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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 the 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
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Commission File Number 1-14331
MERISTAR HOTELS & RESORTS, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 52-2101815
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 WISCONSIN AVENUE, N.W. 20007
WASHINGTON, D.C. (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 965-4455
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered:
------------------- -------------------------
Common Stock, par value $0.01 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 28, 2001, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$56,719,804.
The number of shares of the Registrant's common stock outstanding as of
March 28, 2001 was 37,136,307.
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.
PART I
ITEM 1. BUSINESS
THE COMPANY
We lease, manage and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, golf, and vacation membership markets. Our portfolio is diversified by
franchise and brand affiliations. As of December 31, 2000, we leased or managed
216 hotels with 47,313 rooms in 33 states, the District of Columbia, Canada,
Puerto Rico, and the U.S. Virgin Islands. In addition, we had approximately
3,200 apartments under lease in the United States, Canada, and the United
Kingdom at December 31, 2000.
We are the lessee, manager and operator of various hospitality-related
assets, including nearly all of the hotels owned by MeriStar Hospitality
Corporation. We are the largest independent hotel management company in the
United States, based on rooms under management. As of December 31, 2000, we
leased and/or managed 216 hotels containing 47,313 rooms. Of these hotels, we
(i) leased and managed 106 hotels owned by MeriStar Hospitality, containing
27,797 rooms, (ii) lease 51 additional hotels containing 7,344 rooms, and (iii)
manage an additional 59 hotels containing 12,172 rooms. The hotels we manage are
located throughout the United States and Canada, including most major
metropolitan areas and rapidly growing secondary cities. Our hotels include
hotels operated under nationally recognized brand names such as Hilton(R),
Sheraton(R), Westin(R), Radisson(R), Marriott(R), Doubletree(R), Embassy
Suites(R), and Holiday Inn(R). Our business strategy is to manage the
renovation, repositioning and operations of each property according to a
business plan specifically tailored to the characteristics of the property and
its market.
We lease and manage properties primarily within the upscale, full-service
and premium limited-service sector, and perform third-party management services
for owners of both sectors as well. Our management believes concentrating on the
upscale, full-service sector of the lodging industry is appropriate because this
sector is among the most attractive sectors available in today's current
hospitality market. This sector is attractive for several reasons. First, these
hotels appeal to a wide variety of customers, thus reducing the risk of
decreasing demand from any particular customer group. Secondly, such 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. Finally, full-service hotels require a greater depth of
management expertise than limited-service hotels, and we believe that our
superior management skills provide us with a significant competitive advantage
in their operation.
We have capitalized on our hospitality management experience and expertise
by continuing to secure additional management contracts and improving the
operating performance of the hotels under our management. Our senior management
team, with an average of more than 20 years of hospitality industry experience,
has successfully managed hotels in all segments of the lodging industry. We
attribute our management success to our ability to analyze each hotel as a
unique property and to identify particular cash flow growth opportunities
present at each hotel. Our principal operating objectives are to continue to
analyze each hotel as a unique property in order to generate higher revenue per
available room, increase average daily rate, and increase net operating income
while providing our hotel guests with high-quality service and value.
We also expect to capitalize on our hospitality management experience as
we continue to expand into related sectors of the hospitality industry, such as
managing golf courses, resorts and conference centers, and corporate
(extended-stay) housing. We believe portions of these sectors are currently
served by fragmented, relatively smaller management companies without the broad
range of management, operational, and financial resources we possess. By
bringing our expertise to other property management activities we believe we can
realize significant economic benefit for the owners/lessors of such properties
through increased profitability of the properties' operations. In addition,
we expect to expand our own brand, Doral, through a combination of licensing and
management agreements for hotels, resorts, conference centers, and golf courses.
During 2000, we entered into an additional 14 hospitality and leisure
management contracts. During 2000, we secured an additional golf course
management contract, and, as of December 31, 2000, we leased, managed or were
otherwise affiliated with 11 golf courses.
We have invested $10 million in MeriStar Investment Partners, a joint
venture with Oak Hill Capital Partners, L.P., established to acquire upscale,
full-service hotels. As of December 31, 2000, the joint venture had acquired 10
full service hotels throughout the United States. We manage all of these hotels.
Company Background
We were formed on August 3, 1998 when we were spun off by CapStar Hotel
Company. CapStar Hotel Company transferred or caused to be transferred certain
assets and liabilities constituting the hotel management and leasing business
operated by CapStar Hotel Company and its subsidiaries to our company, which was
a wholly owned subsidiary of CapStar Hotel Company. CapStar Hotel Company
distributed, on a share-for-share basis, to its stockholders of record on August
3, 1998, all of the outstanding capital stock of our company.
After the spin-off, pursuant to an agreement and plan of merger, dated as
of March 15, 1998, between American General Hospitality Corporation, a Maryland
corporation operating as a real estate investment trust, and certain of its
affiliates and CapStar Hotel Company and certain of its affiliates, CapStar
Hotel Company merged with American General Hospitality creating MeriStar
Hospitality. We then acquired 100% of the partnership interests in AGH Leasing,
Inc., the third party lessee of most of the hotels owned by American General
Hospitality, and substantially all of the assets and certain liabilities of
American General Hospitality Inc., the third-party manager of most of the hotels
owned by American General Hospitality. CapStar Hotel Company and American
General Hospitality Inc. were two of the fastest growing operators of upscale,
full-service hotels in North America, based on rooms
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under management.
In 1999, the Federal government enacted changes to the federal tax laws
governing real estate investment trusts. Those changes became effective on
January 1, 2001. Under those changes, MeriStar Hospitality is permitted to
create subsidiaries that lease the property they currently own and these
subsidiaries are taxable in a manner similar to subchapter C corporations.
Because of these changes in the tax laws, MeriStar Hospitality formed a number
of wholly owned taxable subsidiaries to which we have assigned the participating
leases on the 106 hotels we leased from MeriStar Hospitality, effective January
1, 2001. In connection with the assignment, we signed new management agreements
with the taxable subsidiaries of MeriStar Hospitality to manage the 106 hotels.
We have structured the management agreements to substantially mirror the
economics of the former leases.
THE INTERCOMPANY AGREEMENT
We are party to an intercompany agreement with MeriStar Hospitality. The
intercompany agreement provides that, for so long as the agreement remains in
effect, we are prohibited from making real property investments that a real
estate investment trust could make unless:
o MeriStar Hospitality is first given the opportunity, but elects not
to pursue the activities or investments;
o it is on land already owned or leased by us or subject to a lease or
purchase option in favor of us;
o we will operate the property under a trade name owned by us; or
o it is a minority investment made as part of a lease or management
agreement arrangement by us.
The intercompany agreement will generally grant us the right of first
refusal to become the manager of any real property acquired by MeriStar
Hospitality. This opportunity will be made available to us only if MeriStar
Hospitality determines that:
o consistent with its status as a real estate investment trust,
MeriStar Hospitality must enter into a management agreement with an
unaffiliated third party with respect to the property;
o we are qualified to be the manager of that property; and
o MeriStar Hospitality decides not to have the property operated by
the owner of a hospitality trade name under that trade name.
Services
We provide MeriStar Hospitality with certain services as MeriStar
Hospitality 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. MeriStar Hospitality compensates us for
services provided in an amount determined in good faith by us as the amount an
unaffiliated third party would charge MeriStar Hospitality for comparable
services.
Equity Offerings
If either we or MeriStar Hospitality desire to engage in a securities
issuance, the issuing party will give notice to the 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 a 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 (a) August
3, 2008, or (b) a change in our ownership or control.
3
Intercompany Loan
MeriStar Hospitality may lend us up to $50 million for general corporate
purposes pursuant to a revolving credit agreement. Amounts outstanding under the
facility bear interest at the 30-day London Interbank Offered Rate plus 650
basis points. At December 31, 2000, the interest rate was 13.19% and we had
no borrowings under the facility. As of March 29, 2001, we had $36.0 million of
borrowings outstanding under the facility at an interest rate of 11.58%
On February 29, 2000, we entered into a $100.0 million senior secured
revolving credit facility among a syndicate of banks. The senior secured credit
facility bears interest at the 30-day London Interbank Offered Rate plus 350
basis points and expires in 2002 with an optional one-year extension. We
borrowed $65 million to repay the then-outstanding borrowings under the then
existing $75 million revolving credit agreement with MeriStar Hospitality.
Upon execution of the senior secured credit facility, the MeriStar Hospitality
facility was amended to reduce the maximum borrowing limit from $75 to $50
million.
Other Recent Developments
On February 26, 2001, we mailed a proxy to our shareholders seeking
approval of a merger agreement providing for a merger of a wholly-owned
subsidiary of American Skiing Company, a Delaware corporation, with and into our
company and the other transactions contemplated by that merger agreement. On
March 22, 2001, we and the other parties to the merger agreement mutually agreed
to terminate the merger agreement. Each company cancelled its respective special
shareholder meeting, which was scheduled for March 26, 2001, to vote on the
merger. There will be no termination fees payable to any of the parties.
4
BUSINESS
Business Segments
We operate primarily within four significant segments of the hospitality
industry:
o Hospitality management;
o Corporate housing;
o Golf management; and
o Vacation ownership.
Each division is managed separately because of its distinctive products
and services. Hospitality management and corporate housing are reportable
operating segments. In 1999 and 1998, we were organized into three different
operating segments: upscale, full-service hotels; premium limited-service hotels
and inns; and resort properties. In 2000, we reorganized our operations into the
current operating divisions. Accordingly, we reclassified the segment
information for 1999 and 1998. We evaluate the performance of each division
based on earnings before interest, taxes, depreciation, and amortization. The
golf management and vacation ownership segments were not reportable segments in
fiscal 2000, 1999 or 1998.
The following table summarizes certain segment financial data as of and
for the year ended December 31 (amounts in thousands):
2000 1999 1998
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Hospitality Management
- ----------------------
Revenues ........................................ $ 1,341,358 $ 1,288,134 $ 554,911
Earnings (loss) before Interest, Taxes,
Depreciation and Amortization ................ (4,349) 23,871 10,004
Total Assets .................................... 160,736 109,592 106,631
Corporate Housing
- -----------------
Revenues ........................................ $ 64,910 -- --
Earnings before Interest, Taxes, Depreciation and
Amortization ................................. 4,650 -- --
Total Assets .................................... 22,878 -- --
Revenues for foreign operations for the year ended December 31 were as follows
(amounts in thousands):
2000 1999 1998
------- ------- -------
Canada $27,724 $21,477 $ 8,865
======= ======= =======
United Kingdom $16,152 $ -- $ --
======= ======= =======
HOSPITALITY MANAGEMENT
We lease, manage and operate a portfolio of hospitality properties and
provide related services in the hotel, resort, and conference center markets. We
are the largest independent hotel management company in the United States, based
on rooms under management. As of December 31, 2000, we leased or managed 216
hotels containing 47,313 rooms.
Our properties are located throughout the United States and Canada,
including most major metropolitan areas and rapidly growing secondary cities.
Many of the properties are operated under nationally recognized brand names such
as Hilton(R), Sheraton(R), Westin(R), Radisson(R), Marriott(R), Doubletree(R),
Embassy Suites(R), and Holiday Inn(R). Our business strategy is to manage the
renovation, repositioning and operations of each property according to a
business plan specifically tailored to the characteristics of the property and
its market.
5
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc., a provider of corporate housing services in metropolitan
markets located in the United States, Canada and the United Kingdom. As of
December 31, 2000, our corporate housing division, which continues to be
operated under the BridgeStreet name, had approximately 3,200 apartments under
lease.
We expect to capitalize on our hospitality management experience as we
continue to expand into related sectors of the hospitality industry, such as
managing resorts, conference centers, and golf courses.
Expansion Strategy
We anticipate that we will continue to expand our portfolio by securing
additional management contracts. We attempt to identify properties that are
promising management candidates located in markets with economic, demographic
and supply dynamics favorable to hotel operators. Through our extensive due
diligence process, we select those expansion targets where we believe selective
capital improvements and intensive management will increase the property's
ability to attract key demand segments, enhance property operations and increase
long-term value. In order to evaluate the relative merits of each investment
opportunity, senior management and individual operations teams create detailed
plans covering all areas of renovation and operation. These plans serve as the
basis for our expansion decisions and guide subsequent renovation and operating
plans.
We seek to manage properties that meet the following criteria:
Market Criteria
Economic Growth. We focus on metropolitan areas that are approaching, or have
already entered, periods of economic growth. Such areas generally show above
average growth in the business community as measured by job formation rates,
population growth rates, tourism and convention activity, airport traffic
volume, local commercial real estate occupancy, and retail sales volume. Markets
that exhibit these characteristics typically have strong demand for hotel
facilities and services.
Supply Constraints. We seek lodging markets with favorable supply dynamics for
property owners and operators, including an absence of current new hotel
development and barriers to future development such as zoning constraints, the
need to undergo lengthy local development approval processes and a limited
number of suitable sites. Other factors limiting the supply of new hotels are
the current lack of financing available for new development and the inability to
generate adequate returns on investment to justify new development.
Geographic Diversification. Our properties are located in 33 states across the
United States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands
and Canada. See "Properties" for additional information regarding our
properties. We seek to maintain a geographically diverse portfolio of managed
properties to offset the effects of regional economic cycles.
Hotel Criteria
Location and Market Appeal. We seek to operate hotels that are situated near
both business and leisure centers that generate a broad base of demand for hotel
accommodations and facilities. These demand generators include airports,
convention centers, business parks, shopping centers and other retail areas,
sports arenas and stadiums, major highways, tourist destinations, major
universities and cultural and entertainment centers with nightlife and
restaurants. The confluence of nearby business and leisure centers enables us to
attract both weekday business travelers and weekend leisure guests. Attracting a
balanced mix of business, group and leisure guests to the hotels helps to
maintain stable occupancy rates and high average daily rates.
Size and Facilities. We seek to operate hotels that contain 200 to 500 guest
rooms and include accommodations and facilities that are, or are capable of
being made, attractive to key demand segments such as business, group and
leisure travelers. These facilities typically include large, upscale guest
rooms, food and beverage facilities, extensive meeting and banquet space, and
amenities such as health clubs, swimming pools and adequate parking.
Potential Performance Improvements. We seek to operate underperforming hotels
where intensive management and selective capital improvements can increase
revenue and cash flow. These hotels represent opportunities where a systematic
management approach and targeted renovations should result in improvements in
revenue and cash flow.
We expect that our relationships throughout the industry will continue to
provide us with a competitive advantage in identifying, evaluating and managing
hotels that meet our criteria. We have a record of successfully managing the
renovation and repositioning of hotels, in situations with varying levels of
service, room rates and market types, and we plan to continue to manage such
renovation programs as we acquire new management contracts.
Operating Strategy
Our principal operating objectives are to generate higher revenue per available
room and to increase net operating income while
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providing our guests with high-quality service and value. We believe that
skilled management is the most critical element in maximizing revenue and cash
flow in properties, especially in upscale, full-service properties.
Our corporate headquarters carry out financing and investment activities
and provide services to support as well as monitor our on-site hotel operating
executives. Each of our executive departments, including Hotel Operations, Sales
and Marketing, Human Resources, Food and Beverage, Technical Services,
Information Technology, Development, Legal, Tax and Corporate Finance, is headed
by an executive with significant experience in that area. These departments
support decentralized decision-making by the hotel operating executives by
providing accounting and budgeting services, property management software and
other resources which cannot be economically maintained at the individual
properties.
Key elements of our management programs include the following:
Comprehensive Budgeting and Monitoring
Our operating strategy begins with an integrated budget planning process
that is implemented by individual on-site managers and monitored by our
corporate staff. Management sets targets for cost and revenue categories at each
of the properties based on historical operating performance, planned
renovations, operational efficiencies and local market conditions. On-site
managers coordinate with the corporate staff to ensure that such targets are
realistic. Through effective and timely use of our comprehensive financial
information and reporting systems, we are able to monitor actual performance and
rapidly adjust prices, staffing levels and sales efforts to take advantage of
changes in the market and to improve yield.
Targeted Sales and Marketing
We employ a systematic approach toward identifying and targeting segments
of demand for each property in order to maximize market penetration. Executives
at our corporate headquarters and property-based managers divide such segments
into smaller subsegments, typically ten or more for each property, and develop
narrowly tailored marketing plans to suit each such segment. We support each
property's local sales efforts with corporate sales executives who develop new
marketing concepts and monitor and respond to specific market needs and
preferences. These executives are active in implementing on-site marketing
programs developed in the central management office. We employ computerized
revenue yield management systems to manage each property's use of the various
distribution channels in the lodging industry. Management control over those
channels, which include franchisor reservation systems and toll-free numbers,
travel agent and airline global distribution systems, corporate travel offices
and office managers, and convention and visitor bureaus, enables us to maximize
revenue yields on a day-to-day basis. Sales teams are recruited locally and
receive incentive-based compensation bonuses. All of our sales managers complete
a highly developed sales training program.
Strategic Capital Improvements
We, and the owners of our properties, plan renovations primarily to
enhance a property's appeal to targeted market segments, thereby attracting new
customers and generating increased revenue and cash flow. For example, in many
of our properties, the banquet and meeting spaces have been or are intended to
be renovated and guest rooms have been upgraded with computer ports and
comfortable work spaces to better accommodate the needs of business travelers
and to increase average daily rates. Capital spending decisions will be based on
both strategic needs and potential rate of return on a given capital investment.
The owners of the properties are responsible for funding capital expenditures.
Selective Use of Multiple Brand Names
We believe that the selection of an appropriate franchise brand is
essential in positioning a property optimally within its local market. We select
brands based on local market factors such as local presence of the franchisor,
brand recognition, target demographics and efficiencies offered by franchisors.
We believe that our relationships with many major hotel franchisors place us in
a favorable position when dealing with those franchisors and allows us to
negotiate favorable franchise agreements with franchisors. We believe that our
growth in acquiring management contracts will further strengthen our
relationship with franchisors.
7
The following chart summarizes information with respect to the national
franchise affiliations of our properties as of December 31, 2000:
Leased Properties
(Includes Hotels Owned by
MeriStar Hospitality) Managed Properties
------------------------- -----------------------
Guest % of Guest % of
Franchise Rooms Hotels Rooms Rooms Hotels Rooms
- --------- ----- ------ ----- ----- ------ ------
Hilton(R) ................ 6,309 23 18.0% 1,628 6 13.4%
Sheraton(R) .............. 3,502 10 10.0% 1,514 5 12.4%
Radisson(R) .............. 3,460 12 9.8% 1,021 3 8.4%
Holiday Inn(R) ........... 2,754 13 7.8% 623 4 5.1%
Independent .............. 2,048 12 5.8% 1,216 10 10.0%
Hampton Inn(R) ........... 1,964 16 5.6% -- -- --
Doubletree(R) ............ 1,729 5 4.9% 488 2 4.0%
Courtyard by Marriott(R) . 1,642 9 4.7% 162 1 1.3%
Comfort Inn(R) ........... 1,293 9 3.7% 194 1 1.6%
Westin(R) ................ 1,289 4 3.7% 426 2 3.5%
Holiday Inn Select(R) .... 1,244 4 3.5% 284 1 2.3%
Marriott(R) .............. 1,211 3 3.4% 323 1 2.7%
Wyndham(R) ............... 849 3 2.4% 221 1 1.8%
Homewood Suites(R) ....... 795 7 2.3% -- -- --
Embassy Suites(R) ........ 728 3 2.1% 760 3 6.3%
Crowne Plaza(R) .......... 715 3 2.0% 318 1 2.6%
Doral(R) ................. 575 2 1.6% 280 1 2.3%
Hilton Garden Inn(R) ..... 474 3 1.4% 715 3 5.9%
Ramada(R) ................ 407 2 1.2% 309 2 2.5%
Doubletree Guest Suites(R) 292 2 0.8% -- -- --
Renaissance(R) ........... 289 1 0.8% -- -- --
Best Western(R) .......... 254 2 0.7% 75 1 0.6%
Comfort Suites(R) ........ 215 1 0.6% 238 2 2.0%
Four Points(R) ........... 213 1 0.6% -- -- --
Holiday Inn Express(R) ... 208 2 0.6% -- -- --
Residence Inn(R) ......... 168 1 0.5% 342 3 2.8%
Quality Suites(R) ........ 168 1 0.5% 281 2 2.3%
Hampton Inn & Suites(R) .. 136 1 0.4% -- -- --
Fairfield Inn(R) ......... 110 1 0.3% 200 1 1.6%
Howard Johnson(R) ........ 100 1 0.3% -- -- --
Omni(R) .................. -- -- -- 215 1 1.8%
Hilton Suites(R) ......... -- -- -- 174 1 1.4%
Quality Inn(R) ........... -- -- -- 165 1 1.4%
------ ------ ----- ------ ---- -----
Total .................... 35,141 157 100.0% 12,172 59 100.0%
====== ====== ===== ====== ==== =====
Emphasis on Food and Beverage
We believe popular food and beverage ideas are a critical component in the
overall success of a hospitality property. We utilize food and beverage
operations to create local awareness of our hotel facilities, to improve the
profitability of our hotel operations and to enhance customer satisfaction. We
are committed to competing for patrons with restaurants and catering
establishments by offering high-quality restaurants that garner positive reviews
and strong local and/or national reputations. We have engaged food and beverage
experts to develop several proprietary restaurant concepts. We have also
successfully placed national food franchises such as Pizza Hut(R), Starbuck's
Coffee(R) and "TCBY"(R) Yogurt in several of our hotels. We believe that popular
food concepts will strengthen our ability to attract business travelers and
group meetings and improve the name recognition of our properties.
Commitment to Service and Value
We are dedicated to providing exceptional service and value to our
customers on a consistent basis. We conduct extensive employee training programs
to ensure personalized service at the highest levels. Programs have been created
and implemented to ensure the effectiveness and uniformity of our employee
training. Our practice of tracking customer comments, through the recording of
guest comment cards and the direct solicitation, during check-in and check-out,
of guest opinions regarding specific items, allows investment in
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services and amenities where they are most effective. Our focus on these areas
has enabled us to attract lucrative group business.
Distinct Management Culture
We have a distinct management culture that stresses creativity, loyalty
and entrepreneurship. We believe in realistic solutions to problems, and
innovation is always encouraged. Incentive programs and awards have been
established to encourage individual property managers to seek new ways of
increasing revenues and operating cash flow. This creative, entrepreneurial
spirit is prevalent from the corporate staff and the general managers down to
the operations staff. Individual general managers work closely with the
corporate staff and they and their employees are rewarded for achieving target
operating and financial goals.
Computerized Reporting Systems
We employ computerized reporting systems at each of our properties and at
our corporate offices to monitor the financial and operating performance of the
properties. Management information services have been fully integrated through
networks at many of the properties. We also utilize daily reporting and
electronic mail programs to facilitate daily communication between our
properties and our corporate headquarters. Such programs enable us to create and
implement detailed reporting systems at each of our properties and our corporate
headquarters. Corporate executives utilize information systems that track each
property's daily occupancy, average daily rates, and revenue from rooms, food
and beverage. By having the latest property operating information available at
all times, we are better able to respond to changes in the market of each
property.
Effect of Recent Federal Tax Legislation
Until January 1, 2001, in order for MeriStar Hospitality to maintain its
tax status as a real estate investment trust, MeriStar Hospitality was not
permitted to engage in the operations of its hotel properties. To comply with
this requirement, MeriStar Hospitality leased most of its real property to us
and one other third-party lessee/manager. In late 1999, the Federal government
enacted changes to the Internal Revenue Code that now permit MeriStar
Hospitality to create taxable subsidiaries, which are subject to taxation
similar to a subchapter C corporation and are permitted to lease MeriStar
Hospitality's real property.
Although a taxable subsidiary of a REIT may lease real property, it is not
permitted to 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. We are such a qualified independent third party manager.
In connection with MeriStar Hospitality's creation of its taxable
subsidiaries, we assigned our leases of hotels owned by MeriStar Hospitality to
taxable subsidiaries of MeriStar Hospitality effective January 1, 2001 and
entered into management contracts with those taxable subsidiaries with respect
to those hotels. Under the management agreements, we receive a management fee
based on total hotel revenue that is subject to increase based on the
achievement of specified operating thresholds. We have structured the management
agreements to substantially mirror the economics of the prior leases. We believe
the elimination of the lease structure reduces our exposure to fluctuations in
the economy, and the management agreement provides us with a more stable source
of revenue.
Management Agreements
The management agreements with MeriStar Hospitality for the 106 hotels
formerly leased by us will have initial terms of 10 years. Each management
agreement provides us with three renewal options of five years each. However, a
renewal will not go into effect if a change in the federal tax law has occurred
that would permit MeriStar Hospitality or one of its affiliates to operate the
hotel directly without adversely affecting MeriStar Hospitality's qualification
as a real estate investment trust.
Management Fees and Performance Standards
Each taxable subsidiary will pay us 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:
o the actual excess of total operating revenues over total operating
expenses; and
o 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 Hospitality 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 MeriStar Hospitality or
one of its subsidiaries to operate the hotel directly without adversely
affecting MeriStar Hospitality's ability to qualify as a real estate investment
trust or if we elect not to renew the agreement. MeriStar Hospitality may elect
not to renew the management agreements only as discussed below.
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MeriStar Hospitality's 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, MeriStar Hospitality's taxable subsidiary will be required to pay
us 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 we would have been paid
management fees under the agreement based on the operating results for the 12
months preceding the termination. MeriStar Hospitality's 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 Hospitality 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, MeriStar Hospitality's taxable subsidiaries will have the right to
terminate the management agreement for the hotel, unless:
o MeriStar Hospitality did not materially comply with the capital
expenditures contemplated by the budget for either or both of the
applicable fiscal years; or
o we cure the shortfall by agreeing to reduce our 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.
We can only use the cure right once during the term of each management
agreement.
Assignment
We do not have the right to assign a management agreement without the
prior written consent of the relevant taxable subsidiary of MeriStar
Hospitality. A change in control of our company will require MeriStar
Hospitality's consent which may be granted or withheld in its sole discretion.
Other Leases and Management Agreements
In addition to the management agreements on the 106 MeriStar Hospitality
owned hotels, we lease 51 hotels from Winston Hotels, Inc. and other third
parties, and manage an additional 59 hotels for other third parties.
CORPORATE HOUSING
Expansion Strategies
Our corporate housing division, which continues to operate under the
BridgeStreet name, is a leading international provider of flexible accommodation
services. Key elements of BridgeStreet's business strategy include:
Local Market Share
BridgeStreet has offices in many markets that offer significant
opportunity for expansion. In order to expand in these markets, we have trained,
since our May 2000 acquisition of BridgeStreet, all of our BridgeStreet sales
employees in our sales and marketing techniques. With a better-trained sales
force and our management experience, we believe that BridgeStreet will be in a
better position to penetrate local markets and increase its market share.
Growth through National Accounts
We believe that there is substantial growth potential for BridgeStreet
through national accounts. BridgeStreet's current customers include a
significant number of large national companies who utilize BridgeStreet's
services in a limited, but loyal, manner. We plan to maximize sales to those
existing corporate clients and to obtain new clients through a national sales
and marketing program which promotes the BridgeStreet brand and highlights
BridgeStreet's expanding national and international network, as well as
BridgeStreet's ability to serve as a central point of contact on all issues.
Many of BridgeStreet's clients are Fortune 2000 companies with significant
national and international employee lodging requirements.
Growth through Network Partner Relationships
BridgeStreet has developed a network partner relationship with flexible
accommodation service providers in the United States and in 22 countries
worldwide. Through network partner agreements, BridgeStreet has expanded the
number of locations where it can serve its clients' needs. In some additional
markets, BridgeStreet intends to enter into network partner agreements with one
or more leading local or regional flexible accommodation service providers
having the size and quality of operations suitable for serving BridgeStreet's
client base.
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Accommodations and Services
Accommodations
Our BridgeStreet brand offers high-quality, fully-furnished one-, two- and
three-bedroom and larger accommodations that, together with the specialized
amenities offered by BridgeStreet, are intended to provide guests with a "home
away from home." We select our BridgeStreet accommodations based on location,
general condition and basic amenities, with the goal of providing accommodations
that meet each guest's particular needs. As a flexible accommodation services
provider, BridgeStreet can satisfy client requests for accommodations in a
variety of locations and neighborhoods, including requests for proximity to an
office, school or area attraction, as well as requests for accommodations of
specific types and sizes. The substantial majority of BridgeStreet's
accommodations are located within high-quality property complexes that typically
feature in-unit washers and dryers, dedicated parking, and access to fitness
facilities, including, in many cases, pools, saunas and tennis courts. Standard
furnishings typically include, among other things, cable television, answering
machines and clock radios. BridgeStreet also is able to customize its
accommodations at a guest's request with items such as office furniture, fax
machines and computers.
We lease substantially all of our BridgeStreet accommodations through
flexible, short-term leasing arrangements in order to match our supply of
accommodations with client demand. We believe that BridgeStreet's flexible
leasing strategy allows it to react to changes in market demand for particular
geographic locations and types of accommodations. BridgeStreet management
strives to develop strong relationships with property managers to ensure that it
has a reliable supply of high quality, conveniently located accommodations.
BridgeStreet's accommodations generally are priced competitively with
all-suite or upscale extended-stay hotel rooms even though, on average, we
believe BridgeStreet's accommodations are substantially larger. BridgeStreet
believes it generally is able to price its accommodations competitively due to:
o The high quality of its accommodations;
o Its relatively low operating cost structure; and
o Its ability to lease accommodations in accordance with demand and
leave unfavorable markets quickly.
The length of a guest's stay can range from a few nights to a few years, with
the typical stay ranging from 30 to 45 days.
Corporate Client Services
BridgeStreet's goal is to provide valuable, cost-effective services to its
corporate clients, many of which have human resource directors, relocation
managers or training directors with significant, national employee lodging
requirements. In particular, BridgeStreet aims to relieve its clients of the
administrative burden often associated with relocating employees and/or
providing them with temporary housing.
BridgeStreet believes that existing and potential clients will
increasingly turn to outside providers such as BridgeStreet to satisfy their
employee lodging requirements as their awareness of BridgeStreet and the
flexible accommodation services industry increases.
Guest Services
BridgeStreet strives to provide the highest quality of customer service by
overseeing all aspects of a guest's lodging experience, from preparations prior
to the guest's arrival to the moving out process. BridgeStreet maintains a
representative in each city in which it operates to be responsive to guests'
needs. BridgeStreet's guest services department offers guests comprehensive
information services before and during their stays to help guests acclimate
themselves to their new surroundings.
Sales and Marketing
BridgeStreet focuses primarily on business-to-business selling. At the
local level, each of BridgeStreet's operating subsidiaries has corporate account
specialists that call on local companies, including local branches of regional
or national companies, to solicit business. Each account specialist focuses his
or her efforts on the key decision makers at each company responsible for
establishing and administering travel and accommodation policies, typically
human resource directors, relocation managers or training directors. By
aggressively pursuing relationships with potential clients and expanding
services to existing clients, BridgeStreet seeks to become each client's primary
or sole provider of flexible accommodation services nationwide. We operate a
global BridgeStreet sales office to market our nationwide capabilities to our
local corporate clients. In addition, we have expanded BridgeStreet's internet
presence to supplement traditional marketing strategies and to better serve our
customers.
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BridgeStreet tailors its marketing strategy to the needs of particular
clients. For example, BridgeStreet markets itself to a corporation with
relocating employees by focusing on its ability to situate large families in
apartments with three or more bedrooms, its access to accommodations in both
metropolitan and suburban settings, and its access to accommodations that allow
pets. In contrast, when marketing to potential corporate clients in need of
short-term housing, BridgeStreet emphasizes its flexible lease terms and its
ability to customize an accommodation with amenities such as office equipment,
including computers, additional telephone lines and other work-related items.
BridgeStreet intends to continue an advertising program designed to
enhance the BridgeStreet name both inside and outside the flexible accommodation
services industry and broaden its client base. In addition, BridgeStreet
promotes its brand name by advertising in trade publications, Chamber of
Commerce listings, local visitor magazines and telephone directories and the
Internet, and through periodic direct mail campaigns.
OTHER BUSINESS INFORMATION
Expansion into Related Sectors of the Hospitality Industry
We expect to capitalize on our hospitality management experience as we
continue to expand into related sectors of the hospitality industry, such as
managing resorts, conference centers, and golf courses. We believe these sectors
are currently served by fragmented, relatively smaller management companies
without the broad range of management, operational, and financial resources we
possess. By bringing our expertise in other property management activities, we
believe we can realize significant economic benefit for the owners of such
properties through increased profitability of the properties' operations.
Employees
As of December 31, 2000, we employed approximately 27,500 persons, of whom
approximately 24,300 were compensated on an hourly basis. Some of the employees
at 25 of our hotels are represented by labor unions. We believe that labor
relations with our employees are generally good.
Franchises
We employ a flexible branding strategy based on a particular property's
market environment and the property's unique characteristics. Accordingly, we
use various national trade names pursuant to licensing arrangements with
national franchisors.
Governmental Regulation
A number of states regulate the licensing of hospitality properties and
restaurants, including liquor license grants, by requiring registration,
disclosure statements and compliance with specific standards of conduct. We
believe that we are substantially in compliance with these requirements.
Managers of hospitality properties are also subject to laws governing their
relationship with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. Compliance with, or changes in,
these laws could reduce the revenue and profitability of our properties and
could otherwise adversely affect our operations.
Americans with Disabilities Act. Under the Americans with Disabilities
Act, 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
federally required upgrades to our properties and units leased by BridgeStreet,
a determination that we are not in compliance with the Americans with
Disabilities Act 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 Americans with Disabilities Act.
Those costs, however, 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 such property. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the owner's ability to use the property, sell the
property or borrow by using such 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 such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person. The operation and removal of underground
storage tanks are also regulated by federal and state laws. In connection with
the operation of our properties, we could be liable for the costs of remedial
action with respect to such regulated substances and storage tanks and claims
related thereto. Environmental laws and common law principles could also be used
to impose liability for releases of hazardous
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materials, including asbestos-containing materials, into the environment, and
third parties may seek recovery from owners or operators of real properties for
personal injury associated with exposure to released asbestos-containing
materials or other hazardous materials.
Phase I environmental site assessments have been conducted at all of the
hotels owned by MeriStar Hospitality, and Phase II environmental site
assessments have been conducted at some of these hotels by qualified independent
environmental engineers. The purpose of the environmental site assessments is to
identify potential sources of contamination for which we may be responsible and
to assess the status of environmental regulatory compliance. These assessments
have not revealed any environmental liability or compliance concerns that we
believe would have a material adverse effect on our business, assets, results of
operations or liquidity, nor are we aware of any material 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 reliance upon the Phase I and Phase II environmental site assessments,
we believe the hotels owned by MeriStar Hospitality are in material compliance
with all federal, state and local ordinances and regulations regarding hazardous
or toxic substances and other environmental matters. We have not been notified
by any governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
any of the properties we lease or manage.
Other regulation. As a lessee of its accommodations, our corporate housing
division believes that it and its employees are either outside the purview of,
exempted from or in compliance with laws in the jurisdictions in which
BridgeStreet operates requiring real estate brokers to hold licenses. However,
there can be no assurance that BridgeStreet's position in any jurisdiction where
it believes itself to be excepted or exempted would be upheld if challenged or
that any such jurisdiction will not amend its laws to require BridgeStreet
and/or one or more of its employees to be licensed brokers. Moreover, there can
be no assurance that BridgeStreet will not operate in the future in additional
jurisdictions requiring such licensing.
In some of the jurisdictions in which BridgeStreet operates, BridgeStreet
believes that it is not required to charge guests the sales and "bed" taxes that
are applicable to establishments furnishing rooms to transient guests. There can
be no assurance, however, that the tax laws in particular jurisdictions will not
change or that a tax collection agency will not successfully challenge
BridgeStreet's position regarding the applicability of tax laws. BridgeStreet
believes that it properly charges and remits such taxes in all jurisdictions
where it is required to do so.
Competition
We compete primarily in the following segments of the lodging industry:
the upscale and mid-priced sectors of the full-service segment, the
limited-service segment and resorts. We also compete with other providers of
flexible accommodation services. In each geographic market in which our
properties are located, there are other full- and limited-service hotels and
resorts that compete with our properties. Competition in the U.S. lodging
industry is based generally on convenience of location, brand affiliation,
price, availability, range of services and guest amenities or accommodations
offered, and quality of customer service and overall product.
The Operating Partnership
Substantially all of our assets are held indirectly by MeriStar H&R
Operating Company, L.P., our subsidiary operating partnership. We are the sole
general partner of that partnership, and we, one of our directors and
approximately 85 independent third-parties are limited partners of that
partnership. The partnership agreement gives the general partner full control
over the business and affairs of the partnership. We, as general partner, are
also given the right, in connection with the contribution of property to the
partnership or otherwise, to issue additional partnership interests in the
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 we may determine.
The partnership agreement currently has three classes of limited
partnership interests: Class A units, Class B units and Preferred units. As of
March 30, 2000, the ownership of the limited partnership units is as follows:
o we and our wholly-owned subsidiaries own a number of Class A units
equal to the number of outstanding shares of our common stock; and
o other limited partners own 561,614 Class A units, 1,275,607 Class B
units and 392,157 Preferred units.
No distributions were made during 2000, 1999 or 1998 to the holders of the
Class A units and Class B units. Preferred units receive a 6.5% cumulative
annual preferred return based on an assumed price per share of our common stock
of $3.34, compounded
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quarterly to the extent not paid on a current basis. All net income and capital
proceeds earned by the partnership, after payment of the annual preferred return
and, if applicable, the liquidation preference, will be shared by the holders of
the Class A units and Class B units in proportion to the number of units owned
by each holder.
Each Class A or Class B unit not held by us or one of our subsidiaries is
redeemable by the holders for cash equal to the value of one share of our common
stock or, at our option, one share of our common stock. Until April 1, 2004, the
partnership may redeem the Preferred units for cash at a price of $3.34 per unit
or, at our option, our common stock having equivalent aggregate value. After
April 1, 2004, each holder of the Preferred units may require the partnership to
redeem these units for cash at a price of $3.34 per unit or, at the holder's
option, our common stock having equivalent aggregate value.
RISK FACTORS
Restrictions imposed by our debt agreements may limit our ability to execute our
business strategy and increase the risk of default under our debt obligations.
Our senior secured credit facility contains a number of covenants which
may significantly limit our ability to, among other things:
o borrow additional money;
o make capital expenditures and other investments;
o pay dividends;
o merge, consolidate or dispose of assets; and
o incur additional liens.
If our performance was negatively affected by one or more of a variety of risks
related to the lodging industry, our results of operations could suffer.
Operating risks
Various factors could adversely affect our ability to generate revenues on
which our management fee will be based. Our business is subject to all of the
operating risks inherent in the lodging industry. These risks include the
following:
o changes in general and local economic conditions;
o cyclical overbuilding in the lodging industry;
o varying levels of demand for rooms and related services;
o competition from other hotels, motels and recreational properties,
some of which may have greater marketing and financial resources
than us or the owners of the properties we manage;
o dependence on business and commercial travelers and tourism, which
may fluctuate and be seasonal;
o the recurring need for renovations, refurbishment and improvements
of hotel properties;
o changes in governmental regulations that influence or determine
wages, prices and construction and maintenance costs; and
o changes in interest rates and the availability of credit.
Demographic, geographic or other changes in one or more of our markets
could impact the convenience or desirability of the sites of some hotels or
guest accommodation apartments, which would in turn affect the operations of
those hotels or flexible accommodations. In addition, 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.
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Seasonality
The lodging industry 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 the hotels we lease or manage 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.
Franchising
In connection with terminating or changing the franchise affiliation of a
hotel, the owner of the hotel 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 operation 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. Franchise agreements covering the hotels managed or leased by us
expire or terminate, without specified renewal rights, at various times and have
differing remaining terms. As a condition to renewal, these franchise agreements
frequently contemplate a renewal application process, which may require
substantial capital improvements to be made to a hotel which are the owner's
responsibility. We intend to develop our own Doral brand name in multiple
locations for resorts, conference centers and golf courses. It is difficult to
assess the impact, if any, that this brand name development will have on our
ability to maintain existing franchise licenses, obtain additional franchises or
manage properties subject to franchise licenses.
Competition in the lodging industry
The lodging industry and the flexible accommodation service market are
highly competitive. There is no single competitor or small number of competitors
that will be dominant in the industry. We operate in areas that contain numerous
competitors, some of which may have substantially greater resources than us or
the owners of our properties, including better access to apartment communities
and the ability to accept more risk than it will be able to manage. Competition
in the lodging industry is based generally on location, availability, room rates
or accommodations prices, 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.
Leasing arrangements
Our BridgeStreet corporate housing division, which provides flexible
accommodation services, intends to continue to lease substantially all of its
accommodations through flexible, short term leasing arrangements with property
managers in order to match its supply of accommodations with client demand.
Because its only access to apartment communities will be through leasing
arrangements, the corporate housing division will be dependent upon its
relationships with property managers in order to conduct its operations
effectively. While the corporate housing division will strive to develop strong
relationships with property managers to ensure it has a reliable supply of
high-quality, conveniently-located accommodations, there is no assurance that,
in the event these relationships were to deteriorate or fail to develop, the
corporate housing division would be able to satisfactorily meet client demand
requirements. This in turn could negatively impact our results of operations.
Costs of compliance with 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.
These 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 the property or to borrow using the 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
such substances at the disposal or treatment facility, whether or not that
facility is or ever was owned or operated by that person. The operation and
removal of underground storage tanks are also regulated by federal and state
laws. In connection with the ownership and operation of hotels, we or the owners
of our properties could be held liable for the costs of remedial action for
regulated substances and storage tanks and related claims. Activities have been
undertaken to close or remove storage tanks located on the property of several
of the hotels that we lease or manage.
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Governmental regulation
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. We believe that we
are substantially in compliance with these requirements or, in the case of
liquor licenses, that we have or will promptly obtain the appropriate licenses.
Managers of hotels and providers of flexible accommodation services are also
subject to employment laws, including minimum wage requirements, overtime,
working conditions and work permit requirements. Compliance with, or changes in,
these laws could reduce the revenue and profitability of our hotels and
corporate housing units and could otherwise adversely affect our results of
operations or 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 MeriStar Hospitality's hotels, a determination that the hotels we
lease or manage or the units leased by our corporate housing division 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.
If we are unable to pursue new growth opportunities through our relationship
with MeriStar Hospitality, our hotel management business could be negatively
affected.
Because of the terms of the intercompany agreement with MeriStar
Hospitality, we will be highly dependent on MeriStar Hospitality. If MeriStar
Hospitality in the future fails to qualify as a real estate investment trust, it
could have a substantial adverse effect on those aspects of our business
operations and business opportunities that are dependent upon MeriStar
Hospitality. For example, if MeriStar Hospitality ceases to qualify as a real
estate investment trust, the requirements in the intercompany agreement that
MeriStar Hospitality enter into management agreements with us would cease. In
that case, MeriStar Hospitality would have the right to operate a newly acquired
property itself. We, however, would remain subject to all of the limitations on
our operations contained in the existing management agreements. In addition,
although it is anticipated that the management agreements involving us generally
will be assigned to any person or entity acquiring the fee or leasehold interest
in a hotel property from MeriStar Hospitality or its affiliates, we could lose
our rights under any such management agreement upon the expiration of the
agreement. The likelihood of a sale of the hotel properties could possibly
increase if MeriStar Hospitality fails to qualify as a real estate investment
trust. In addition, if there is a change in the Internal Revenue Code that would
permit MeriStar Hospitality or one of its affiliates to operate hotels without
adversely affecting MeriStar Hospitality's status as a real estate investment
trust, MeriStar Hospitality would not be required to enter into future renewals
of its management agreements.
Also, if we and MeriStar Hospitality do not negotiate a mutually
satisfactory management arrangement within 30 days, generally, after MeriStar
Hospitality provides the hotel management subsidiary with written notice of the
management opportunity, MeriStar Hospitality may offer the opportunity to others
for a period of one year before it must again offer the opportunity to us.
Our relationship with MeriStar Hospitality Corporation may lead to conflicts of
interests that adversely affect your interests.
General conflicts of interests
We have historically had a close business relationship with a real estate
investment trust, MeriStar Hospitality Corporation, and the relationship between
our hotel management subsidiary and MeriStar Hospitality will continue to be
close. We and MeriStar Hospitality have four common board members and two common
senior executives. Our relationship with MeriStar Hospitality is governed by an
intercompany agreement, which restricts each party from taking advantage of some
business opportunities without first presenting those opportunities to the other
party.
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In its relationship with us, MeriStar Hospitality may have conflicting
views on the manner in which the hotels are operated and managed, as well as
lease arrangements, acquisitions and dispositions. As a result, our directors
and senior executives, who may serve in similar capacities at MeriStar
Hospitality, may well be presented with several decisions which provide them the
opportunity to benefit MeriStar Hospitality to our detriment or benefit us to
the detriment of MeriStar Hospitality. Potential conflicts of interest will be
present in all of the numerous transactions among us and MeriStar Hospitality.
Restrictions on business and future opportunities
So long as the intercompany agreement with MeriStar Hospitality is in
effect, we are prohibited from making real property investments that a real
estate investment trust could make unless MeriStar Hospitality is first given
the opportunity, but elects not to pursue the activities or investments. Under
the intercompany agreement, we have agreed not to acquire or make investments in
real estate, including investments in hotel properties, real estate mortgages,
real estate derivatives or entities that invest primarily in real estate assets,
unless we have notified MeriStar Hospitality of the acquisition or investment
opportunity, in accordance with the terms of the intercompany agreement, and
MeriStar Hospitality has determined not to pursue the acquisition or investment.
We are permitted, however, to:
o engage in development activities on land already owned or leased by
us or subject to a lease or purchase option in our favor;
o acquire or invest in hospitality property to be operated under a
trade name owned by us under which five or more hospitality
properties are then operated; and
o make limited minority investments or contributions as part of a
lease or management arrangement with a party that is not an
affiliate of us in a bona-fide arms-length transaction, if the
investment or contribution does not materially impact our financial
and legal qualifications to manage properties owned by MeriStar
Hospitality and its affiliates.
The intercompany agreement will generally grant us the right of first
refusal to become the manager of any real property acquired by MeriStar
Hospitality as to which MeriStar Hospitality determines that, consistent with
MeriStar Hospitality's status as a real estate investment trust, its affiliate
that is the lessee of such property is required to enter into a management
arrangement with an unaffiliated third party. This opportunity will be available
to us only if MeriStar Hospitality determines that we are qualified to be the
manager and MeriStar Hospitality decides not to operate the property under a
trade name not owned by us. 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
MeriStar Hospitality will generally be required to pay a termination fee
to us if it elects to sell or transfer a hotel to a person or entity that is not
an affiliate of MeriStar Hospitality or if it elects to permanently close a
hotel after a casualty and does not replace it with another hotel with a
management fee equal to that payable under the management agreement to be
terminated. Where applicable, the termination fee will equal the present value
of the management fees payable during the remainder of the existing term of the
management agreement, as determined based on fees payable during the previous
twelve months. A decision to transfer a hotel may, therefore, have significantly
different consequences for us and MeriStar Hospitality.
Fluctuations in the real estate market beyond our control may affect our
revenues and management fees.
We operate hotels for MeriStar Hospitality and other hotel owners under
management agreements and lease hotels from other hotel owners. MeriStar
Hospitality has the right to terminate a management agreement upon the sale of a
hotel to a person or entity that is not an affiliate of MeriStar Hospitality or
if we consistently fail to follow operational instructions. The underlying value
of our operations and our income is dependent upon our ability to operate the
hotels in a manner sufficient to maintain or increase revenues and to generate
sufficient revenue in excess of operating expenses to meet or exceed operating
profit projections for the hotels. Many of these risks are beyond our control
and may be more significant because we operate only within the hospitality
industry.
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If we fail to retain our executive officers and key personnel, our business
would be harmed.
Our ability to maintain our competitive position will depend to a
significant extent on the efforts and ability of our senior management,
particularly Paul W. Whetsell, our Chairman and Chief Executive Officer. Our
future success and our ability to manage future growth will depend in large part
upon the efforts of Mr. Whetsell and on our ability to attract and retain other
highly qualified personnel. Competition for personnel is intense, and we may not
be successful in attracting and retaining our personnel. Our inability to
attract and retain other highly qualified personnel may adversely affect our
results of operations and financial condition.
Our shareholder rights plan and the anti-takeover defense provisions of our
charter documents may deter potential acquirors and depress our stock price.
Under our shareholder rights plan, holders of our common stock are
entitled to one preferred share purchase right for each outstanding share of
common stock they hold, exercisable under certain defined circumstances
involving a potential change of control. The preferred share purchase rights
have the anti-takeover effect of causing substantial dilution to a person or
group that attempts to acquire us on terms not approved by our board of
directors. Those provisions could have a material adverse effect on the premium
that potential acquirors might be willing to pay in an acquisition or that
investors might be willing to pay in the future for shares of our common stock.
For a more complete description of our shareholder rights plan, please refer to
the description of the plan contained in our registration statement on Form S-4,
filed with the SEC on April 28, 2000, file No. 333-35890, under the caption
"Certain Antitakeover Provisions of MeriStar."
Provisions of Delaware law and of our charter and by-laws may have the
effect of discouraging a third party from making an acquisition proposal for our
company. These provisions could delay, defer or prevent a transaction or a
change in control of our company under circumstances that could otherwise give
the holders of our common stock the opportunity to realize a premium over the
then-prevailing market prices of our common stock. These provisions include the
following:
o we are able to issue preferred shares with rights senior to its
common stock;
o our bylaws prohibit action by written consent of our
stockholders, and stockholders may not call special meetings;
o our certificate of incorporation and bylaws provide for a
classified board of directors;
o removal of directors only for cause and upon the vote of two-thirds
of the outstanding shares of our common stock; and
o our bylaws require advance notice for nomination of directors
and for shareholder proposals.
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference in this
annual report on Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, and as such may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
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 the operations and future prospects of our Company 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, and supply and demand for lodging
facilities in our current and proposed market areas. These risks and
uncertainties should be considered in evaluating any forward-looking statements
contained or incorporated by reference herein.
18
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Washington, D.C. with other
corporate offices in North Carolina and Texas. We lease our offices. In
addition, BridgeStreet, our corporate housing division, leases administrative
offices in the majority of the markets in which they operate. We lease and/or
manage hotel properties and golf courses throughout the United States and
Canada. No one leased or managed hotel property is material to our operations. A
typical full-service hospitality property has meeting and banquet facilities,
food and beverage facilities and guest rooms and suites. Additionally, our golf
management operations are currently not material to our operations.
The hotels owned by MeriStar Hospitality generally feature, or after
contemplated renovation programs have been completed will 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 tables set forth
the operating information with respect to the properties we leased as of
December 31:
Number of Guest
Year Properties Rooms ADR Occupancy RevPAR
---- ---------- ------ ------- --------- ---------
2000 157 35,141 $102.38 71.4% $ 73.11
1999 161 35,655 $ 96.24 71.4% $ 68.74
1998 162 35,666 $ 90.12 71.8% $ 64.71
The following table summarizes the operating information for the properties we
managed as of December 31:
Number of Guest
Year Properties Rooms
---- ---------- ------
2000 59 12,172
1999 54 9,693
1998 41 6,800
The following table sets forth the operating information with respect to our
corporate housing division as of December 31:
Number of Number of
Year Markets of Units ADR Occupancy
---- --------- --------- ------ ---------
2000 22 3,231 $83.80 88.4%
19
THE LEASES
Until January 1, 2001, our subsidiaries leased 106 of the 114 hotels owned
by MeriStar Hospitality. Each lease provided for an initial term of 12 years.
Each lease provided us 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:
o we would not have the right to a renewal if a change in the tax law
has occurred that would permit MeriStar Hospitality to operate the
hotel directly;
o if we elected not to renew a lease for any applicable hotel, then
MeriStar Hospitality had the right to reject the exercise of a
renewal right on a lease of a comparable hotel; and
o the rent for each renewal term would be adjusted to reflect the then
fair market rental value of the hotel.
If we and MeriStar Hospitality 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 we then would have had a right of first
refusal to lease the hotel from MeriStar Hospitality on such terms as it may
have agreed upon with a third-party lessee.
Base Rent; Participating Rent; Additional Charges
Each lease required us to pay:
o fixed monthly base rent;
o 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
o certain other amounts, including interest accrued on any late
payments or charges.
The 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. 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 us to pay rent, liability insurance, all costs and
expenses and all utility and other charges incurred in the operations of the
hotels. MeriStar Hospitality was 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 us, 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 our tangible net worth was less than 17.5% of the aggregate rents payable
under the leases for the prior calendar year, we were 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 taxable income of the operating partnership attributable to its partners
plus any required preferred distributions existing to partners.
Termination
MeriStar Hospitality had the right to terminate the applicable lease upon
the sale of a hotel to a third party or, upon its determination not to rebuild
after a casualty, upon payment to us of the fair market value of the leasehold
estate (except for properties initially identified by MeriStar Hospitality and
us 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 our company
under the applicable lease for the 12-month period preceding the termination
date. MeriStar Hospitality would 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 Hospitality
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.
20
Performance Standards
MeriStar Hospitality had the right to terminate the applicable lease if,
in any calendar year, the gross revenues from a hotel were less than 95% of the
projected gross revenues for such year as set forth in the applicable budget
unless:
o we could reasonably demonstrate that the gross revenue shortfall was
caused by general market conditions beyond our control; or
o we "cured" the shortfall by paying MeriStar Hospitality the
difference between the rent that would have been paid had the
property achieved gross revenues of 95% of the budgeted amounts and
the rent paid based on actual gross revenues.
We did not have such a cure right for more than two consecutive years.
The leases also required that we spend in each calendar year at least 95%
of the amounts budgeted for marketing expenses and for repair and maintenance
expenses.
Assignment and Subleasing
We did not have the right to assign a lease or sublet a hotel without
MeriStar Hospitality's prior written consent. For purposes of the lease, a
change in control of our company would have been deemed an assignment of the
lease and would require the consent of MeriStar Hospitality, which may be
granted or withheld in MeriStar Hospitality's sole discretion.
THE MANAGEMENT AGREEMENTS
Effective January 1, 2001, we assigned our leases with MeriStar
Hospitality to taxable subsidiaries of MeriStar Hospitality. In connection with
the assignment, the taxable subsidiaries of MeriStar Hospitality executed new
management agreements with one of our subsidiaries for each property that we
previously leased from MeriStar Hospitality. We believe the elimination of the
lease structure reduces our exposure to fluctuations in the economy and the
management agreement provides us with a more stable source of income.
Management Agreements
The management agreements with MeriStar Hospitality for the 106 hotels
formerly leased by us will have initial terms of 10 years. Each management
agreement provides us with three renewal options of five years each. However, a
renewal will not go into effect if a change in the federal tax law has occurred
that would permit MeriStar Hospitality or one of its affiliates to operate the
hotel directly without adversely affecting MeriStar Hospitality's qualification
as a real estate investment trust.
Management Fees and Performance Standards
Each taxable subsidiary will pay us 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:
o the actual excess of total operating revenues over total operating
expenses; and
o 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 Hospitality 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 MeriStar Hospitality or
one of its subsidiaries to operate the hotel directly without adversely
affecting MeriStar Hospitality's ability to qualify as a real estate investment
trust or if we elect not to renew the agreement. MeriStar Hospitality may elect
not to renew the management agreements only as discussed below.
MeriStar Hospitality's 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, MeriStar Hospitality's taxable subsidiary will be required to pay
us 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 we would have been paid
management fees under the agreement based on the operating results for the 12
months preceding the termination. MeriStar Hospitality's 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 Hospitality 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, MeriStar Hospitality's taxable subsidiaries will have the right to
terminate the management agreement for the hotel, unless:
o MeriStar Hospitality did not materially comply with the capital
expenditures contemplated by the budget for either or both of the
applicable fiscal years; or
o we cure the shortfall by agreeing to reduce our 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.
We can only use the cure right once during the term of each management
agreement.
21
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business activities, various lawsuits, claims and
proceedings have been or may be instituted or asserted against us. Based on
currently available facts, we believe 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 NYSE under the symbol "MMH." As of March
28, 2001, 37,136,307 shares of our common stock were issued and outstanding,
held by approximately 257 record holders.
The following table lists, for the fiscal quarters indicated, beginning
with the spin-off of our company from CapStar Hotel Company on August 3, 1998,
the range of high and low intra-day sale prices per share of our common stock in
U.S. dollars, as reported on the NYSE Composite Transaction Tape.
High Low
---- ---
Fiscal 1998
Third Quarter (from August 3, 1998) ................. $ 3.75 $ 2.00
Fourth Quarter ...................................... 2.69 1.94
Fiscal 1999
First Quarter ....................................... $ 3.19 $ 2.38
Second Quarter ...................................... 4.44 2.69
Third Quarter ....................................... 3.75 2.88
Fourth Quarter ...................................... 3.56 2.19
Fiscal 2000
First Quarter ....................................... $ 3.44 $ 2.63
Second Quarter ...................................... 3.13 2.69
Third Quarter ....................................... 3.13 2.44
Fourth Quarter ...................................... 2.69 2.06
Fiscal 2001
First Quarter (through March 28, 2001)............... $ 2.74 $ 1.51
The last reported sale price of our common stock on the NYSE on March 28,
2001 was $1.65.
We have not paid any cash dividends on our common stock and we do not
anticipate that we will do so in the foreseeable future. We intend to retain
earnings to provide funds for the continued growth and development of our
business. Until January 1, 2001, when we assigned our leases with MeriStar
Hospitality to its taxable subsidiaries and, in connection with the assignment,
we executed management agreements with the taxable subsidiaries, our lease
agreements with MeriStar Hospitality restricted our ability to pay dividends on
our common stock. No similar restrictions on the payment of dividends exist in
the new management agreements we have with the taxable subsidiaries. Any
determination to pay cash dividends in the future will be at the discretion of
the Board of Directors and will be dependent upon our results of operations,
financial condition, contractual restrictions and other factors deemed relevant
by the Board of Directors.
Recent Sales of Unregistered Securities
On August 3, 1998, we privately issued 3,414,872 Class B operating
partnership units as part of the purchase of 100% of the partnership interests
in AGH Leasing and substantially all of the assets and certain liabilities of
American General Hospitality, Inc.
On October 1, 1998, we privately issued 916,230 Class A operating
partnership units as part of the purchase of a portfolio of assets from South
Seas Properties Company Limited Partnership and its affiliates.
On April 15, 1999, we privately issued 1,818,182 shares of our common
stock at a price of $2.75 per share to our joint venture partner in MIP Lessee,
L.P. On January 6, 2000, we privately issued an additional 1,818,182 shares of
our common stock at a price of $2.75 per share to our joint venture partner MIP
Lessee, L.P.
23
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial
information. 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 our
consolidated financial statements and notes 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 in thousands, except per share amounts)
Operating Results:
Revenues:
Rooms ..................................................... $ 929,585 $ 894,983 $ 395,633 $ 9,880 $ --
Food, beverage and other .................................. 397,205 387,091 152,276 1,871 --
Corporate housing ......................................... 64,872 -- -- -- --
Management and other fees ................................. 19,957 10,040 14,528 12,088 7,050
----------- ----------- ----------- ----------- -----------
Total revenues ......................................... 1,411,619 1,292,114 562,437 23,839 7,050
----------- ----------- ----------- ----------- -----------
Operating expenses:
Departmental expenses:
Rooms ..................................................... 219,197 213,239 95,627 2,533 --
Food, beverage and other .................................. 272,923 260,537 107,860 1,170 --
Corporate housing expense ................................. 42,827 -- -- -- --
Undistributed operating expenses:
Administrative and general ................................ 233,553 208,576 84,881 10,473 6,140
Participating lease expense ............................... 431,014 404,086 186,601 4,135 --
Property operating costs .................................. 188,235 182,412 76,300 1,917 --
Depreciation and amortization ............................. 9,470 6,014 3,372 636 349
Merger and lease conversion costs ......................... 2,989 -- -- -- --
Loss on asset impairment .................................. 21,657 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses ............................... 1,421,865 1,274,864 554,641 20,864 6,489
----------- ----------- ----------- ----------- -----------
Net operating income (loss) ................................... (10,246) 17,250 7,796 2,975 561
Interest expense, net ......................................... 6,401 4,692 2,017 56 123
Equity in earnings of affiliates .............................. -- (31) (1,337) 46 --
Minority interests ............................................ (1,094) 1,916 155 103 --
Income taxes (A) .............................................. (6,173) 3,926 337 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ...................................... $ (9,380) $ 6,685 $ 3,950 $ 2,862 $ 438
=========== =========== =========== =========== ===========
Basic earnings (loss) per share (B) ........................... $ (0.27) $ 0.24 $ 0.02 -- --
Diluted earnings (loss) per share (B) ......................... $ (0.27) $ 0.24 $ 0.02 -- --
Number of shares of common stock issued and outstanding (C) ... 35,976 29,625 25,437 -- --
Other Financial Data:
Earnings before interest, taxes, depreciation, and
amortization (D)........................................... $ (776) $ 23,264 $ 11,168 $ 3,611 $ 910
Net cash provided by operating activities ..................... 4,590 27,528 10,125 11,167 19,069
Net cash used in investing activities ......................... (32,048) (32,837) (102,109) (6,501) (1,826)
Net cash provided by (used in) financing activities ........... 33,308 (4,100) 76,113 4,208 699
Balance Sheet Data:
Total assets .................................................. $ 338,214 $ 258,144 $ 247,529 $ 84,419 $ 24,366
Debt .......................................................... 100,187 57,762 67,812 981 885
(A) No provision for federal income taxes was included prior to August 3, 1998
because our predecessor entities were partnerships and all federal income
tax liabilities were passed through to the individual partners.
(B) Basic and diluted earnings per share for the year ended December 31, 1998
is based on earnings for the period from the date of the spin-off, August
3, 1998 through December 31, 1998.
(C) As of December 31 for the periods presented.
(D) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. We believe 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 operating
partnership 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, is not necessarily indicative of
cash available to fund all cash flow needs, should not be considered as an
alternative to net income under generally accepted accounting principles
for purposes of evaluating our results of operations and may not be
comparable to other similarly titled measures used by other companies.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We lease, manage and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, golf and vacation membership markets. Our portfolio is diversified by
franchise and brand affiliations. Our subsidiary, MeriStar H&R Operating
Company, L.P., conducts all of our operations. We are the sole general partner
of MeriStar H&R and control its operations.
On August 3, 1998, American General Hospitality Corporation and CapStar
Hotel Company merged together to form MeriStar Hospitality Corporation, a real
estate investment trust. As part of that merger, CapStar Hotel Company formed
our company to become the lessee, manager and operator of substantially all of
the hotels owned or leased by American General and CapStar Hotel Company before
the merger. At the time of the merger, CapStar Hotel Company distributed all of
the shares of our common stock to its stockholders and we became a separate,
publicly traded company.
We manage all of the hotels CapStar Hotel Company leased and/or managed
for third-party owners before the merger. Immediately after the merger, we
acquired all of the partnership interests in AGH Leasing, L.P., the third-party
lessee that leased most of the hotels American General owned. We also acquired
substantially all of the assets and some liabilities of American General
Hospitality, Inc., the third-party manager that managed most of the hotels
American General owned.
Our financial statements include the historical results of the management
and leasing operations of CapStar Hotel Company for all periods and include the
operating results of AGH Leasing, L.P. and American General Hospitality, Inc.
since August 3, 1998. In addition, before August 3, 1998, we managed
substantially all of the hotels owned by CapStar Hotel Company and received
management fee revenues from those hotels. From August 3, 1998 until January 1,
2001, we have leased these hotels from MeriStar Hospitality. Since January 1,
2001, we manage these hotels for MeriStar Hospitality. Prior to January 1, 2001,
we did not record management fees from these hotels. We did record room, food
and beverage and other operating department revenues and expenses from the
leases until January 1, 2001.
The following table outlines our historical portfolio of managed and
leased properties as of December 31:
LEASED MANAGED TOTAL
------ ------- -----
PROPERTIES ROOMS PROPERTIES ROOMS PROPERTIES ROOMS
---------- ----- ---------- ----- ---------- -----
2000 157 35,141 59 12,172 216 47,313
1999 161 35,655 54 9,693 215 45,348
1998 162 35,666 41 6,800 203 42,466
We also manage or are otherwise affiliated with 11 golf courses. Golf course
management operations and vacation membership operations are not material to any
period presented.
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. for $1.50 in cash and 0.5 shares of our common stock for
each share of BridgeStreet common stock outstanding. In addition, we repaid
$12.0 million of BridgeStreet's outstanding debt as part of the acquisition.
BridgeStreet provides corporate housing services in the United States, Canada
and the United Kingdom. The total purchase price of the acquisition was
approximately $37.6 million. As of December 31, 2000, BridgeStreet had
approximately 3,200 apartments under lease in the United States, Canada, and the
United Kingdom. Our financial statements include the operating results of
BridgeStreet since May 31, 2000.
In late 1999, amendments to the Internal Revenue Code were enacted that
permit real estate investment trusts to create a taxable subsidiary on or after
January 1, 2001, which will be subject to taxation similar to a subchapter C
corporation and which can perform some activities not permissible for the real
estate investment trust. As a result of this legislation, we agreed to assign
all 106 leases with MeriStar Hospitality to taxable subsidiaries of MeriStar
Hospitality. In connection with the assignment, we executed management
agreements with the taxable subsidiaries for each of the 106 properties. We have
structured the management agreements to substantially mirror the economics of
the prior leases. The conversion did not result in the exchange of any cash
consideration among the parties. Under the management agreements, the annual
base management fee is 2.5 percent of total hotel revenue with increases up to
4.0 percent of total hotel revenue based in part on our achievement of specified
operating thresholds.
On February 26, 2001, we mailed a proxy to our shareholders seeking
approval of a merger agreement providing for a merger of a wholly-owned
subsidiary of American Skiing Company, a Delaware corporation, with and into
our company and the other transactions contemplated by that merger agreement. On
March 22, 2001, we and the other parties to the merger agreement mutually agreed
to terminate the merger agreement. Each company cancelled its respective special
shareholder meeting, which was scheduled for March 26, 2001, to vote on the
merger. There will be no termination fees payable to any of the parties.
25
Financial Condition
Assets
Our total assets increased by $80.1 million to $338.2 million at
December 31, 2000 from $258.1 million at December 31, 1999 primarily due to the
following:
o investments in and advances to affiliates increased by $8.9 million
due to our investment in MIP Lessee, L.P. and our other hotel
ventures;
o accounts receivable increased $30.2 million primarily due to:
o an increase of $9.7 million in our hotel related revenue in
the fourth quarter of 2000 compared to the fourth quarter of
1999; and
o the addition of $8.7 million of BridgeStreet's accounts
receivable;
o cash and cash equivalents increased $5.9 million resulting from net
operating activity and increased borrowings under our credit
facility;
o fixed assets increased $12.4 million primarily due to the
acquisition of BridgeStreet and enhancements made to our information
technology systems. As of December 31, 2000, BridgeStreet had $6.4
million of net fixed assets.
o intangible assets increased $13.0 million primarily due to:
o the goodwill related to the acquisition of BridgeStreet;
offset by
o the write-down of $21.7 million of goodwill related to our
limited-service hotels due to an impairment; and
o prepaid expenses increased $6.1 million due to the acquisition
of BridgeStreet.
Our assets include a substantial amount of intangible assets, primarily
related to our acquisitions of hotel management companies and BridgeStreet. We
evaluate the carrying values of our long-lived intangible assets periodically in
relation to the operating performance and expected future undiscounted cash
flows of the underlying assets. During 2000, we conducted a review of each
hotel's performance and anticipated future performance and our expected future
income from those hotels. We conducted this review in connection with the
possible restructuring of our lease arrangements. As a result of this review,
our expectation for the future performance of some of our leased limited-service
hotels has been reduced. This process triggered an impairment review of our
long-lived intangible assets, including goodwill. The review included an
analysis of our expected future undiscounted cash flows in comparison to the net
book value of the long-lived intangible assets. This review indicated that
certain long-lived intangible assets, including goodwill, were impaired. We
estimated the fair value of the long-lived intangible assets by using the
discounted expected future cash flows generated by the underlying assets. We
reduced the net book value of those long-lived intangible assets to their
estimated fair value and recorded an impairment loss of $21.7 million to adjust
the goodwill related to our leased limited-service hotels.
Liabilities
Total liabilities increased by $74.6 million to $253.8 million at December
31, 2000 from $179.2 million at December 31, 1999 primarily due to the
following:
o accounts payable, accrued expenses and other liabilities increased
$27.3 million due to:
o higher operating expenses before participating lease expense
and loss on asset impairment during the fourth quarter of 2000
as compared to 1999; and
o BridgeStreet's accounts payable, accrued expenses and
other liabilities of $11.6 million;
o amounts payable to MeriStar Hospitality increased $10.7 million
primarily due to the participating rent payable balance at
December 31, 2000 being higher than at December 31, 1999; and
o long-term debt increased $42.4 million due to borrowings under our
credit facility to fund short term liquidity requirements, the
acquisition of BridgeStreet and other investments.
Stockholders' Equity
Stockholders' equity increased $8.1 million primarily due to:
o the issuance of 4,072,099 shares of our common stock to
BridgeStreet's stockholders;
o the sale of 1,818,182 shares of our common stock to our joint
venture partner in MIP Lessee, L.P.; partially offset by
o net loss of $9.4 million in 2000.
26
Results of Operations
2000 Compared to 1999
Revenues
Our total revenue increased $119.5 million, or 9.2%, to $1,411.6 million in
2000, compared to $1,292.1 million in 1999. The increase in revenue is primarily
the result of the acquisition of BridgeStreet which generated $64.9 million of
revenue, an increase in the number of third party managed hotels, and a 4.9%
improvement in revenue per available room from our leased hotels. The
improvement in revenue per available room was primarily the result of a 5.5%
increase in the average daily rate. The following table provides our operating
statistics for our leased hotels on a same-store basis:
2000 1999 Change
---------- --------- ---------
Revenue per available room $ 73.11 $ 69.69 4.9%
Average daily rate $ 102.38 $ 97.00 5.5%
Occupancy 71.4% 71.8% (0.6%)
Operating Expenses
Operating expenses increased $147.0 million or 11.5% to $1,421.9 million in 2000
compared to $1,274.9 million in 1999. This increase reflects:
o the acquisition of BridgeStreet, which resulted in $60.3 million
of operating expenses;
o the asset impairment of $21.7 million related to the write-down of
the goodwill associated with our leased limited service hotels;
o the $3.0 million of merger and lease conversion costs;
o the increased participating lease expense resulting from the
increase in revenue at our leased hotels; and
o increased administrative and general expenses due to higher
insurance costs and labor costs.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation and amortization decreased to
($0.8) million in 2000 compared to $23.3 million in 1999. The decrease in
earnings before interest, taxes, depreciation and amortization is primarily due
to:
o a $28.2 million decrease in hospitality management's earnings before
interest, taxes, depreciation and amortization due primarily to:
o the $21.7 million nonrecurring write-down of the goodwill
associated with our leased limited service hotels; and
o the $3.0 million of nonrecurring merger and lease
conversion costs; and partially offset by
o the acquisition of BridgeStreet resulted in $4.7 million of
earnings before interest, taxes, depreciation and amortization.
Minority interest decreased by $3.0 million primarily due to lower operating
income compared to 1999 and the conversion of operating partnership units to
common stock. Taxes decreased by $10.1 million due to the operating loss in 2000
compared to the operating income 1999.
1999 Compared to 1998
Revenues
Our total revenue increased $729.7 or 129.7% to $1,292.1 million in 1999
compared to $562.4 million in 1998. The increase in revenue is primarily the
result of an increase in the number of hotels leased. During the period January
1, 1998 through August 3, 1998, revenue represents CapStar Hotel Company's
management and leasing operations. From August 3, 1998 through December 31, 1998
and for all of 1999, revenue also includes the management and leasing operations
of AGH Leasing, L.P. and American General Hospitality, Inc. As a result, the
1998 revenue was derived from a smaller number of hotels being leased and
managed throughout the year. In addition, we had a significant increase in
revenues from our resort properties due to the acquisition of South Seas
Resorts. We acquired this portfolio of resort properties during the fourth
quarter of 1998. Therefore, there are only three months of revenue included in
1998 and a full 12 months of revenue included in 1999 from these properties.
Operating Expenses
Operating expenses increased $720.3 million or 129.9% to $1,274.9 million in
1999 compared to $554.6 million in 1998. The increase reflects the increase in
the number of leased and managed hotels. This 129.9% increase is consistent with
the increase in revenues.
Earnings Before Interest, Taxes, Depreciation, and Amortization
Earnings before interest, taxes, depreciation, and amortization increased 108.0%
to $23.3 million in 1999 compared to $11.2 million in 1998. The increase in
earnings before interest, taxes, depreciation, and amortization is due to the
change in the number of hotels operated and managed by us in 1999 compared to
1998.
Minority interest and taxes increased by $1.8 million and $3.6 million,
respectively, due to higher operating income in 1999 compared to 1998.
Liquidity and Capital Resources
Sources of Cash
Our continuing operations are funded through cash generated from hotel
management and leasing operations, and corporate housing operations. We finance
business acquisitions and investments in affiliates through a combination of
internally generated cash, external borrowings and the issuance of partnership
interests and/or common stock. We generated $4.6 million of cash from operations
27
during 2000.
We generated $33.3 million of cash from financing activities during 2000
primarily from the following:
o we had net borrowings of $42.3 million under our credit facilities;
o we repaid $12.0 million of the BridgeStreet debt as part of our
acquisition of BridgeStreet; and
o we received $5.8 million from the issuances of our common stock.
Under the terms of the participating lease agreements with our lessors and
management agreements with MeriStar Hospitality, our lessors will generally be
required to fund significant capital expenditures at the hotels we lease.
Uses of Cash
We used $32.0 million of cash in investing activities during 2000
primarily for the following:
o we purchased $9.2 million of fixed assets;
o we invested $8.9 million in hotel partnerships; and
o we paid $12.2 million in cash to BridgeStreet stockholders in
connection with the acquisition.
Revolving Credit Facilities
On August 3, 1998, we entered into a three-year, $75.0 million revolving
credit facility with MeriStar Hospitality. This loan contains covenants
regarding financial ratios, reporting requirements and other customary
restrictions. The interest rate on this loan is based on the 30-day London
Interbank Offered Rate plus 650 basis points. As of December 31, 2000, we had no
borrowings outstanding under this facility. As of March 29, 2001, we had $36.0
million of borrowings outstanding at an interest rate of 11.58%.
On February 29, 2000, we entered into a $100.0 million senior secured
credit facility among a syndicate of banks. The credit facility bears interest
at the 30-day London Interbank Offered Rate plus 350 basis points and expires in
February 2002 with an optional one-year extension. We borrowed $65 million under
the facility to repay the borrowings outstanding under our revolving credit
agreement with MeriStar Hospitality. As of December 31, 2000, the senior secured
revolving credit facility was fully drawn. As of March 29, 2001, we had $82.0
million of borrowings outstanding at an interest rate of 8.58%. Upon execution
of this new credit facility, the facility with MeriStar Hospitality was amended
to reduce the maximum borrowing limit from $75 million to $50 million.
At December 31, 2000, we were not in compliance with a debt covenant
related to the senior secured facility. On February 16, 2001, we obtained an
amendment to the credit facility revising the covenant and waiving that failure
to comply with the covenant. We expect to meet the covenant at future
determination dates.
Summary
We believe cash generated by our operations, together with anticipated
borrowing capacity under our credit facilities, will be sufficient to fund our
requirements for working capital, capital expenditures, and debt service. We
expect to continue to seek acquisitions of hotel, resort and golf management
businesses and management contracts. In addition, we expect to expand our
corporate housing business by entering new markets. We expect to finance future
acquisitions through a combination of additional borrowings under our credit
facilities and the issuance of partnership interests and/or our common stock. We
believe these sources of capital will be sufficient to provide for our long-term
capital needs.
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, its operations generally
reflect non-resort seasonality patterns. Excluding the effect of Emerging Issues
Task Force Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial
Periods", 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.
Corporate housing activity peaks in the summer months and declines during
the fourth quarter and the first part of the first quarter. We expect to have
lower revenue, operating income and cash flow from corporate housing in the
first and fourth quarters.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our credit
facilities that impacts the fair value of these obligations. 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.
In April 2000, we entered into a $40 million periodic rate collar
agreement with a financial institution in order to hedge against the impact
future interest rate fluctuations may have on our floating rate debt. The rate
collar agreement establishes the London Interbank Offered Rate at a floor rate
of 6.05% and a ceiling rate of 8.5%. During the year ended December 31, 2000,
we neither made nor received any payments related to this instrument. The
estimated fair value of the collar agreement is approximately $205,000 at
December 31, 2000.
Our long-term debt of $100.0 million at December 31, 2000 matures in
February 2002 with an optional one-year extension. Interest on the debt is
variable, based on the 30-day London Interbank Offered Rate plus 350 basis
points. The interest rate was 10.19% at December 31, 2000. We have determined
that the fair value of the debt approximates its carrying value. A 1.0% change
in the 30-day London Interbank Offered Rate would have changed our interest
expense by approximately $835,000 during 2000.
Although we conduct business in Canada and the United Kingdom, these
foreign operations were not material to our consolidated financial position,
results of operations or cash flows as of and for the year ended December 31,
2000. Additionally, foreign currency transaction gains and losses were not
material to our results of operations for the year ended December 31, 2000.
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.
29
ITEM 8. FINANCIAL STATEMENTS
The following Consolidated Financial Statements are filed as part of this
Annual Report on Form 10-K:
MeriStar Hotels & Resorts, Inc.
Independent Auditors' Report .................................................................................................. 31
Consolidated Balance Sheets as of December 31, 2000 and 1999 .................................................................. 32
Consolidated Statements of Operations and Other Comprehensive Income
for the Years Ended December 31, 2000, 1999 and 1998 ........................................................................ 33
Consolidated Statements of Stockholders' Equity and Owners' Equity for the Years Ended December 31, 2000, 1999 and 1998 ....... 34
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 .................................... 35
Notes to the Consolidated Financial Statements ................................................................................ 36
All Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hotels & Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of MeriStar
Hotels & Resorts, Inc. and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations and other comprehensive income,
stockholders' equity and owners' equity, and cash flows for each of the years in
the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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
Hotels & Resorts, Inc. 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.
KPMG LLP
Washington, D.C.
February 19, 2001
31
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(in thousands, except per share amounts)
2000 1999
----- ----
Assets
Current Assets:
Cash and cash equivalents ............................ $ 7,645 $ 1,726
Accounts receivable, net of allowance for
doubtful accounts of $4,097 and $2,090 .............. 78,176 47,976
Prepaid expenses ..................................... 9,719 3,589
Deposits and other ................................... 12,107 8,388
--------- ---------
Total current assets ...................................... 107,647 61,679
--------- ---------
Fixed assets:
Furniture, fixtures, and equipment ..................... 33,996 14,832
Accumulated depreciation ............................... (9,247) (2,522)
--------- ---------
Total fixed assets, net ................................... 24,749 12,310
--------- ---------
Investments in and advances to affiliates ................. 38,920 30,018
Intangible assets, net of accumulated
amortization of $11,899 and $7,927 ....................... 166,898 153,927
Restricted cash ........................................... -- 210
--------- ---------
$ 338,214 $ 258,144
========= =========
Liabilities, Minority Interests, and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $ 123,929 $ 96,603
Due to MeriStar Hospitality Corporation ................ 22,222 11,476
Income taxes payable ................................... 1,923 80
Long-term debt, current portion ........................ 147 10
--------- ---------
Total current liabilities ................................. 148,221 108,169
Deferred income taxes ..................................... 5,508 13,247
Long-term debt ............................................ 100,040 57,752
--------- ---------
Total liabilities ......................................... 253,769 179,168
--------- ---------
Minority interests ........................................ 11,140 13,774
Stockholders' equity:
Common stock, par value $0.01 per share:
Authorized - 100,000 shares
Issued and outstanding - 35,976 and 29,625 shares ... 360 296
Additional paid-in capital ............................. 74,989 57,637
Retained earnings ...................................... (2,144) 7,236
Accumulated other comprehensive income:
Translation adjustment ............................. 207 33
Unrealized loss on investments ..................... (107) --
--------- ---------
Total stockholders' equity ................................ 73,305 65,202
--------- ---------
$ 338,214 $ 258,144
========= =========
See accompanying notes to consolidated financial statements.
32
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
INCLUDING PREDECESSOR ENTITY
(in thousands, except per share amounts)
2000 1999 1998
---- ---- ----
Revenue:
Rooms ...................................... $ 929,585 $ 894,983 $ 395,633
Food and beverage .......................... 304,415 295,551 119,295
Corporate housing .......................... 64,872 -- --
Other operating departments ................ 92,790 91,540 32,981
Management and other fees .................. 19,957 10,040 14,528
----------- ----------- -----------
Total revenue .............................. 1,411,619 1,292,114 562,437
----------- ----------- -----------
Operating expenses by department:
Rooms .................................... 219,197 213,239 95,627
Food and beverage ........................ 219,791 217,349 90,662
Corporate housing ........................ 42,827 -- --
Other operating departments expenses ..... 53,132 43,188 17,198
Undistributed operating expenses:
Administrative and general ............... 233,553 208,576 84,881
Participating lease expense .............. 431,014 404,086 186,601
Property operating costs ................. 188,235 182,412 76,300
Depreciation and amortization ............ 9,470 6,014 3,372
Merger and lease conversion costs ........ 2,989 -- --
Loss on asset impairment ................. 21,657 -- --
----------- ----------- -----------
Total operating expenses ................... 1,421,865 1,274,864 554,641
----------- ----------- -----------
Net operating income (loss)................. (10,246) 17,250 7,796
Interest expense, net ...................... 6,401 4,692 2,017
Equity in losses of affiliates ............. -- (31) (1,337)
----------- ----------- -----------
Income (loss) before minority interests
and income taxes ........................... (16,647) 12,527 4,442
Minority interests ......................... (1,094) 1,916 155
Income tax expense (benefit) ............... (6,173) 3,926 337
----------- ----------- -----------
Net income (loss) .......................... $ (9,380) $ 6,685 $ 3,950
Other comprehensive income:
Foreign currency translation adjustment 174 (2) 35
Unrealized loss on investments ........ (107) -- --
----------- ----------- -----------
Comprehensive income (loss) ................ $ (9,313) $ 6,683 $ 3,985
=========== =========== ===========
Earnings (loss) per share:
Basic ................................ $ (0.27) $ 0.24 $ 0.02
Diluted .............................. $ (0.27) $ 0.24 $ 0.02
See accompanying notes to consolidated financial statements.
33
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
INCLUDING PREDECESSOR ENTITY
(in thousands)
Accumulated
Common Stock Additional Other
--------------- Paid-in Retained Comprehensive Owners'
Shares Amount Capital Earnings Income Equity Total
------ ------ ---------- -------- ------------- -------- ----------
Balance, January 1, 1998 ....... -- $ -- $ -- $ -- $ -- $ 40,909 $ 40,909
Spin-off and issuances of common
stock .......................... 24,952 249 42,914 -- -- (44,308) (1,145)
Net income for period January 1,
1998 through August 2, 1998 .... -- -- -- -- -- 3,399 3,399
Net income for period August 3,
1998 through December 31, 1998 . -- -- -- 551 -- -- 551
Foreign currency translation
adjustment ..................... -- -- -- -- 35 -- 35
Issuances of common stock under
Stock Purchase Plan ............ 5 -- 11 -- -- -- 11
Rights offering ................ 480 5 952 -- -- -- 957
Proceeds from exercise of stock
options, net ................... -- -- 17 -- -- -- 17
---------------------------------------------------------------------------
Balance, December 31, 1998 ..... 25,437 254 43,894 551 35 -- 44,734
Net income for the year ........ -- -- -- 6,685 -- -- 6,685
Foreign currency translation
adjustment ..................... -- -- -- -- (2) -- (2)
Issuances of common stock ...... 1,820 18 4,793 -- -- -- 4,811
Redemption of OP units ......... 1,908 19 7,816 -- -- -- 7,835
Issuances of common stock under
Stock Purchase Plan ............ 381 4 935 -- -- -- 939
Proceeds from exercise of stock
options, net ................... 79 1 199 -- -- -- 200
---------------------------------------------------------------------------
Balance, December 31, 1999 ..... 29,625 296 57,637 7,236 33 -- 65,202
Net loss for the year .......... -- -- -- (9,380) -- -- (9,380)
Foreign currency translation
adjustment ..................... -- -- -- -- 174 -- 174
Unrealized loss on investments.. -- -- -- -- (107) -- (107)
Issuance of common stock ....... 5,890 59 16,180 -- -- -- 16,239
Redemption of OP Units ......... 156 2 389 -- -- -- 391
Issuance of common stock under
Stock Purchase Plan ............ 255 2 634 -- -- -- 636
Proceeds from exercise of stock
options, net ................... 50 1 149 -- -- -- 150
---------------------------------------------------------------------------
Balance, December 31, 2000 ..... 35,976 $ 360 $ 74,989 $ (2,144) $ 100 $ -- $ 73,305
===========================================================================
See accompanying notes to the consolidated financial statements.
34
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, and 1998
INCLUDING PREDECESSOR ENTITY
(in thousands)
2000 1999 1998
--------- --------- ---------
Operating activities:
Net income (loss) .............................................. $ (9,380) $ 6,685 $ 3,950
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization .............................. 9,470 6,014 3,372
Equity in earnings of affiliates ........................... -- 31 1,337
Minority interests ......................................... (1,094) 1,916 155
Deferred income taxes ...................................... (8,246) 3,880 267
Loss on asset impairment ................................... 21,657 -- --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable, net ............................... (25,852) 14,011 (54,825)
Prepaid expenses ....................................... (445) 604 (3,096)
Deposits and other ..................................... (1,462) 497 (8,229)
Accounts payable, accrued expenses and other liabilities 7,523 (8,033) 81,975
Due to MeriStar Hospitality Corporation ................ 10,746 1,912 (14,850)
Income taxes payable ................................... 1,673 11 69
--------- --------- ---------
Net cash provided by operating activities ........................... 4,590 27,528 10,125
--------- --------- ---------
Investing activities:
Purchases of fixed assets ...................................... (9,211) (7,507) (4,628)
Purchases of intangible assets ................................. (1,929) (3,388) (99,438)
Investments in and advances to affiliates ...................... (8,902) (22,338) 2,563
Cash paid to BridgeStreet Accommodations shareholders .......... (12,216) -- --
Change in restricted cash ...................................... 210 396 (606)
--------- --------- ---------
Net cash used in investing activities ............................... (32,048) (32,837) (102,109)
--------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt ....................... 154,500 177,000 67,000
Principal payments on long-term debt ........................... (112,201) (187,050) (169)
Proceeds from issuances of common stock, net ................... 5,786 5,950 974
Purchase of operating partnership units ........................ (1,149) -- --
BridgeStreet Accommodations debt repaid ........................ (12,021) -- --
Deferred financing costs ....................................... (1,607) -- --
Contributions from CapStar ..................................... -- -- 8,383
Distributions to minority investors ............................ -- -- (75)
--------- --------- ---------
Net cash provided by (used in) financing activities ................. 33,308 (4,100) 76,113
--------- --------- ---------
Effect of exchange rate changes on cash ............................. 69 (20) 4
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................ 5,919 (9,429) (15,867)
Cash and cash equivalents, beginning of year ........................ 1,726 11,155 27,022
--------- --------- ---------
Cash and cash equivalents, end of year .............................. $ 7,645 $ 1,726 $ 11,155
========= ========= =========
See accompanying notes to consolidated financial statements.
35
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
INCLUDING PREDECESSOR ENTITY
(dollars in thousands, except per share amounts)
1. Organization
We lease, manage and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, golf, and vacation membership markets. Our portfolio is diversified by
franchise and brand affiliations. Our subsidiary, MeriStar H&R Operating
Company, L.P., conducts all of our operations. We are the sole general partner
of MeriStar H&R and control its operations.
We were created in connection with the August 3, 1998 merger of
American General Hospitality Corporation and CapStar Hotel Company, which
created MeriStar Hospitality Corporation, a real estate investment trust. We are
the lessee, manager and operator of substantially all of the hotels owned or
leased by American General and CapStar Hotel Company before the merger. At the
time of the merger, CapStar Hotel Company distributed all of the shares of our
common stock to its stockholders and we became a separate, publicly traded
company.
We manage all of the hotels CapStar Hotel Company leased and/or managed
for third-party owners before the merger. Immediately after the merger, we
acquired all of the partnership interests in AGH Leasing, L.P., the third-party
lessee that leased most of the hotels American General owned. We also acquired
substantially all of the assets and some liabilities of American General
Hospitality, Inc., the third-party manager that managed most of the hotels
American General owned.
We have an intercompany agreement with MeriStar Hospitality. This provides
each of us the right to participate in certain transactions entered into by each
company. In particular, we have the right of first refusal to become the lessee
of any real property acquired by MeriStar Hospitality subject to certain
exceptions. We also provide MeriStar Hospitality 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. We are compensated
in an amount that MeriStar Hospitality would be charged by an unaffiliated third
party for comparable services.
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. BridgeStreet provides corporate housing services in the
United States, Canada, and the United Kingdom. We are continuing to operate our
corporate housing division under the BridgeStreet name. Our consolidated
financial statements for the year ended December 31, 2000 include the operating
results of BridgeStreet since May 31, 2000.
In late 1999, amendments to the Internal Revenue Code were enacted that
permit real estate investment trusts to create a taxable subsidiary on or after
January 1, 2001, which will be subject to taxation similar to a subchapter C
corporation and which can perform some activities not permissible for the real
estate investment trust. As a result of this legislation, we agreed to assign
all 106 leases with MeriStar Hospitality to taxable subsidiaries of MeriStar
Hospitality. In connection with the assignment, we executed management
agreements with the taxable subsidiaries for each of the 106 properties. We have
structured the management agreements to substantially mirror the economics of
the prior leases. The conversion did not result in the exchange of any cash
consideration among the parties. Under the management agreements, the annual
base management fee is 2.5 percent of total hotel revenue with increases up to
4.0 percent of total hotel revenue based in part on our achievement of specified
operating thresholds.
On December 10, 2000, we entered into a merger agreement with American
Skiing Company to combine our companies. On March 22, 2001, we and the other
parties to the merger agreement mutually agreed to terminate the merger
agreement.
As of December 31, 2000, we leased or managed 216 hotels with 47,313 rooms
in 33 states, the District of Columbia, Canada, Puerto Rico and the U.S. Virgin
Islands. In addition, we had approximately 3,200 apartments under lease in the
United States, Canada, and the United Kingdom at December 31, 2000.
2. Summary of Significant Accounting Policies
Principles of Consolidation- Our consolidated financial statements include
our accounts and the accounts of all of our majority owned subsidiaries. We
eliminate all significant intercompany balances and transactions.
We use the equity method to account for investments in unconsolidated
joint ventures and affiliated companies in which we hold a voting interest of
50% or less and we exercise significant influence. We use the cost method to
account for investments in entities in which we do not have the ability to
exercise significant influence.
Cash Equivalents and Restricted Cash- We consider all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Our restricted cash represents amounts required to be maintained in
escrow.
36
Fixed Assets- Our fixed assets are recorded at cost. They are depreciated
using the straight-line method over lives ranging from three to seven years.
Intangible Assets- Our intangible assets consist of goodwill, hotel
contracts purchased, franchise costs, and costs incurred to obtain management
contracts. Goodwill is the excess of the cost to acquire a business over the
fair value of the net identifiable assets of that business. We amortize
intangible assets on a straight-line basis over the estimated useful lives of
the underlying assets. These lives range from five to 40 years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of-
We periodically evaluate the carrying values of our long-lived intangible assets
in relation to their operating performance and the expected future undiscounted
cash flows of the underlying assets. We make adjustments to the carrying value
if the expected future undiscounted net cash flows are less than net book value
of the assets. If necessary, we calculate an impairment loss as the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Income Taxes- Prior to our spin-off from CapStar Hotel Company, no
provision for income taxes was made since our predecessor entities were
partnerships and limited liability companies. All income, losses, and credits
for income tax purposes were passed through to the individual partners. After
the spin-off from CapStar, we adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred income taxes reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts.
Foreign Currency Translation- The results of operations for our foreign
locations are maintained in the local currency and translated using the average
exchange rates during the period. The assets and liabilities are translated to
U.S. dollars using the exchange rate in effect at the balance sheet date. The
resulting translation adjustments are reflected in stockholders' equity as a
cumulative foreign currency translation adjustment.
Stock-Based Compensation- We have adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Accordingly, we apply Accounting Principles Board
Opinion No. 25 in accounting for our stock-based plans. All grants have been
made at fair value, and therefore, we have not recognized any compensation cost
for these grants.
Revenue Recognition- We earn revenue through the operations and management
of our hospitality properties. We recognize revenue when it is earned.
Participating Lease Agreements- Our participating leases have
non-cancelable remaining terms ranging from 8 to 13 years, subject to earlier
termination upon the occurrence of certain contingencies as defined in the
leases. The rent payable under each participating 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, we recognize contingent rental
expense prior to the achievement of the specified target that triggers the
contingent rental expense if the achievement of the specified target by the end
of the fiscal year is considered probable.
Comprehensive Income- Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," requires companies to display comprehensive
income and its components in a financial statement to be included in the
company'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 a company that result from recognized transactions and other economic events
for the period other than transactions with owners in their capacity as owners.
Our comprehensive income includes net income and other comprehensive income from
foreign currency items and unrealized gains/losses from our investments.
New Accounting Pronouncements- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards 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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 which amended Statement of Financial
Accounting Standards No. 133 to defer the effective date to all fiscal quarters
of fiscal years beginning after June 15, 2000. This new standard will not have a
material effect on our financial statements.
Use of Estimates- To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
we must make estimates and assumptions. These estimates and assumptions affect
the reported amounts on our balance sheet and income statement, and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Our actual results could differ from those
37
estimates.
Reclassifications- We have reclassified certain 1999 and 1998 amounts to
be consistent with the 2000 classifications.
3. Investments in and Advances to Affiliates
Our net investment in and advances to joint ventures and affiliated
companies consists of the following:
December 31,
2000 1999
------- -------
CapStar Hallmark Company, L.L.C. $11,495 $11,255
MIP Lessee, L.P. 10,654 5,429
CapStar San Diego HGI Associates 4,076 3,940
CapStar Wyandotte II, LLC 2,683 2,620
Sapphire Beach Resort & Marina 2,116 2,137
Ballston Parking Associates 1,629 1,629
BoyStar Ventures, L.P. 1,546 1,458
Other 4,721 1,550
-------- --------
$38,920 $30,018
======== ========
The combined summarized financial information of our unconsolidated
joint ventures and affiliated companies is as follows:
December 31,
2000 1999
Balance sheet data: ------- -------
Current assets $31,712 $11,460
Non-current assets 429,094 267,345
Current liabilities 16,610 10,560
Non-current liabilities 240,757 132,298
Equity 203,439 135,947
Operating data:
Revenue $143,877 $61,284
Net income (loss) 9,352 (2,394)
4. Intangible Assets
Intangible assets consist of the following:
December 31,
2000 1999
------- -------
Goodwill $130,468 $117,060
Hotel contracts 41,747 39,993
Other 6,582 4,801
-------- ---------
178,797 161,854
Less accumulated amortization (11,899) (7,927)
-------- ---------
$166,898 $153,927
======== =========
During 2000, we conducted a review of each property's performance and
anticipated future performance and our expected future income from those
properties. We conducted this review in connection with the possible
restructuring of our lease arrangements. As a result of this review, our
expectation for the future performance of some of our leased limited-service
hotels has been reduced. This process triggered an impairment review of our
long-lived intangible assets, including goodwill. The review included an
analysis of our expected future undiscounted cash flows in comparison to the net
book value of the long-lived intangible assets. This review indicated that
certain long-lived intangible assets, including goodwill, were impaired. We
estimated the fair value of the long-lived intangible assets by using the
discounted expected future cash flows generated by the underlying assets. We
reduced the net book value of those long-lived intangible assets to their
estimated fair value and recorded an impairment loss of $21,657 to adjust the
goodwill related to our leased limited-service hotels.
38
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------------
2000 1999
-------- ----------
Senior secured credit facility ................................ $ 100,000 $ --
Revolving credit facility with MeriStar Hospitality Corporation -- 57,000
Other ......................................................... 187 762
--------- ---------
$ 100,187 57,762
Less current portion .......................................... (147) (10)
--------- ---------
$ 100,040 $ 57,752
========= =========
Credit Facility- On February 29, 2000, we entered into a $100,000 senior
secured credit facility with a syndicate of banks. The interest rate on the
credit facility is the 30-day London Interbank Offered Rate plus 350 basis
points. The senior secured credit facility expires in February 2002 with a one-
year extension at our option. The senior secured credit facility contains
certain covenants, including maintenance of financial ratios, reporting
requirements and other customary restrictions. The interest rate as of December
31, 2000 was 10.19%. We have determined that the fair value of the notes payable
under the senior secured credit facility approximates its carrying value. We
incurred interest expense of $7,310 on this facility during 2000. On March 1,
2000, we borrowed $65,000 under the facility to repay the then-outstanding
borrowings under the revolving credit agreement with MeriStar Hospitality. Upon
execution of the senior secured credit facility, we amended the facility with
MeriStar Hospitality to reduce the maximum borrowing limit from $75,000 to
$50,000.
On August 3, 1998, we entered into a three-year $75,000 unsecured
revolving credit facility with MeriStar Hospitality. As mentioned above, this
facility was subsequently amended on February 29, 2000 to reduce the maximum
borrowing limit to $50,000. The credit facility contains certain covenants,
including maintenance of financial ratios, reporting requirements and other
customary restrictions. Interest on the facility is variable, based on the
30-day London Interbank Offered Rate plus 650 basis points. The interest rate as
of December 31, 1999 was 9.98%. We have determined that the fair value of this
note payable approximates its carrying value. We incurred interest expense of
$955, $4,907, and $1,967 on this facility during 2000, 1999, and 1998,
respectively.
Future Maturities- Aggregate future maturities of the above obligations
are as follows:
2001 $ 147
2002 100,040
-------
Total $100,187
=======
At December 31, 2000, we were not in compliance with a debt covenant
related to the senior secured credit facility. On February 16, 2001, we obtained
an amendment to the credit agreement revising the covenant and waiving that
failure to comply with the covenant. We expect to meet the covenant at future
determination dates.
6. Income Taxes
Prior to the spin-off, our predecessor entity conducted its operations in
partnerships and limited liability companies; these operations, therefore, were
not subject to income taxes. We are taxable as a C Corporation. Accordingly, our
1998 income taxes are based on pre-tax income since the spin-off. Pre-tax income
for the period August 3, 1998 through December 31, 1998 was $887.
39
Our effective income tax expense (benefit) rate for the year ended
December 31, 2000 and 1999 differs from the federal statutory income tax
rate as follows:
2000 1999 1998
-----------------------------------
Statutory tax rate ............................................ (35.0)% 35.0% 35.0%
State and local taxes ......................................... (3.9) 4.0 4.2
Difference in rates on foreign subsidiaries ................... 0.3 -- 2.3
Business meals and entertainment .............................. 0.3 0.7 5.2
Compensation expense .......................................... 1.9 (0.5) (77.8)
Valuation allowance ........................................... -- (5.8) 69.0
Goodwill ...................................................... 1.2 -- --
Other ......................................................... (4.5) 3.6 --
-----------------------------------
(39.7)% 37.0% 37.9%
===================================
The components of income tax expense (benefit) are as follows:
2000 1999 1998
-----------------------------------
Current:
Federal .................................................. $ 100 $ -- $-
State .................................................... 525 46 27
Foreign .................................................. 1,448 -- 42
-------- -------- -------
2,073 46 69
-----------------------------------
Deferred:
Federal .................................................. (6,798) 3,276 234
State .................................................... (1,448) 604 33
-----------------------------------
(8,246) 3,880 267
---------------------------------
$ (6,173) $ 3,926 $ 336
===================================
The tax effects of the temporary differences and carryforwards that give
rise to our net deferred tax liability at December 31, 2000 and 1999 are
as follows:
2000 1999
-------- --------
Deferred tax assets:
Allowance for doubtful accounts ................ $ 387 $ 144
Accrued vacation ............................... -- 491
Minority interests temporary difference ........ 347 862
Net operating loss carryforward ................ 572 1,159
Accrued expenses ............................... 2,936 --
Deferred income ................................ 40 --
Other .......................................... 48 --
-----------------------
Total gross deferred tax assets ................ 4,330 2,656
-----------------------
Deferred tax liabilities:
Accrued expenses ............................... $ -- $ (876)
Operating partnership units..................... -- (9,100)
Depreciation and amortization expense .......... (5,871) (2,443)
Prepaid expenses ............................... (98) (306)
Intangible assets basis differences ............ (3,572) (3,100)
Other .......................................... (297) (78)
-----------------------
Total gross deferred tax liabilities ........... (9,838) (15,903)
-----------------------
Net deferred tax liability ....................... $ (5,508) $(13,247)
=======================
At December 31, 2000, we had net operating loss carryforwards of
approximately $1,267 that begin to expire in 2007.
40
7. Stockholders' Equity and Minority Interests
Common Stock- In conjunction with our spin-off from CapStar Hotel Company,
CapStar Hotel Company distributed all of the 24,948,754 outstanding shares of
our common stock to CapStar Hotel Company's stockholders, on a share-for-share
basis.
In connection with the spin-off, we distributed one right for every six
shares or units owned to holders of MeriStar Hospitality's common stock and
operating partnership units. Each right entitled its holder to purchase a share
of our common stock at a subscription price of $2.84 per share, during a
subscription period from August 13, 1998 through August 31, 1998. The rights
offering resulted in the sale of approximately 480,000 shares of common stock
with net proceeds of $957.
In November 1998, we established a stock purchase plan that allows
eligible employees to purchase our common stock at a discount to market value.
We have reserved 1,500,000 shares of common stock for issuance under this plan.
As of December 31, 2000, we had sold approximately 641,000 shares under this
plan. We suspended this employee stock purchase plan effective December 31,
2000.
In April 1999, we privately issued 1,818,182 shares of our common stock at
a price of $2.75 per share to our joint venture partner in MIP Lessee, L.P. In
January 2000, we privately issued an additional 1,818,182 shares of our common
stock at a price of $2.75 per share to our joint venture partner in MIP Lessee,
L.P.
On May 31, 2000, we issued 4,072,099 shares of common stock to the
shareholders of BridgeStreet Accommodations, Inc. to acquire BridgeStreet.
Operating Partnership Units- Substantially all of our assets are held
indirectly by MeriStar H&R Operating Company, L.P., our subsidiary operating
partnership. We are the sole general partner of that partnership, and we, one of
our directors and approximately 85 independent third-parties are limited
partners of that partnership. The partnership agreement gives the general
partner full control over the business and affairs of the partnership. We, as
general partner, are also given the right, in connection with the contribution
of property to the partnership or otherwise, to issue additional partnership
interests in the 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 we may
determine.
The partnership agreement currently has three classes of limited
partnership interests: Class A units, Class B units and Preferred units. As of
December 31, 2000, the ownership of the limited partnership units was as
follows:
o we and our wholly-owned subsidiaries own a number of Class A units
equal to the number of outstanding shares of our common stock;
o one of our directors owns 1,073,929 Class B units; and
o other limited partners own 561,614 Class A units, 1,275,607 Class B
units and 392,157 Preferred units.
No distributions were made during 2000, 1999 or 1998 to the holders of the
Class A units and Class B units. Preferred units receive a 6.5% cumulative
annual preferred return based on an assumed price per share of our common stock
of $3.34, compounded quarterly to the extent not paid on a current basis. All
net income and capital proceeds earned by the partnership, after payment of the
annual preferred return and, if applicable, the liquidation preference, will be
shared by the holders of the Class A units and Class B units in proportion to
the number of units owned by each holder.
Each Class A or Class B unit not held by us or one of our subsidiaries is
redeemable by the holders for cash equal to the value of one share of our common
stock or, at the partnership's option, one share of our common stock. Until
April 1, 2004, the partnership may redeem the Preferred units for cash at a
price of $3.34 per unit or, at the partnership's option, our common stock having
equivalent aggregate value. After April 1, 2004, each holder of the Preferred
units may require the partnership to redeem these units for cash at a price of
$3.34 per unit or, at the holder's option, our common stock having equivalent
aggregate value.
In conjunction with the spin-off from CapStar, we issued 1,083,759 Class A
and B units and 392,157 Preferred units to holders of CapStar operating
partnership units. Immediately following the spin-off, we acquired 100% of the
partnership interests in AGH Leasing, L.P. and acquired substantially all of the
assets and certain liabilities of American General Hospitality, Inc. We funded
the purchase price of $95,000 through a combination of cash and the issuance of
3,414,872 Class B units.
In October 1998, we issued 916,230 Class A units for the purchase of
certain assets of South Seas Properties Company, L.P.
In May 2000, we repurchased 409,523 Class A operating partnership units at
a price of $2.81 per unit.
41
8. Earnings (Loss) Per Share
The following tables present the basic and diluted earnings (loss) per
share computations for the years ended December 31, 2000 and 1999 and for the
period August 3, 1998 through December 31, 1998:
2000 1999 1998
-------- -------- --------
Basic Earnings (Loss) Per Share Computation:
Net income (loss) .............................................. $ (9,380) $ 6,685 $ 551
Weighted average number of shares of common stock outstanding . 34,148 27,868 25,335
-------- -------- --------
Basic earnings (loss) per share ................................ $ (0.27) $ 0.24 $ 0.02
======== ======== ========
Diluted Earnings (Loss) Per Share Computation:
Net income (loss) .............................................. $ (9,380) $ 6,685 $ 551
Minority interest, net of tax .................................. -- -- (90)
-------- -------- --------
Adjusted net income (loss) ..................................... (9,380) $ 6,685 $ 461
-------- -------- --------
Weighted average number of shares of common stock outstanding .. 34,148 27,868 25,335
Common stock equivalents - stock options ....................... -- 146 18
Common stock equivalents - operating partnership units ......... -- 392 1,308
-------- -------- --------
Total weighted average number of diluted shares of common stock
outstanding ................................................... 34,148 28,406 26,661
-------- -------- --------
Diluted earnings (loss) per share .............................. $ (0.27) $ 0.24 $ 0.02
======== ======== ========
Operating partnership units are not included in the computation of
diluted earnings (loss) per share when their effect is anti-dilutive.
Earnings per share for 1998 has been calculated using net income amounts
for the period from the spin-off on August 3, 1998 through December 31, 1998.
Earnings per share is not presented for periods prior to the spin-off because
our predecessor entities were partnerships.
9. Related-Party Transactions
We have an intercompany agreement with MeriStar Hospitality. This provides
each of us the right to participate in certain transactions entered into by each
company. In particular, we have the right of first refusal to become the lessee
of any real property acquired by MeriStar Hospitality subject to certain
exceptions. We also provide MeriStar Hospitality 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. We believe we are
compensated in an amount that MeriStar Hospitality would be charged by an
unaffiliated third party for comparable services. We were paid $1,165, $1,600
and $781 during 2000, 1999 and 1998, respectively, for services provided to
MeriStar Hospitality.
10. Stock-Based Compensation
On August 3, 1998, we adopted an equity incentive plan that authorized us
to issue and award up to 4,000,000 shares of common stock. This plan was amended
to increase the maximum number of shares of common stock that may be issued
under the plan to 15 percent of the number of outstanding shares of common
stock. Awards under the plan may be granted to directors, officers, or other key
employees.
On August 8, 1998, we adopted an equity incentive plan for non-employee
directors that authorized us to issue and award options for up to 125,000 shares
of common stock. These options vest in three annual installments beginning on
the date of grant and on subsequent anniversaries, provided the eligible
director continues to serve as a director on each such anniversary. Options
granted under the plan are exercisable for ten years from the grant date.
In November 1998, we established a stock purchase plan that allows
eligible employees to purchase our common stock at a discount to market value.
We have reserved 1,500,000 shares of common stock for issuance under this plan.
We suspended this employee stock purchase plan effective December 31, 2000.
42
Stock option activity is as follows:
Equity Incentive Plan Directors' Plan
--------------------- -------------------
Average Average
Number of Option Number of Option
Shares Price Shares Price
---------- ----- ---------- -----
Balance, August 3, 1998 ............... -- $ -- -- $ --
Granted ............................... 2,805,955 3.37 45,000 3.28
Exercised ............................. (2,235) -- -- --
Forfeited ............................. -- -- -- --
---------- ----- ---------- -----
Balance, December 31, 1998 ............ 2,803,720 3.37 45,000 3.28
Granted ............................... 449,425 3.22 40,000 4.19
Exercised ............................. (79,323) 2.48 -- --
Forfeited ............................. (178,078) 3.62 -- --
---------- ----- ---------- -----
Balance, December 31, 1999 ............ 2,994,744 3.36 85,000 3.71
Granted ............................... 973,750 3.01 35,000 2.94
Exercised ............................. (49,965) 2.37 -- --
Forfeited ............................. (285,182) 3.42 (22,500) 3.61
---------- ----- ---------- -----
Balance, December 31, 2000 ............ 3,633,347 3.25 97,500 3.46
========== ===== ========== =====
Shares exercisable at December 31, 2000 2,359,033 $3.37 35,000 3.54
========== ===== ========== =====
Shares exercisable at December 31, 1999 1,776,946 $3.40 15,000 $3.28
========== ===== ========== =====
Shares exercisable at December 31, 1998 1,415,044 $3.43 -- $ --
========== ===== ========== =====
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted
Average Weighted
Range of exercise Number Remaining Weighted Average Number Average
prices outstanding Contractual Life Exercise Price exercisable Exercise Price
- ------------------ ------------ ---------------- ---------------- ------------- ---------------
$2.19 to $2.63 795,300 6.31 $2.40 687,414 $2.38
$2.69 to $3.06 1,032,068 9.02 2.98 250,781 3.02
$3.09 to $3.28 872,804 7.60 3.27 569,833 3.27
$3.31 to $4.43 901,500 7.24 4.13 758,163 4.23
$4.44 to $4.76 129,175 6.88 4.61 127,842 4.61
---------- --------- ---------- ------------- --------
$2.19 to $4.76 3,730,847 7.61 $3.26 2,394,033 $3.37
========== ========= ========== ============= ========
We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, we apply Accounting Principles Board Opinion No. 25 in accounting
for the equity incentive plans and no compensation cost has been
recognized as all grants have been made at fair value.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, and has been
determined as if we had accounted for our employee stock options under the fair
value method. The weighted average fair value of the options granted was $1.88,
$1.49 and $1.58 during 2000, 1999, and 1998, respectively. 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:
2000 1999 1998
---------- ----------- -----------
Risk-free interest rate ................ 6.70% 6.70% 5.51%
Dividend rate .......................... -- -- --
Volatility factor ...................... 0.59 0.56 0.50
Weighted average expected life .........2.83 years 2.63 years 6.15 years
Our pro forma net income (loss) and basic earnings (loss) per share as if
the fair value method had been applied were as follows:
2000 1999 1998
--------- ------ --------
Pro forma net income (loss) $(11,585) $6,185 $(2,324)
Basic earnings (loss) per share (0.34) 0.22 (0.09)
43
The effects of applying Statement of Financial Accounting Standards No.
123 for disclosing compensation costs may not be representative of the effects
on reported net income (loss) and earnings (loss) per share for future years.
11. Commitments and Contingencies
We lease some hotels under non-cancelable participating leases with
remaining initial terms ranging from 8 to 13 years, expiring through 2013. The
total amount payable on these participating leases was $11,526 and $9,503 at
December 31, 2000, and 1999, respectively. We also lease corporate office space.
Future minimum lease payments required under these operating leases as of
December 31, 2000 were as follows:
2001 $ 65,418
2002 41,553
2003 39,834
2004 38,563
2005 38,374
Thereafter 249,332
--------
$473,074
========
On January 1, 2001, our hotel leases with MeriStar Hospitality were
assigned to taxable subsidiaries of MeriStar Hospitality. We now manage the
MeriStar Hospitality hotels under 10-year management agreements. There was no
cash consideration received as a result of the termination of these leases. The
table above excludes the lease payments that would have been required under the
leases with MeriStar Hospitality.
In the course of normal business activities, various lawsuits, claims and
proceedings have been or may be instituted or asserted against us. Based on
currently available facts, we believe 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.
12. Segments
We are organized into four operating divisions: hospitality management,
corporate housing, golf management, and vacation ownership. Each division is
managed separately, because of its distinctive products and services.
Hospitality management and corporate housing are reportable operating segments.
In 1999, we were organized into three different operating segments: upscale,
full-service hotels; premium limited-service hotels and inns; and resort
properties. In 2000, we reorganized our operations into the current operating
divisions. Accordingly, we reclassified the segment information for 1999 and
1998. We evaluate the performance of each division based on earnings before
interest, taxes, depreciation, and amortization. The golf management and
vacation ownership segments were not reportable segments in fiscal 1998, 1999 or
2000.
Hospitality Corporate Financial
Year Ended December 31, 2000 Management Housing Other Statements
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,341,358 $ 64,910 $ 5,351 $ 1,411,619
Earnings before interest, taxes, depreciation, and amortization (4,349) 4,650 (1,077) (776)
Total assets 160,736 22,878 154,600 338,214
Hospitality Corporate Financial
Year Ended December 31, 1999 Management Housing Other Statements
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,288,134 $ -- $ 3,980 $ 1,292,114
Earnings before interest, taxes, depreciation, and amortization 23,871 -- (607) 23,264
Total assets 109,592 -- 148,552 258,144
44
Hospitality Corporate Financial
Year Ended December 31, 1998 Management Housing Other Statements
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 554,911 $ -- $ 7,526 $ 562,437
Earnings before interest, taxes, depreciation, and amortization 10,004 -- 1,164 11,168
Total assets 106,631 -- 140,898 247,529
The other items in the tables above represent operating segment activity
and assets for the non-reportable segments and non-operating segment activity
and assets. The non-operating segment activity and assets are primarily
unallocated corporate expenses and intangibles and other miscellaneous assets.
Revenues for foreign operations for the year ended December 31 were as
follows:
2000 1999 1998
------- ------- -------
Canada $27,724 $21,477 $ 8,865
======= ======= =======
United Kingdom $16,152 $ -- $ --
======= ======= =======
13. Acquisitions and Proposed Merger
Following our spin-off from CapStar Hotel Company, we acquired 100% of the
partnership interests in AGH Leasing, L.P., the third-party lessee of most of
the hotels owned by American General Hospitality, and substantially all of the
assets and liabilities of American General Hospitality Inc., the third-party
manager of most of the American General Hospitality hotels. As a result, we
became the lessee and manager of most of the hotels owned by MeriStar
Hospitality. We paid the purchase price of $95,000 with a combination of cash
and operating partnership units in our subsidiary operating partnerships.
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. for $1.50 in cash and 0.5 shares of our common stock for
each share of BridgeStreet common stock outstanding. We issued 4,072,000 shares
of common stock and paid $12,216 to BridgeStreet's shareholders. In addition, we
repaid $12,021 of BridgeStreet's outstanding debt as part of the acquisition.
BridgeStreet provides corporate housing services in the United States, Canada,
and the United Kingdom. The total purchase price of the acquisition was
approximately $37,605, which resulted in $34,335 of goodwill. We are amortizing
the goodwill on a straight line basis over 35 years. We accounted for the
acquisition as a purchase. Accordingly, we have included the operating results
of BridgeStreet in our condensed consolidated financial statements since May 31,
2000, the date of acquisition. The following table summarizes the acquisition:
Cash paid to BridgeStreet shareholders $12,216
MeriStar common stock issued to BridgeStreet shareholders 11,239
BridgeStreet debt repaid 12,021
Transaction costs 2,129
-------
Total cost of acquisition 37,605
Fair value of liabilities acquired 14,001
Fair value of assets acquired (17,271)
--------
Goodwill $34,335
========
The following unaudited pro forma consolidated results of operations
are presented as if we had acquired BridgeStreet, AGH Leasing and American
General Hospitality, Inc. at the beginning of the periods presented:
Pro Forma Information (Unaudited)
2000 1999 1998
---------------------------------------------
Revenue $1,452,571 $1,387,669 $1,180,143
Net Income (Loss) $ (10,325) $ 5,832 $ 3,719
Diluted Earnings (Loss) Per Share $ (0.30) $ 0.18 $ 0.13
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined operations.
On December 10, 2000, we entered into a merger agreement with American
Skiing Company to combine our companies. On March 22, 2001, we and the other
parties to the merger agreement mutually agreed to terminate the merger
agreement. There will be no termination payment to either company.
14. Quarterly Financial Information (Unaudited)
The following is a summary of our quarterly results of operations:
2000 1999
---- ----
First Second Third Fourth First Second
Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- -------
Total revenue ............... $ 340,496 $ 372,688 356,364 $ 342,071 $ 325,838 $ 345,223
Total operating expenses .... 335,031 349,517 355,362 381,955 325,547 327,318
Net operating income (loss) . 5,465 23,171 1,002 (39,884) 291 17,905
Net income (loss) ........... 2,440 12,490 (901) (23,409) (465) 8,810
Diluted earnings (loss) per
share ................... $ 0.08 $ 0.37 $ (0.03) $ (0.65) $ (0.02) $ 0.31
Third Fourth
Quarter Quarter
------- --------
Total revenue ............... $ 314,788 $ 306,265
Total operating expenses .... 311,037 310,962
Net operating income (loss) . 3,751 (4,697)
Net income (loss) ........... 1,553 (3,213)
Diluted earnings (loss) per
share ................... $ 0.05 $ (0.11)
During the fourth quarter of 2000, we recorded a $21,657 loss on asset
impairment related to our leased limited service hotels. We also recognized
$2,989 of expenses related to our merger discussions with American Skiing
Company and the lease conversions of the MeriStar Hospitality leases.
45
15. Supplemental Cash Flow Information
2000 1999 1998
-------------------------------
Cash paid for interest and income taxes:
Interest ........................................................... $ 6,166 $ 4,907 $ 2,017
Income taxes ....................................................... 722 36 --
Non-cash investing and financing activities:
Conversion of operating partnership units to common stock .......... 391 7,835 --
Operating partnership units issued and/or assumptions of liabilities
in purchase of intangible assets ................................... -- 8,346 14,022
Issuance of common stock to BridgeStreet shareholders ................... 11,239 -- --
Fair value of assets acquired ........................................... 17,271 -- --
Fair value of liabilities acquired ...................................... (14,001) -- --
Fair value of debt assumed .............................................. (12,021) -- --
Assets contributed by CapStar ........................................... -- -- 2,605
Liabilities contributed by CapStar ...................................... -- -- (7,549)
Debt contributed by CapStar ............................................. -- -- (1,116)
46
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 Items 401 and 405 of Regulation S-K with
respect to our Directors and Executive Officers is incorporated herein by
reference to the sections entitled "Management" and "Principal Stockholders" in
our definitive proxy for our 2001 annual meeting of stockholders.
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 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 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 Proxy Statement.
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.
47
Exhibit No. Description of Document
- -----------
2.1* Acquisition Agreement, dated as of March 15, 1998, among MeriStar
H&R Operating Company, L.P., American General Hospitality
Corporation, American General Hospitality, Inc., AGHL GP, Inc., the
general partner
of AGH Leasing, L.P., and the limited partners of AGH Leasing, Inc.
2.2** Form of Contribution, Assumption and Indemnity Agreement between
CapStar Hotel Company and MeriStar H&R Operating Company, L.P.
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-laws of the Company
4.1* Specimen Common Stock certificate
4.4* Form of Rights Agreement
4.5**** Form of Stock Purchase Agreement dated as of March 31, 1999
4.6**** Amendment to Stock Purchase Agreement dated April 15, 1999
4.7**** Form of Registration Rights Agreement dated as of March 31, 1999
4.8***** Rights Agreement Amendment, dated December 8, 2000, between
MeriStar and the Rights Agent
10.1****** Form of Employment Agreement between the Company and Paul W.
Whetsell
10.2* Form of Employment Agreement between the Company and Steven D.
Jorns
10.3* Form of Employment Agreement between the Company and David E.
McCaslin
10.4* Form of Employment Agreement between the Company and James A.
Calder
10.5* Form of Employment Agreement between the Company and John E.
Plunket
10.6* Form of Equity Incentive Plan of the Company
10.7* Form of Non-Employee Directors' Incentive Plan of the Company
10.8*** Form of Intercompany Agreement among MeriStar Hotels & Resorts,
Inc., MeriStar H&R Operating Company, L.P., MeriStar Hospitality
Corporation and MeriStar Hospitality Operating Partnership, L.P.
(Incorporated by reference to Exhibit 99.4 to CapStar Hotel
Company's Report on Form 8-K dated March 17, 1998, No. 1-11903)
10.9*** Form of Revolving Credit Agreement, dated as of August 3, 1998
between MeriStar H&R Operating Company, L.P., and MeriStar
Hospitality Operating Partnership, L.P.
10.10*** Form of Employee Stock Purchase Plan
10.11******* Form of Senior Secured Revolving Credit Facility, dated as of
February 29, 2000 between MeriStar H&R Operating Company, L.P. and
Societe Generale, Southwest Agency, as Arranger and Administrative
Agent
10.12**** Form of Agreement of Limited Partnership of MIP Lessee, LP dated as
of March 31, 1999.
10.13******* Amendment to Revolving Credit Agreement, dated as of February 29,
2000, between MeriStar H&R Operating Company, L.P. and MeriStar
Hospitality Operating Partnership, L.P.
10.14******* Form of Employment Agreement between the Company and John Emery
10.15 Amended Intercompany Agreement, dated as of January 1, 2000,
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 First Amendment, dated as of December 31, 2000, to Senior Secured
Credit Agreement among MeriStar H&R Operating Company L.P. and
Societe Generale, Southwest Agency, as Arranger and Administrative
Agent.
21 Subsidiaries of the Company
23 Consent of KPMG LLP
29 Power of Attorney (see signature page)
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-49881), filed with the Securities and Exchange
Commission on August 12, 1998.
** Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's
Report on Form 8-K dated March 17, 1998, No. 1-11903.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 001-14331), filed with the Securities and Exchange Commission
on March 22, 1999.
**** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 001-14331), filed with the Securities and Exchange Commission
on May 7, 1999.
***** Incorporated by reference to Exhibit 4.1 to MeriStar Hotels & Resort,
Inc.'s Report on Form 8-K (File No. 1-14331) dated December 12, 2000.
****** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 001-14331), filed with the Securities and Exchange Commission
on November 13, 2000.
******* Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 001-14331), filed with the Securities and Exchange Commission
on March 15, 2000.
B. Reports on Form 8-K:
A current report on Form 8-K was filed with the Securities and Exchange
Commission on March 24, 2000, regarding the merger of MeriStar Hotels and
Resorts, Inc. with BridgeStreet Accommodations, Inc.
A current report on Form 8-K was filed with the Securities and Exchange
Commission on December 12, 2000, reporting events required to be reported
pursuant to Items 5 and 7 of Form 8-K.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MeriStar Hotels & Resorts, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERISTAR HOTELS & RESORTS, INC.
By: /s/ Paul W. Whetsell
-----------------------------
Paul W. Whetsell
Chief Executive Officer and
Chairman of the Board
Dated: March 30, 2001
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul W. Whetsell and Christopher L. Bennett, 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 and Chairman of the Board of
Paul W. Whetsell Directors (Principal Executive Officer) March 30, 2001
- ---------------------
Steven D. Jorns Vice Chairman of the Board of Directors March __, 2001
/s/ David E. McCaslin
--------------------
David E. McCaslin President and Director March 30, 2001
/s/ James A. Calder
- -------------------- Chief Financial Officer (Principal Financial and Accounting
James A. Calder Officer) March 30, 2001
----------------------
Daniel L. Doctoroff Director March __, 2001
49
/s/ Kent R. Hance
- --------------------
Kent R. Hance Director March 30, 2001
/s/ S. Kirk Kinsell
- --------------------
S. Kirk Kinsell Director March 30, 2001
/s/ James McCurry
- -------------------
James McCurry Director March 30, 2001
- --------------------
James R. Worms Director March __, 2001
50