Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 1-14331
MERISTAR HOTELS & RESORTS, INC.
(Exact name of issuer as specified in its charter)
Delaware 52-2101815
(State or other jurisdiction) (I.R.S. Employer)
of incorporation or organization) Identification Number)
1010 Wisconsin Avenue, N.W.
Washington, D.C.
(Address of principal executive offices)
20007
(Zip code)
Registrant's telephone number, including area code: (202) 965-4455
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
------------------------
Title of each class 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 5, 2002, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$20,046,234.
The number of shares of the Registrant's common stock outstanding as of
March 5, 2002 was 37,188,574.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III--Those portions of the Registrant's definitive proxy statement
relating to Registrant's 2002 Annual Meeting of Stockholders which are
incorporated into Items 10, 11, 12, and 13.
PART I
ITEM 1. BUSINESS
THE COMPANY
We manage, lease and operate a portfolio of hospitality properties, and
provide related services in the hotel, corporate housing, resort, conference
center and golf markets. Our portfolio is diversified by franchise and brand
affiliations. As of December 31, 2001, we managed 229 hotels with 51,880 rooms
in 43 states, the District of Columbia, and Canada, and leased 48
limited-service hotels with 6,581 rooms in 12 states. In addition, we had 3,054
apartments under lease in the United States, Canada, France and the United
Kingdom at December 31, 2001.
We are the lessee, manager and operator of various hospitality-related
assets, including 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, 2001, we managed 229 hotels;
112 of these hotels are owned by MeriStar Hospitality. We also lease 48 hotels
from Winston Hotels, Inc.; we manage 40 of these hotels. The hotels we manage
are located throughout the United States and Canada, including most major
metropolitan areas and rapidly growing secondary cities. Our managed 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 manage properties primarily within the upscale, full-service and premium
limited-service sector, and provide related management services for owners of
properties in both sectors as well. We believe the upscale, full-service segment
of the lodging industry offers strong potential operating results and investment
opportunities. The real estate market has recently experienced a significant
slowdown in the construction of upscale, full-service hotels. Also, upscale,
full-service hotels have particular appeal to both business executives and
upscale leisure travelers. We believe the combination of these factors offers
good potential opportunities for us in this sector of the lodging industry.
We are the lessor of high quality, fully furnished one-, two- and
three-bedroom and larger accommodations through our BrideStreet brand. We lease
substantially all of our Corporate Housing accommodations through flexible,
short-term leasing arrangements in order to match our supply of accommodations
with current and anticipated client demand. We believe our flexible leasing
strategy allows us to react to changes in market demand for particular
geographic locations and types of accommodations. Our management strives to
develop strong relationships with property managers to ensure that we have a
reliable supply of high quality, conveniently located accommodations.
We were formed on August 3, 1998 when we were spun off by CapStar Hotel
Company and became the lessee and manager of all of CapStar's hotels. After the
spin-off, American General Hospitality Corporation, (a Maryland corporation
operating as a real estate investment trust or "REIT") and CapStar Hotel Company
merged to form MeriStar Hospitality Corporation. We then acquired the third
party lessee of most of the hotels owned by American General Hospitality, and
substantially all of the assets and certain liabilities of the third-party
manager of most of the hotels owned by American General Hospitality.
We continue to capitalize on our hospitality management experience and
expertise. We secured a net of nine additional management contracts in 2001. We
also worked closely with the owners of the hotels we manage to obtain revenues
and reduce costs in the face of an extremely difficult economic and operating
environment.
Our senior management team 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 and increase net operating
2
income, while providing our hotel guests with high-quality service and value.
Given the challenging operating environment that has resulted from a slowing
economy coupled with the disruptions caused by the events of September 11, we
believe our experience and strategies are now even more valuable to the owners
of the hotels we manage.
We have invested $10 million in MeriStar Investment Partners, a joint
venture with Oak Hill Capital Partners, L.P. This joint venture was established
to acquire upscale, full-service hotels. As of December 31, 2001, the joint
venture had acquired 10 full-service hotels throughout the United States. We
manage all of these hotels. We are continually looking for additional hotel
investment opportunities that we can bring to new joint venture partners.
Business Strategy
We plan to focus on the internal growth of our two core operating segments
- - Hotel Management and Corporate Housing.
In our Hotel Management business segment, we plan to generate earnings
through base fees, incentive fees and other services from our existing
management contracts as well as additional management contracts we may acquire.
We are also currently negotiating the conversion of our Winston leases of
limited-service hotels to management contracts. We believe this will better
align our interests with Winston, the owners of the properties we lease.
In our Corporate Housing business segment, we plan to generate net income
by improving our inventory management and cost control in our existing markets.
We may also add additional markets in North America if the conditions are
favorable. In our European markets we plan to manage shifting demand in London
and expand the Paris operations acquired in 2001.
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 short-term capital needs. In order
to provide sufficient long-term capital for our operations, we will attempt to
refinance our existing senior secured credit facility during 2002.
Relationship with MeriStar Hospitality
We have historically had a close business relationship with MeriStar
Hospitality Corporation, a REIT, and we have five common board members and five
common senior executives.
REIT Modernization Act
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 to manage
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
3
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 agreements provide us with a more stable source of revenue.
The Intercompany Agreement
We are party to an intercompany agreement with MeriStar Hospitality. 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:
. MeriStar Hospitality is first given the opportunity but elects not to
pursue the investments;
. The investment is on land already owned or leased by us or subject to
a lease or purchase option in favor of us;
. We will operate the property under a trade name owned by us; or
. The investment 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. MeriStar Hospitality will make such an opportunity available to us
only if MeriStar Hospitality determines that:
. 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;
. We are qualified to be the manager of that property; and
. MeriStar Hospitality decides not to have the property operated by the
owner of a hospitality trade name under that trade name.
Because of the provisions of the intercompany agreement, we are restricted
in the nature of our business and the opportunities we may pursue.
Services
- --------
Under our intercompany agreeement with MeriStar Hospitality we provide each
other with certain services. These may include administrative, renovation
supervision, corporate, accounting, financial, risk management, legal, tax,
information technology, human resources, acquisition identification and due
diligence, and operational services. We believe we compensate each other in an
amount that would be charged by an unaffiliated third party for comparable
services. The arrangements relating to the provision of these services were not
subject to arms-length negotiation.
Equity Offerings
- ----------------
If we or MeriStar Hospitality wish to issue securities, the issuing party
will give notice to the other party as promptly as practicable of the proposed
securities issuance. The notice will include the proposed material terms of the
issuance, to the extent determined by the issuing party, including whether such
issuance is proposed to be in a public or private offering, the amount of
securities proposed to be issued and the manner of determining the offering
price, and other terms of the securities. The non-issuing party will cooperate
with the issuing party by assisting in the preparation of any registration
statement or other document required in connection with the issuance and by
providing the issuing party with such information as may be required to be
included in the registration statement or offering document.
4
Term
- ----
The Intercompany Agreement will terminate upon the earlier of August 3,
2008 and a change in our ownership or control.
The Management Agreements with MeriStar Hospitality
Management Agreements
- ---------------------
We currently have management agreements with respect to all 112 hotels
owned by MeriStar Hospitality.
Management Fees and Performance Standards
- -----------------------------------------
Under the management agreements with MeriStar Hospitality, we receive a
management fee for each hotel equal to a specified percentage of aggregate hotel
operating revenues, increased or reduced, as the case may be, by 20% of the
positive or negative difference between:
. The actual excess of total operating revenues over total operating
expenses; and
. A 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 the base fee of 2.5%, or greater than 4.0% (with incentive fees) of
aggregate hotel operating revenues.
Term and Termination
- --------------------
The management agreements with MeriStar Hospitality generally have initial
terms of 10 years with three renewal periods of five years each, except for four
management agreements that have initial terms of one year with additional
one-year renewal periods. 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 of the remaining payments (discounted using a
10% rate) under the then-existing term of 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
present value of projected fees (discounted using a 10% rate) under any
management agreements or leases entered into between MeriStar Hospitality and us
(or our subsidiaries) after August 3, 1998.
If a hotel's gross operating profit 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:
. MeriStar Hospitality did not materially comply with the capital
expenditures contemplated by the budget for either or both of the
applicable fiscal years; or
. 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.
5
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,
and they may grant or withhold their consent at their sole discretion.
Borrowings From MeriStar Hospitality
We have a revolving credit agreement with MeriStar Hospitality under which
MeriStar Hospitality may lend us up to $50 million for general corporate
purposes. On January 25, 2002, we amended this revolving credit agreement to
provide revised, relaxed financial covenants. These covenant revisions are
similar to those made to our senior secured credit facility. The covenant
revisions are effective through the maturity of the revolving credit facility,
which is 91 days after the maturity date of our senior credit facility. As of
December 31, 2001, we had $36.0 million of borrowings outstanding under the
revolving credit facility at an interest rate of 10.8%.
In connection with the execution of the amendment to the revolving credit
agreement, we executed a Term Note with MeriStar Hospitality in the amount of
$13.1 million. This term note refinances our account payable to MeriStar
Hospitality. The Term Note bears interest at the 30-day London Interbank Offered
Rate plus 650 basis points and the maturity date is the same as that of the
revolving credit agreement.
Other Recent Developments
On January 28, 2002, we amended our $100.0 million senior secured credit
facility provided by a syndicate of banks. The amendment provided financial
covenant relief through the maturity of the senior credit facility, and the
interest rate of the senior secured credit facility was increased by 100 basis
points to the 30-day London Interbank Offered Rate plus 450 basis points. The
amendment also reduced the borrowing capacity of the facility to $82.5 million.
The term of the senior secured credit facility was extended to February 28,
2003. As of December 31, 2001, we had $82.5 million of borrowings under the
senior secured credit facility at a weighted average effective interest rate of
7.9%.
BUSINESS
Business Segments
We operate primarily in two segments, Hotel Management and Corporate
Housing. We operate our Corporate Housing division under the trade name
BridgeStreet Corporate Housing Worldwide. Each segment is managed separately
because of its distinctive products and services and is a reportable operating
segment. We evaluate the performance of each segment based on earnings before
interest, taxes, depreciation and amortization.
The following table summarizes certain segment financial data as of and for
the year ended December 31 (amounts in thousands):
2001 2000 1999
-------- ---------- ----------
Hotel Management
Revenues................................................... $201,843 $1,345,144 $1,292,221
Earnings (loss) before Interest, Taxes, Depreciation and
Amortization.............................................. 17,890 16,718 23,500
Total Assets............................................... 22,692 156,972 111,216
Corporate Housing
Revenues................................................... $103,733 $ 64,910 --
Earnings before Interest, Taxes, Depreciation and
Amortization.............................................. 1,139 4,650 --
Total Assets............................................... 19,108 22,878 --
6
Revenues for foreign operations for the year ended December 31 were as
follows (amounts in thousands):
2001 2000 1999
------- ------- -------
Canada................. $11,200 $27,724 $21,477
United Kingdom......... $30,460 $16,152 --
France................. $ 196 -- --
Hotel Management
Operating Strategy
Our Hotel Management division's principal operating objectives are to
generate higher revenue per available room and increase net operating income of
the hotels we manage, while 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.
Personnel at our Corporate Office carry out financing and investment
activities and provide services to support and 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, and Corporate Finance, is
headed by an executive with significant experience in that area. These
departments support the hotel operating executives by providing accounting and
budgeting services, property management tools and other resources that can be
created, maintained and provided more efficiently and effectively, centrally at
our Corporate Office.
Key elements of our management programs include the following:
Comprehensive Budgeting and Monitoring
- --------------------------------------
Our operating strategy begins with an integrated budget planning process.
The budget is implemented by individual on-site managers and monitored by our
corporate staff. Our Corporate Office personnel work with the property-based
managers to set targets for cost and revenue categories at each of the
properties. These targets are based on historical operating performance, planned
renovations, operational efficiencies and local market conditions. Through
effective and timely use of our comprehensive financial information and
reporting systems, we are able to monitor actual performance efficiently. As a
result, we can rapidly adjust prices, staffing levels and sales efforts to take
advantage of changes in the market and to improve revenue yield.
Targeted Sales and Marketing
- ----------------------------
We employ a systematic approach toward identifying and targeting demand
segments for each property in order to maximize market penetration. Executives
at our Corporate Office and property-based managers divide these segments into
smaller subsegments (typically ten or more for each property) and develop
tailored marketing plans to suit each such segment. We support each property's
local sales efforts with Corporate Office sales executives who develop and
implement new marketing programs, and monitor and respond to specific market
needs and preferences. We employ revenue yield management systems to manage each
property's use of the various distribution channels in the lodging industry.
Those channels 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. Our access to these
channels enables us to maximize revenue yields on a day-to-day basis. We
recruit sales teams locally and those teams receive incentive-based compensation
bonuses. All of our sales managers complete our sales training program.
Strategic Capital Improvements
- ------------------------------
We and the owners of our properties plan renovations primarily to enhance a
property's appeal to targeted
7
market segments. This is designed to attract new customers and generate
increased revenue and cash flow. For example, in many of our properties, the
banquet and meeting spaces have been renovated and guest rooms have been
upgraded with high speed internet access and comfortable work spaces to better
accommodate the needs of business travelers and to increase average daily rates.
We base recommendations on capital spending decisions on both strategic needs
and potential rate of return on a given capital investment. While we provide
recommendations and supervision of many capital expenditure projects, the owners
of the properties are responsible for funding capital expenditures.
Selective Use of Multiple Brand Names
- -------------------------------------
We believe the selection of an appropriate franchise brand is essential in
positioning a hotel 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 our relationships with many major hotel franchisors place us in a
favorable position when dealing with those franchisors and allow us to negotiate
favorable franchise agreements with franchisors. We believe our growth in
acquiring management contracts will further strengthen our relationship with
franchisors.
The following chart summarizes information on the national franchise
affiliations of our properties as of December 31, 2001:
8
Leased Properties Managed Properties
----------------- ------------------
Guest % of Guest % of
----- ---- ------ ----
Franchise Rooms Hotels Rooms Rooms Hotels Rooms
- ------------------------------ ----- ------ ----- ------ ------ -----
Hilton(R). -- -- -- 7,920 29 15.3%
Sheraton(R)................... -- -- -- 6,299 21 12.1%
Independent................. -- -- -- 6,266 28 12.1%
Radisson(R)................... -- -- -- 4,664 16 9.0%
Holiday Inn(R)................ 414 2 6.3% 4,439 22 8.6%
Hampton Inn(R)................ 1,964 16 29.8% 2,128 17 4.1%
Doubletree(R)................. -- -- -- 2,049 7 3.9%
Marriott(R)................... -- -- -- 1,841 5 3.5%
Westin(R). ................... -- -- -- 1,715 6 3.3%
Residence Inn(R).............. 168 1 2.5% 1,641 12 3.1%
Embassy Suites(R)............. -- -- -- 1,488 6 2.9%
Crowne Plaza(R)............... -- -- -- 1,395 6 2.7%
Courtyard by Marriott(R)...... 607 4 9.2% 1,299 7 2.5%
Holiday Inn Select(R)......... -- -- -- 1,244 4 2.4%
Wyndham(R).................... -- -- -- 1,070 4 2.1%
Ramada(R)..................... -- -- -- 1,011 6 1.9%
Hilton Garden Inn(R).......... 652 4 9.9% 821 4 1.6%
Comfort Inn(R)................ 1,144 8 17.4% 670 4 1.3%
Holiday Inn Express(R)........ 208 2 3.2% 637 5 1.2%
Doral(R)...................... -- -- -- 575 2 1.1%
Four Points(R)................ -- -- -- 338 2 0.7%
Best Western(R)............... -- -- -- 329 3 0.6%
Doubletree Guest Suites(R).... -- -- -- 292 2 0.6%
Renaissance(R)................ -- -- -- 289 1 0.6%
Comfort Suites(R)............. 215 1 3.3% 238 2 0.5%
Omni(R)....................... -- -- -- 215 1 0.4%
Fairfield Inn(R).............. 110 1 1.7% 200 1 0.4%
Quality Suites(R)............. 168 1 2.5% 177 1 0.3%
Hilton Suites(R).............. -- -- -- 174 1 0.3%
Quality Inn(R)................ -- -- -- 165 1 0.3%
Staybridge Suites(R).......... -- -- -- 108 1 0.2%
Howard Johnson(R)............. -- -- -- 100 1 0.2%
Homewood Suites(R)............ 795 7 12.1% 83 1 0.2%
Hampton Inn & Suites(R)....... 136 1 2.1% -- -- --
----- ----- ----- ------ ----- -----
Total........................ 6,581 48 100.0% 51,880 229 100.0%
===== ===== ===== ====== ===== =====
Emphasis on Food and Beverage
- -----------------------------
We believe popular food and beverage ideas are a critical component in the
overall success of a full-service 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 nationally recognized food outlets such as Pizza
Hut(R), Starbuck's Coffee(R), "TCBY"(R) Yogurt and TJ Cinnamon(R) in several of
our hotels. We believe popular food concepts will strengthen our ability to
attract business travelers and group meetings and improve the name recognition
of our properties.
9
Commitment to Service and Value
- -------------------------------
We are dedicated to providing consistent, exceptional service and value to
our customers. We conduct extensive employee training programs to ensure
high-quality, personalized service. We have created and implemented programs to
ensure the effectiveness and uniformity of our employee training. Our practice
of tracking customer comments through guest comment cards, and the direct
solicitation of guest opinions regarding specific items, allows us to target
investment in services and amenities. Our focus on these areas has enabled us to
attract lucrative group business.
Purchasing
- ---------
We have spent extensive resources to create efficient purchasing programs
that offer the owner of each hotel we manage quality products at very
competitive pricing. These programs are available to all of the properties we
manage. While participation in our purchasing programs is voluntary, we believe
they provide each of our managed hotels with a distinct competitive and economic
edge. In developing these programs, we seek to obtain the best pricing available
for the quality of item or service being sourced, in order to minimize the
operating expenses of the property.
Internet-based Reporting Systems
- --------------------------------
We employ internet-based reporting systems at each of our properties and at
our Corporate Office to monitor the daily financial and operating performance of
the properties. We have integrated information technology services through
networks at many of the properties. Corporate Office 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.
Expansion Strategy
We anticipate 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 selected
capital improvements and focused management will increase the property's ability
to attract key demand segments, demonstrate better financial performance, 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. These dynamics include 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 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 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
10
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 with 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 target 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 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. We plan to continue to manage such
renovation programs as we acquire new management contracts.
Corporate Housing
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. BridgeStreet is a leading provider of corporate housing
services in metropolitan markets located in the United States, Canada and the
United Kingdom. On August 17, 2001, we expanded BridgeStreet into France through
the acquisition of a Paris-based corporate housing company. As of December 31,
2001, our Corporate Housing division had approximately 3,054 apartments under
lease.
Accommodations and Services
Accommodations
- --------------
Through our BridgeStreet brand, we offer high quality, fully furnished
one-, two- and three-bedroom and larger accommodations. These accommodations,
together with the specialized services we offer, 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, we 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. We also are able to customize accommodations at a guest's request with
items such as office furniture, fax machines and computers.
We lease substantially all of our Corporate Housing accommodations through
flexible, short-term leasing arrangements in order to match our supply of
accommodations with client demand. We believe our flexible leasing strategy
allows us to react to changes in market demand for particular geographic
locations and types of accommodations. Our Corporate Housing management strives
to develop strong relationships with property managers to ensure that we have a
reliable supply of high quality, conveniently located accommodations.
Our Corporate Housing accommodations generally are priced competitively
with all-suite or upscale extended-stay hotel rooms, even though we believe our
accommodations are substantially larger than those hotel rooms. We believe we
generally are able to price our accommodations competitively due to:
. Our high quality accommodations;
11
. Our relatively low operating cost structure; and
. Our 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
- -------------------------
Our goal is to provide valuable, cost-effective services to our corporate
clients. Many of these clients' human resource directors, relocation managers or
training directors have significant, national employee lodging requirements. In
particular, BridgeStreet aims to relieve our clients of the administrative
burden often associated with relocating employees and/or providing them with
temporary housing.
We believe 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
- --------------
We strive 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
Our Corporate Housing division 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 their efforts on the key decision makers at each company
responsible for establishing and administering travel and accommodation
policies. These decision makers are 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 worldwide capabilities to our international corporate clients. In
addition, we have expanded BridgeStreet's internet presence to supplement
traditional marketing strategies and to better serve our customers.
We tailor our marketing strategy to the needs of particular clients. For
example, we may market ourselves to a corporation with relocating employees by
focusing on our ability to situate large families in apartments with three or
more bedrooms, our access to accommodations in both metropolitan and suburban
settings, and our access to accommodations that allow pets. In contrast, when
marketing to potential corporate clients in need of short-term housing, we might
emphasize our flexible lease terms and our ability to customize an accommodation
with amenities such as office equipment, including computers, additional
telephone lines and other work-related items.
We intend to continue an advertising program designed to enhance the
BridgeStreet name both inside and outside the flexible accommodation services
industry and broaden our client base. In addition, we promote our BridgeStreet
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.
Expansion Strategies
12
Local Market Share
- ------------------
We have offices in many markets that offer significant opportunity for
expansion. Since our May 2000 acquisition of BridgeStreet, we have trained all
of our BridgeStreet sales employees in our sales and marketing techniques. We
believe this training will allow us to expand our sales in these markets. With a
better-trained sales force and our management experience, we believe we will be
in a better position to penetrate local markets and increase our market share.
National Accounts
- -----------------
We believe national accounts have substantial growth potential for
BridgeStreet. 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. We intend to use a national sales and marketing program
that 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.
Network Partner Relationships
- -----------------------------
We have developed a network partner relationship with flexible
accommodation service providers in the United States and in 39 countries
worldwide. Through network partner agreements, BridgeStreet has expanded the
number of locations where it can serve our 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.
Other Business Information
Employees
As of December 31, 2001, we employed approximately 20,300 persons, of whom
approximately 17,100 were compensated on an hourly basis. Some of the employees
at 21 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 each particular property's
market environment and other 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 licensing, 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
13
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 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, we believe
that we are not required to charge guests the sales and "bed" taxes that are
applicable to establishments furnishing rooms to transient guests. We cannot
provide 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. We believe we
properly charge and remit such taxes in all jurisdictions where we are required
to do so.
14
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. Other full- and limited-service hotels and resorts
compete with our properties in each geographic market in which our properties
are located. Competition in the United States lodging industry is based on a
number of factors, most notably convenience of location, brand affiliation,
price, range of services and guest amenities or accommodations offered, and
quality of customer service and overall product.
In addition, we compete for hotel management contracts against numerous
competitors, many of which have more financial resources than us. These
competitors include the management arms of some of the major hotel brands as
well as independent, non-brand affiliated hotel managers.
The Operating Partnership
The following summary information is qualified in its entirety by the
provisions of the MeriStar H&R Operating Company, L.P. limited partnership
agreement. We have filed a copy of the agreement as an exhibit to this Form
10-K.
MeriStar H&R Operating Company, L.P., our subsidiary operating partnership,
indirectly holds substantially all of our assets. We are the sole general
partner of that partnership. 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. The agreement also gives us, as general partner,
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. These interests may have 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 5, 2002, the ownership of the limited partnership units was as follows:
. 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
. Other limited partners own 543,539 Class A units, 1,275,607 Class B
units and 392,157 Preferred units.
We did not make any distributions during 2001, 2000 or 1999 to the holders
of the Class A units and Class B units. Holders of preferred units receive a
6.5% cumulative annual preferred return based on a capital amount of $3.34 per
unit compounded quarterly to the extent not paid currently. All net income and
capital proceeds received 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.
The holders of each Class A or Class B unit not held by us or one of our
subsidiaries is redeemable 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 with the holder's consent for 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, shares of our common stock having
equivalent aggregate value. If we or the holders of the Preferred units chose to
redeem the Preferred units for our common stock instead of cash, and if our
common stock was valued at that time at less than $3.34 per share, we would have
to issue more shares of our common stock than the number of Preferred units
being redeemed. For example, at December 31, 2001, our stock price was $0.69 per
share. If the Preferred units were redeemed for common stock at that date, we
would have issued 1,898,267 shares of our common stock, which would have
represented approximately 4.9% of our then outstanding common stock, with
respect to 392,157
15
Preferred units then outstanding.
16
RISK FACTORS
Financing Risks
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 and other indebtedness contain a number
of covenants, including requirements to maintain financial ratios, which may
significantly limit our ability to, among other things:
. borrow additional money;
. make capital expenditures and other investments;
. pay dividends;
. merge, consolidate or dispose of assets; and
. incur additional liens.
While we believe our current business plan and outlook provide sufficient
liquidity to fund our operations, a significant decline in our operations could
reduce our cash from operations and cause us to be not in compliance with other
covenants in our debt agreements, leaving us unable to use our senior credit
facility to supply needed liquidity.
Our credit facilities mature during 2003. If we are unable to refinance or
extend the maturities of these credit facilities, our continuing operations
could suffer.
Our senior secured credit facility, as amended in January 2002, matures in
February 2003. As of February 15, 2002, we had approximately $82.5 million of
outstanding indebtedness under that facility. Our revolving credit facility with
MeriStar Hospitality matures 91 days after our senior secured credit facility
matures. As of February 15, 2002, we had approximately $44.0 million of
outstanding indebtedness under the MeriStar Hospitality facility. In addition,
we have a $13.1 million note payable to MeriStar Hospitality, which matures on
the same date as the MeriStar Hospitality facility
We plan to refinance or negotiate an extension of the maturity of our
senior secured credit facility. However, our ability to complete such a
transaction is subject to a number of conditions, many of which are beyond our
control. For example, if there were a further disruption in the financial
markets because of a terrorist attack or other event, we may be unable to access
the financial markets. Failure to complete a refinancing or extension of the
senior secured credit facility would have a material adverse effect on our
company.
We have limited additional availability under our credit facilities.
Our principal sources of liquidity have been our credit facilities and cash
flow from operations. As of February 15, 2002, we had no availability for
further borrowings under our senior credit facility and approximately $6.0
million of availability under the MeriStar Hospitality Facility. On February 28,
2002 we made a required payment of $2.5 million on our senior credit facility.
In addition, the availability under the senior credit facility will decrease by
$2.5 million on June 30, 2002, September 30, 2002 and December 31, 2002. Our
cash flow from operations is subject to a number of risks, including those set
forth below under "Operating Risks." If our cash flow and capital resources are
insufficient to fund our cash needs, which include debt service, we may be
forced to reduce or delay capital expenditures, sell material assets or
operations, obtain additional capital or restructure our indebtedness. In the
event we are required to dispose of material assets or operations, we may not be
able to do so on terms that are acceptable to us. Failure to meet our cash needs
would have a material adverse effect on our company.
Our failure to meet the NYSE's continued listing standards could negatively
impact our ability to raise future capital and could make it more difficult for
investors to obtain quotations or trade our stock.
We have received notification from the NYSE that we are not in compliance
with the continued listing standards of the NYSE because our average closing
share price was less than $1.00 over a consecutive 30-day trading period. The
NYSE's continued listing standards require that we bring our 30-day average
closing price and our share price above $1.00 by June 20, 2002, subject to
certain conditions. Although management is actively seeking to remedy the
problem, we may not be able to resolve the problem in a timely fashion or at
all. If we fail to comply with the listing requirements, our common stock might
be delisted by the NYSE. Delisting from the NYSE would adversely affect the
liquidity of our common stock and our ability to raise additional capital
through a sale of our common stock.
17
Operating Risks
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.
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:
. changes in general and local economic conditions;
. cyclical overbuilding in the lodging industry;
. varying levels of demand for rooms and related services;
. competition from other hotels, motels and recreational properties,
some of which may have greater marketing and financial resources than
us or the owners of the properties we manage;
. dependence on business and commercial travelers and tourism, which may
fluctuate and be seasonal;
. decreases in air travel;
. fluctuations in operating costs;
. the recurring costs of necessary renovations, refurbishment and
improvements of hotel properties;
. changes in governmental regulations that influence or determine wages,
prices and construction and maintenance costs; and
. changes in interest rates and the availability of credit.
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.
The recent economic slowdown has adversely affected the performance of our
hotels and, if it worsens or continues, these effects could be material.
The economic slowdown and the resulting declines in revenue per available
room at the hotels we manage began in March 2001. These trends are currently
continuing. The decline in occupancy during the second, third and fourth
quarters of 2001 has led to declines in room rates as hotels compete more
aggressively for guests. If the current economic slowdown worsens significantly
or continues for a protracted period of time, the declines in occupancy could
also lead to further declines in average daily room rates and could have a
material adverse effect on our EBITDA and operating results.
Acts of terrorism, the threat of terrorism and the ongoing war against terrorism
have impacted and will continue to impact our industry and our results of
operations.
The terrorist attacks of September 11, 2001 have had a negative impact on
our hotel operations in the third and fourth quarters causing lower than
expected performance in an already slowing economy. The events of September 11
have caused a significant decrease in our hotels' occupancy and average daily
rate due to disruptions in business and leisure travel patterns, and concerns
about travel safety. Major metropolitan area and airport hotels have been
adversely affected due to concerns about air travel safety and a significant
overall decrease in the amount of air
18
travel.
The September 11 terrorist attacks were unprecedented in scope, and in
their immediate, dramatic impact on travel patterns. We have not previously
experienced such events, and it is currently not possible to accurately predict
if and when travel patterns will be restored to pre-September 11 levels. While
we have had improvements in our operating levels from the period immediately
following the attacks, we believe the uncertainty associated with subsequent
incidents, threats and the possibility of future attacks will continue to hamper
business and leisure travel patterns for the next several quarters.
The lodging business is seasonal.
Generally, hotel revenues are greater in the second and third calendar
quarters than in the first and fourth calendar quarters. This may not be true,
however, 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. Because of the September 11 events, our operating
results for the third and fourth quarters of 2001 were lower than expected.
Seasonal variations in revenue at the hotels we lease or manage will cause
quarterly fluctuations in our revenues. Events beyond our control, such as
extreme weather conditions, economic factors and other considerations affecting
travel may also adversely affect our earnings.
We may be adversely affected by the limitations in our franchising and licensing
agreements.
The franchise agreements under which we operate and manage hotels generally
contain specific standards for, and restrictions and limitations on, the
operation and maintenance of a hotel in order to maintain uniformity within the
franchisor system. Those limitations may conflict with our philosophy, which is
shared with MeriStar Hospitality, of creating specific business plans tailored
to each hotel and to each market. Standards are often subject to change over
time, in some cases at the discretion of the franchisor, and may restrict a
franchisee's ability to make improvements or modifications to a hotel without
the consent of the franchisor. In addition, compliance with standards could
require a hotel owner to incur significant expenses or capital expenditures.
Action or inaction on our part or by the owner of one of our hotels could result
in a breach of standards or other terms and conditions of the franchise
agreements, and could result in the loss or cancellation of a franchise license.
Loss of franchise licenses without replacement would likely have an adverse
effect on our revenues. 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 due to 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.
This process may require an owner to make substantial capital improvements to a
hotel. Although our management agreements generally require owners to make
capital improvements to maintain the quality of a property, we do not directly
control the timing or amount of those expenditures.
The lodging industry and flexible accommodation service market are highly
competitive.
We have no single competitor or small number of competitors that are
dominant in our business. We operate in areas that contain numerous competitors,
some of which may have substantially greater resources than us or the owners of
our properties. 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; offer greater conveniences, services or amenities; or
significantly expand, improve or introduce new facilities in markets in which we
compete. All of these factors could adversely affect our operations and the
number of suitable business opportunities. In addition, we compete for hotel
management contracts against numerous competitors, many of which have more
financial resources than us. These competitors include the management arms of
some of the major hotel brands as well as independent, non-brand affiliated
hotel managers.
19
Our leasing arrangements may not match demand for services in our markets.
Our 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. Our
goal is to match our supply of accommodations with client demand. Because our
only access to apartment communities will be through leasing arrangements, the
Corporate Housing division will be dependent upon relationships with property
managers in order to conduct our operations effectively. We will strive to
develop strong relationships with property managers to ensure we have a reliable
supply of high-quality, conveniently-located accommodations. In the event these
relationships were to deteriorate or fail to develop, the Corporate Housing
division might not be able to satisfactorily meet client demand requirements. In
addition, as we obtain our supply of accommodations through leases with typical
terms of between one and 12 months, we may not be able to react immediately to
sudden changes in consumer demand, such as that which occurred after the
September 11 attacks, by decreasing or increasing our inventory of
accommodations. Failure to maintain good relationships with property managers
and increased volatility in consumer demand could negatively impact our results
of operations.
Costs of compliance with environmental laws could adversely affect our operating
results.
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.
Substantially all of the hotels we lease or manage have undergone Phase I
environmental site assessments, which generally provide a nonintrusive physical
inspection and database search, but not soil or groundwater analyses, by a
qualified independent environmental engineer. The purpose of a Phase I is to
identify potential sources of contamination for which the hotels may be
responsible and to assess the status of environmental regulatory compliance. The
Phase I assessments have not revealed any environmental liability or compliance
concerns that we believe would have a material adverse effect on our results of
operations or financial condition, 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 addition, substantially all of the hotels we lease or manage have been
inspected to determine the presence of asbestos. Federal, state and local
environmental laws, ordinances and regulations also require abatement or removal
of asbestos-containing materials and govern emissions of and exposure to
asbestos fibers in the air. Asbestos-containing materials are present in various
building materials such as sprayed-on ceiling treatments, roofing materials or
floor tiles at some of the hotels. Operations and maintenance programs for
maintaining asbestos-containing materials have been or are in the process of
being designed and implemented, or the asbestos-containing materials have been
scheduled to be or have been abated, at these hotels. Any liability resulting
from non-compliance or other claims relating to environmental matters could have
a material adverse effect on our results of operations or financial condition.
Aspects of our operations are subject to government regulation, and changes in
regulations may have significant effects on our business.
20
A number of states regulate the licensing of hotels and restaurants,
including liquor licensing, by requiring registration, disclosure statements and
compliance with specific standards of conduct. We believe 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
owners of hotels we manage have invested significant amounts in ADA-required
upgrades, 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.
A high concentration of the hotels we manage or lease are in the upscale,
full-service segment, and our Corporate Housing division primarily services
business travelers, so we may be more susceptible to an economic downturn.
Approximately 85% of the rooms our Hotel Management division currently
manages or leases are in hotels that are in the upper-upscale, full-service
segment. This hotel segment generally permits higher room rates. However, in an
economic downturn, hotels in this segment may be more susceptible to a decrease
in revenues, as compared to hotels in other segments that have lower room rates.
This characteristic may result from hotels in this segment generally targeting
business and high-end leisure travelers. In periods of economic difficulties,
business and leisure travelers may seek to reduce travel costs by limiting trips
or seeking to reduce costs on their trips. Our Corporate Housing division, which
primarily services business travelers, is sensitive to economic conditions for
the same reasons. Adverse changes in economic conditions could have a material
adverse effect on our revenues and results of operations.
Other Risks
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 our 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,
that could have a substantial adverse effect on those aspects of our business
operations and business opportunities that depend on MeriStar Hospitality. For
example, if MeriStar Hospitality ceases to qualify as a real estate investment
trust, the requirement 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 we
anticipate 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. Furthermore, a change in control of MeriStar
Hospitality could have the same effect as a sale of all of the MeriStar
Hospitality hotel properties, and our working relationship with the new owner of
those hotels may not be as close as our working relationship with MeriStar
Hospitality.
Also, if we and MeriStar Hospitality do not negotiate a mutually
satisfactory management arrangement within approximately 30 days 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.
21
Our relationship with MeriStar Hospitality Corporation may lead to general
conflicts of interests that adversely affect our shareholders' interests.
We have historically had a close business relationship with MeriStar
Hospitality. We and MeriStar Hospitality have five common board members and five
common senior executives. Our relationship with MeriStar Hospitality is governed
by an intercompany agreement. That agreement restricts each party from taking
advantage of some business opportunities without first presenting those
opportunities to the other party.
In its relationship with us, MeriStar Hospitality may have conflicting
views on the manner in which we operate and manage their hotels, 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. Inherent potential conflicts of interest
will be present in all of the numerous transactions among us and MeriStar
Hospitality.
We have restrictions on our business and on our future opportunities that could
affect our operations.
So long as the intercompany agreement with MeriStar Hospitality is in
effect, we are prohibited from making real property investments that a REIT
could make unless:
. MeriStar Hospitality is first given the opportunity, but elects not to
pursue the investments;
. The investment is on land already owned or leased by us or subject to
a lease or purchase option in favor of us;
. We will operate the property under a trade name owned by us; or
. The investment 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. MeriStar Hospitality will make such an opportunity available to us
only if MeriStar Hospitality determines that:
. Consistent with its status as a REIT, MeriStar Hospitality must enter
into a management agreement with an unaffiliated third party with
respect to the property;
. We are qualified to be the manager of that property; and
. MeriStar Hospitality decides not to have the property operated by the
owner of a hospitality trade name under that trade name.
Because of the provisions of the intercompany agreement, we are restricted
in the nature of our business and the opportunities we may pursue.
The terms of the intercompany agreement were not negotiated on an
arm's-length basis. Because the two companies share some of the same executive
officers and directors, there is a potential conflict of interest with respect
to the enforcement and termination of the intercompany agreement to our benefit
and to the detriment of MeriStar Hospitality, or to the benefit of MeriStar
Hospitality and to our detriment. Furthermore, because of the independent
trading of the two companies, stockholders in each company may develop divergent
interests that could lead to conflicts of interest. The divergence of interests
could also reduce the anticipated benefits of our close relationship with
MeriStar Hospitality.
We may have conflicts relating to sale of hotels subject to management
agreements
22
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 (discounted using a 10% discount rate), based on fees payable during
the previous twelve months. MeriStar Hospitality's decision to sell a hotel may,
therefore, have significantly different consequences for us and MeriStar
Hospitality.
We rely on the knowledge and experience of some key personnel, and the loss of
these personnel may have a material adverse effect on our operations.
We place substantial reliance on the lodging industry knowledge and
experience and the continued services of our senior management, led by Paul W.
Whetsell and John Emery. While we believe that, if necessary, we could find
replacements for these key personnel, the loss of their services could have a
material adverse effect on our operations. In addition, Messrs. Whetsell and
Emery are currently engaged, and in the future will continue to engage, in the
management of MeriStar Hospitality. Messrs. Whetsell and Emery may experience
conflicts of interest in allocating management time, services and functions
between MeriStar Hospitality and us.
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:
. we are able to issue preferred shares with rights senior to its common
stock;
. our bylaws prohibit action by written consent of our stockholders, and
stockholders may not call special meetings;
. our certificate of incorporation and bylaws provide for a classified
board of directors;
. removal of directors only for cause and upon the vote of two-thirds of
the outstanding shares of our common stock; and
. our bylaws require advance notice for nomination of directors and for
shareholder proposals.
23
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 our actual results, performance or achievements 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 of them or other variations of them or comparable terminology.
Factors which could have a material adverse effect on our operations and future
prospects include, but are not limited to:
. the current slowdown of the national economy;
. economic conditions generally and the real estate market
specifically;
. the impact of the September 11, 2001 terrorist attacks or actual
or threatened future terrorist incidents;
. legislative/regulatory changes (including changes to laws
governing the taxation of REITs);
. availability of debt and equity 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 in this annual
report on Form 10-K.
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events, or otherwise,
other than as required by law.
ITEM 2. PROPERTIES
We maintain our Corporate headquarters in Washington, D.C. We also have
other corporate offices in North Carolina and Texas. We lease our offices. In
addition our Corporate Housing division leases administrative offices in the
majority of the markets in which they operate in the United States, Canada, the
United Kingdom and Paris, France. 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.
The full-service hotels we manage generally feature comfortable, modern
guest rooms, extensive meeting and convention facilities and full-service
restaurant and catering facilities. These facilities are designed to attract
meeting and convention functions from groups and associations, upscale business
and vacation travelers, and banquets and receptions from the local community.
The following tables set forth operating information with respect to the
properties we leased as of December 31:
Number of Guest
--------- ------
Year Properties Rooms ADR Occupancy RevPAR
- ---- ---------- ------ ------- --------- ------
2001..... 48 6,581 $80.22 63.6% $51.03
2000..... 157 35,141 $102.38 71.4% $73.11
1999..... 161 35,655 $96.24 71.4% $68.74
The following table summarizes operating information for the properties we
managed as of December 31:
24
Number of Guest
--------- -----
Year Properties Rooms
- ---- ---------- -----
2001..... 229 51,880
2000..... 59 12,172
1999..... 54 9,693
The following table sets forth operating information with respect to our
Corporate Housing division for the year ended December 31:
Average
-------
Number
------
Number of of
--------- --
Year Markets Units ADR Occupancy
- ---- ------- ----- --- ---------
2001..... 21 3,589 $84.47 85.3%
2000..... 22 3,231 $83.80 88.4%
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 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
We did not submit any matters to a vote of security holders during the
fourth quarter of 2001.
25
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
5, 2002, 37,188,574 shares of our common stock were issued and outstanding, held
by approximately 1,049 record holders.
The following table lists, for the fiscal quarters indicated, 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 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........................................ $2.71 $1.60
Second Quarter....................................... 2.14 1.49
Third Quarter........................................ 1.85 0.87
Fourth Quarter....................................... 0.98 0.54
Fiscal 2002
First Quarter (through March 5, 2002)................ $0.84 $0.65
The last reported sale price of our common stock on the NYSE on March 5,
2002 was $0.70.
In December 2001, we received notification from the NYSE that we were not
in compliance with the continued listing standards of the NYSE because our
average closing share price was less than $1.00 over a consecutive 30-day
trading period. The NYSE's continued listing standards require that we bring our
30-day average closing price and our share price above $1.00 by June 20, 2002,
subject to certain conditions. We are currently evaluating our alternatives with
regard to complying with this standard.
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. The agreements governing our outstanding indebtedness restrict our
ability to pay dividends. 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 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 in MIP
Lessee, L.P.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial
information. We have extracted the selected operating results and balance sheet
data from our 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.
26
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- ----------- ----------- --------- --------
(dollars in thousands, except per share amounts)
Operating Results:
Revenues:
Rooms ................................................. $ 138,600 $ 929,585 $ 894,983 $ 395,633 $ 9,880
Food, beverage and other .............................. 17,435 397,205 387,091 152,276 1,871
Corporate housing ..................................... 103,638 64,872 -- -- --
Management and other fees ............................. 46,201 19,206 10,040 14,528 12,088
--------- ----------- ----------- --------- --------
Total revenues ................................... 305,874 1,410,868 1,292,114 562,437 23,839
--------- ----------- ----------- --------- --------
Operating expenses:
Departmental expenses:
Rooms ................................................. 31,449 219,197 213,239 95,627 2,533
Food, beverage and other .............................. 12,119 272,923 260,537 107,860 1,170
Corporate housing expense ............................. 76,019 42,827 -- -- --
Undistributed operating expenses:
Administrative and general ............................ 75,683 233,553 208,576 84,881 10,473
Participating lease expense ........................... 59,375 431,014 404,086 186,601 4,135
Property operating costs .............................. 33,250 188,235 182,412 76,300 1,917
Depreciation and amortization ......................... 12,958 9,470 6,014 3,372 636
Merger and lease conversion costs ..................... 4,239 2,989 -- -- --
Charges to investments in and advances to
affiliates, account and notes receivable and other ... 16,098 -- -- -- --
Loss on asset impairment .............................. -- 21,657 -- -- --
Restructuring expenses ................................ 3,479 -- -- -- --
--------- ----------- ----------- --------- --------
Total operating expenses ......................... 324,669 1,421,865 1,274,864 554,641 20,864
--------- ----------- ----------- --------- --------
Net operating income (loss) ................................ (18,795) (10,997) 17,250 7,796 2,975
Interest expense, net ...................................... 11,303 6,401 4,692 2,017 56
Equity in (earnings) loss of affiliates .................... (732) (751) 31 1,337 (46)
Minority interests ......................................... (1,130) (1,094) 1,916 155 103
Income tax expense (benefit) /(A)/ ......................... (9,287) (6,173) 3,926 337 --
--------- ----------- ----------- --------- --------
Net income (loss) ................................ $ (18,949) $ (9,380) $ 6,685 $ 3,950 $ 2,862
========= =========== =========== ========= ========
Basic earnings (loss) per share /(B)/ ...................... $ (0.51) $ (0.27) $ 0.24 $ 0.02 --
Diluted earnings (loss) per share /(B)/ .................... $ (0.51) $ (0.27) $ 0.24 $ 0.02 --
Number of shares of common stock issued and
outstanding /(C)/ ....................................... 37,189 35,976 29,625 25,437 --
Other Financial Data:
EBITDA /(D)/ ............................................... $ (5,105) $ (776) $ 23,233 $ 9,831 $ 3,657
Net cash provided by (used in) operating activities ........ (10,156) 5,028 27,528 10,125 11,167
Net cash used in investing activities ...................... (11,339) (32,486) (32,837) (102,109) (6,501)
Net cash provided by (used in) financing
activities .............................................. 18,497 33,308 (4,100) 76,113 4,208
Balance Sheet Data:
Total assets ............................................ $ 242,937 $ 338,214 $ 258,144 $ 247,529 $ 84,419
Long-term debt .......................................... 118,500 100,187 57,762 67,812 981
/(A) We did not include a provision for federal and state income taxes prior to
August 3, 1998 because our predecessor entities were partnerships, and all
income tax liabilities were passed through to the individual partners./
/(B) Our calculations of basic and diluted earnings per share for the year ended
December 31, 1998 are based on earnings for the period from the date of our
spin-off from CapStar Hotel Company, 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 it is industry practice to evaluate hotel
27
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
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./
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
We manage, lease, and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, and golf markets. Our portfolio is diversified by franchise and brand
affiliations. We were created in connection with the August 3, 1998 merger of
American General Hospitality Corporation and CapStar Hotel Company. At the time
of the merger, CapStar distributed all of the shares of our common stock to its
shareholders and we became a separate, publicly traded company. The merger
created MeriStar Hospitality Corporation, a real estate investment trust. We are
the manager and operator of all of the hotels owned by MeriStar Hospitality.
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. BridgeStreet provides corporate housing services in the
United States, Canada, the United Kingdom and France. Our consolidated financial
statements include the operating results of BridgeStreet since May 31, 2000. We
operate our corporate housing division under the name BridgeStreet Corporate
Housing Worldwide or BridgeStreet.
Until January 1, 2001, we leased from MeriStar Hospitality their hotels
that we operated. As of January 1, 2001, we assigned these participating leases
to wholly-owned taxable subsidiaries of MeriStar Hospitality. In connection with
the assignment, MeriStar Hospitality's taxable subsidiaries executed new
management agreements with us to manage these hotels. Under these management
agreements, MeriStar Hospitality's taxable subsidiaries pay us a management fee
for each property. The management agreements were structured to substantially
mirror the economics of the former leases. We and MeriStar Hospitality did not
exchange any cash consideration except for the transfer of hotel operating
assets and liabilities to the taxable subsidiaries. Under the new management
agreements, the base management fee is 2.5% of total hotel revenue plus
incentives payments, based on meeting performance thresholds that could total up
to 1.5% of total hotel revenue. The agreements have an initial term of 10 years
with three renewal periods of five years each at our option, subject to some
exceptions. Because these leases have been assigned to MeriStar Hospitality's
taxable subsidiaries, those taxable subsidiaries now bear the operating risk
associated with these hotels.
On January 1, 2001, we invested $100,000 in Flagstone Hospitality
Management LLC, a joint venture established to manage 54 hotels owned by RFS
Hotel Investors, Inc. We owned 51% of, and controlled, the joint venture during
2001. We have included the results of Flagstone in our consolidated financial
statements since January 1, 2001. Effective January 1, 2002, Flagstone became a
single member LLC, of which we own 100%.
On August 17, 2001, our corporate housing division acquired Paris-based
Apalachee Bay Properties. Apalachee Bay is an apartment finder service, third-
party manager and a property sales brokerage business, representing 300 units.
Apalachee Bay has been renamed BridgeStreet Paris. Our consolidated financial
statements include the operating results of BridgeStreet Paris since August 17,
2001.
The following table summarizes our historical portfolio of managed and
leased hotel properties as of December 31:
Leased Managed Total
------------------- ------------------- -------------------
Properties Rooms Properties Rooms Properties Rooms
---------- ------ ---------- ------ ---------- ------
2001 ......... 48 6,581 229 51,880 277 58,461
2000 ......... 157 35,141 59 12,172 216 47,313
1999 ......... 161 35,655 54 9,693 215 45,348
As discussed above, effective January 1, 2001, we converted 106 leases with
MeriStar Hospitality to long-term management contracts. In addition, during
2001, we terminated three leases with another hotel owner and converted those
leases to long-term management contracts. Our remaining 48 leases are with
Winston Hotels, Inc. We have had, and continue to have, discussions with Winston
to convert these leases to long-term management contracts. We
29
believe management contracts provide a better alignment of interests between a
hotel's owner and operator.
Business Summary
The terrorist attacks of September 11, 2001 have had a negative impact on
our hotel operations in the third and fourth quarters, causing lower than
expected performance in an already slowing economy. The events of September 11th
have caused a significant decrease in our hotels' occupancy and average daily
rate due to disruptions in business and leisure travel patterns and concerns
about travel safety. Major metropolitan area and airport hotels have been
adversely affected due to concerns about air travel safety and a significant
overall decrease in the amount of air travel. Although the conversion of our
leases with MeriStar Hospitality to management contracts on January 1, 2001 has
significantly reduced the earnings volatility from hotel operations, we still
experience the effects of market downturns because our management fees are tied
directly to hotel revenues, and we continue to lease 48 hotel properties not
owned by MeriStar Hospitality.
In response to the decline in operating activity following the terrorist
attacks, we have worked with our hotel owners to aggressively review and reduce
the cost structure of the hotels we operate. We have implemented numerous
cost-cutting strategies, including the following items:
. reducing overall staffing and reducing hours for remaining hourly
staff,
. instituting hiring and wage freezes for all properties,
. revising operating procedures to gain greater efficiencies and/or
reduce costs,
. closing under-utilized or duplicative facilities and outlets,
. creating revised minimum staffing guides for each department in our
hotels, and
. reducing capital expenditures to focus primarily on life-safety
requirements, and deferring or terminating discretionary capital
outlays.
The September 11, 2001 terrorist attacks were unprecedented in scope and in
their immediate dramatic impact on travel patterns. We have not previously
experienced such events, and it is currently not possible to accurately predict
if and when travel patterns will be restored to pre-September 11 levels. While
we have had improvements in our operating levels from the period immediately
following the attacks, we believe the uncertainty associated with subsequent
incidents and the possibility of future attacks will continue to hamper business
and leisure travel patterns for the next several quarters.
Our senior secured credit facility requires us to meet or exceed certain
financial performance ratios at the end of each quarter. Travel disruptions and
safety concerns following the terrorist attacks on September 11, 2001 and the
slowdown of the national economy resulted in a significant negative impact to
the lodging industry and our operations. This decline in operations would have
caused us to be out of compliance with certain financial covenants specified in
our senior credit facility. However, on October 24, 2001, we finalized a waiver
on all affected financial covenants with our senior bank group. This waiver to
the senior credit facility waived these covenants through February 28, 2002.
On January 28, 2002, we amended our senior credit facility to provide more
flexibility under certain financial covenants and allow us to extend the
maturity from February 2002 until February 2003. The interest rate on the
revolver increases 100 basis points to 30-day London Interbank Offered Rate plus
450 basis points. We currently have no additional borrowing capacity under this
credit facility. The amendment also sets restrictions on investments and capital
expenditures. The availability under our senior secured credit facility must
also be reduced by $2.5 million on each of the following dates: February 28,
2002, June 30, 2002, September 30, 2002 and December 31, 2002. In addition, on
January 31, 2003, the availability under our senior credit facility will be
further reduced in the amount of our earnings before interest, taxes,
depreciation and amortization greater than $20 million, for 2002.
On January 25, 2002, we amended our credit facility with MeriStar
Hospitality to provide financial covenant relief similar to that in our senior
credit facility. The maturity date remains 91 days after the maturity of the
senior credit facility. The interest rate also remains the same, at the 30-day
London Interbank Offered Rate plus 650 basis points.
30
In January 2002, in connection with the execution of the amendment to the
revolving credit facility with MeriStar Hospitality, we executed a Term Note
payable to MeriStar Hospitality in the amount of $13.1 million to refinance our
outstanding account payable due to MeriStar Hospitality. The Term Note bears
interest at the 30-day London Interbank Offered Rate plus 650 basis points and
matures on the same date as our revolving credit facility with MeriStar
Hospitality.
In December 2001, we received notification from the NYSE that we were not
in compliance with the continued listing standards of the NYSE because our
average closing share price was less than $1.00 over a consecutive 30-day
trading period. The NYSE's continued listing standards require that we bring our
30-day average closing price and our share price above $1.00 by June 20, 2002,
subject to certain conditions. We are currently evaluating our alternatives with
regard to complying with this standard.
Critical Accounting Policies
Accounting estimates are an integral part of the preparation of our
consolidated financial statements and our financial reporting process and are
based on our current judgments. Certain accounting estimates are particularly
sensitive because of their significance to our consolidated financial statements
and because of the possibility that future events affecting them may differ
markedly from our current judgments.
The most significant accounting policies affecting the Company's
consolidated financial statements relate to:
. the evaluation of impairment of certain long-lived assets;
. estimation of valuation allowances, specifically those related to
income taxes and allowance for doubtful accounts;
. estimates of restructuring and other accruals; and
. the evaluation of the fair value of our derivative instruments.
Impairment of long-lived assets
Whenever events or changes in circumstances indicate that the carrying
value of a long-lived asset (including all intangibles) may be impaired, we
perform an analysis to determine the recoverability of the asset's carrying
value. We make estimates of the undiscounted cash flows from the expected future
operations of the asset. If the analysis indicates that the carrying value is
not recoverable from future cash flows, the asset is written down to estimated
fair value and an impairment loss is recognized. Any impairment losses are
recorded as operating expenses. In 2000, we recognized $21.7 million of
impairment losses. We did not recognize any impairment losses in 2001 or 1999.
We review long-lived assets for impairment when one or more of the
following events has occurred:
a. Current or immediate short-term (future twelve months) projected cash
flows are significantly less than the most recent historical cash
flows.
b. The unplanned departure of an executive officer or other key personnel
that could adversely affect our ability to maintain our competitive
position and manage future growth.
c. A significant adverse change in legal factors or an adverse action or
assessment by a regulator that could affect the value of the goodwill
or other long-lived assets.
d. Events that could cause significant adverse changes and uncertainty in
business and leisure travel patterns.
We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In
31
projecting the expected future operations of the asset, we base our estimates on
future budgeted earnings before interest expense, income taxes, depreciation and
amortization, or EBITDA, amounts and use growth assumptions to project these
amounts out over the expected life of the underlying asset. Our growth
assumptions are based on assumed future improvements in the national economy and
improvements in the demand for lodging; if actual conditions differ from those
in our assumptions, the actual results of each asset's actual future operations
could be significantly different from the estimated results we used in our
analysis. Our operating results also are subject to risks set forth under "Risk
Factors - Operating Risks."
Valuation Allowances
We use our judgment in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance recorded
against our deferred tax assets. We have recorded a $7.9 million valuation
allowance as of December 31, 2001 to reduce our deferred tax assets to the
amount that we believe is more likely than not to be realized. This is an
allowance against some, but not all, of our recorded deferred tax assets. We
have considered estimated future taxable income and prudent and feasible ongoing
tax planning strategies in assessing the need for a valuation allowance. Our
estimates of taxable income require us to make assumptions about various factors
that affect our operating results, such as economic conditions, consumer demand,
competition and the other factors that are listed in Item 1, "Risk
Factors--Operating Risks" and "Forward-Looking Information." Our actual results
may differ from these estimates. Based on actual results or a revision in future
estimates, we might determine that we would not be able to realize additional
portions of our net deferred tax assets in the future. If that occurred, we
would record a charge to the income tax provision in that period. We also might
determine that we would be able to realize all or part of the deferred tax
assets covered by the existing valuation allowance. If that occurred, we would
record a credit to the income tax provision in that period.
We record an allowance for doubtful accounts based on our judgment in
determining the ability and willingness of our customers to make required
payments. Our judgments in determining customers' ability and willingness are
based on past experience with customers and our assessment of the current and
future operating environments for our customers. If a customer's financial
condition deteriorates or a management contract is terminated in the future,
this could decrease a customer's ability or obligation to make payments. If that
occurred, we might have to make additional allowances, which could reduce our
earnings.
Restructuring and Other Accruals
During 2001, the slowing national economy and travel disruptions from the
September 11, 2001 terrorist attacks negatively affected our operations. In
response to these events, we implemented restructuring plans to reduce our
overhead costs. These plans included termination of some personnel positions as
well as the abandonment of some leases. We accrued the total estimated cost of
the restructuring at the time the plans were finalized and communicated to our
employees. These estimates require our judgment as to the outcome of net lease
costs. If actual results differ from our estimates, we will be required to
adjust our financial statements when we identify the differences.
Derivative Instruments and Hedging Activities
We enter into derivative instruments for cash flow hedging purposes to
limit the impact of interest rate changes on earnings and cash flows. We have
designated our interest rate swap agreements as hedges against changes in future
cash flows associated with the interest payments of our variable rate debt
obligations. Accordingly, we reflect the interest rate swap agreements at fair
value in our consolidated balance sheet as of December 31, 2001, and we record
in stockholders' equity the related unrealized gains and losses on these
contracts. We assess interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
Results of Operations
32
Historical Year Ended December 31, 2001 Compared to Pro Forma Year Ended
December 31, 2000
Effective January 1, 2001, we assigned our leases with MeriStar Hospitality
to taxable subsidiaries of MeriStar Hospitality. In connection with the
assignment, we executed management agreements with the taxable subsidiaries of
MeriStar Hospitality for the properties we previously leased from MeriStar
Hospitality. Through December 31, 2000, our results of operations included both
operating revenue and expenses for these hotels. Beginning January 1, 2001, our
results of operations reflect only management fee revenue from these hotels.
Therefore, our operating results for the year ended December 31, 2001 are not
directly comparable to those for the same period in 2000.
Because of the lease conversions, we believe presenting the pro-forma
effect - showing our results as if the lease conversions had occurred earlier -
provides a more meaningful view of our operating results. For comparative
purposes, the following table shows the results for the twelve months ended
December 31, 2000 on a pro forma basis assuming the leases with MeriStar
Hospitality were converted to management contracts on January 1, 2000. These pro
forma results are compared to the actual results for the twelve months ended
December 31, 2001 (dollars in thousands, except per share amounts):
2001 2000
---- ----
Total Revenue ............................................................. $ 305,874 $ 279,193
Operating expenses by department:
Rooms ................................................................. 31,449 34,405
Food and beverage ..................................................... 8,069 9,829
Other operating department expenses ................................... 4,050 4,869
Corporate housing ..................................................... 76,019 42,827
Undistributed operating expenses:
Administrative and general ............................................ 75,683 66,001
Participating lease expense ........................................... 59,375 66,800
Property operating costs .............................................. 33,250 31,343
Depreciation and amortization ......................................... 12,958 9,470
Merger and lease conversion costs ..................................... 4,239 2,989
Charges to investments in and advances to affiliates, accounts and
notes receivable and other ............................................ 16,098 --
Loss on asset impairment .............................................. -- 21,657
Restructuring charges ................................................. 3,479 --
Earnings (loss) before interest, taxes, depreciation and
amortization .............................................................. (5,105) (776)
Net income (loss) ......................................................... (18,949) (9,380)
Diluted income (loss) per common share .................................... $ (0.51) $ (0.27)
As explained above, through December 31, 2000 we recorded the operating
revenues and expenses of the hotels we leased from MeriStar Hospitality in our
results of operations. The pro forma 2000 results reverse the effect of
recording the operating revenues and expenses of these hotels, and instead
reflect the management fee revenue we would have earned from operating those
hotels. Since we consider the pro forma 2000 operating amounts as a more
meaningful comparison to our actual 2001 results, we will discuss changes
relative to those pro forma 2000 amounts rather than our actual reported 2000
results.
Revenues
- --------
We earn revenue from leased hotels, management contracts and related
services and corporate housing operations. We recognize revenue from our leased
hotels from their rooms, food and beverage and other operating departments as
earned at the close of each business day. Our management and other fees consist
of base and incentive management fees received from third-party owners of hotel
properties and fees for other related services we provide. We recognize base
fees and fees for other services as revenue when earned in accordance with the
individual management contracts. In accordance with Staff Accounting Bulletin
No. 101, "Revenue Recognition in
33
Financial Statements," we accrue incentive fees in the period when we are
certain they are earned. For contracts with annual incentive fee measurements,
we typically will record any incentive fees in the last month of the annual
contract period.
The following table shows the operating statistics for our full-service
managed and limited-service leased hotels on a same-store basis for the twelve
months ended December 31:
2001 2000 Change
------- ------- ------
Revenue per available room ........... $ 66.85 $ 73.52 (9.1%)
Average daily rate ................... $102.01 $103.32 (1.2%)
Occupancy ............................ 65.5% 71.2% (8.0%)
Overall, disruptions in travel patterns and travel safety concerns due to
the terrorist attacks on September 11, 2001 and the slowing United States
economy had a major negative effect on our managed and leased hotels during the
last half of 2001. In addition, the travel concerns and a slowing economy have
had a negative effect on our corporate housing operations. We have seen a sharp
reduction in both business and leisure travel. This is reflected in the 9.1%
reduction in revenue per available room and the 8.0% reduction in occupancy for
2001 compared to 2000. This slowdown was more pronounced during the third and
fourth quarters of 2001.
On a pro forma basis, our total revenue increased $26.7 million to $305.9
million in 2001 compared to $279.2 million in 2000. Major components of this
increase were:
. Our corporate housing revenue increased by $38.8 million due to the
inclusion of twelve months of BridgeStreet operations in 2001,
compared to only seven months of BridgeStreet operations in 2000.
. Our revenue from our leased hotels (from rooms, food and beverage and
other operating departments) decreased $13.0 million, resulting from
the disruptions in travel patterns due to travel safety concerns and
the slowdown of the economy as discussed above.
. Our management fee revenue remained stable. Our revenue from existing
management contracts was lower than the prior year by approximately
$5.7 million due to the disruptions in travel patterns due to travel
safety concerns and the slowdown of the economy as discussed above.
This decline was offset, however, by a $5.8 million increase in our
management fees from Flagstone. We included Flagstone's results in our
consolidated results beginning January 1, 2001, the time of our
$100,000 investment, representing 51% ownership and control.
Operating Expenses by Department
- --------------------------------
On a pro forma basis, our operating expenses by department, including room,
food and beverage, other operating department expenses and corporate housing
increased by $27.7 million from $91.9 million in 2000 to $119.6 million in 2001.
Major components of this increase were:
. Our corporate housing expenses increased $33.2 million due to the
inclusion of twelve months of BridgeStreet operations in 2001,
compared to only seven months of BridgeStreet operations in 2000.
. Our operating expenses from our leased hotels (from room, food and
beverage and other department expenses) decreased $5.5 million. This
was a direct result of the decrease in revenue from our leased hotels
described above.
Undistributed Operating Expenses
- --------------------------------
Our undistributed operating expenses include the following items:
. administrative and general;
34
. property operating costs;
. participating lease expense;
. depreciation and amortization;
. loss on asset impairment, merger and lease conversion costs;
. charges to investments in and advances to affiliates, accounts and
notes receivable, and other; and
. restructuring expenses.
On a pro forma basis our total undistributed operating expenses increased
by $6.8 million from $198.3 million in 2000 to $205.1 million in 2001. Major
components of this are described in the following paragraphs.
Administrative and general expenses are associated with the management of
hotels and corporate housing facilities and consist primarily of expenses such
as operations management, sales and marketing, finance, information technology
support, human resources and other support services, as well as general
corporate expenses. On a pro forma basis, administrative and general expenses
increased by $9.7 million from $66.0 million in 2000 to $75.7 million in 2001.
This increase was primarily due to a $5.5 million increase in expenses
attributable to Flagstone in 2001 and a $1.6 million increase attributable to
BridgeStreet in 2001.
Participating lease expense represents base rent and participating rent
that is based on a percentage of rooms and food and beverage revenues from the
leased hotels. On a pro forma basis, participating lease expense decreased by
$7.4 million from $66.8 million in 2000 to $59.4 million in 2001. This decrease
relates directly to the decrease in revenues from leased hotels.
Property operating costs include energy costs, repairs and maintenance,
franchise fees, insurance, taxes, management fees and other expenses. On a pro
forma basis, property operating costs increased by $1.9 million from $31.3
million in 2000 to $33.2 million in 2001. This increase was primarily due to a
$2.2 million increase in expenses related to BridgeStreet offset by a decrease
in leased hotels' costs as a result of decreased revenues from those hotels.
On a pro forma basis, depreciation and amortization increased by $3.5
million from $9.5 million in 2000 to $13.0 million in 2001. Approximately $2.1
million of this increase was attributable to including a full year of
BridgeStreet's operations in our 2001 results, as compared with only seven
months of BridgeStreet operations in 2000. The remaining $1.4 million increase
is attributable to additions to fixed assets and intangible assets during 2000
and 2001.
Merger and lease conversion costs of $3.0 million for 2000, included the
expenses related to our proposed merger with American Skiing Company ($2.7
million) and costs related to the conversion of the MeriStar Hospitality leases
to management contracts ($0.3 million). During 2001, we recorded $4.2 million of
additional costs related to the proposed merger with American Skiing Company. On
March 22, 2001, we and the other parties to the merger agreement mutually agreed
to terminate the agreement. There were no termination fees payable to any of the
parties.
The operating expense line item titled charges to investments in and
advances to affiliates, accounts and notes receivable, and other includes
reserves against accounts and notes receivables and charges to write-off the
remaining book values of impaired and abandoned assets. The following is a
summary of the amounts comprising the $16.1 million charge we took in 2001:
. During the first quarter of 2001, several of the hotels that we manage
experienced severe financial difficulties, which affected the
collectibility of our accounts and notes receivable from these hotels.
One of the hotel owners filed for bankruptcy. The lender subsequently
foreclosed on this hotel in early July 2001. We terminated our
management agreement with another hotel owner in the second quarter of
2001. As a result, we fully reserved for the amounts due from these
entities in the amount of $5.1 million and recorded a charge to
write-off other related assets in the amount of $1.8 million.
. We also wrote off our investments in an internet services company and
certain real estate ventures. The internet services company
significantly curtailed its operations during the first quarter of
2001. We
35
are involved in a dispute with our partners in the real estate
ventures and believe that the recorded values of our investments in
these real estate ventures have been impaired as a result of this
dispute. We recorded a charge in the amount of $5.2 million to reduce
the book values of these assets.
. In connection with the conversion of our lease contracts to management
contracts, we implemented changes to our business structure, which
resulted in the abandonment of certain fixed assets totaling $2.9
million.
. One of our former partners in our operating partnership claimed
that we owed them special distributions under the partnership
agreement. We have estimated the amount of distributions due to the
former partner to be $325,000, which we accrued at March 31, 2001 and
paid later in 2001.
. We exited three management contracts in October 2001. This resulted in
uncollectible management fees and reimbursable expenses. We fully
reserved the amount due from these entities in the amount of $798,000
in September 2001. We have not collected any amounts on these
receivables.
Loss on asset impairment includes a write-down of intangible assets during
2000 in accordance with SFAS No. 121. In the fourth quarter of 2000, we
conducted a review of each property's performance and anticipated future
performance and our expected future income from those properties. As a result of
this review, we reduced our expectation for the future performance of some of
our leased limited-service hotels. This process triggered an impairment review
of our long-lived intangible assets associated with these hotels, including
goodwill. The review included analysis of our expected future undiscounted cash
flows in comparison to net book value of the long-lived intangible assets. This
review indicated that certain long-lived assets related to our leased
limited-service hotels, 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 realizable fair
value and recorded an impairment loss of $21.7 million to adjust the goodwill
related to our leased limited-service hotels.
We incurred restructuring charges of $3.5 million, consisting of severance-
related costs and lease termination costs in connection with three separate
restructurings during 2001, as described below:
. During the second quarter of 2001, we restructured our Corporate
Office as a result of the change to management contracts with MeriStar
Hospitality and the termination of the merger agreement with American
Skiing Company. This restructuring is expected to reduce our
annualized corporate overhead expenditures by approximately 10%, or
$3.5 million. We recorded $0.9 million in 2001 in employee severance
costs and lease termination costs related to this restructuring.
. During the third and fourth quarters of 2001, we restructured our
Corporate Housing segment as a result of the slowdown in the national
economy and shifted our focus from certain markets. We closed our
offices in four markets: Jackson, Mississippi; Lexington, Kentucky;
Denver, Colorado; and Phoenix, Arizona. We also realigned and
eliminated certain administrative functions to achieve additional cost
savings. We recorded a $1.2 million restructuring charge in 2001 for
employee severance costs, lease termination costs and other expenses
related to this restructuring. This restructuring is expected to
reduce our annualized net expense by approximately $1.5 million.
. During the fourth quarter of 2001, we recorded a $1.4 million
restructuring charge. This charge is due to additional personnel
reductions in our Corporate Office. This restructuring was the result
of declines in our business due to the slowdown of the national
economy and the disruptions in business and leisure travel due to
travel safety concerns since the terrorist attacks on September 11,
2001. This restructuring is expected to reduce our annualized
corporate overhead by approximately $1.9 million.
Earnings (loss) before Interest, Taxes, Depreciation and Amortization
- ---------------------------------------------------------------------
On a pro forma basis, earnings (loss) before interest, taxes, depreciation
and amortization, or EBITDA, decreased $4.3
36
million from $(0.8) million in 2000 to $(5.1) million in 2001. Major components
of this decrease were:
. Our Corporate Housing segment's EBITDA decreased by $3.5 million due
to the excess inventory carried in 2001 and the inclusion of
underperforming markets for a full twelve months in 2001 compared to
seven months in 2000. During the latter half of 2001, we restructured
our Corporate Housing segment as described above.
. Our Hotel Management segment's EBITDA increased by $1.2 million from
$16.7 million in 2000 to $17.9 million in 2001 due to the increase in
number of properties we managed and leased from 2000 to 2001 and an
increase in EBITDA from our existing limited-service hotels.
. Our remaining EBITDA decreased by $2.0 million primarily due to the
following charges recorded in 2000 and 2001:
. Merger and lease conversion costs of $4.2 million in 2001
compared to $3.0 million in 2000; o Charges to investments in and
advances to affiliates, accounts and notes receivable, and other
of $16.1 million in 2001;
. Goodwill impairment of $21.7 million in 2000;
. Restructuring charges of $3.5 million in 2001; and
. Losses of $1.1 million in our vacation ownership division in
2000. This division was eliminated during 2001 as part of our
restructuring plan in the second quarter.
Net loss
- --------
Our net loss increased by $9.5 million from $(9.4) million in 2000 to
$(18.9) million in 2001. This increase is due to the decrease of $4.3 million in
EBITDA and the increase of $3.5 million in depreciation and amortization expense
as discussed above. The major components of the $1.8 million remaining increase
were:
. Our interest expense increased by $4.9 million in 2001 due to the
increase in our total outstanding long-term debt balance.
. Our income tax benefit increased by $3.1 million due to the increase
of $12.7 million in our loss before income taxes offset by a decrease
of 6.8% in our effective tax rate.
Historical Year Ended December 31, 2000 Compared to Historical Year Ended
December 31, 1999
Revenues
- --------
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%)
Our total revenue increased $118.8 million, or 9.2%, to $1,410.9 million in
2000, compared to $1,292.1 million in 1999.
. Our corporate housing revenue increased by $64.9 million in 2000 due
to the acquisition of BridgeStreet on May 31, 2000.
. Our revenue from our leased hotels (from rooms, food and beverage and
other operating departments) increased $44.7 million in 2000 resulting
from a 4.9% improvement in revenue per available room. The improvement
in revenue per available room was primarily the result of a 5.5%
increase in the average
37
daily rate.
. Our management fee revenue increased by $9.2 million in 2000,
resulting from an increase in the number of management contracts in
2000 and better performance of existing hotels.
Operating Expenses by Department
- --------------------------------
Our total operating expenses by department increased $61.1 million to
$534.9 million in 2000 compared to $473.8 million in 1999. The increase is
primarily the result of:
. The acquisition of BridgeStreet in May 2000, which accounted for $42.8
million in operating expenses in 2000.
. Our operating expenses from our leased hotels (from room, food and
beverage and other department expenses) increased $18.4 million in
2000 due to the increase in leased hotel revenue described above.
Undistributed Operating Expenses
- --------------------------------
Our total undistributed operating expenses increased $85.8 million to
$886.9 million in 2000 compared to $801.1 million in 1999.
. Our administrative and general costs, increased by $25.0 million in
2000 due to higher insurance and labor costs.
. Our participating lease expense and property operating costs increased
by $32.8 million in total in 2000, which is attributable to the
increase in lease revenue described above.
. Depreciation and amortization increased by $3.4 million in 2000, $1.5
million of which was due to the acquisition of BridgeStreet, while the
remaining $1.9 million increase was due to additions to fixed assets
and intangible assets, including the goodwill recorded as a result of
the BridgeStreet acquisition.
. We recorded a $21.7 million loss on asset impairment in accordance
with SFAS No. 121 during 2000 because of write-downs in the carrying
value of goodwill associated with some of our leased limited-service
hotels.
. Merger and lease conversion costs of $2.9 million for 2000 include the
expenses related to our proposed merger with American Skiing Company
($2.7 million) and the conversions of the MeriStar Hospitality leases
to management contracts ($0.3 million). On March 22, 2001, we and the
other parties to the merger agreement mutually agreed to terminate the
agreement. There were no termination fees payable to any of the
parties.
Earnings before Interest, Taxes, Depreciation and Amortization
- --------------------------------------------------------------
EBITDA decreased $24.1 million from $23.3 million in 1999 to $(0.8) million
in 2000. Major components of this decrease were:
. Our Corporate Housing segment generated $4.7 million of EBITDA in 2000
due to the inclusion of seven months of BridgeStreet operations in
2000.
. Our Hotel Management segment's EBITDA decreased by $6.8 million from
$23.5 million in 2000 to $16.7 million in 2001 primarily due to an
increase in our labor and insurance expenses in 2000.
. Our remaining EBITDA decreased by $22.0 million primarily due to a
$21.7 million loss on asset impairment recorded in 2000.
38
Net income
- ----------
Our net income decreased by $16.1 million from $6.7 million in 1999 to
$(9.4) million in 2000. This decrease is due to the decrease of $24.1 million in
EBITDA, the increase of $3.4 million in depreciation and amortization expense as
discussed above and the increase in our interest expense of $1.7 million due to
the increase in our total outstanding long-term debt balance in 2000. This was
offset by:
. A decrease in minority interest of $3.0 million primarily due to lower
operating income compared to 1999 and the conversion of operating
partnership units to common stock; and
. An income tax benefit of $6.1 million in 2000 compared to income tax
expense of $3.9 million in 1999.
Liquidity and Capital Resources
Our cash and cash equivalent assets decreased by $3.0 million from $7.6
million at December 31, 2000 to $4.6 million at December 31, 2001.
Sources of Cash
We fund our continuing operations through cash generated from hotel
management and corporate housing operations. We finance capital expenditures,
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. Factors that may influence our liquidity include:
. Factors that affect our results of operations, including general
economic conditions, demand for business and leisure travel, public
concerns about travel safety and other operating risks described under
the caption, "Risk Factors--Operating Risks";
. Factors that affect our access to bank financing and the capital
markets, including interest rate fluctuations, operational risks and
other risks described under the caption "Risk Factors--Financing
Risks"; and
. The other factors described under the caption, "Forward-Looking
Information."
Our financing activities provided $18.5 million of cash during 2001
primarily from net borrowings of $18.3 million on our credit facilities. As of
February 15, 2002, we had no availability under our senior secured credit
facility and approximately $6.0 million available under our credit facility with
MeriStar Hospitality. This credit facility with MeriStar Hospitality, however,
can be amended to provide for potential additional borrowings subject to our
compliance with certain leverage ratios as well as approval from MeriStar
Hospitality's Board of Directors. Based on our leverage ratio at February 15,
2002, the credit facility with MeriStar Hospitality could provide up to
approximately $34 million of additional borrowings, contingent upon the approval
of MeriStar Hospitality's Board of Directors.
Uses of Cash
We used $10.2 million of cash in operations during 2001 primarily as a
result of the reduction in the payable to MeriStar Hospitality, offset by other
operating activity.
We used $11.3 million of cash in investing activities during 2001 primarily
due to:
. $3.8 million of hotel operating cash transferred to the taxable
subsidiaries of MeriStar Hospitality as part of the assignment of the
leases on January 1, 2001; and
. $6.2 million of cash used to acquire BridgeStreet Paris and management
contracts on six hotels.
In January 2002, in connection with the execution of the amendment to the
revolving credit facility with MeriStar Hospitality, we issued a Term Note
payable to MeriStar Hospitality in the amount of $13.1 million, which refinances
our account payable to MeriStar Hospitality. The Term Note bears interest at the
30-day London
39
Interbank Offered Rate plus 650 basis points and matures on the same date as the
revolving credit facility with MeriStar Hospitality, which is 91 days after the
maturity of our senior secured credit agreement.
Revolving Credit Facilities
In 1998, we entered into a three-year, $75 million revolving credit
facility with MeriStar Hospitality. This facility was subsequently amended on
February 29, 2000 to reduce the maximum borrowing limit to $50 million and to
change the maturity date to 91 days after the maturity date of our senior
secured credit facility. This loan contains covenants regarding financial
ratios, reporting requirements and other customary restrictions. The interest
rate on this facility is variable, based on the 30-day London Interbank Offered
Rate plus 650 basis points. As of December 31, 2001, we had $36 million
outstanding under this facility at an effective interest rate of 10.8%.
On January 25, 2002, we amended our credit facility with MeriStar
Hospitality to provide financial covenant relief similar to that in our senior
credit facility. The maturity date remained at 91 days after the maturity of our
senior credit facility. The interest rate also remained the same, at the 30-day
London Interbank Offered Rate plus 650 basis points.
On February 29, 2000, we entered into a $100 million senior secured credit
facility among a syndicate of banks. Our senior secured credit facility has only
a revolving credit facility and no term facilities. The interest rate on the
facility is the 30-day London Interbank Offered Rate plus 350 basis points. The
senior secured credit facility originally was to expire in February 2002, with a
one-year extension at our option.
The senior credit facility contains certain covenants, including
maintenance of financial ratios at the end of each quarter, reporting
requirements and other customary restrictions. Travel disruptions and safety
concerns following the terrorist attacks on September 11, 2001 had a significant
negative impact on the lodging industry and our operations. This decline in
operations would have caused us to be out of compliance with these financial
covenants. However, effective September 30, 2001, we finalized a waiver of all
affected financial covenants with our senior bank group through February 28,
2002. On January 28, 2002, we amended our senior secured credit facility to
provide more flexibility with certain financial covenants and allow us to extend
the maturity from February 2002 until February 2003. The interest rate on the
facility was increased to the 30-day London Interbank Offered Rate plus 450
basis points. We currently have no additional borrowing capacity under this
credit facility. The amendment also sets restrictions on investments and capital
expenditures as well as requiring that availability under the facility be
reduced by $2.5 million on February 28, 2002, June 30, 2002, September 30, 2002
and December 31, 2002. In addition, on January 31, 2003, the amount available
under the senior credit facility will be further reduced in the amount of our
EBITDA greater than $20 million, for 2002.
The interest rate on borrowings under our senior credit facility as of
December 31, 2001 and 2000, respectively, was 7.9% and 10.2%. We incurred
interest expense of $6.9 million and $7.3 million on this facility during 2001
and 2000 respectively.
Contractual Obligations and Maturities of Indebtedness
We lease some hotels under non-cancelable participating leases with
remaining initial terms ranging from 9 to 12 years, expiring through 2013. The
participating leases have minimum base rent requirements. We also lease
apartments for our Corporate Housing operations and corporate office space.
Those leases have terms up to 13 years.
Minimum payments due (principal only) under our debt and lease obligations
as of December 31, 2001 (as adjusted by the January 2002 amendments to our
senior credit facility) were as follows (in thousands):
Revolving Credit
Facility with
Senior Credit MeriStar Hospitality Non-Cancelable
Facility Corporation Operating Leases Total
------------- -------------------- ---------------- --------
2002 $10,000 $ -- $ 60,484 $ 70,484
40
2003 72,500 36,000 42,278 150,778
2004 -- -- 40,148 40,148
2005 -- -- 39,657 39,657
2006 -- -- 38,381 38,381
2007 and thereafter -- -- 225,566 225,566
------------------------------------------------------------
$82,500 $ 36,000 $446,514 $565,014
============================================================
Summary
During 2001, a significant portion of our cash inflows came from borrowings
under our credit facilities. Our lower-than-expected operating results in 2001
required us to negotiate amendments to our credit facilities. These amendments
imposed restrictions that may limit our ability to execute our business strategy
and increase the risk of default under out debt obligations. While we believe
our current business plan and operating expectations will provide sufficient
liquidity to fund our operations, a significant decline in our operations could
leave us unable to use our senior credit facility to supply needed liquidity.
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 the peak travel season.
For resort properties, demand is generally higher in the winter and early
spring. Since the majority of our hotels are non-resort properties, our
operations generally have reflected non-resort seasonality patterns. We expect
to 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, although the disruptions caused by the September 11, 2001
attacks and their aftermath may cause disruptions to this pattern.
Corporate housing activity traditionally 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.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our credit
facilities. 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 2001, we entered into a $50 million, one-year interest rate swap
agreement with a financial institution to hedge against the effect future
interest rate fluctuations may have on our floating rate debt. The swap
agreement effectively fixes the 30-day London Interbank Offered Rate at 4.4%.
During the year ended December 31, 2001, we paid $275,000 under this agreement.
The fair value of the interest rate swap agreement was $415,000 at December 31,
2001.
In April 2000, we entered into a $40 million, 23-month periodic rate collar
agreement with a financial institution in order to hedge against the effect
future interest rate fluctuations may have on our floating rate debt. The rate
collar agreement establishes the 30-day London Interbank Offered Rate at a floor
rate of 6.05% and a ceiling rate of 8.5%. During the year ended December 31,
2001, we paid $808,000 under this agreement. The fair value of the rate collar
agreement was $271,000 at December 31, 2001.
Our senior secured debt of $82.5 million at December 31, 2001 matures in
February 2003. Interest on the debt is variable, based on the 30-day London
Interbank Offered Rate plus 450 basis points. The weighted average effective
interest rate was 7.9% at December 31, 2001. We have determined that the fair
value of the debt approximates its carrying value.
Our $36.0 million of long-term debt under the MeriStar Hospitality
revolving credit facility at December 31, 2001 matures 91 days after the
maturity date of our senior secured credit facility. Interest on the debt is
variable, based on the 30-day London Interbank Offered Rate plus 650 basis
points. The weighted average effective interest rate was 10.8% at December 31,
2001. 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 $0.3 million during the year ended
December 31, 2001.
Our international operations are subject to foreign exchange rate
fluctuations. We derived approximately 14% of our revenue for the year ended
December 31, 2001 from services performed in Canada, the United Kingdom and
France. Our foreign currency transaction gains and losses were not material to
our results of operations for the year ended December 31, 2001. To date, since
most of our foreign operations have been largely self contained we have not been
exposed to material foreign exchange risk. Therefore, we have not entered into
any significant foreign currency exchange contracts or other derivative
financial instruments to hedge the effects of adverse fluctuations in foreign
currency exchange rates. In the event that we will have large transactions
requiring currency conversion we will reevaluate whether we should engage in
hedging activity.
42
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......................................................................... 44
Consolidated Balance Sheets as of December 31, 2001 and 2000......................................... 45
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999........... 46
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and
1999................................................................................................. 47
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999........... 48
Notes to the Consolidated Financial Statements....................................................... 49
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.
43
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, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2001.
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, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Washington, D.C.
January 29, 2002
44
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(in thousands, except per share amounts)
2001 2000
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents ............................................... $ 4,584 $ 7,645
Accounts receivable, net of allowance for doubtful accounts of $3,422 and
$4,097 ............................................................... 10,155 72,655
Prepaid expenses ........................................................ 5,668 9,719
Deposits and other ...................................................... 3,527 12,107
--------- ---------
Total current assets ......................................................... 23,934 102,126
--------- ---------
Fixed assets:
Furniture, fixtures, and equipment ...................................... 32,595 33,996
Accumulated depreciation ................................................ (14,712) (9,247)
--------- ---------
Total fixed assets, net ...................................................... 17,883 24,749
--------- ---------
Investments in and advances to affiliates .................................... 30,003 40,109
Intangible assets, net of accumulated amortization of $18,498 and $11,899 .... 163,352 166,898
Deferred income taxes ........................................................ 7,765 --
--------- ---------
$ 242,937 $ 333,882
========= =========
LIABILITIES, MINORITY INTERESTS, AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other liabilities ................ $ 50,149 $ 119,597
Due to MeriStar Hospitality Corporation ................................. 8,877 22,222
Income taxes payable .................................................... 1,300 1,923
Long-term debt, current portion ......................................... 10,000 147
--------- ---------
Total current liabilities .................................................... 70,326 143,889
Deferred income taxes ........................................................ -- 5,508
Derivative financial instruments ............................................. 687
Long-term debt ............................................................... 108,500 100,040
--------- ---------
Total liabilities ............................................................ 179,513 249,437
--------- ---------
Minority interests ........................................................... 6,293 11,140
Stockholders' equity:
Common stock, par value $0.01 per share:
Authorized--100,000 shares
Issued and outstanding--37,189 and 35,976 shares ................... 372 360
Additional paid-in capital ......................................... 78,841 74,989
Deficit ............................................................ (21,093) (2,144)
Accumulated other comprehensive income:
Translation adjustment ............................................. (313) 207
Unrealized loss on derivative financial instruments ................ (687) --
Unrealized gain (loss) on investments .............................. 11 (107)
--------- ---------
Total stockholders' equity .................................... 57,131 73,305
--------- ---------
$ 242,937 $ 333,882
========= =========
See accompanying notes to consolidated financial statements.
45
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
(in thousands, except per share amounts)
2001 2000 1999
--------- ----------- ----------
Revenue:
Rooms .............................................. $ 138,600 $ 929,585 $ 894,983
Food and beverage .................................. 10,862 304,415 295,551
Corporate housing .................................. 103,638 64,872 --
Other operating departments ........................ 6,573 92,790 91,540
Management and other fees .......................... 46,201 19,206 10,040
--------- ----------- ----------
Total revenue ........................................... 305,874 1,410,868 1,292,114
--------- ----------- ----------
Operating expenses by department:
Rooms .............................................. 31,449 219,197 213,239
Food and beverage .................................. 8,069 219,791 217,349
Corporate housing .................................. 76,019 42,827 --
Other operating departments ........................ 4,050 53,132 43,188
Undistributed operating expenses:
Administrative and general ......................... 75,683 233,553 208,576
Participating lease expense ........................ 59,375 431,014 404,086
Property operating costs ........................... 33,250 188,235 182,412
Depreciation and amortization ...................... 12,958 9,470 6,014
Merger and lease conversion costs .................. 4,239 2,989 --
Charges to investments in and advances to
affiliates, accounts and notes receivable, and
other ........................................ 16,098 -- --
Loss on asset impairment ........................... -- 21,657 --
Restructuring charges .............................. 3,479 -- --
--------- ----------- ----------
Total operating expenses ......................... 324,669 1,421,865 1,274,864
--------- ----------- ----------
Net operating income (loss) ............................. (18,795) (10,997) 17,250
Interest expense, net ................................... 11,303 6,401 4,692
Equity in (earnings) losses of affiliates ............... (732) (751) 31
--------- ----------- ----------
Income (loss) before minority interests and income taxes (29,366) (16,647) 12,527
Minority interests ...................................... (1,130) (1,094) 1,916
Income tax expense (benefit) ............................ (9,287) (6,173) 3,926
--------- ----------- ----------
Net income (loss) ....................................... $(18,949) $ (9,380) $ 6,685
======== =========== ==========
Earnings (loss) per share:
Basic .............................................. $ (0.51) $ (0.27) $ 0.24
Diluted ............................................ $ (0.51) $ (0.27) $ 0.24
See accompanying notes to consolidated financial statements.
46
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
Accumulated
-----------
Additional Retained Other
---------- -------- -----
Paid-in Earnings Comprehensive
------- -------- -------------
Common Stock Capital (Deficit) Income (loss) Total
---------------- ---------- --------- -------------- --------
Shares Amount
------ ------
Balance, January 1, 1999 ................... 25,437 $254 $43,894 $ 551 $ 35 $ 44,734
Net income for the year .................... -- -- -- 6,685 -- 6,685
Foreign currency translation adjustment .... -- -- -- -- (2) (2)
--------
Comprehensive income ....................... 6,683
--------
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)
--------
Comprehensive income ....................... (9,313)
--------
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
Net loss for the year ...................... -- -- -- (18,949) -- (18,949)
Foreign currency translation adjustment .... -- -- -- -- (520) (520)
Transition Adjustment ...................... -- -- -- -- (205) (205)
Unrealized loss on derivative financial
instruments ................................ -- -- -- -- (482) (482)
Unrealized gain on investments ............. -- -- -- -- 118 118
--------
Comprehensive income (loss) ................ (20,038)
--------
Redemption of OP Units ..................... 1,092 11 3,612 -- -- 3,623
Issuance of common stock under Stock
Purchase Plan .............................. 121 1 240 -- -- 241
------ ---- ------- -------- ----- --------
Balance, December 31, 2001 ................. 37,189 $372 $78,841 $(21,093) $(989) $ 57,131
====== ==== ======= ======== ===== ========
See accompanying notes to the consolidated financial statements.
47
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
(in thousands)
2001 2000 1999
--------- --------- ---------
Operating activities:
Net income (loss) ...................................................... $ (18,949) $ (9,380) $ 6,685
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ........................................ 12,958 9,470 6,014
Equity in (earnings) losses of affiliates ............................ (732) (751) 31
Minority interests ................................................... (1,130) (1,094) 1,916
Deferred income taxes ................................................ (10,997) (8,246) 3,880
Loss on asset impairment ............................................. -- 21,657 --
Charges to investments in and advances to affiliates, accounts and
notes receivable, and other ......................................... 16,098 -- --
Changes in operating assets and liabilities, excluding effects of
acquisitions:
Accounts receivable, net ........................................... 8,339 (20,331) 14,011
Prepaid expenses ................................................... 2,570 (445) 604
Deposits and other ................................................. 2,100 (1,462) 497
Accounts payable, accrued expenses and other liabilities ........... (6,425) 3,191 (8,033)
Due to MeriStar Hospitality Corporation ............................ (13,345) 10,746 1,912
Income taxes payable ............................................... (643) 1,673 11
--------- --------- ---------
Net cash provided by (used in) operating activities .............. (10,156) 5,028 27,528
--------- --------- ---------
Investing activities:
Purchases of fixed assets .............................................. (1,639) (9,211) (7,507)
Purchases of intangible assets ......................................... (6,161) (1,929) (3,388)
Investments in and advances to affiliates .............................. 66 (9,340) (22,338)
Hotel operating cash transferred with lease conversions ................ (3,778) -- --
Cash received (paid) to shareholders on acquisitions ................... 173 (12,216) --
Change in restricted cash .............................................. -- 210 396
--------- --------- ---------
Net cash used in investing activities ............................ (11,339) (32,486) (32,837)
--------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt ............................... 102,000 154,500 177,000
Principal payments on long-term debt ................................... (83,655) (112,201) (187,050)
Proceeds from issuances of common stock, net ........................... 241 5,786 5,950
Purchase of operating partnership units ................................ -- (1,149) --
BridgeStreet Accommodations debt repaid ................................ -- (12,021) --
Deferred financing costs ............................................... -- (1,607) --
Contributions from minority investors .................................. 25 -- --
Distributions to minority investors .................................... (114) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities .............. 18,497 33,308 (4,100)
--------- --------- ---------
Effect of exchange rate changes on cash ................................... (63) 69 (20)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...................... (3,061) 5,919 (9,429)
Cash and cash equivalents, beginning of year .............................. 7,645 1,726 11,155
--------- --------- ---------
Cash and cash equivalents, end of year .................................... $ 4,584 $ 7,645 $ 1,726
========= ========= =========
See accompanying notes to consolidated financial statements.
48
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(dollars in thousands, except per share amounts)
1. Organization
We manage, lease, and operate a portfolio of hospitality properties and
provide related services in the hotel and corporate housing markets. Our
portfolio is diversified by franchise and brand affiliations. We were created in
connection with the August 3, 1998 merger of American General Hospitality
Corporation and CapStar Hotel Company. At the time of the merger, CapStar
distributed all of the shares of our common stock to its shareholders and we
became a separate, publicly traded company. The merger created MeriStar
Hospitality Corporation, a real estate investment trust. We are the manager and
operator of all of the hotels owned by MeriStar Hospitality.
MeriStar H&R Operating Company, L.P., our subsidiary operating partnership,
indirectly holds substantially all of our assets. We are the sole general
partner of that partnership. 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 have an intercompany agreement with MeriStar Hospitality. That agreement
provides each of us the right to participate in certain transactions entered
into by the other company. The intercompany agreement provides MeriStar
Hospitality with a right of first refusal with respect to some of our hotel real
estate opportunities and it also provides us with a right of first refusal with
respect to some of MeriStar Hospitality's hotel management opportunities
(excluding hotels that MeriStar Hospitality elects to have managed by a hotel
brand). We also provide each other with certain services. These services are
described in Note 9.
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. BridgeStreet provides corporate housing services in the
United States, Canada, the United Kingdom and France. Our consolidated financial
statements include the operating results of BridgeStreet since May 31, 2000. We
operate our corporate housing division under the name BridgeStreet Corporate
Housing Worldwide.
Until January 1, 2001, we leased and operated MeriStar Hospitality's
hotels. As of January 1, 2001, we assigned these participating leases to
wholly-owned taxable subsidiaries of MeriStar Hospitality. In connection with
the assignment, MeriStar Hospitality's taxable subsidiaries executed new
management agreements with us to manage these hotels. Under these management
agreements, MeriStar Hospitality's taxable subsidiaries pay us a management fee
for each property. The management agreements were structured to substantially
mirror the economics of the former leases. We and MeriStar Hospitality did not
exchange any cash consideration as a result of these transactions except for the
transfer of hotel operating assets and liabilities to the taxable subsidiaries.
Under the new management agreements, the base management fee is 2.5% of total
hotel revenue plus incentives payments, based on meeting performance thresholds
that could total up to 1.5% of total hotel revenue. The agreements have an
initial term of 10 years with three renewal periods of five years each at our
option, subject to some exceptions. Because these leases have been assigned to
MeriStar Hospitality's taxable subsidiaries, those taxable subsidiaries now bear
the operating risk associated with these hotels.
On January 1, 2001, we invested $100 in Flagstone Hospitality Management
LLC, a joint venture established to manage 54 hotels owned by RFS Hotel
Investors, Inc. We own 51% of, and control, the joint venture. We have included
the results of Flagstone in our consolidated financial statements since January
1, 2001. Effective January 1, 2002 Flagstone became a single member LLC, of
which we own 100%.
On August 17, 2001, our Corporate Housing division acquired Paris-based
Apalachee Bay Properties. Apalachee Bay is an apartment finder service, third
party manager and a property sales brokerage business and represents 300 units.
Apalachee Bay has been renamed BridgeStreet Paris. Our consolidated financial
statements include the operating results of BridgeStreet Paris since August 17,
2001.
As of December 31, 2001, we leased or managed 277 hotels with 58,461 rooms
in 43 states, the
49
District of Columbia and Canada. In addition, we had 3,054 apartments under
lease in the United States, Canada, the United Kingdom and France at December
31, 2001.
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. As part
of our consolidation process, 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--We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts--We provide an allowance for doubtful
accounts receivable when we determine it is more likely than not a specific
account will not be collected. Although it is reasonably possible that our
estimate for doubtful accounts could change in the near future, we are not aware
of any events that would result in a change to our estimate that would be
material to our financial position or results of operations. At December 31,
2001 and 2000 we had an allowance for doubtful accounts of $3,422 and $4,097,
respectively.
Fixed Assets-- We record our fixed assets at cost. We depreciate these
assets 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--Whenever events or changes in
circumstances indicate that the carrying values of long -lived assets (including
all intangibles) may be impaired, we perform an analysis to determine the
recoverability of the asset's carrying value. We make estimates of the
undiscounted cash flows from the expected future operations of the asset. If the
analysis indicates that the carrying value is not recoverable from future cash
flows, the asset is written down to estimated fair value and an impairment loss
is recognized. Any impairment losses are recorded as operating expenses.
We review long-lived assets for impairment when one or more of the
following events have occurred:
a. Current or immediate short-term (future twelve months) projected cash
flows are significantly less than the most recent historical cash
flows.
b. A significant loss of management contracts without the realistic
expectation of a replacement.
c. The unplanned departure of an executive officer or other key personnel
which could adversely affect our ability to maintain our competitive
position and manage future growth.
d. A significant adverse change in legal factors or an adverse action or
assessment by a regulator, which could affect the value of the
goodwill or other long-lived assets.
e. Events which could cause significant adverse changes and uncertainty
in business and leisure travel patterns.
50
We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In projecting the expected future operations of the
asset, we base our estimates on future budgeted earnings before interest
expense, income taxes, depreciation and amortization, or EBITDA, amounts and use
growth assumptions to project these amounts out over the expected life of the
underlying asset.
As described in Note 4, we recorded impairment losses in 2000 related to a
portion of our long-lived asset balances. We did not record any impairment
losses in 1999 or 2001.
Income Taxes--We account for income taxes using 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--We maintain the results of operations for our
foreign locations in the local currency and translate these results using the
average exchange rates during the period. We translate the assets and
liabilities to U.S. dollars using the exchange rate in effect at the balance
sheet date. We reflect the resulting translation adjustments 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,
"Accounting for Stock Issued to Employees," in accounting for our stock-based
plans. We have made all our grants at fair value, and therefore, we have not
recognized any compensation cost for these grants.
Revenue Recognition--We earn revenue from leased hotels, management
contracts and related sources, and corporate housing operations. We recognize
revenue from our leased hotels from their rooms, food and beverage and other
operating departments as earned at the close of each business day. Our
management and other fees consist of base and incentive management fees received
from third-party owners of hotel properties and fees for other related services
we provide. We recognize base fees and fees for other services as revenue when
earned in accordance with the individual management contracts. In accordance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," we accrue incentive fees in the period when we are certain they are
earned. For contracts with annual incentive fee measurements, we typically will
record any incentive fees in the last month of the annual contract period.
Participating Lease Agreements--Our participating leases have
non-cancelable remaining terms ranging from 9 to 12 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 we consider it probable we will achieve the
specified target by the end of the fiscal year.
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 a 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, derivative instruments, transition adjustments, and
unrealized gains (losses) from our investments.
Derivative Instruments and Hedging Activities--SFAS No. 133, "Accounting
for Derivative Instruments and
51
Hedging Activities," requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 137 and No. 138 amended certain provisions of FAS No. 133. We
adopted these accounting pronouncements effective January 1, 2001.
Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows. We assess interest rate cash
flow risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows, and by
evaluating hedging opportunities. We do not enter into derivative instruments
for any purpose other than cash flow hedging purposes.
Our interest rate swap agreements have been designated as hedges against
changes in future cash flows associated with the interest payments of our
variable rate debt obligations. Accordingly, the interest rate swap agreements
are reflected at fair value in our consolidated balance sheet as of December 31,
2001 and the related unrealized gains or losses on these contracts are recorded
in stockholders' equity as a component of accumulated and other comprehensive
income.
We recognized a transition adjustment of $205 as the fair value of our
derivative instruments at January 1, 2001. We recorded a liability and
corresponding charge to other comprehensive income for this amount. As of
December 31, 2001, the fair value of our derivative instruments represents a
liability of $687. The estimated net amount recorded in accumulated other
comprehensive income is expected to be reclassified to the statement of
operations during 2002.
Earnings per Share--We present basic and diluted earnings per share, or
EPS, on the face of the income statement. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock that then
shared in the earnings of the entity. Dilutive securities are excluded from the
computation in periods in which they have an anti-dilutive effect.
New Accounting Pronouncements--In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations," SFAS No. 142,
"Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 142 eliminates the amortization of goodwill
and replaces it with a requirement to conduct an impairment analysis of the
carrying value of the goodwill at least annually, and more often as
circumstances warrant. We will adopt this standard on January 1, 2002. In August
2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supersedes SFAS No. 121. We are currently in the
process of evaluating the effect these new standards will have 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 estimates. Based on managements
estimates, we believe our cash flows from operations will be sufficient to fund
our cash needs over the next year. However, a prolonged economic slowdown or a
deterioration in our current operating results could adversely impact our
ability to fund our cash needs through operations.
Reclassifications--We have reclassified certain 2000 and 1999 amounts to be
consistent with the 2001 classifications.
3. Investments in and Advances to Affiliates
Our investment in and advances to joint ventures and affiliated companies
consists of the following:
December 31,
-----------------------
2001 2000
------- -------
CapStar Hallmark Company, L.L.C .................. $11,699 $11,495
MIP Lessee, L.P. ................................. 11,224 10,654
CapStar San Diego HGI Associates ................. 4,076 4,076
CapStar Wyandotte II, LLC ........................ -- 2,683
Sapphire Beach Resort & Marina ................... -- 2,116
Ballston Parking Associates ...................... -- 1,629
52
BoyStar Ventures, L.P. ........................... -- 1,546
Other ............................................ 3,004 5,910
------- -------
$30,003 $40,109
======= =======
As described in Note 15, we wrote off our investments in Capstar Wyandotte
II, BoyStar Ventures, LP, Sapphire Beach Resort & Marina and several notes
receivable in the first quarter of 2001. An interest in Ballston Parking
Associates was assigned to MeriStar Hospitality Corporation as a result of the
transfer of hotel leases to MeriStar Hospitality's taxable subsidiaries on
January 1, 2001.
The combined summarized financial information of our unconsolidated joint
ventures and affiliated companies is as follows:
December 31,
-----------------------
2001 2000
-------- --------
Balance sheet data:
Current assets ................................. $ 12,672 $ 31,712
Non-current assets ............................. 413,652 429,094
Current liabilities ............................ 16,271 16,610
Non-current liabilities ........................ 228,458 240,757
Equity ......................................... 181,595 203,439
Operating data:
Revenue ........................................ $147,719 $143,877
Net income ..................................... 9,734 9,352
4. Intangible Assets
Intangible assets consist of the following:
December 31,
-----------------------
2001 2000
-------- --------
Goodwill ......................................... $132,512 $130,468
Hotel contracts .................................. 43,000 41,747
Other ............................................ 6,338 6,582
-------- --------
181,850 178,797
Less accumulated amortization .................... (18,498) (11,899)
-------- --------
$163,352 $166,898
======== ========
During 2000, we conducted a review of each property's performance and
anticipated future performance and our expected future income from those
properties in accordance with SFAS No. 121. We conducted this review in
connection with the possible restructuring of our lease arrangements. As a
result of this review, we reduced our expectation for the future performance of
some of our leased limited-service hotels. 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 associated
with these hotels. 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.
5. Long-Term Debt
Long-term debt consists of the following:
53
December 31,
-----------------------
2001 2000
-------- --------
Senior secured credit facility ..................... $ 82,500 $100,000
Revolving credit facility with MeriStar Hospitality 36,000 --
Other .............................................. -- 187
-------- --------
$118,500 $100,187
-------- --------
Less current portion ............................... (10,000) (147)
-------- --------
$108,500 $100,040
======== ========
Senior Secured Credit Facility--On February 29, 2000, we entered into a
$100 million senior secured credit facility among a syndicate of banks. Our
senior secured credit facility has only a revolving credit facility and no term
facilities. The interest rate on the facility was the 30-day London Interbank
Offered Rate plus 350 basis points. The senior secured credit facility
originally was to expire in February 2002, with a one-year extension at our
option.
The senior credit facility contains certain covenants, including
maintenance of financial ratios at the end of each quarter, reporting
requirements and other customary restrictions. Travel disruptions and safety
concerns following the terrorist attacks on September 11, 2001 had a significant
negative impact on the lodging industry and our operations. This decline in
operations would have caused us to be out of compliance with these financial
covenants. However, effective September 30, 2001, we finalized a waiver of all
affected financial covenants with our senior bank group through February 28,
2002. On January 28, 2002, we amended our senior secured credit facility to
provide more flexibility with certain financial covenants and allow us to extend
the maturity from February 2002 until February 2003. The interest rate on the
facility was increased to the 30-day London Interbank Offered Rate plus 450
basis points. The amendment also reduced our borrowing capacity to $82.5
million. The amendment also sets restrictions on investments and capital
expenditures as well as requiring that availability under the facility be
reduced by $2.5 million on February 28, 2002, June 30, 2002, September 30, 2002
and December 31, 2002. In addition, on January 31, 2003, the amount available
under the senior credit facility will be further reduced in the amount of our
EBITDA greater than $20 million, for 2002. Based on this amendment, we have
reclassified $10 million from Long-term debt to Long-term debt, current portion
on the consolidated balance sheet at December 31, 2001.
The weighted average effective interest rate on borrowings under our senior
credit facility as of December 31, 2001 and 2000 was 7.9% and 10.2%,
respectively. We incurred interest expense of $6.9 million and $7.3 on this
facility during 2001 and 2000, respectively.
Revolving Credit Facility with MerStar Hospitality--In 1998, we entered
into a three-year, $75,000 unsecured revolving credit facility with MeriStar
Hospitality. This facility was subsequently amended on February 29, 2000 to
reduce the maximum borrowing limit to $50,000 and to change the maturity date to
91 days after the maturity of our senior secured credit facility. 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 weighted average effective interest rate as of December 31,
2001 was 10.8%. We incurred interest expense of $3,610, $955, and $4,907 on this
facility during 2001, 2000, and 1999, respectively.
On January 25, 2002, we amended our credit facility with MeriStar
Hospitality Corporation to provide financial covenant relief similar to that in
our senior credit facility. The maturity date and interest rate remained the
same.
In connection with the execution of the amendment to the revolving credit
facility with MeriStar Hospitality, we executed a Term Note payable to MeriStar
Hospitality in the amount of $13,069, which refinances our account payable due
to MeriStar Hospitality. The Term Note bears interest at the 30-day London
Interbank Offered Rate plus 650 basis points and matures on the same date as the
revolving credit facility with MeriStar Hospitality.
We have determined that the fair values of our outstanding borrowings on
our senior credit facility and note payable to MeriStar Hospitality approximate
their carrying values at December 31, 2001.
6. Income Taxes
Our effective income tax expense (benefit) rate for the years ended
December 31, 2001, 2000 and 1999 differs from the federal statutory income tax
rate as follows:
54
2001 2000 1999
----- ----- ----
Statutory tax rate ........................... (35.0)% (35.0)% 35.0%
State and local taxes ........................ (4.0) (3.9) 4.0
Difference in rates on foreign subsidiaries .. 0.5 0.3 --
Business meals and entertainment ............. 0.2 0.3 0.7
Compensation expense ......................... 2.8 1.9 (0.5)
Tax credits ............................... (28.1) -- --
Valuation allowance .......................... 28.1 -- (5.8)
Amortization ................................. 0.4 1.2 --
Other ........................................ 2.2 (4.5) 3.6
----- ----- ----
(32.9)% (39.7)% 37.0%
===== ===== ====
The components of income tax expense (benefit) are as follows:
2001 2000 1999
-------- ------- ------
Current:
Federal .................... $ -- $ 100 $ --
State ...................... 450 525 46
Foreign .................... 1,260 1,448 --
-------- ------- ------
1,710 2,073 46
-------- ------- ------
Deferred:
Federal .................... (8,827) (6,798) 3,276
State ...................... (2,170) (1,448) 604
-------- ------- ------
(10,997) (8,246) 3,880
-------- ------- ------
$ (9,287) $(6,173) $3,926
======== ======= ======
The tax effects of the temporary differences and carryforwards that give
rise to our net deferred tax asset (liability) at December 31, 2001 and 2000 are
as follows:
2001 2000
-------- --------
Deferred tax assets:
Allowance for doubtful accounts ................ $ -- $ 387
Minority interests temporary difference ........ 1,279 347
Net operating loss carryforward ................ 16,937 572
Accrued expenses ............................... 1,388 2,936
Deferred income ................................ -- 40
Tax credits .............................. 7,925 --
Other .......................................... 84 48
-------- -------
Total gross deferred tax assets ........... 27,613 4,330
Less: valuation allowance .............. (7,925) --
-------- -------
Net deferred tax assets ............... $ 19,688 $ 4,330
======== =======
Deferred tax liabilities:
Allowance for doubtful accounts ................ $ (180) $ --
Depreciation and amortization expense .......... (9,237) (5,871)
Prepaid expenses ............................... (304) (98)
Intangible assets basis differences ............ (1,340) (3,572)
Equity in investee earnings .............. (609) --
Other .......................................... (253) (297)
-------- -------
Total gross deferred tax liabilities ...... (11,923) (9,838)
-------- -------
Net deferred tax asset (liability) ........ $ 7,765 $(5,508)
======== =======
At December 31, 2001, we had potential federal income tax benefits of
$7,925 from certain tax credits that generated deferred tax assets during 2001.
For financial reporting purposes, we established a valuation allowance of $7,925
due to the substantial uncertainty associated with realizing this deferred tax
asset.
55
At December 31, 2001, we had net operating loss carryforwards of
approximately $41,076 that begin to expire in 2018.
7. Stockholders' Equity and Minority Interests
Common Stock--In conjunction with our spin-off from CapStar, CapStar
distributed all of the 24,948,754 outstanding shares of our common stock to its
stockholders, on a share-for-share basis.
In 1998, we established a stock purchase plan that allowed 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
2001, we distributed shares held in the plan to each participant.
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-- MeriStar H&R Operating Company, L.P., our
subsidiary operating partnership, indirectly holds substantially all of our
assets. We are the sole general partner of that partnership. 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. The agreement also
gives us, as general partner, 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. These interests
may have 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, 2001, the ownership of the limited partnership units was as
follows:
. 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
. Other limited partners own 543,539 Class A units, 1,275,607 Class B
units and 392,157 Preferred units.
We did not make any distributions during 2001, 2000 or 1999 to the holders
of the Class A units and Class B units. Holders of preferred units receive a
6.5% cumulative annual preferred return based on capital amount of $3.34 per
unit; compounded quarterly to the extent not paid currently. All net income and
capital proceeds received 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.
The holders of each Class A or Class B unit not held by us or one of our
subsidiaries is redeemable 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, (with the holder's consent) for 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, shares of our common stock having
equivalent aggregate value. If we or the holders of the Preferred units chose to
redeem the Preferred units for our common stock instead of cash, and if our
common stock was valued at that time at less than $3.34 per share, we would have
to issue more shares of our common stock than the number of Preferred units
being redeemed. For example, at December 31, 2001, our stock price was $0.69 per
share. If the Preferred
56
units were redeemed for common stock at that date, we would have issued
1,898,267 shares of our common stock, which would have represented approximately
4.9% of our then outstanding common stock, with respect to 392,157 Preferred
units then outstanding.
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 May 2000, we repurchased 409,523 Class A operating partnership units at
a price of $2.81 per unit.
8. Earnings (Loss) Per Share
The following tables present the basic and diluted earnings (loss) per
share computations for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
-------- -------- -------
Basic Earnings (Loss) Per Share Computation:
Net income (loss) ........................................... $(18,949) $ (9,380) $ 6,685
Weighted average number of shares of common stock outstanding 36,986 34,148 27,868
-------- -------- -------
Basic earnings (loss) per share ............................. $ (0.51) $ (0.27) $ 0.24
======== ======== =======
Diluted Earnings (Loss) Per Share Computation:
Net income (loss) ........................................... $(18,949) $ (9,380) $ 6,685
-------- -------- -------
Weighted average number of shares of common stock outstanding .... 36,986 34,148 27,868
Common stock equivalents--stock options .......................... -- -- 146
Common stock equivalents--operating partnership units ............ -- -- 392
-------- -------- -------
Total weighted average number of diluted shares of common stock
Outstanding ................................................... 36,986 34,148 28,406
-------- -------- -------
Diluted earnings (loss) per share ................................ $ (0.51) $ (0.27) $ 0.24
======== ======== =======
We do not include operating partnership units in the computation of diluted
earnings (loss) per share when their effect is anti-dilutive.
9. Related-Party Transactions
Pursuant to an intercompany agreement, we and MeriStar Hospitality provide
each other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, we have a right of first
refusal to become the manager of any real property MeriStar Hospitality
acquires. Under our intercompany agreement with MeriStar Hospitality, we provide
each other with certain services. These services include administrative,
renovation supervision, corporate, accounting, finance, risk management, legal,
tax, information technology, human resources, acquisition identification and due
diligence, and operational services. We believe we compensate each other in an
amount that would be charged by an unaffiliated third party for comparable
services. We were paid a net amount of $151, $1,165 and $1,600 during 2001, 2000
and 1999, respectively, for services provided to MeriStar Hospitality.
10. Stock-Based Compensation
We have an equity incentive plan that authorizes us to issue and award
options for up to up 15 percent of the number of outstanding shares of our
common stock. We may grant awards under the plan to directors, officers, or
other key employees.
We also have an equity incentive plan for non-employee directors that
authorizes us to issue and award options for up to 500,000 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.
57
We had a stock purchase plan that allowed eligible employees to purchase
our common stock at a discount to market value. We reserved 1,500,000 shares of
common stock for issuance under this plan. We suspended this employee stock
purchase plan effective December 31, 2000.
Stock option activity is as follows:
Equity Incentive Plan Directors Plan
--------------------- -------------------
Average Average
------- -------
Number of Option Number of Option
--------- ------ --------- ------
Shares Price Shares Price
--------- ------ ------- -------
Balance, January 1, 1999 .............. 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
Granted .......................... 1,834,250 0.71 30,000 2.00
Exercised ........................ (2,000) 2.36 -- --
Forfeited ........................ (512,778) 3.39 -- --
--------- ------ ------- -------
Balance, December 31, 2001 ............ 4,952,819 $ 2.30 127,500 $ 3.12
========= ====== ======= =======
Shares exercisable at December 31, 2001 2,653,498 $ 3.27 67,506 $ 3.50
========= ====== ======= =======
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
========= ====== ======= =======
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
--------
Average Weighted Weighted
------- -------- --------
Remaining Average Average
--------- ------- -------
Range of Number Contractual Exercise Number Exercise
-------- ------ ----------- -------- ------ --------
exercise prices Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ----- ----------- -------
$0.56 to $0.69 1,746,500 9.90 $0.65 -- $ 0.00
$0.80 to $3.06 1,761,558 7.03 2.68 1,212,805 2.67
$3.14 to $4.43 1,481,036 6.40 3.71 1,416,974 3.72
$4.45 to $4.76 91,225 5.85 4.59 91,225 4.59
--------- ---- ----- --------- -------
$0.56 to $4.76 5,080,319 7.81 $2.32 2,721,004 $ 3.28
========= ==== ===== ========= =======
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, "Accounting
for Stock Issued to Employees," 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 using the fair
value method. The weighted average fair value of the options granted was $0.40,
$1.88 and $1.49 during 2001, 2000, and 1999, 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:
2001 2000 1999
---- ---- ----
Risk-free interest rate............ 5.60% 6.70% 6.70%
Dividend rate...................... -- -- --
58
Volatility factor.................. 0.68 0.59 0.56
Weighted average expected life..... 2.83 years 2.83 years 2.63 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:
2001 2000 1999
-------- -------- ------
Pro forma net income (loss)....... $(19,424) $(11,585) $6,185
Basic earnings (loss) per share... $(0.53) $(0.34) $0.22
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 48 limited-service hotels under non-cancelable participating
leases with remaining initial terms ranging from 9 to 12 years, expiring through
2013. The total amount payable on these participating leases was $4,829 and
$11,526 at December 31, 2001, and 2000, respectively. We also lease apartments
for our Corporate Housing operations and corporate office space. Future minimum
lease payments required under these operating leases as of December 31, 2001
were as follows:
2002.......... $60,484
2003.......... 42,278
2004.......... 40,148
2005.......... 39,657
2006.......... 38,381
Thereafter.... 225,566
--------
$446,514
========
We received notification from the NYSE that we are not in compliance with
the continued listing standards of the NYSE because our average closing share
price was less than $1.00 over a consecutive 30-day trading period. The NYSE's
continued listing standards require that we bring our 30-day average closing
price and our share price above $1.00 by June 20, 2002, subject to certain
conditions. We are currently evaluating our alternatives with regard to
complying to this standard.
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 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 two operating divisions: hotel management and
corporate housing, both of which are reportable operating segments. Each
division is managed separately because of its distinctive products and services.
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 four operating
divisions: hospitality management, corporate housing, golf management and
vacation ownership. In 2001, we reorganized our golf operations and included
them in our hotel management segment. We also eliminated our vacation ownership
segment in 2001. Accordingly, we reclassified the segment information for 2000
and 1999 to reflect the changes we made in 2001. We evaluate the performance of
each division based on earnings before interest, taxes, depreciation, and
amortization.
Hotel Corporate Financial
----- --------- ---------
Management Housing Other Statements
---------- -------- --------- -----------
Year Ended December 31, 2001
Revenues ......................................... $ 201,843 $103,733 $ 298 $ 305,874
Earnings before interest, taxes, depreciation, and
amortization .................................. 17,890 1,139 (24,134) (5,105)
Total assets ..................................... 22,692 19,108 201,137 242,937
59
Year Ended December 31, 2000
Revenues ......................................... $1,345,144 $ 64,910 $ 814 $ 1,410,868
Earnings before interest, taxes, depreciation, and
amortization .................................. 16,718 4,650 (22,144) (776)
Total assets ..................................... 156,972 22,878 154,032 333,882
Year Ended December 31, 1999
Revenues ......................................... $1,292,221 $ -- $ (107) $ 1,292,114
Earnings before interest, taxes, depreciation, and
amortization .................................. 23,500 -- (236) 23,264
Total assets ..................................... 111,216 -- 146,928 258,144
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 includes merger and lease conversion
costs, charges to investments and advances to affiliates, restructuring charges
and impairment charges. The non-operating segment assets are primarily
unallocated corporate expenses and intangibles and other miscellaneous assets.
Revenues for foreign operations for the years ended December 31 were as
follows:
2001 2000 1999
------- ------- -------
Canada............... $11,200 $27,724 $21,477
United Kingdom....... $30,460 $16,152 $ --
France $ 196 $ -- $ --
13. Acquisitions
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 Europe. 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 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 at the beginning of the periods
presented:
Pro Forma Information
---------------------
(Unaudited)
-----------
2000 1999
---------- ----------
Revenue............................... $1,452,571 $1,387,669
60
Net income (loss)..................... $ (10,325) $ 5,832
Diluted earnings (loss) per share..... $ (0.30) $ 0.18
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 January 1, 2001 we acquired a 51% interest in Flagstone and on August
17, 2001, our corporate housing division acquired Paris based Apalachee Bay
Properties for approximately $1,500, of which approximately $760 is
accrued as of December 31, 2001. We accounted for these acquisitions using the
purchase method. These acquisitions were insignificant to our 2001 operations;
therefore we have not presented pro forma results.
14. Merger and Lease Conversion Costs
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. There were no termination fees payable to any
of the parties. During the years ended 2001 and 2000, we incurred $4,239 and
$2,650, respectively, of expenses related to the proposed merger. These expenses
are included in our statements of operations.
During 2000, we incurred $339 in costs related to the conversions of the
MeriStar Hospitality leases to management contracts.
15. Charges to Investments in and Advances to Affiliates, Accounts and Notes
Receivable, and Other
During 2001, we recorded a charge in the amount of $16,098 to record an
allowance for accounts and notes receivables and to write-off the remaining book
values of impaired and abandoned assets. The following is a summary of the
amounts comprising this charge.
. During the first quarter of 2001, several of the hotels that we manage
experienced severe financial difficulties, which affected the
collectibility of our accounts and notes receivable from these hotels.
One of the hotel owners filed for bankruptcy. The lender subsequently
foreclosed on this hotel in early July 2001. We terminated our
management agreement with another of the hotel owners in the second
quarter of 2001. As a result, we fully provided for the amounts due
from these entities in the amount of $5.1 million and recorded a
charge to write-off other related assets in the amount of $1.8
million.
. We also wrote-off our investments in an internet services company and
certain real estate ventures. The internet services company
significantly curtailed its operations during the first quarter of
2001. We are involved in a dispute with our partners in the real
estate ventures and believe that the recorded values of our
investments in these real estate ventures have been impaired as a
result of this dispute. We recorded a charge in the amount of $5.2
million to reduce the book values of these assets.
. In connection with the conversion of our lease contracts to management
contracts, we implemented changes to our business structure, which
resulted in the abandonment of certain fixed assets totaling $2.9
million.
. One of our former partners in our operating partnership claimed
that we owed them special distributions under the partnership
agreement. We have estimated the amount of distributions due to the
former partner to be $325,000 which we accrued at March 31, 2001 and
paid later in 2001.
. We exited three management contracts in October 2001. This resulted in
uncollectible management fees and reimbursable expenses. We fully
provided for the amount due from these entities in the amount of
$798,000 in September 2001. We have not collected any amounts on these
receivables.
61
. We exited three management contracts in October 2001. This resulted in
uncollectible management fees and reimbursable expenses. We fully
provided for the amount due from these entities in the amount of
$798,000 in September 2001. We have not collected any amounts on these
receivables.
16. Restructuring Expenses
During the second quarter of 2001, we incurred restructuring charges in
connection with personnel changes primarily as a result of the change to
management contracts with MeriStar Hospitality and the termination of the merger
agreement with American Skiing Company. This restructuring is expected to reduce
our annualized corporate overhead expenditures by approximately 10%, or $3.5
million. The restructuring included eliminating approximately 55 corporate staff
positions that were no longer needed under the new structure.
As a result of the restructuring, we recorded restructuring charges of $855
in 2001, none of which remains accrued at December 31, 2001. The restructuring
charge consisted of $842 of severance costs and $13 of non-cancelable lease
costs.
During the third and fourth quarters of 2001, we restructured our corporate
housing division as a result of the slowdown in the economy and shifting focus
on certain markets. We incurred restructuring charges in connection with closing
offices in four BridgeStreet markets and realigned and eliminated certain
administrative functions. We eliminated approximately 54 positions as a result
of this restructuring. This restructuring is expected to reduce our annualized
expense by approximately $1.5 million. As a result of the restructuring, we
recorded restructuring charges of $1,219 in 2001. The restructuring charge
consisted of $133 of severance costs and $1,086 of non-cancelable lease costs.
We applied $133 and $881 in severance and lease termination costs, respectively,
against the restructuring accrual, of which $205 remains at December 31, 2001.
During the fourth quarter of 2001, we recorded restructuring charges of
$1,405. This charge consisted entirely of severance-related costs, including the
accelerated vesting of restricted stock. This charge also represents the
elimination of approximately 15 corporate positions and is the result of
declines in our business due to the slowdown of the national economy and the
disruptions in business and leisure travel due to travel safety concerns since
the terrorist attacks on September 11, 2001. This restructuring is expected to
reduce our annualized expense by approximately $1.9 million. During 2001, $1,090
in severance was applied against the restructuring accrual, of which $315
remains at December 31, 2001.
17. Quarterly Financial Information (Unaudited)
The following is a summary of our quarterly results of operations:
2001 2000
------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- --------
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------- -------- -------- --------
Total revenue........................ $79,750 $83,517 $77,617 $64,990 $340,627 $372,684 355,858 $341,699
Total operating expenses............. 95,694 82,842 79,324 66,809 335,031 349,517 355,362 381,955
Net operating income (loss) ......... (15,944) 675 (1,707) (1,819) 5,596 23,167 496 (40,256)
Net income (loss).................... (10,826) (1,120) (2,282) (4,721) 2,440 12,490 (901) (23,409)
Diluted earnings (loss) per share.... $ (0.30) $ (0.03) $ (0.06) $ (0.12) $ 0.08 $ 0.37 $ (0.03) $ (0.65)
During the fourth quarter of 2001, we recorded a $1,649 restructuring
charge related to the elimination of corporate positions and estimated
non-cancelable lease costs related to the corporate housing division.
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.
18. Supplemental Cash Flow Information
2001 2000 1999
-------- -------- --------
62
Cash paid for interest and income taxes:
Interest .................................................................. $ 10,747 $ 6,166 $ 4,907
Income taxes .............................................................. 1,582 722 36
Non-cash investing and financing activities:
Conversion of operating partnership units to common stock ................. 3,623 391 7,835
Operating partnership units issued and/or assumptions of liabilities in ...
purchase of intangible assets .......................................... -- -- 8,346
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 --
Operating assets and liabilities acquired from BridgeStreet Paris:
Accounts receivable .................................................... 46 -- --
Prepaid expenses and other ............................................. 24 -- --
Furniture, fixtures and other .......................................... 9 -- --
-------- -------- --------
Total operating assets acquired ................................................ $ 79 $ -- $ --
======== ======== ========
Accounts payable and accrued expenses ................................... 232
Income taxes ............................................................ 20 -- --
-------- -------- --------
Total liabilities acquired ..................................................... $ 252 $ -- $ --
======== ======== ========
Operating assets and liabilities transferred in lease conversion:
Accounts receivable ..................................................... 52,072 -- --
Prepaid expenses ........................................................ 1,478 -- --
Deposits and other ...................................................... 6,462 -- --
Furniture, fixtures and other, net ...................................... 152 -- --
Investments in and advances to affiliates ............................... 1,796 -- --
-------- -------- --------
Total operating assets transferred ............................................. $ 61,960 $ -- $ --
======== ======== ========
Accounts payable and accrued expenses .......................................... 65,706 -- --
Long-term debt ................................................................. 32 -- --
-------- -------- --------
Total liabilities transferred .................................................. $ 65,738 $ -- $ --
======== ======== ========
63
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 2002 annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the sections titled "Executive Compensation," "Compensation of Directors"
and "Stock Option Grants" in our 2002 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 titled "Principal Stockholders" in our 2002 proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section titled "Certain Relationships and Related Transactions" in our
2002 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 set forth in Item 8.
2. Reports on Form 8-K - none
64
(b) Exhibits
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other
documents previously filed with the Commission.
Exhibit No. Description of Document
- ----------- -----------------------
2.1 Acquisition Agreement, dated March 15, 1998, among MeriStar H&R Operating Company, L.P.,
American General Hospitality, Inc. and AGHL GP, Inc. and certain other parties (incorporated
by reference to Exhibit 2.1 to the Company's Form S-1/A filed with the Securities and
Exchange Commission on June 5, 1998 (Registration No. 333-49881)).
2.2 Contribution, Assumption and Indemnity Agreement between CapStar Hotel Company and MeriStar
H&R Operating Company, L.P. (incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's
Report on Form 8-K dated March 17, 1998).
2.3 Agreement and Plan of Merger by and among MeriStar Hotels & Resorts, Inc, MeriStar Brooklyn,
Inc. and BridgeStreet Accommodations, Inc. dated as of March 23, 2000 (incorporated by
reference to Exhibit 2 to the Company's Form 8-K filed with the Securities and Exchange
Commission on March 24, 2000).
3.1 Amended and Restated Certificate of Incorporation of MeriStar Hotels & Resorts, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's Form S-1/A filed with the
Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
3.1.1 Certificate of Amendment of the Restated Certificate of Incorporation dated June 30, 2001.
3.2 By-laws of MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.2 to the
Company's Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998
(Registration No. 333-49881)).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's
Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration
No. 333-49881)).
4.2 Preferred Share Purchase Rights Agreement, dated July 23, 1998, between MeriStar Hotels &
Resorts, Inc. and the Rights Agent (incorporated by reference to Exhibit 4.4 to the Company's
Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998(Registration
No. 333-49881)).
4.2.1 Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to the Company's Form
S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No.
333-49881)).
4.2.2 Amendment to Rights Agreement, dated December 8, 2000, between MeriStar Hotels & Resorts,
Inc. and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company's Form
8-K filed with the Securities and Exchange Commission on December 12, 2000).
4.3 Stock Purchase Agreement, dated March 31, 1999 (the "Stock Purchase Agreement"), between
MeriStar Hotels & Resorts, Inc., Oak Hill Capital Partners, L.P. and Oak Hill Capital
Management Partners, L.P. (incorporated by reference to Exhibit 4.5 to the Company's Form
10-Q filed with the Securities and Exchange Commission for the three months ended March 31, 1999).
4.3.1 Amendment to the Stock Purchase Agreement (incorporated by reference to Exhibit 4.6 to the
Company's Form 10-Q filed with the Securities and Exchange Commission for the three months ended
March 31, 1999).
4.4 Registration Rights Agreement, dated March 31, 1999, between MeriStar Hotels & Resorts, Inc.,
Oak Hill Capital Partners, L.P. and Oak Hill Capital Management Partners, L.P. (incorporated
by reference to Exhibit 4.7 to the Company's Form 10-Q filed with the Securities and Exchange
Commission for the three months ended March 31, 1999).
10.1 Amended and Restated Agreement of Limited Partnership of MeriStar H&R Operating Company, L.P.
dated as of August 3, 1998 (incorporated by reference to Exhibit 10.11 to the Company's Form
10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998).
10.2 Senior Secured Credit Agreement dated as of February 29, 2000 between MeriStar H&R
65
Operating Company, L.P. and certain subsidiaries and Societe Generale,Southwest Agency and
certain other parties (the "Senior Credit Agreement") (incorporated by reference to Exhibit
10.11 to the Company's Form 10-K filed with the Securities and Exchange Commission for the year
ended December 31, 1999).
10.2.1 First Amendment to the Senior Credit Agreement (incorporated by reference to Exhibit 10.16
to the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2000).
10.2.2 Second Amendment to the Senior Credit Agreement.
10.2.3 Third Amendment to the Senior Credit Agreement.
10.3 Intercompany Agreement between MeriStar Hospitality Corporation, MeriStar Hospitality
Operating Partnership, L.P., MeriStar Hotel Lessee, Inc., MeriStar Hotels & Resorts, Inc. and
MeriStar H&R Operating Company L.P. ("Intercompany Agreement")
10.3.1 Amendment to the Intercompany Agreement (incorporated by reference to Exhibit 10.15 to the
Company's Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2000).
10.4 Revolving Credit Agreement (the "Revolving Credit Agreement"), dated as of August 3, 1998, by
and between MeriStar H&R Operating Company, L.P. and MeriStar Hospitality Operating
Partnership, L.P. (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31, 1998).
10.4.1 Amendment to Revolving Credit Agreement (incorporated by reference to Exhibit 10.13 to the
Company's Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1999).
10.4.2 Second Amendment to Revolving Credit Agreement
10.5 Term Note by MeriStar H&R Operating Company, L.P. to MeriStar Hospitality Operating
Partnership, L.P.
10.6 Agreement of Limited Partnership of MIP Lessee, L.P. (incorporated by reference to Exhibit
10.12 to the Company's Form 10-Q filed with the Securities and Exchange Commission for the
three months ended March 31, 1999).
10.7 MeriStar Hotels & Resorts, Inc. Incentive Plan (the "Incentive Plan") (incorporated by
reference to Exhibit 10.6 to the Company's Form S-1/A filed with the Securities and Exchange
Commission on June 19, 1998 (Registration No. 333-49881)).
10.7.1 Amendment to the Incentive Plan.
10.8 MeriStar Hotels & Resorts, Inc. Non-Employee Directors' Incentive Plan (the "Directors'
Plan") (incorporated by reference to Exhibit 10.7 to the Company's Form S-1/A filed with the
Securities and Exchange Commission on June 19, 1998 (Registration No. 333-49881)).
10.8.1 Amendment to the Directors' Plan.
10.9 MeriStar Hotels & Resorts, Inc. Employee Stock Purchase Plan.
10.10 Employment Agreement between MeriStar Hotels & Resorts, Inc., MeriStar Management Company,
LLC and Paul W. Whetsell (incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q filed with the Securities and Exchange Commission for the three and nine months ended
September 30, 2000).
10.11 Employment Agreement between MeriStar Hotels & Resorts, Inc. and Steven D. Jorns
(incorporated by reference to Exhibit 10.2 to the Company's Form S-1/A filed with the
Securities and Exchange Commission on June 19, 1998 (Registration No. 333-49881)).
10.12 Employment Agreement between MeriStar Hotels & Resorts, Inc., MeriStar Management Company,
LLC and John Emery (incorporated by reference to Exhibit 10.14 to the Company's Form 10-Q
filed with the Securities and Exchange Commission for the three and nine months ended
September 30, 2000).
10.13 Employment Agreement between MeriStar Hotels & Resorts, Inc., MeriStar H&R Operating Company,
LLC and James A. Calder (incorporated by reference to Exhibit 10.4 to the Company's Form
S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No.
333-49881)).
10.14 Employment Agreement between MeriStar Hotels & Resorts, Inc., MeriStar Management
66
Company,LLC and Robert Morse.
10.15 Employment Agreement between MeriStar Management Company, LLC and Thomas Vincent.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Power of Attorney (see signature page).
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 5, 2002
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
- -------------------- ----------------------------- -------------
Chief Executive Officer and March 5, 2002
/s/ PAUL W. WHETSELL Chairman of the Board of
- -------------------- Directors (Principal
Paul W. Whetsell Executive Officer)
/S/ STEVEN D. JORNS Vice Chairman of the Board of March 5, 2002
- ------------------- Directors
Steven D. Jorns
67
/s/ JOHN EMERY President, Chief Operating March 5, 2002
- -------------- Officer and Director
John Emery
/s/ JAMES A. CALDER Chief Financial Officer March 5, 2002
- ------------------- (Principal Financial and
James A. Calder Accounting Officer)
/s/ J. TAYLOR CRANDALL Director March 5, 2002
- ----------------------
J. Taylor Crandall
/s/ LESLIE R. DOGGETT Director March 5, 2002
- ---------------------
Leslie R. Doggett
/s/ KENT R. HANCE Director March 5, 2002
- -----------------
Kent R. Hance
/s/ S. KIRK KINSELL Director March 5, 2002
- -------------------
S. Kirk Kinsell
/s/ JAMES MCCURRY Director March 5, 2002
- -----------------
James McCurry
/s/ JAMES R. WORMS Director March 5, 2002
- ------------------
James R. Worms
68