Subordinated Notes--In 1999, the Company sold $55,000 aggregate principal
amount (issue price of $51,906, net of discount) of 8.75% senior subordinated
notes ("Subordinated Notes") due 2007, generating net proceeds of $51,219
million to the Company. The Company used the net proceeds to repay
indebtedness under its New Credit Facility and to invest in MIP. These notes
are unsecured obligations of the Company and provide for semi-annual payments
of interest on February 15 and August 15, commencing on August 15, 1999.
In 1997, the Company completed the offering of $150,000 aggregate principal
amount (issue price of $149,799, net of discount) of its 8.75% senior
subordinated notes due 2007 (the "Subordinated Notes"), generating net
proceeds to the Company of $144,620. The indenture pursuant to which the
Subordinated Notes were issued contains certain covenants, including
maintenance of certain financial ratios, reporting requirements, and other
customary restrictions. The Subordinated Notes are unsecured obligations of
the Company and provide for semi-annual payments of interest on February 15
and August 15, commencing on February 15, 1998.
Convertible Notes--In 1997, the Company completed the offering of $172,500
aggregate principal amount of its 4.75% convertible subordinated notes due
2004 (the "Convertible Notes"), generating net proceeds to the Company of
$167,581. The proceeds were used to repay outstanding indebtedness under a
prior credit facility and to finance certain hotel acquisitions. The
Convertible Notes are unsecured obligations of the Company and provide for
semi-annual payments of interest on April 15 and October 15, commencing on
April 15, 1998. During 2000, the Company repurchased $18,200 of its
Convertible Notes at a discount. This resulted in an extraordinary gain of
$3,116 ($3,054, net of tax effect).
Mortgage Debt--In connection with the Merger, the Company assumed mortgage
debt secured by seven hotels. The mortgage debt matures between 2001 and 2012
and the interest rates on the mortgages range from 7.5% to 10.5%.
Hedge Agreements--As of December 31, 2000, the Company has seven swap
agreements with notional principal amounts totaling $700,000. These swap
agreements provide hedges against the impact future interest rates have on the
Company's floating London Interbank Offered Rate ("LIBOR") debt instruments.
The swap agreements effectively fix the 30-day LIBOR between 6.0% and 7.2%.
The swap agreements expire between September 2001 and July 2003. For the year
ended December 31, 2000, the Company has received net payments of $3,081 on
these swaps and other similar swaps that expired during the year.
In anticipation of the August 1999 completion the New Secured Facility, the
Company entered into two separate hedge transactions during July 1999. Upon
completion of the New Secured Facility, the Company terminated the underlying
treasury lock agreements, resulting in a net payment to the Company of $5,100.
This
47
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
amount was deferred and is being recognized as a reduction to interest expense
over the life of the underlying debt. As a result, the effective interest rate
on the New Secured Facility is 7.76%.
Additionally, in anticipation of the August 1997 offering of $150,000
aggregate principal amount of its 8.75% senior subordinated notes due 2007
(the "Subordinated Notes"), the Company entered into separate hedge
transactions during June and July 1997. Upon completion of the Subordinated
Notes offering, the Company terminated the underlying swap agreements,
resulting in a net payment to the Company of $836. This amount was deferred
and is being recognized as a reduction to interest expense over the life of
the underlying debt. As a result, the effective interest rate on the
Subordinated Notes is 8.69%.
As of December 31, 2000, after consideration of the hedge agreements
described above, the Company has fixed the effective interest rate on 88% of
its debt and its overall weighted average interest rate is 7.93%.
Future Maturities--Aggregate future maturities of the above obligations are
as follows:
2001.............................................................. $ 28,288
2002.............................................................. 47,897
2003.............................................................. 667,589
2004.............................................................. 361,168
2005.............................................................. 9,265
Thereafter........................................................ 524,112
----------
$1,638,319
==========
Management has determined that the fair value of the outstanding balance of
the Company's long-term debt approximates $1,589,311 at December 31, 2000.
7. Income Taxes
The Company's income taxes were allocated as follows:
2000 1999 1998
------ ------ -------
Taxes on income before gain on sale of assets,
extraordinary gain (loss) and cumulative effect of
accounting change................................. $2,028 $2,102 $15,699
Taxes on gain on sale of assets.................... 70 -- --
Tax liability or (benefit) on extraordinary gain
(loss)............................................ 62 (93) (2,083)
Tax benefit on cumulative effect of accounting
change............................................ -- -- (564)
------ ------ -------
$2,160 $2,009 $13,052
====== ====== =======
The Company's effective income tax rate differs from the federal statutory
income tax rate as follows:
2000 1999 1998
----- ----- -----
Statutory tax rate................................. 35.0 % 35.0 % 35.0 %
Effect of REIT dividends paid deduction............ (35.0) (35.0) (35.0)
Effect of federal taxes in pre-REIT period......... -- -- 17.9
State and local taxes.............................. 1.7 1.7 2.1
Difference in effective rate on foreign
subsidiaries...................................... 0.3 0.3 2.8
Other.............................................. -- -- 0.2
----- ----- -----
2.0 % 2.0 % 23.0 %
===== ===== =====
48
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The components of income tax expense related to income before gain on sale
of assets, extraordinary gain(loss) and cumulative effect of accounting change
are as follows:
2000 1999 1998
------ ------ -------
Current:
Federal............................................. $ -- $ -- $14,873
State............................................... 800 1,020 3,771
Foreign............................................. 433 190 1,500
------ ------ -------
1,233 1,210 20,144
Deferred:
Federal............................................. -- -- (3,546)
State............................................... 685 842 (899)
Foreign............................................. 110 50 --
------ ------ -------
795 892 (4,445)
------ ------ -------
$2,028 $2,102 $15,699
====== ====== =======
The tax effects of the principal temporary differences that give rise to
the Company's net deferred tax liability are as follows:
December 31,
---------------
2000 1999
------- ------
Accelerated depreciation.................................... $ 2,611 $1,846
Fair value of hotel assets acquired......................... 6,800 6,800
Allowance for doubtful accounts............................. (30) (30)
Accrued vacation............................................ (15) (15)
Accrued expenses............................................ 482 482
Other....................................................... 292 262
------- ------
Net deferred tax liability.................................. $10,140 $9,345
======= ======
There is no valuation allowance for deferred tax assets as of December 31,
2000 or 1999 as management believes it is more likely than not that these
deferred tax assets will be fully realized.
In conjunction with the Merger and related transactions, the Company had
several significant events that affect income tax-related balances for the
year ended December 31, 2000 and 1999. These events are summarized below:
. REITs are subject to federal income taxes in certain instances for asset
dispositions occurring within 10 years of electing REIT status. The
Company does not expect to incur federal tax liability resulting from the
disposition of assets with built-in gain. The 2000 asset dispositions
were not subject to the built-in gain rules.
. As described above, for purposes of preparing the Company's financial
statements, the Company established a new accounting basis for AGH's
assets and liabilities based on their fair values. In accordance with
generally accepted accounting principles, the Company has provided a
deferred income tax liability for the estimated future tax effect of
differences between the accounting and tax bases of assets acquired from
AGH. This deferred income tax liability, related to future state and
local income taxes, is estimated as $6,800, based on information
available at the date of the Merger and subsequently.
49
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
8. Stockholders' Equity and Minority Interests
Common Stock Transactions--On March 15, 1998, CapStar and AGH entered into
the Merger Agreement. Pursuant to the Merger, CapStar shareholders received
one share each in the Company and OpCo, for each CapStar share owned. AGH
shareholders received 0.8475 shares of the Company for each AGH share owned.
To effect the Merger, the Company issued 20,607,611 shares valued at $755,907
to former AGH shareholders.
CapStar also distributed on a pro rata basis to its stockholders all of the
capital stock of OpCo, which consisted of CapStar's hotel operations
(including leased hotels) and management business. In conjunction with the
Spin-Off, the Company distributed $23,745 of cash and $28,565 of net assets to
the new shareholders of OpCo.
During the 1999 Annual Meeting of Stockholders, the shareholders authorized
100,000,000 shares of preferred stock, par value $0.01 per share, of the
Company to be issued from time to time with such rights, preferences and
priorities as the Board of Directors shall designate.
In September 1999, the Company's Board of Directors authorized the
repurchase of up to five million shares of its Common Stock from time to time
in open market or privately negotiated transactions. As of December 31, 2000
the Company has repurchased a total of 4,083,204 shares for $72,354.
In May 2000, the Company implemented a stock purchase plan that allowed
eligible employees to purchase the Company's common stock at a discount to
market value. The Company had reserved 500,000 shares of common stock for
issuance under this plan.
OP Units--Substantially all of the Company's assets are held indirectly by
and operated through MeriStar Hospitality Operating Partnership, L.P. (the
"Operating Partnership"), the Company's subsidiary operating partnership.
The Operating Partnership's partnership agreement provides four classes of
partnership interests ("OP Units"): Common OP Units, Class B OP Units, Class C
OP Units and Class D OP Units. Common OP Units and Class B OP Units receive
quarterly distributions per OP Unit equal to the dividend paid on each share
of the Company's Common Stock. Class C OP Units receive a non-cumulative,
quarterly distribution equal to $0.5575 per Class C OP Unit until such time as
the dividend rate on the Company's Common Stock exceeds $0.5575 whereupon the
Class C OP Units automatically convert into Common OP Units. Class D OP Units
pay a 6.5% cumulative annual preferred return based on an assumed price per
common share of $22.16, compounded quarterly to the extent not paid on a
current basis, and are entitled to a liquidation preference of $22.16 per
Class D OP Unit. The Company may redeem them at any time after April 1, 2000
at a price of $22.16 per share for cash or, at the Company's option, for
shares of common stock having a value equal to the redemption price. The
holders have the option to redeem the Class D OP Units at any time after April
1, 2004 for cash or, at the holders option, for shares of common stock having
a value equal to $22.16. All net income earned and capital proceeds received
by the Operating Partnership, after payment of the annual preferred return
and, if applicable, the liquidation preference, are shared by the holders of
the Common OP Units.
During 1999, 65,875 Common OP Units were issued to partially finance the
purchase of a hotel and 974,588 Common OP units were issued as a conditional
component of a purchase agreement for a hotel purchased in 1998. During 1998,
962,858 Common and Class B OP Units were issued to partially finance the
purchases of certain hotels and 3,305,175 Common OP Units were issued to
former holders of AGH OP Units. During 1997, the Company issued 1,483,759
Common and Class B OP Units and 392,157 Class D OP Units to partially finance
the purchases of both certain hotels and lease contracts on hotels.
50
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
On March 21, 2000, June 21, 2000, September 25, 2000 and December 20, 2000,
the Company declared its first, second, third and fourth quarter dividends,
respectively, equivalent to an annual rate of $2.02 per share of Common Stock
and OP Unit in the Operating Partnership. The amount of the dividend for each
quarter was $0.505 per share of Common Stock and OP Unit and was paid on April
28, 2000, July 31, 2000, October 31, 2000 and January 31, 2001, respectively.
On March 17, 1999, June 21, 1999, September 15, 1999 and December 6, 1999,
the Company declared its first, second, third and fourth quarter dividends,
respectively, equivalent to an annual rate of $2.02 per share of Common Stock
and OP Unit in the Operating Partnership. The amount of the dividend for each
quarter was $0.505 per share of Common Stock and OP Unit and was paid on April
30, 1999, July 30, 1999, October 29, 1999 and January 31, 2000, respectively.
On September 2, 1998 and November 4, 1998, respectively, the Company
declared its third and fourth quarter dividends, equivalent to an annual rate
of $2.02 per share of Common Stock and OP Unit in the Operating Partnership.
The third quarter dividend was paid on a prorated basis from August 4, 1998
(the first day of operations following the Merger) through September 30, 1998.
The amount of the dividend was $0.31837 per share of Common Stock and OP Unit
and was paid on October 30, 1998. The fourth quarter dividend of $0.505 per
share of Common Stock and OP Unit and was paid on January 29, 1999.
51
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
9. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for income before
extraordinary loss and cumulative effect of accounting change ("EPS"):
Year Ended December 31,
--------------------------
2000 1999 1998
-------- -------- -------
Basic EPS Computation:
Net income before extraordinary gain(loss) and
cumulative effect of accounting change........... $102,807 $103,496 $48,708
Dividends paid on unvested restricted stock....... (1,168) -- --
-------- -------- -------
Income available to common shareholders........... 101,639 103,496 48,708
Weighted average number of shares of Common Stock
outstanding...................................... 45,958 47,276 33,653
-------- -------- -------
Basic EPS before extraordinary gain(loss) and
cumulative effect of accounting change........... $ 2.21 $ 2.19 $ 1.45
======== ======== =======
Diluted EPS Computation:
Income available to common shareholders........... $101,639 $103,496 $48,708
Minority interest, net of tax..................... 554 10,143 2,633
Interest on convertible debt, net of tax.......... 7,338 8,137 --
Dividends on unvested restricted stock............ 254 -- --
-------- -------- -------
Adjusted net income............................... $109,785 $121,776 $51,341
-------- -------- -------
Weighted average number of shares of Common Stock
outstanding...................................... 45,958 47,276 33,653
Common Stock equivalents:
Stock options................................... 208 102 383
OP Units........................................ 441 5,205 2,624
Convertible debt................................ 4,612 5,066 --
Restricted stock................................ 176 -- --
-------- -------- -------
Total weighted average number of diluted shares of
Common Stock outstanding......................... 51,395 57,649 36,660
-------- -------- -------
Diluted EPS before extraordinary gain(loss) and
cumulative effect of accounting change........... $ 2.14 $ 2.11 $ 1.40
======== ======== =======
In certain years, the effects of certain OP Units and convertible debt were
not included in the computation of diluted EPS as their effect was anti-
dilutive.
10. Related-Party Transactions
Pursuant to an intercompany agreement, the Company and OpCo provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, OpCo has a right of
first refusal to become the lessee of any real property acquired by the
Company. OpCo also may provide the Company with certain services including
administrative, renovation supervision, corporate, accounting, finance,
insurance, legal, tax, information technology, human resources, acquisition
identification and due diligence, and operational services, for which OpCo is
compensated in an amount that the Company would be charged by a third party
for comparable services. During the years ended December 31, 2000, 1999 and
1998, the Company paid OpCo $1,165, $1,600 and $781 respectively, for such
services.
52
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Summarized financial information of the Company's significant lessee, OpCo,
is as follows:
2000 1999
---------- ----------
Balance sheet data:
Total assets.......................................... $ 339,118 $ 258,931
Total liabilities..................................... $ 254,673 $ 179,168
Operating data:
Revenue............................................... $1,411,619 $1,292,114
Net income............................................ $ (9,380) $ 6,685
OpCo has a revolving credit facility with the Company. On March 1, 2000,
OpCo repaid the remaining balance of $57,100 on its revolving credit agreement
with the Company upon closing its bank revolving credit facility. At this
time, the revolving credit agreement was amended to reduce the maximum
borrowing limit from $75,000 to $50,000 and the interest rate on the facility
was changed from LIBOR plus 350 basis points to LIBOR plus 650 basis points.
During 2000, 1999 and 1998, the Company earned interest of $955, $4,907, and
$1,967, respectively, from this facility. There were no amounts outstanding
under this facility at December 31, 2000.
In order for AGH to qualify as a REIT prior to the Merger, AGH's operating
partnership sold certain personal property relating to certain of the hotels
acquired by AGH in connection with its initial public offering to AGH Leasing,
L.P. (which has since come under the control of OpCo) for $315, which amount
was paid by issuance of a promissory note to AGH's operating partnership. The
note was transferred to the Company in connection with the Merger. The
promissory note bears interest at the rate of 10.0% per annum and requires the
payment of quarterly installments of principal and interest over a five-year
period ending on July 31, 2000. This note was repaid during 2000.
Certain members of management and their respective affiliates owned equity
interests relating to a hotel which was acquired by the Company in January
1999. Such persons and affiliates received an aggregate of $1,488 of the
Company's OP Units in exchange for such interests in the hotel.
Certain members of management and their respective affiliates owned equity
interests relating to a hotel which was acquired by AGH in November 1997. Such
persons and affiliates received an aggregate of $13,650 in operating
partnership units in AGH's operating partnership ("AGH OP Units") in exchange
for such interests in the hotel; which converted to 11,568 OP Units at the
Merger. The AGH OP Units were converted into 11,568 shares of Common Stock in
December 1998.
Of the $150,000 aggregate principal amount of Subordinated Notes sold by
the Company in August 1997, $50,000 principal amount was sold at a price of
97.866% to an affiliate of Oak Hill Capital Partners. One of the principal
stockholders of Oak Hill is a director of the Company. The Subordinated Notes
purchased are identical to those purchased by third parties, including voting
rights.
11. Stock-Based Compensation
Stock Options
At the date of the Merger, CapStar had outstanding approximately 1,758,000
options (the "CapStar Options") under an equity incentive plan. As a result of
the Merger, all holders of CapStar Options received one option in the Company
and one option of OpCo, and the original exercise price of the CapStar Options
was allocated between the two companies. In addition, approximately 1,060,000
of the CapStar Options became fully vested as of the Merger date.
53
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In connection with the Merger, a new equity incentive plan (the "Equity
Incentive Plan") was adopted. This plan authorizes 4,549,561 shares of common
stock to be awarded. Awards may be granted to officers or other key employees
of the Company or an affiliate. These shares are exercisable in three annual
installments and expire ten years from the grant date.
In addition, the Company adopted a new equity incentive plan for non-
employee directors (the "Directors' Plan"). The Directors' Plan authorizes up
to 125,000 options to be awarded. These shares are exercisable in three annual
installments and expire ten years from the grant date. As of December 31, 2000,
115,000 options had been awarded.
Stock option activity for 2000, 1999 and 1998 is as follows:
Equity Incentive Plan Directors' Plan
----------------------- --------------------
Number
Number of Average of Average
Shares Option Price Shares Option Price
--------- ------------ ------- ------------
Balance, January 1, 1998......... 1,601,406 $26.28 -- $ --
Granted........................ 2,171,796 24.78 45,000 21.38
Exercised...................... (37,823) 17.45 -- --
Forfeited...................... (32,000) 29.44 -- --
--------- ------ ------- ------
Balance, December 31, 1998....... 3,703,379 24.80 45,000 21.38
Granted........................ 1,015,750 19.37 35,000 23.63
Exercised...................... (94,012) 15.64 -- --
Forfeited...................... (264,064) 27.87 -- --
--------- ------ ------- ------
Balance, December 31, 1999....... 4,361,053 23.56 80,000 22.36
Granted........................ 584,875 16.13 35,000 19.00
Exercised...................... (47,153) 17.26 -- --
Forfeited...................... (113,441) 28.62 -- --
--------- ------ ------- ------
Balance, December 31, 2000....... 4,785,334 $22.68 115,000 $21.34
========= ====== ======= ======
Shares exercisable at December
31, 1998........................ 2,231,072 $24.63 -- $ --
========= ====== ======= ======
Shares exercisable at December
31, 1999........................ 2,577,620 $24.53 15,000 $21.38
========= ====== ======= ======
Shares exercisable at December
31, 2000........................ 3,482,816 $23.99 26,667 $22.56
========= ====== ======= ======
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
exercise prices outstanding Life Price exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$14.88 to $19.19 2,013,572 7.59 $17.18 1,051,410 $16.59
$19.75 to $25.31 1,240,502 7.05 21.63 878,873 21.69
$25.80 to $31.42 1,435,280 6.02 29.98 1,435,280 29.98
$31.51 to $32.08 210,980 7.00 32.05 143,920 32.04
--------- ---- ------ --------- ------
$14.88 to $32.08 4,900,334 6.97 $22.70 3,509,483 $23.98
========= ==== ====== ========= ======
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies
Accounting Principles Board Opinion No. 25 in accounting
54
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
for the Equity Incentive Plan and therefore no compensation cost has been
recognized for the Equity Incentive Plan.
Pro forma information regarding net income and diluted EPS is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 2000, 1999
and 1998:
2000 1999 1998
---------- ---------- ----------
Risk-free interest rate.................. 6.71% 6.70% 5.51%
Dividend rate............................ $2.02 $2.02 $2.02
Volatility factor........................ 0.27 0.31 0.35
Weighted average expected life........... 3.06 years 3.07 years 6.09 years
The Company's pro forma net income and diluted EPS as if the fair value
method had been applied were $98,216 and $2.07 for 2000, $98,273 and $2.02 for
1999, and $32,402 and $0.96 for 1998. The effects of applying SFAS No. 123 for
disclosing compensation costs may not be representative of the effects on
reported net income and diluted EPS for future years.
Other Stock Compensation
In conjunction with the Merger, holders of CapStar options were granted a
total of 150,000 shares of stock with a value of $3,205. This restricted stock
vests ratably over a three-year period.
As of December 31, 2000, the Company granted 586,500 shares of restricted
stock. This restricted stock vests ratably over a three-year or five-year
period. The issuance of restricted stock has resulted in $7,550 of unearned
stock-based compensation recorded as a reduction to stockholders' equity on
the Company's consolidated balance sheet as of December 31, 2000.
On March 29, 2000 the Company issued 462,500 Profits-Only OP Units to
certain of the Company's executive officers and executive officers of OpCo
pursuant to the Profits-Only Operating Partnership Units Plan which is filed
as an exhibit to this Form 10-K. The units vest over three years based on
achieving certain operating performance criteria and upon the occurrence of
certain other events.
12. Commitments and Contingencies
The Company leases land at certain hotels from third parties. Certain
leases contain contingent rent features based on gross revenues at the
respective property. Future minimum lease payments required under these
operating leases as of December 31, 2000 were as follows:
2001................................................................. $ 1,556
2002................................................................. 1,556
2003................................................................. 1,556
2004................................................................. 1,559
2005................................................................. 1,559
Thereafter........................................................... 57,396
-------
$65,182
=======
55
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Until January 1, 2001 the Company leased all of its hotels to OpCO and one
other lessee under noncancellable participating leases that expire from 2009
to 2011. Beginning January 1, 2001, the Company will lease eight hotels to one
lessee under non cancelable participating leases that expire in 2009. The
Company also leases certain office, retail and parking space to outside
parties under non-cancelable operating leases with initial or remaining terms
in excess of one year. Future minimum rental receipts under these leases as of
December 31, 2000 were as follows:
2001................................................................ $ 20,289
2002................................................................ 19,801
2003................................................................ 18,937
2004................................................................ 18,590
2005................................................................ 16,945
Thereafter.......................................................... 63,428
--------
$157,990
========
In the course of the Company's normal business activities, various
lawsuits, claims and proceedings have been or may be instituted or asserted
against the Company. Based on currently available facts, management believes
that the disposition of matters that are pending or asserted will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
13. Acquisitions and Dispositions
During 2000, the Company sold three limited service hotels and received
proceeds of $24,148. This resulted in a gain on sale of assets of $3,495
($3,425, net of tax). The company also purchased a full service hotel for
$19,400. Of the $19,400, $11,400 was paid in cash and $8,000 will be paid from
the hotel's future cash flow within the next five years. The acquisition was
funded using existing cash and borrowings on the New Credit Facility.
During 1999, the Company acquired one hotel for a purchase price of $10,642
of cash and $1,488 of OP Units. The acquisition was funded using existing cash
and borrowings on the New Credit Facility. The Company also sold 2 hotels
during 1999 for a total price of $8,900. The resulting gain on the sales was
immaterial.
During 1998, the Company acquired 70 hotels (containing 17,332 rooms), of
which 53 were acquired pursuant to the Merger. The Company purchased AGH for
approximately $1,306,000 through the issuance of approximately 23,913,000
shares of Common Stock and OP Units in the Company's subsidiary operating
partnership. The total purchase price for the remaining 17 acquired hotels
during 1998 was $549,068 of cash and $16,932 of OP Units. The cash portions of
these acquisitions were funded through borrowings on the New Credit Facility
and a prior credit facility.
The following unaudited pro forma information is presented as if the
Merger, the Spin-Off and all 117 hotels owned at December 31, 1998 had been
acquired at the beginning of 1998. The pro forma information is provided for
informational purposes only. It is based on historical information and does
not necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the Company. Pro
forma information for 1998 for total revenue, net income and diluted EPS is
$332,632, $96,232 and $2.05, respectively.
56
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
14. Quarterly Financial Information (Unaudited)
The following is a summary of the Company's quarterly results of
operations:
2000 1999
---------------------------------- ---------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- -------- -------- ------- ------- -------- --------
Total revenue........... $67,100 $81,539 $117,631 $134,508 $64,093 $74,055 $103,214 $133,542
Total operating
expenses............... 41,698 43,631 42,506 43,769 39,521 38,687 37,727 41,904
Net operating income.... 25,402 37,908 75,125 90,739 24,572 35,368 65,487 91,638
Income before
extraordinary (loss)
gain................... (3,426) 10,424 41,259 54,550 267 7,179 37,709 58,341
Net (loss) income....... (372) 10,424 41,259 54,550 267 7,179 33,177 58,341
Diluted (loss) earnings
per share.............. $ (0.01) $ 0.22 $ 0.83 $ 1.13 $ -- $ 0.15 $ 0.67 $ 1.14
15. Supplemental Cash Flow Information
2000 1999 1998
-------- ------- ----------
Cash paid for interest and income taxes:
Interest, net of capitalized interest of $8,613,
$12,540 and $5,182, respectively............... $120,539 $93,491 $ 48,156
Income taxes.................................... 874 1,261 18,591
Non-cash investing and financing activities:
Deferred financing costs written off............ 334 -- --
Long-term debt assumed in purchase of property
and equipment.................................. -- -- 543
OP Units issued in purchase of property and
equipment...................................... -- 1,488 16,932
Redemption of OP Units.......................... 24 29,412 31,430
Dividends reinvested............................ 91 -- --
Issuance of restricted stock.................... 10,620 -- --
Deferred purchase price......................... 8,000 -- --
Book value of assets distributed to spun-off
affiliate...................................... -- -- $ 41,449
Book value of liabilities distributed to spun-
off affiliate.................................. -- -- (11,768)
Book value of debt distributed to spun-off
affiliate...................................... -- -- (1,116)
Fair value of assets acquired in Merger......... -- -- $1,306,018
Fair value of liabilities assumed in Merger..... -- -- (26,167)
Fair value of debt assumed in Merger............ -- -- (523,944)
16. Subsequent Event
On January 26, 2001, the Company sold $300,000 of 9.0% senior notes due
2008 and $200,000 of 9.13% senior notes due 2011 (collectively the "Senior
Unsecured Notes"). The notes are unsecured obligations of the Company and a
number of its subsidiaries guarantee payment of principal and interest on the
notes on a senior, unsecured basis. The net proceeds from the sale of $492,000
were used to repay amounts outstanding under the New Credit Facility and to
make payments to terminate certain swap agreements that hedged variable
interest rates of the loans that were repaid.
In conjunction with the sales of the Senior Unsecured Notes, the Company
terminated three of the seven swap agreements with notional amounts totaling
$300,000. These swap agreements were designated to the New Credit Facility
term loans that were repaid with the proceeds from the sale. The Company made
payments totaling $9,297 to terminate these swap agreements.
57
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(dollars in thousands)
Initial cost Costs subsequent
to Company to acquisition Gross amount at end of year
-------------- ------------------- --------------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
----------- ------- ----- -------- ------- ---------- -------- ---------- ----------- --------- -------- ----
Hotel Assets:
Salt Lake Airport
Hilton, UT............ -- $ 770 $12,828 $ -- $ 2,827 $ 770 $ 15,655 $ 2,184 1980 3/3/95 40
Radisson Hotel,
Schaumburg, IL........ -- 1,080 5,131 -- 2,282 1,080 7,413 908 1979 6/30/95 40
Sheraton Hotel,
Colorado Springs, CO.. (1) 1,071 14,592 1 3,728 1,072 18,320 2,387 1974 6/30/95 40
Hilton Hotel, Bellevue,
WA.................... 48 5,211 6,766 -- 3,186 5,211 9,952 1,108 1979 8/4/95 40
Marriott Hotel,
Somerset, NJ.......... (1) 1,978 23,001 -- 4,390 1,978 27,391 3,357 1978 10/3/95 40
Westin Atlanta Airport,
Atlanta, GA........... -- 2,650 15,926 (300) 9,403 2,350 25,329 3,084 1982 11/15/95 40
Sheraton Hotel,
Charlotte, NC......... (1) 4,700 11,057 -- 3,906 4,700 14,963 1,739 1985 2/2/96 40
Radisson Hotel
Southwest, Cleveland,
OH.................... -- 1,330 6,353 -- 4,547 1,330 10,900 1,190 1978 2/16/96 40
Orange County Airport
Hilton, Irvine, CA.... (1) 9,990 7,993 -- 3,133 9,990 11,126 1,255 1976 2/22/96 40
The Latham Hotel,
Washington, DC........ -- 6,500 5,320 -- 3,889 6,500 9,209 915 1981 3/8/96 40
Hilton Hotel,
Arlington, TX......... (1) 1,836 14,689 79 2,828 1,915 17,517 2,018 1983 4/17/96 40
Hilton Hotel,
Arlington, VA......... -- 4,000 15,069 -- 496 4,000 15,565 1,716 1990 8/23/96 40
Southwest Hilton,
Houston, TX........... -- 2,300 15,665 -- 1,244 2,300 16,909 1,728 1979 10/31/96 40
Embassy Suites,
Englewood, CO......... (1) 2,500 20,700 -- 2,782 2,500 23,482 2,380 1986 12/12/96 40
Holiday Inn, Colorado
Springs, CO........... -- 1,600 4,232 -- 1,057 1,600 5,289 482 1974 12/17/96 40
Embassy Row Hilton,
Washington, DC........ -- 2,200 13,247 -- 2,240 2,200 15,487 1,482 1969 12/17/96 40
Hilton Hotel & Towers,
Lafayette, LA......... (1) 1,700 16,062 -- 1,808 1,700 17,870 1,712 1981 12/17/96 40
Hilton Hotel,
Sacramento, CA........ (1) 4,000 16,013 -- 1,678 4,000 17,691 1,768 1983 12/17/96 40
Santa Barbara Inn,
Santa Barbara, CA..... -- 2,600 5,141 -- 1,110 2,600 6,251 602 1959 12/17/96 40
San Pedro Hilton, San
Pedro, CA............. -- 640 6,047 -- 2,300 640 8,347 753 1989 1/28/97 40
Doubletree Hotel,
Albuquerque, NM....... (1) 2,700 15,075 -- 823 2,700 15,898 1,565 1975 1/31/97 40
Westchase Hilton &
Towers, Houston, TX... (1) 3,000 23,991 -- 1,531 3,000 25,522 2,485 1980 1/31/97 40
Four Points Hotel,
Cherry Hill, NJ....... -- 1,700 4,178 -- 2,181 1,700 6,359 553 1991 3/20/97 40
Sheraton Great Valley
Inn, Frazer, PA....... -- 2,150 11,653 11 2,712 2,161 14,365 1,190 1971 3/27/97 40
Holiday Inn Calgary
Airport, Calgary,
Alberta, Canada....... -- 751 5,011 (36) 1,428 715 6,439 1,261 1981 4/1/97 40
Sheraton Hotel Dallas,
Dallas, TX............ -- 1,300 17,268 -- 2,358 1,300 19,626 1,771 1974 4/1/97 40
Radisson Hotel Dallas,
Dallas, TX............ -- 1,800 17,580 -- 1,466 1,800 19,046 1,746 1972 4/1/97 40
Sheraton Hotel
Guildford, Surrey, BC,
Canada................ -- 2,366 24,008 (112) (258) 2,254 23,750 3,558 1992 4/1/97 40
Doubletree Guest
Suites, Indianapolis,
IN.................... 1,000 8,242 -- 893 1,000 9,135 824 1987 4/1/97 40
58
Initial cost to Costs subsequent
Company to acquisition Gross amount at end of year
--------------- ------------------- --------------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
----------- ------- ------ -------- ------- ---------- --------- ---------- -------------------- -------- ----
Ramada Vancouver
Centre, Vancouver,
BC, Canada.......... -- 4,400 7,840 (208) 2,160 4,192 10,000 1,605 1968 4/1/97 40
Holiday Inn Sports
Complex, Kansas
City, MO............ -- 420 4,742 -- 1,551 420 6,293 538 1975 4/30/97 40
Hilton Crystal City,
Arlington, VA....... -- 5,800 29,879 -- 1,036 5,800 30,915 2,681 1974 7/1/97 40
Doubletree Resort
Hotel, Cathedral
City, CA............ -- 1,604 16,141 -- 2,837 1,604 18,978 1,557 1985 7/1/97 40
Radisson Hotel &
Suites, Chicago,
IL.................. 4,870 39,175 -- 1,793 4,870 40,968 3,544 1971 7/15/97 40
Georgetown Inn,
Washington, DC...... -- 6,100 7,103 -- 1,486 6,100 8,589 655 1962 7/15/97 40
Embassy Suites Center
City,
Philadelphia, PA.... (1) 5,500 26,763 -- 1,457 5,500 28,220 2,382 1963 8/12/97 40
Doubletree Hotel
Austin, Austin, TX.. (1) 2,975 25,678 -- 2,501 2,975 28,179 2,295 1984 8/14/97 40
Radisson Plaza Hotel,
Lexington, KY....... 240 1,100 30,375 -- 6,254 1,100 36,629 2,876 1982 8/14/97 40
Jekyll Inn, Jekyll
Island, GA.......... -- -- 7,803 -- 3,218 -- 11,021 848 1971 8/20/97 40
Holiday Inn
Metrotown, Burnaby,
BC, Canada.......... -- 1,115 5,303 (53) 1,292 1,062 6,595 890 1989 8/22/97 40
Embassy Suites
International
Airport, Tucson,
AZ.................. -- 1,640 10,444 -- 2,214 1,640 12,658 901 1982 10/23/97 40
Westin Morristown,
NJ.................. -- 2,500 19,128 100 3,501 2,600 22,629 1,626 1962 11/20/97 40
Doubletree Hotel
Bradley
International
Airport, Windsor
Locks, CT........... -- 1,013 10,228 87 1,422 1,100 11,650 838 1985 11/24/97 40
Sheraton Hotel, Mesa,
AZ.................. -- 1,850 16,938 -- 2,315 1,850 19,253 1,382 1985 12/5/97 40
Metro Airport Hilton
& Suites, Detroit,
MI.................. -- 1,750 12,639 -- 1,311 1,750 13,950 995 1989 12/16/97 40
Marriott Hotel, Los
Angeles, CA......... -- 5,900 48,250 -- 7,208 5,900 55,458 3,956 1983 12/18/97 40
Austin Hilton &
Towers, TX.......... -- 2,700 15,852 -- 2,674 2,700 18,526 1,291 1974 1/6/98 40
Dallas Renaissance
North, TX........... -- 3,400 20,813 -- 3,550 3,400 24,363 1,708 1979 1/6/98 40
Houston Sheraton
Brookhollow Hotel,
TX.................. -- 2,500 17,609 -- 2,148 2,500 19,757 1,467 1980 1/6/98 40
Seelbach Hilton,
Louisville, KY...... -- 1,400 38,462 -- 5,550 1,400 44,012 3,017 1905 1/6/98 40
Midland Hilton &
Towers, TX.......... -- 150 8,487 -- 1,715 150 10,202 708 1976 1/6/98 40
Westin Oklahoma, OK.. -- 3,500 27,588 -- 1,683 3,500 29,271 2,159 1977 1/6/98 40
Sheraton Hotel,
Columbia, MD........ -- 3,600 21,393 -- 3,744 3,600 25,137 1,513 1972 3/27/98 40
Radisson Cross Keys,
Baltimore, MD....... -- 1,500 5,615 -- 1,492 1,500 7,107 417 1973 3/27/98 40
Sheraton Fisherman's
Wharf, San
Francisco, CA....... (1) 19,708 61,751 -- 2,985 19,708 64,736 4,356 1975 4/2/98 40
Hartford Hilton, CT.. -- 4,073 24,458 -- 2,824 4,073 27,282 1,642 1975 5/21/98 40
Holiday Inn Dallas
DFW AirportSouth,
TX.................. 12,634 3,388 28,847 -- 8 3,388 28,855 1,747 1974 8/3/98 --
Courtyard by Marriott
Meadowlands, NJ..... 3,979 -- 9,649 -- 45 -- 9,694 581 1993 8/3/98 40
Hotel Maison de
Ville, New Orleans,
LA.................. -- 292 3,015 -- (2) 292 3,013 181 1778 8/3/98 40
Hilton Hotel Toledo,
OH.................. -- -- 11,708 -- 38 -- 11,746 708 1987 8/3/98 40
Holiday Inn Select
Dallas DFW Airport
West, TX............ -- 947 8,346 -- 213 947 8,559 812 1974 8/3/98 40
59
Initial cost Costs subsequent
to Company to acquisition Gross amount at end of year
-------------- ------------------- -------------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
----------- ------- ----- -------- ------ ---------- -------- ---------- -------------------- -------- ----
Holiday Inn Select
New Orleans
International Airport,
LA.................... (1) 3,040 25,616 -- 2,150 3,040 27,766 1,610 1973 8/3/98 40
Crowne Plaza Madison,
WI.................... (1) 2,629 21,634 -- 210 2,629 21,844 1,384 1987 8/3/98 40
Wyndham Albuquerque
Airport Hotel, NM..... -- -- 18,889 -- 112 -- 19,001 1,146 1972 8/3/98 40
Wyndham San Jose
Airport Hotel, CA..... -- -- 35,743 -- 997 -- 36,740 2,194 1974 8/3/98 40
Holiday Inn Select
Mission Valley, CA.... 2,410 20,998 -- 176 2,410 21,174 1,282 1970 8/3/98 40
Sheraton Safari Hotel,
Lake Buena Vista, FL.. -- 4,103 35,263 -- 9,062 4,103 44,325 2,437 1985 8/3/98 40
Hilton Monterey, CA.... -- 2,141 17,666 -- 4,964 2,141 22,630 1,219 1971 8/3/98 40
Hilton Hotel Durham,
NC.................... -- 1,586 15,577 -- 2,390 1,586 17,967 973 1987 8/3/98 40
Wyndham Garden Hotel
Marietta, GA.......... -- 1,900 17,077 -- 611 1,900 17,688 1,038 1985 8/3/98 40
Westin Resort Key
Largo, FL............. -- 3,167 29,190 -- 340 3,167 29,530 1,814 1985 8/3/98 40
Doubletree Guest Suites
Atlanta, GA........... 8,678 2,236 18,514 -- 3,798 2,236 22,312 1,310 1985 8/3/98 40
Radisson Hotel
Arlington Heights,
IL.................... -- 1,540 12,645 -- 6,848 1,540 19,493 954 1981 8/3/98 40
Holiday Inn Select
Bucks County, PA...... -- 2,610 21,744 -- 2,773 2,610 24,517 1,335 1987 8/3/98 40
Hilton Hotel Cocoa
Beach, FL............. -- 2,783 23,076 -- 1,784 2,783 24,860 1,494 1986 8/3/98 40
Radisson Twin Towers
Orlando, FL........... -- 9,555 73,486 -- 8,209 9,555 81,695 4,701 1972 8/3/98 40
Crowne Plaza Phoenix,
AZ.................... -- 1,852 15,957 -- 3,448 1,852 19,405 1,145 1981 8/3/98 40
Hilton Airport Hotel
Grand Rapids, MI...... (1) 2,049 16,657 -- 539 2,049 17,196 1,033 1979 8/3/98 40
Marriott West Loop
Houston, TX........... (1) 2,943 23,934 -- 2,623 2,943 26,557 1,563 1976 8/3/98 40
Courtyard by Marriott
Durham, NC............ -- 1,406 11,001 -- 47 1,406 11,048 659 1996 8/3/98 40
Courtyard by Marriott,
Marina Del Rey, CA.... (1) 3,450 24,534 -- 359 3,450 24,893 1,531 1976 8/3/98 40
Courtyard by Marriott,
Century City, CA...... -- 2,165 16,465 -- 20 2,165 16,485 1,016 1986 8/3/98 40
Courtyard by Marriott,
Lake Buena Vista, FL.. -- -- 41,267 -- 2,438 -- 43,705 2,565 1972 8/3/98 40
Crowne Plaza, San Jose,
CA.................... (1) 2,130 23,404 (24) 1,501 2,106 24,905 1,501 1975 8/3/98 40
Doubletree Hotel
Westshore, Tampa, FL.. -- 2,904 23,476 -- 7,312 2,904 30,788 1,596 1972 8/3/98 40
Howard Johnson Resort
Key Largo, FL......... -- 1,784 12,419 -- 507 1,784 12,926 767 1971 8/3/98 40
Radisson Annapolis,
MD.................... -- 1,711 13,671 -- 1,945 1,711 15,616 829 1975 8/3/98 40
Holiday Inn Fort
Lauderdale, FL........ -- 2,381 19,419 -- 2,126 2,381 21,545 1,225 1969 8/3/98 40
Holiday Inn Madeira
Beach, FL............. -- 1,781 13,349 -- 26 1,781 13,375 811 1972 8/3/98 40
Holiday Inn Chicago
O'Hare, IL............ 19,080 4,290 72,631 -- 12,812 4,290 85,443 4,638 1975 8/3/98 40
Holiday Inn & Suites
Alexandria, VA........ -- 1,769 14,064 -- 52 1,769 14,116 882 1985 8/3/98 40
Hilton Clearwater, FL.. -- -- 69,285 -- 3,608 -- 72,893 4,298 1980 8/3/98 40
Radisson Rochester,
NY.................... -- -- 6,499 -- 2,520 -- 9,019 438 1971 8/3/98 40
Radisson Old Towne
Alexandria, VA........ -- 2,241 17,796 -- 3,690 2,241 21,486 1,223 1975 8/3/98 40
Ramada Inn Clearwater,
FL.................... -- 1,270 13,453 -- 89 1,270 13,542 1,612 1969 8/3/98 40
Richmond Hotel and
Conference Center..... -- 245 3,380 -- 58 245 3,438 712 1975 8/3/98 40
60
Costs
Initial cost to subsequent to
Company acquisition Gross amount at end of year
------------------- --------------- -----------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
----------- ------- -------- ---------- ----- -------- -------- ---------- --------- --------- -------- ----
Crowne Plaza Las
Vegas, NV........ -- 3,006 24,011 -- 15 3,006 24,026 2,593 1989 8/3/98 40
Crowne Plaza
Portland, OR..... 4,917 2,950 23,254 -- 58 2,950 23,312 2,623 1988 8/3/98 40
Four Points Hotel,
Mt. Arlington,
NJ............... 4,328 6,553 6,058 -- 64 6,553 6,122 645 1984 8/3/98 40
Ramada Inn Mahwah,
NJ............... -- 1,117 8,994 -- 121 1,117 9,115 898 1972 8/3/98 40
Ramada Plaza
Meriden, CT...... -- 1,247 10,057 -- 12 1,247 10,069 974 1985 8/3/98 40
Ramada Plaza
Shelton, CT...... 4,567 2,040 16,235 -- 28 2,040 16,263 1,529 1989 8/3/98 40
Sheraton
Crossroads
Mahwah, NJ....... -- 3,258 26,185 -- 188 3,258 26,373 2,785 1986 8/3/98 40
St. Tropez Suites,
Las Vegas, NV.... -- 3,027 24,429 -- 24 3,027 24,453 2,360 1986 8/3/98 40
Doral Forrestal,
Princeton, NJ.... -- 9,578 57,555 -- 7,135 9,578 64,690 3,726 1981 8/11/98 40
South Seas
Plantation,
Captiva, FL...... -- 3,084 83,573 -- 7,161 3,084 90,734 6,525 1975 10/1/98 40
Radisson Suites
Beach Resort,
Marco Island,
FL............... -- 7,120 35,300 -- 2,103 7,120 37,403 4,106 1983 10/1/98 40
Best Western
Sanibel Island,
FL............... -- 3,868 3,984 17 302 3,885 4,286 665 1967 10/1/98 40
The Dunes Golf &
Tennis Club,
Sanibel Island,
FL............... -- 7,705 3,043 9 21 7,714 3,064 246 1964 10/1/98 40
Sanibel Inn,
Sanibel Island,
FL............... -- 8,482 12,045 -- (74) 8,482 11,971 989 1964 10/1/98 40
Seaside Inn,
Sanibel Island,
FL............... -- 1,702 6,416 22 73 1,724 6,489 481 1964 10/1/98 40
Song of the Sea,
Sanibel Island,
FL............... -- 339 3,223 19 31 358 3,254 280 1964 10/1/98 40
Sundial Beach
Resort, Sanibel
Island, FL....... -- 320 12,009 -- 556 320 12,565 806 1975 10/1/98 40
Holiday Inn,
Madison, WI...... -- 4,143 6,692 -- 78 4,143 6,770 337 1965 1/11/99 40
Safety Harbor
Resort and Spa,
Sanibel Island,
FL............... -- 732 19,618 -- 1,538 732 21,156 1,547 1926 5/31/00 40
-------- ---------- ----- -------- -------- ---------- --------
$317,460 $2,207,320 $(388) $253,769 $317,072 $2,461,089 $188,647
======== ========== ===== ======== ======== ========== ========
- --------
(1) These properties secure the New Secured Facility which, as of December 31,
2000, had an outstanding balance of $324,554.
The components of hotel property and equipment are as follows:
Property and Accumulated
Equipment Depreciation
------------ ------------
Land............................................... $ 317,072 $ --
Building and Improvements.......................... 2,461,089 188,647
Furniture and equipment............................ 338,350 98,582
Construction in progress........................... 77,219 --
---------- --------
Total property and equipment..................... $3,193,730 $287,229
========== ========
61
A reconciliation of the Company's investment in hotel property and equipment
and related accumulated depreciation is as follows:
2000 1999 1998
---------- ---------- ----------
Hotel property and equipment
Balance, beginning of period............ $3,118,723 $2,957,543 $ 947,597
Acquisitions during period.............. 19,618 12,081 1,865,142
Improvements and construction-in-
progress............................... 78,911 160,294 144,804
Cost of real estate sold................ (23,522) (11,195) --
---------- ---------- ----------
Balance, end of period.................. 3,193,730 3,118,723 2,957,543
---------- ---------- ----------
Accumulated depreciation
Balance, beginning of period............ 182,430 83,797 26,858
Additions-depreciation expense.......... 107,363 99,297 56,939
Cost of real estate sold................ (2,564) (664) --
---------- ---------- ----------
Balance, end of period.................. 287,229 182,430 83,797
---------- ---------- ----------
Net hotel property and equipment, end of
period................................. $2,906,501 $2,936,293 $2,873,746
========== ========== ==========
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 405 of Regulation S-K with respect to
Directors and Executive Officers of the Company is incorporated herein by
reference to the sections entitled "Management" and "Principal Stockholders"
in our 2001 Annual Stockholder Meeting proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the sections entitled "Executive Compensation," "Compensation of Directors"
and "Stock Option Grants" in our 2001 Annual Stockholder Meeting proxy
statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the section entitled "Principal Stockholders" in our 2001 Annual
Stockholder Meeting proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" in
our 2001 Annual Stockholder Meeting proxy statement.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Index to Financial Statements and Financial Statement Schedules
1. Financial Statements
The Financial Statements included in the Annual Report on Form 10-K are
listed in Item 8.
2. Financial Statement Schedules
The Financial Statement Schedules included in the Annual Report on Form 10-
K are listed in Item 8.
3. Exhibits
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other documents
previously filed with the Commission.
Exhibit No. Description of Document
----------- -----------------------
3.1* Amended and Restated Articles of Incorporation of the Registrant
(Articles of Merger between American General Hospitality
Corporation and CapStar Hotel Company).
3.2* Amended and Restated By-laws of the Registrant.
4.1** Form of Share Certificate.
4.2***** Specimen Subordinated Note.
4.3***** Specimen Convertible Note (included in Exhibit 4.7).
4.4***** Indenture, dated as of August 19, 1997, between CapStar Hotel
Company and IBJ Schroder Bank & Trust Company, as Trustee.
4.5***** Second Supplemental Indenture, dated as of August 3, 1998, between
MeriStar Hospitality Corporation and IBJ Schroder Bank & Trust
Company, as Trustee.
4.6***** Indenture, dated as of October 16, 1997, between CapStar Hotel
Company and First Trust, National Association, as Trustee, (the
"Convertible Notes Indenture").
4.7***** Certificate dated October 16, 1997, pursuant to Section 3.1 of
Convertible Notes Indenture.
4.8***** First Supplemental Indenture, dated as of August 3, 1998, between
MeriStar Hospitality Corporation and U.S. Bank Trust, National
Association, as Trustee.
4.9**** Indenture, dated as of March 18, 1999, between MeriStar
Hospitality Corporation and IBJ Whitehall Bank & Trust Company, as
Trustee.
4.10**** Specimen Certificate of Outstanding Note (included in Exhibit 4.9
as Exhibit A).
4.11**** Specimen Certificate of Exchange Note.
4.12****** Form of MeriStar Hospitality Corporation Employee Stock Purchase
Plan.
4.13 First Supplemental Indenture, dated as of January 26, 2001,
between MeriStar Hospitality Corporation and The Bank of New York.
4.14 Indenture, dated January 26, 2001, between MeriStar Hospitality
Operating Partnership, L.P., MeriStar Hospitality Finance Corp.,
MeriStar Hospitality Corporation, and U.S. Bank Trust National
Association.
4.15 Third Supplemental Indenture, dated as of January 26, 2001,
between MeriStar Hospitality Corporation and The Bank of New York.
10.1*** Second Amended and Restated Agreement of Limited Partnership of
MeriStar Hospitality Operating Partnership, L.P. dated as of
August 3, 1998.
64
Exhibit No. Description of Document
----------- -----------------------
10.2*** Second Amended and Restated Senior Secured Credit Agreement dated
as of August 3, 1998.
10.3*** Loan Agreement made as of August 3, 1998 between MeriStar
Hospitality Corporation and its affiliates and Secore Financial
Corporation.
10.4* Form of MeriStar Incentive Plan.
10.5* Form of MeriStar Non-Employee Directors' Incentive Plan.
10.6* Form of Employment Agreement between MeriStar Hospitality
Corporation and Paul W. Whetsell.
10.7* Form of Employment Agreement between MeriStar Hospitality
Corporation and Steven D. Jorns.
10.8*** Form of Employment Agreement between MeriStar Hospitality
Corporation and Bruce G. Wiles.
10.9*** Form of Employment Agreement between MeriStar Hospitality
Corporation and John Emery.
10.10* Form of Exchange Rights Agreement, by and among MeriStar
Hospitality Corporation, MeriStar Hospitality Operating
Partnership, L.P., and the Persons set forth therein.
10.11* Operating Partnership, L.P. CMC Operating Company and CMC
Operating Partnership, L.P.
10.12* Form of Operating Lease.
10.13***** Loan Agreement, dated as of August 12, 1999, between MeriStar
Hospitality Operating Partnership, L.P. and Lehman Brothers
Holdings Inc. D/B/A Lehman Capital, a division of Lehman Brothers
Holdings Inc.
10.14******* Form of Profits-Only Operating Partnership Units Plan.
10.15 Amended Intercompany Agreement between MeriStar Hospitality
Corporation, MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hotel Lessee, Inc., MeriStar Hotels & Resorts, Inc. and
MeriStar H&R Operating Company L.P.
10.16 Registration Rights Agreement, dated as of January 26, 2001,
between MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hospitality Finance Corporation, MeriStar Hospitality
Corporation and certain subsidiaries of MeriStar Hospitality
Operating Partnership, L.P. and Lehman Brothers Inc. and SG Cowen
Securities Corporation.
10.17 Registration Rights Agreement, dated as of January 26, 2001,
between MeriStar Hospitality Operating Partnership, L.P. and
MeriStar Hospitality Finance Corporation, MeriStar Hospitality
Corporation and certain subsidiaries of MeriStar Hospitality
Operating Partnership, L.P. and Certain Other Parties.
12 Schedule Regarding the Computation of Ratios
21 Subsidiaries of the Company
23 Consent of KPMG LLP
24 Power of Attorney (see signature page)
- --------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-49611), filed with the Securities and Exchange
Commission on April 7, as amended.
** Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-66229), filed with the Securities and Exchange
Commission on October 28, as amended.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 001-11903), filed with the Securities and Exchange
Commission on March 2, 1999.
**** Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-78163) filed with the Securities and Exchange
Commission on May 10, 1999.
***** Incorporated by reference to the Company's Registration Statement on
Form 10-K (File No. 001-11903) filed with the Securities and Exchange
Commission on March 13, 2000.
****** Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 333-37888), filed with the Securities and Exchange
Commission on May 25, 2000.
******* Incorporated by reference to the Company's Registration Statement of
Form 10-Q (File No. 001-11903), filed with the Securities and Exchange
Commission on May 12, 2000.
B. Reports on Form 8-K
None.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MeriStar Hospitality Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Meristar Hospitality Corporation
/s/ Paul W. Whetsell
By: _________________________________
Paul W. Whetsell
Chief Executive Officer and
Chairman of the Board
Dated: March , 2001
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul W. Whetsell, Bruce G. Wiles and John
Emery, such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and revocation, for such person and in such person's
name, place and stead, in any and all capacities to sign any and all
amendments (including post-effective amendments) to this report filed pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, and to file the same with all exhibits thereto, and the other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and things requisite and
necessary to be done, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and the foregoing Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Paul W. Whetsell Chief Executive Officer March 5, 2001
______________________________________ and Chairman of the Board
Paul W. Whetsell of Directors (Principal
Executive Officer)
Vice Chairman of the Board March , 2001
______________________________________ of Directors
Steven D. Jorns
/s/ Bruce G. Wiles President and Director March 5, 2001
______________________________________
Bruce G. Wiles
/s/ John Emery Chief Operating Officer March 5, 2001
______________________________________ and Director (Principal
John Emery Financial and Accounting
Officer)
Director March , 2001
______________________________________
James F. Dannhauser
66
Signature Title Date
--------- ----- ----
/s/ Daniel L. Doctoroff Director March 5, 2001
______________________________________
Daniel L. Doctoroff
/s/ William S. Janes Director March 5, 2001
______________________________________
William S. Janes
Director March , 2001
______________________________________
H. Cabot Lodge III
/s/ James R. Worms Director March 5, 2001
______________________________________
James R. Worms
67