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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 fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-11903
MERISTAR HOSPITALITY CORPORATION
(Exact name of issuer as specified in its charter)
MARYLAND 75-2648842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 WISCONSIN AVENUE, N.W.,
WASHINGTON, D.C. 20007
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (202) 295-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
-------------------------------- ------------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-
Based on the average sale price at March 1, 1999, the aggregate market value
of the voting stock held by nonaffiliates of the registrant was $824,935,000.
The number of shares of the Registrant's common stock outstanding as of
March 1, 1999 was 46,828,959.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Those portions of the Registrant's definitive proxy statement
relating to Registrant's 1999 Annual Meeting of Stockholders which are
incorporated into Items 10, 11, 12, and 13.
PART I
ITEM 1. BUSINESS
THE COMPANY
MeriStar Hospitality Corporation (the "Company") is a comprehensive real
estate investment trust ("REIT"), which owns a portfolio of primarily upscale,
full-service hotels, diversified by franchise and brand affiliations, in the
United States and Canada. As of December 31, 1998, the Company owned 117 hotels
that contain 29,351 rooms (the "Hotels"). The Hotels are located in major
metropolitan areas or rapidly growing secondary markets and are well located
within these markets. A majority of the Hotels are operated under nationally
recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R),
Doubletree(R) and Embassy Suites(R). All of the Hotels and the Company's other
assets are held by, and all of the Company's operations are conducted by,
MeriStar Hospitality Operating Partnership, L.P. (the "Operating Partnership").
The Company is the sole general partner of the Operating Partnership and
controls its operations.
The Company was created on August 3, 1998, when American General Hospitality
Corporation ("AGH"), a Maryland corporation operating as a REIT, and its
affiliated entities merged with CapStar Hotel Company, a Delaware corporation
("CapStar"), and its affiliated entities pursuant to an Agreement and Plan of
Merger, dated as of March 15, 1998 (the "Merger").
At the Merger, through a series of transactions, CapStar transferred or caused
to be transferred certain assets and liabilities to MeriStar Hotels & Resorts,
Inc. ("OPCO"), a Delaware corporation and a wholly owned subsidiary of CapStar,
so that OPCO would own the hotel management and leasing business previously
operated by CapStar and its subsidiaries, and CapStar then distributed to its
stockholders on a share-for-share basis (the "Spin-Off") all of the outstanding
capital stock of OPCO. Immediately following the Merger, OPCO acquired 100% of
the partnership interests in AGH Leasing, L.P., the third-party lessee that
leased most of the hotels owned by AGH, and substantially all of the assets and
certain liabilities of American General Hospitality, Inc., the third-party
manager that managed most of the hotels owned by AGH. OPCO is the lessee and
manager of 109 of the Hotels as well as properties of other hotel owners. The
eight Hotels not leased by OPCO are leased by affiliates of Prime Hospitality,
Corp. ("Prime"). The Company and OPCO share certain key officers and four board
members. An intercompany agreement aligns the Company's interests with the
interests of OPCO (the "Intercompany Agreement"), with the objective of
benefiting both companies' shareholders. See "Intercompany Agreement."
Each of the Company's leases is a participating lease ("Participating Lease")
designed to allow the Company to achieve substantial participation in any future
growth of revenues generated at the Hotels. Each Participating Lease has a term
of twelve years from the inception of the lease, subject to earlier termination
upon the occurrence of certain events. Under each Participating Lease, the
lessee is obligated to pay the Company the greater of fixed base rent or
participating rent based on a percentage of revenues at each of the Hotels. See
"The Participating Leases."
The Company's business strategy is to opportunistically acquire hotel
properties and related businesses with the potential for cash flow growth, and
to renovate and reposition each hotel according to the characteristics of the
hotel and its market. During the year ended December 31, 1998, the Company
spent (including expenditures by both CapStar and AGH prior to the Merger) a
total of $200 million on renovations at the Hotels and intends to spend an
additional $175 million during 1999 completing its renovation programs. See
"Special Note Regarding Forward-Looking Statements."
The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to own hotels. The upscale,
full-service segment is attractive for several reasons. First, the real estate
market has experienced a significant slow down in the past year in the
development of upscale, full-service hotels. Second, upscale, full-service
hotels appeal to a wide variety of customers, thus reducing the risk of
decreasing demand from any particular customer group. Additionally, such hotels
have particular
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appeal to both business executives and upscale leisure travelers, customers who
are generally less price sensitive than travelers who use limited-service
hotels.
BUSINESS
The Company seeks to increase shareholder value by maintaining its close
relationship with OPCO, a successful hotel operator, and by continuing to find
upscale, full-service hotels that can be acquired at prices below replacement
cost in selected markets throughout North America.
The Intercompany Agreement
Rights of First Refusal
The Intercompany Agreement provides that OPCO has a right of first refusal to
become the lessee of any real property acquired by the Company if the Company
determines that, consistent with its status as a REIT, the Company is required
to enter into a lease; provided that OPCO or an entity controlled by OPCO is
qualified to be the lessee based on experience in the industry and financial and
legal qualifications.
The Intercompany Agreement provides that the Company must provide OPCO with
written notice of a lessee opportunity. During the 30 days following such
notice, OPCO has a right of first refusal with regard to the offer to become a
lessee and the right to negotiate with the Company on an exclusive basis
regarding the terms and conditions of the lease. If after 30 days, the Company
and OPCO are unable to agree on the terms of a lease or if OPCO indicates that
it is not interested in pursuing the opportunity, the Company may offer the
opportunity to other hotel operators for a period of one year thereafter, at a
price and on terms and conditions that are not more favorable than the price and
terms and conditions proposed to OPCO. After this one-year period, if the
Company has not leased the property, the Company must again offer the
opportunity to OPCO in accordance with the procedures specified above.
Each company has established a leasing committee which reviews all hotel
leases to be entered into between the companies. Both leasing committees consist
of directors that are not directors of the other company.
OPCO has agreed not to acquire or make (i) investments in real estate or (ii)
any other investments that may be made by a REIT under the federal income tax
rules governing REITs unless they have provided written notice to the Company of
the material terms and conditions of the acquisition or investment opportunity,
and the Company has determined not to pursue such acquisitions or investments
either by providing written notice to OPCO rejecting the opportunity within 20
days or by allowing such 20-day period to lapse. OPCO has also agreed to assist
the Company in structuring and consummating any acquisition or investment which
the Company elects to pursue.
The Intercompany Agreement provides the Company and OPCO with a symbiotic
relationship so that investors in both companies may enjoy the economic benefit
of the entire enterprise. Investors should be aware, however, that because of
the independent trading of the shares of the Company and the shares of OPCO,
stockholders of each company may develop divergent interests which could lead to
conflicts of interest. This divergence of interests could also reduce the
anticipated benefits of the relationship between the two companies.
Provision of Services
OPCO provides the Company with certain services as the Company may reasonably
request from time to time, including administrative, corporate, accounting,
financial, insurance, legal, tax, data processing, human resources, acquisition
identification and due diligence, and operational services. The Company
compensates OPCO for services provided in an amount determined in good faith by
OPCO as the amount an unaffiliated third party would charge the Company for
comparable services.
3
Equity Offerings
If either the Company or OPCO desires to engage in a securities issuance, such
issuing party will give notice to such other party as promptly as practicable of
its desire to engage in a securities issuance. Any such notice will include the
proposed material terms of such issuance, to the extent determined by the
issuing party, including whether such issuance is proposed to be pursuant to
public or private offering, the amount of securities proposed to be issued and
the manner of determining the offering price and other terms thereof. The non-
issuing party will cooperate with the issuing party in every way to effect any
securities issuance of the issuing party by assisting in the preparation of any
registration statement or other document required in connection with such
issuance and, in connection therewith, providing the issuing party with such
information as may be required to be included in such registration statement or
other document.
Term
The Intercompany Agreement will terminate upon the earlier of (a) August 3,
2008, or (b) a change in ownership or control of OPCO.
The Company may lend OPCO up to $75 million for general corporate purposes
pursuant to a revolving credit agreement. Amounts outstanding under the
facility bear interest at the rate of the 30-day London Interbank Offered Rate
("LIBOR") plus 350 basis points. As of December 31, 1998, OPCO had drawn $67
million on the facility at an interest rate of 8.56%.
Acquisition Strategy
In order to maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 95% of its taxable income
(excluding net capital gains). As a result, in order to complete acquisitions,
the Company relies heavily on its ability to raise new capital through debt and
equity offerings; that ability is dependent on the then current status of the
capital markets. During the last six to nine months, the capital markets have
changed and equity capital is not available at prices that make it beneficial to
acquire new assets.
Although the Company is not currently pursuing direct acquisition
opportunities due to the lack of available capital, it continues to be aware of
acquisition opportunities in the upscale, full-service hotel market. The Company
currently anticipates that it may make investments in hotels through joint
ventures with strategic partners or through equity contributions, sales and
leasebacks, or secured loans.
The Company focuses its attention on investments in hotels located in markets
with economic, demographic and supply dynamics favorable to hotel owners.
Through its extensive due diligence process, the Company selects those
acquisition targets where it believes selective capital improvements and well
selected third-party management will increase the hotel's ability to attract key
demand segments, enhance hotel operations and increase long-term value. In order
to evaluate the relative merits of each investment opportunity, senior
management of the Company together with OPCO create detailed plans covering all
areas of renovation and operation. These plans serve as the basis for the
Company's acquisition decisions and guide subsequent renovation and operating
plans which will be carried out by a third-party hotel operator.
Competition
The Company competes primarily in the upscale and mid-priced sectors of the
full-service segment of the lodging industry. In each geographic market in which
the Hotels are located, there are other full- and limited-service hotels that
compete with the Hotels. Competition in the U.S. lodging industry is based
generally on convenience of location, brand affiliation, price, range of
services and guest amenities offered and quality of customer service and overall
product.
4
Employees
As of December 31, 1998, the Company employed four persons, all of whom are
compensated on a salary basis. All of the Company's employees work at the
corporate headquarters. The Company also reimburses OPCO for work performed by
its employees on behalf of the Company. During 1998, the Company reimbursed OPCO
approximately $781,000 for worked performed by OPCO employees on behalf of the
Company.
Franchises
The Company employs a flexible branding strategy based on a particular hotel's
market environment and the hotel's unique characteristics. Accordingly, the
Company uses various national trade names pursuant to licensing arrangements
with national franchisors.
Governmental Regulation
Americans with Disability Act - Under the Americans with Disabilities Act (the
"ADA"), all public accommodations are required to meet certain requirements
related to access and use by disabled persons. These requirements became
effective in 1992. Although significant amounts have been and continue to be
invested in ADA required upgrades to the Hotels, a determination that the
Company is 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. The Company is likely to incur additional costs of complying with the
ADA; however, such costs are not expected to have a material adverse effect on
the Company's 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 certain
underground storage tanks are also regulated by federal and state laws. In
connection with the ownership of the Hotels, the Company could be liable for the
costs of remedial action with respect to such regulated substances and storage
tanks and claims related thereto. Certain environmental laws and common law
principles could also be used to impose liability for releases of hazardous
materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs or
other hazardous materials.
Phase I environmental site assessments ("ESA") have been conducted at all of
the Hotels, and Phase II ESAs have been conducted at some of the Hotels by
qualified independent environmental engineers. The purpose of the ESA is to
identify potential sources of contamination for which the Hotels may be
responsible and to assess the status of environmental regulatory compliance. The
ESAs have not revealed any environmental liability or compliance concerns that
the Company believes would have a material adverse effect on the Company's
business, assets, results of operations or liquidity, nor is the Company aware
of any material environmental liability or concerns. Nevertheless, it is
possible that these ESAs did not reveal all environmental liabilities or
compliance concerns or that material environmental liabilities or compliance
concerns exist of which the Company is currently unaware.
In reliance upon the Phase I and Phase II ESAs, the Company believes the
Hotels are in material compliance with all federal, state and local ordinances
and regulations regarding hazardous or toxic substances and other environmental
matters. The Company has not been notified by any governmental
5
authority of any material noncompliance, liability or claim relating to
hazardous or toxic substances or other environmental substances in any of the
Hotels.
THE OPERATING PARTNERSHIPS
The following summary information is qualified in its entirety by the
provisions of the MeriStar Hospitality Operating Partnership, L.P. limited
partnership agreement, a copy of which has been filed as an exhibit to this Form
10-K.
Substantially all of the Company's assets are held indirectly by MeriStar
Hospitality Operating Partnership, L.P. (the "Operating Partnership"), the
Company's subsidiary operating partnership. The Company is the sole general
partner of the Operating Partnership, and the Company and approximately 114
independent third parties are limited partners of the Operating Partnership.
The partnership agreement of the Operating Partnership give the general partner
full control over the business and affairs of the Operating Partnership. The
general partner is also given the right, in connection with the contribution of
property to the Operating Partnership or otherwise, to issue additional
partnership interests in the Operating Partnership in one or more classes or
series, with such designations, preferences and participating or other special
rights and powers (including rights and powers senior to those of the existing
partners) as the general partner may determine.
The Operating Partnership's partnership agreement provides for four classes of
partnership interests ("OP Units"): Common OP Units, Class B OP Units, Class C
OP Units and Class D OP Units. As of March 1, 1999, the partners of the
Operating Partnership own the following aggregate numbers of OP Units: (i) the
Company and its wholly-owned subsidiaries own a number of Common OP Units equal
to the number of issued and outstanding shares of the Company's common stock,
par value $0.01, (the "Common Stock") and (ii) independent third parties own
5,782,490 OP Units (consisting of 3,306,872 Common OP Units, 974,588 Class B OP
Units, 1,108,873 Class C OP Units and 392,157 Class D OP Units). Common OP Units
and Class B OP Units receive quarterly distributions per OP Unit equal to the
dividend paid on each of the Company's Common Shares. Class C OP Units receive a
non-cumulative, quarterly distribution equal to $0.5575 per Class C OP Unit
until such time as the dividend rate on the Company's Common Shares exceeds
$0.5575 whereupon the Class C OP Units automatically convert into Common OP
Units. Class D OP Units pay a 6.5% cumulative annual preferred return based on
an assumed price per Common Share of $22.16, compounded quarterly to the extent
not paid on a current basis, and are entitled to a liquidation preference of
$22.16 per Class D OP Unit. All net income and capital proceeds earned by the
Operating Partnership, after payment of the annual preferred return and, if
applicable, the liquidation preference, will be shared by the holders of the
Common OP Units in proportion to the number of Common OP Units in the relevant
Operating Partnership owned by each such holder.
Each OP Unit held by the independent third-parties is redeemable by the holder
for one share of Common Stock (or, at the Company's option, for cash in an
amount equal to the market value of a share of Common Stock). In addition, the
Class D OP Units may be redeemed by the Operating Partnership at a price of
$22.16 per Class D OP Unit (or, at the Company's option, for a number of shares
of Common Stock having a value equal to such redemption price) at any time after
April 1, 2000 or by the holders of the Class D OP Units at a price of $22.16 per
Class D OP Unit (in cash or, at the holder's option, for a number of shares of
Common Stock having a value equal to the redemption price) at any time after
April 1, 2004.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information both included and incorporated by reference in this
Prospectus may contain forward- looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, and as such may
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of our company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe our
6
future plans, strategies and expectations are generally identifiable by use of
the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative thereof or other variations
thereon or comparable terminology. Factors which could have a material adverse
effect on the operations and future prospects of our Company include, but are
not limited to, changes in: economic conditions generally and the real estate
market specifically, legislative/regulatory changes (including changes to laws
governing the taxation of real estate investment trusts), availability of
capital, interest rates, competition, supply and demand for hotel rooms in our
current and proposed market areas and general accounting principles, policies
and guidelines applicable to real estate investment trusts. These risks and
uncertainties should be considered in evaluating any forward-looking statements
contained or incorporated by reference herein.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Washington, D.C. and owns
hotel properties throughout the United States and Canada. As of December 31,
1998, the Company owned 117 Hotels. The Company leases land for seven of its
Hotels (Hilton Washington Embassy Row, Washington, DC; Hilton Port of Los
Angeles/San Pedro, San Pedro, California; Doubletree Resort, Palm Springs,
California; Jekyll Inn, Jekyll Island, Georgia; Hilton Clearwater, Clearwater,
Florida; Courtyard by Marriott, Lake Buena Vista, Florida; and Radisson Hotel,
Rochester, New York). The Company also leases part of the land for six of the
Hotels (Westin Morristown, Morristown, New Jersey; Courtyard by Marriott
Meadowlands, Secaucus, New Jersey; Wyndham Hotel Albuquerque, Albuquerque, New
Mexico; Hilton Hotel Toledo, Toledo, Ohio; Wyndham Airport Hotel, San Jose,
California; and Westin Resort Key Largo, Key Largo, Florida). No one hotel
property is material to the operation of the Company. A typical Hotel has
meeting and banquet facilities, food and beverage facilities and guest rooms and
suites.
The Hotels feature, or after the Company's renovation programs have been
completed will feature, comfortable, modern guest rooms, extensive meeting and
convention facilities and full-service restaurant and catering facilities that
attract meeting and convention functions from groups and associations, upscale
business and vacation travelers as well as banquets and receptions from the
local community.
The following table sets forth certain information with respect to the Hotels
for the year ended December 31, 1998:
Guest Average Average
Hotel Location Rooms Daily Rate Occupancy
-------- -------- ----------- -------------- -------------
Sheraton Hotel.................... Mesa, AZ 273 $ 85.15 53.0%
Crowne Plaza Hotel............. Phoenix, AZ 250 84.32 52.8
Embassy Suites.................... Tucson, AZ 204 83.72 74.8
Courtyard by Marriott............. Century City, CA 134 115.24 85.6
Hilton Hotel...................... Irvine, CA 289 100.04 73.0
Marriott Hotel.................... Los Angeles, CA 469 118.78 68.5
Courtyard by Marriott............. Marina Del Rey, CA 276 90.08 92.2
Hilton Hotel...................... Monterey, CA 204 114.62 62.5
Doubletree Resort................. Palm Springs, CA 285 81.62 52.8
Hilton Hotel...................... Sacramento, CA 331 100.09 71.9
Holiday Inn Select............... San Diego, CA 317 75.54 84.0
Sheraton Hotel................... San Francisco, CA 525 151.62 86.9
Crowne Plaza Hotel............. San Jose, CA 239 129.05 72.7
Wyndham Hotel..................... San Jose, CA 355 133.51 65.3
Hilton Hotel...................... San Pedro, CA 226 71.83 81.0
Santa Barbara Inn................. Santa Barbara, CA 71 149.60 82.3
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Holiday Inn....................... Colorado Springs, CO 200 66.38 70.7
Sheraton Hotel.................... Colorado Springs, CO 500 76.89 69.2
Embassy Suites Denver............. Englewood, CO 236 109.99 76.3
Hilton Hotel...................... Hartford, CT 388 102.60 74.3
Ramada............................ Meriden, CT 150 78.20 72.2
The Lodge at the Seaport.......... Mystic, CT 77 81.73 54.7
Ramada............................ Shelton, CT 155 122.03 75.9
Doubletree Bradley Airport........ Windsor Locks, CT 200 81.97 69.4
Embassy Row Hilton................ Washington, DC 193 125.84 74.9
Georgetown Inn.................... Washington, DC 96 133.96 83.2
The Latham Hotel.................. Washington, DC 143 124.03 83.0
South Seas Plantation............. Captiva, FL 579 221.00 59.4
Hilton Hotel...................... Clearwater, FL 426 100.57 70.6
Ramada Hotel...................... Clearwater, FL 289 72.95 66.9
Hilton Hotel...................... Cocoa Beach, FL 296 84.93 76.8
Holiday Inn....................... Ft. Lauderdale, FL 240 73.69 73.1
Howard Johnson Resort............. Key Largo, FL 100 78.57 84.6
Westin Hotel...................... Key Largo, FL 200 133.37 70.2
Courtyard by Marriott............. Lake Buena Vista, FL 314 102.48 84.9
Sheraton Safari Hotel............. Lake Buena Vista, FL 489 77.11 77.8
Radisson Hotel.................... Marco Island, FL 268 126.19 69.7
Holiday Inn....................... Madeira Beach, FL 149 76.09 65.5
Radisson Hotel.................... Orlando, FL 742 88.05 71.2
Best Western Hotel................ Sanibel Island, FL 46 133.76 75.6
Sanibel Inn....................... Sanibel Island, FL 96 148.93 74.3
Seaside Inn....................... Sanibel Island, FL 32 148.12 71.2
Song of the Sea................... Sanibel Island, FL 30 170.91 86.3
Sundial Beach Resort.............. Sanibel Island, FL 243 184.43 72.7
Doubletree Hotel.................. Tampa, FL 496 58.97 71.4
Doubletree Guest Suites........... Atlanta, GA 155 107.45 65.9
Westin Atlanta Airport............ Atlanta, GA 495 85.14 78.7
Jekyll Inn........................ Jekyll Island, GA 262 65.59 52.8
Wyndham Hotel..................... Marietta, GA 218 63.60 72.0
Radisson Hotel.................... Arlington Heights, IL 201 87.15 70.3
Radisson Hotel & Suites........... Chicago, IL 350 150.26 78.0
Holiday Inn....................... Rosemont, IL 507 110.26 80.4
Radisson Hotel.................... Schaumburg, IL 200 89.11 70.2
Doubletree Guest Suites........... Indianapolis, IN 137 90.00 69.0
Radisson Plaza.................... Lexington, KY 367 84.00 62.7
Seelbach Hilton Hotel............. Louisville, KY 321 107.54 65.6
Holiday Inn Select................ Kenner, LA 303 85.60 76.6
Lafayette Hilton & Towers......... Lafayette, LA 327 76.89 72.6
Maison de Ville.................. New Orleans, LA 23 267.25 67.6
Holiday Inn....................... Annapolis, MD 219 91.11 70.4
Radisson Hotel................... Baltimore, MD 148 106.25 75.5
Sheraton Hotel................... Columbia, MD 287 102.77 73.4
Holiday Inn Express............ Hanover, MD 159 75.43 82.5
Hampton Inn..................... Ocean City, MD 168 82.67 53.7
Hilton Hotel...................... Detroit, MI 151 93.12 85.1
Hilton Hotel...................... Grand Rapids, MI 224 85.91 66.7
Holiday Inn Sports Complex........ Kansas City, MO 163 69.87 73.0
Holiday Inn....................... St. Louis, MO 120 71.91 81.7
Sheraton Airport Plaza............ Charlotte, NC 222 90.87 73.4
Hilton Hotel...................... Durham, NC 194 88.98 62.0
Courtyard by Marriott............. Durham, NC 146 81.01 72.0
Four Points Hotel................. Cherry Hill, NJ 213 78.64 62.8
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Ramada Hotel...................... Mahwah, NJ 128 91.11 73.2
Sheraton Hotel.................... Mahwah, NJ 225 117.79 78.0
Westin Morristown................. Morristown, NJ 199 121.67 59.1
Four Points Hotel................. Mt. Arlington, NJ 124 100.86 75.7
Doral Forrestal................... Princeton, NJ 290 154.39 65.3
Courtyard by Marriott............. Secaucus, NJ 165 115.84 87.8
Marriott Hotel.................... Somerset, NJ 440 123.13 74.9
Doubletree Hotel.................. Albuquerque, NM 295 75.26 71.4
Wyndham Hotel..................... Albuquerque, NM 276 65.89 80.8
Crowne Plaza Hotel................ Las Vegas, NV 202 86.40 82.2
St. Tropez Suites................. Las Vegas, NV 149 97.35 72.6
Radisson Hotel.................... Rochester, NY 171 69.93 71.4
Radisson Hotel.................... Middleburg Heights, OH 237 75.41 66.8
Hilton Hotel...................... Toledo, OH 213 70.81 60.7
Westin Hotel...................... Oklahoma City, OK 395 74.64 52.9
Crowne Plaza Hotel................ Lake Oswego, OR 161 109.06 64.4
Sheraton Great Valley ............ Frazer, PA 198 110.18 75.4
Embassy Suites Center City........ Philadelphia, PA 288 136.31 74.7
Holiday Inn Select................ Trevose, PA 215 92.77 72.2
Hilton Hotel...................... Arlington, TX 309 86.18 76.8
Doubletree Hotel.................. Austin, TX 350 95.80 66.8
Austin Hilton & Towers............ Austin, TX 320 80.52 67.3
Holiday Inn Select................ Bedford, TX 243 66.62 80.1
Radisson Hotel.................... Dallas, TX 304 65.08 71.8
Renaissance Hotel................. Dallas, TX 289 94.91 58.0
Sheraton Hotel.................... Dallas, TX 348 68.29 60.9
Hilton Hotel...................... Houston, TX 291 67.56 69.2
Marriott Hotel.................... Houston, TX 302 117.52 69.4
Hilton Hotel...................... Houston, TX 295 105.85 78.7
Sheraton Hotel.................... Houston, TX 382 80.55 56.3
Holiday Inn Select................ Irving, TX 409 77.76 79.7
Hilton Hotel...................... Midland, TX 249 74.88 51.9
Hilton Hotel...................... Salt Lake City, UT 287 78.35 80.8
Holiday Inn....................... Alexandria, VA 178 107.75 75.4
Ramada Inn........................ Alexandria, VA 253 99.52 68.0
Hilton Hotel...................... Arlington, VA 209 117.10 82.4
Hilton Hotel...................... Arlington, VA 386 99.25 71.2
Hampton Inn....................... Richmond, VA 124 70.01 75.6
Holiday Inn....................... Richmond, VA 280 55.56 60.9
Hilton Hotel...................... Bellevue, WA 179 118.91 79.0
Crowne Plaza Hotel................ Madison, WI 226 94.11 71.5
Holiday Inn Calgary Airport....... Calgary, Alberta 170 48.36 78.7
Sheraton Hotel.................... Guildford, B.C. 278 66.61 70.1
Holiday Inn Metrotown............. Vancouver, B.C. 100 72.74 83.1
Ramada Vancouver Centre........... Vancouver, B.C. 118 68.74 79.9
------- ------- ----
Total/Weighted Average 29,351 $ 95.00 71.5%
======== ======= ======
9
THE PARTICIPATING LEASES
Subsidiaries of OPCO (the "Lessees") lease all but eight of the Hotels. Each
Participating Lease provides for an initial term of 12 years. Each
Participating Lease provides OPCO with three renewal options of five years each
(except in the case of properties with ground leases having a remaining term of
less than 40 years), provided that (a) the Lessee will not have the right to a
renewal if a change in the tax law has occurred that would permit the Company to
operate the hotel directly; (b) if the Lessee elects not to renew a
Participating Lease for any applicable Hotel, then the Company has the right to
reject the exercise of a renewal right on a Participating Lease of a comparable
hotel; and (c) the rent for each renewal term is adjusted to reflect the then
fair market rental value of the hotel. If the Company and the Lessee are unable
to agree upon the then fair market rental value of a hotel, the Participating
Lease terminates upon the expiration of the then current term and the Lessee
then has a right of first refusal to lease the hotel from the Company on such
terms as the Company may have agreed upon with a third-party lessee.
Base Rent; Participating Rent; Additional Charges
Each Participating Lease requires the Lessee to pay (i) fixed monthly base
rent (the "Base Rent"), (ii) participating rent ("Participating Rent") which is
payable monthly and based on certain percentages of room revenue, food and
beverage revenue and telephone and other revenue at each hotel in excess of Base
Rent, and (iii) certain other amounts, including interest accrued on any late
payments or charges ("Additional Charges"). Base Rent and Participating Rent
departmental thresholds (departmental revenue on which the rent percentage is
based) are increased annually by a percentage equal to the percentage increase
in the Consumer Price Index (CPI percentage increase plus 0.75% in the case of
the Participating Rent departmental revenue threshold) compared to the prior
year. In addition, under certain circumstances, a reduced percentage rate will
apply to the revenues attributable to certain "discounted rates" that the Lessee
may offer. Base Rent is payable monthly in arrears. Participating Rent is
payable in arrears based on a monthly schedule adjusted to reflect the seasonal
variations in the hotel's revenue.
Other than real estate and personal property taxes and assessments, rent
payable under ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments
(determined in accordance with generally accepted accounting principles), that
are obligations of the Company, the Participating Leases require the Lessee to
pay rent, liability insurance, all costs and expenses and all utility and other
charges incurred in the operation of the hotels. The Participating Leases also
provide for rent reductions and abatements in the event of damage or destruction
or a partial taking of any hotel.
The Participating Leases also provide for a rental adjustment under certain
circumstances in the event of (a) a major renovation of the hotel, or (b) a
change in the franchisor of the hotel.
Lessee Capitalization
The Participating Leases require OPCO, as guarantor of the Participating
Leases, to maintain a book net worth of not less than $40 million. Further,
commencing January 1, 1999, for so long as the tangible net worth of OPCO is
less than 17.5% of the aggregate rents payable under the Participating Leases
for the prior calendar year, OPCO is prohibited from paying dividends or making
distributions other than dividends or distributions made for the purpose of
permitting the partners of the Operating Partnership to pay taxes on the taxable
income of the Operating Partnership attributable to its partners plus any
required preferred distributions existing to partners.
Termination
The Company has the right to terminate the applicable Participating Lease upon
the sale of a hotel to a third party or, upon the Company's determination not to
rebuild after a casualty, upon payment to the Lessee of the fair market value of
the leasehold estate (except for properties initially identified by the Company
and OPCO as properties slated to be sold). The fair market value of the
leasehold estate is
10
determined by discounting to present value at a discount rate of 10% per annum
the cash flow for each remaining year of the then current lease term, which cash
flow will be deemed to be the cash flow realized by the Lessee under the
applicable Participating Lease for the 12-month period preceding the termination
date. The Company will receive as a credit against any such termination payments
an amount equal to any outstanding "New Lease Credits," which means the
projected cash flow (determined on the same basis as the termination payment) of
any new Participating Leases entered into between the Company and OPCO after the
Effective Date for the initial term of such new Participating Lease amortized on
a straight-line basis over the initial term of the new Participating Lease.
Performance Standards
The Company has the right to terminate the applicable Participating Lease if,
in any calendar year, the gross revenues from a hotel are less than 95% of the
projected gross revenues for such year as set forth in the applicable budget
unless (a) the Lessee can reasonably demonstrate that the gross revenue
shortfall was caused by general market conditions beyond the Lessee's control or
(b) the Lessee "cures" the shortfall by paying to the Company the difference
between the rent that would have been paid to the Company had the property
achieved gross revenues of 95% of the budgeted amounts and the rent paid based
on actual gross revenues. The Lessee does not have such a cure right for more
than two consecutive years.
The Participating Leases also require that the Lessee spend in each calendar
year at least 95% of the amounts budgeted for marketing expenses and for repair
and maintenance expenses.
Assignment and Subleasing
The Lessees do not have the right to assign a Participating Lease or sublet a
hotel without the prior written consent of the Company. For purposes of the
Participating Lease, a change in control of OPCO or the Lessees will be deemed
an assignment of the Participating Lease and will require the Company's consent,
which may be granted or withheld in its sole discretion.
ITEM 3. LEGAL PROCEEDINGS
In the course of the Company's normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or asserted against the
Company. Based on currently available facts, management believes that the
disposition of matters that are pending or asserted will not have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during the fourth
quarter of 1998.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "MHX." The following table sets forth for the periods indicated the high
and low closing sale prices for the Common Stock on the NYSE.
Price
----------
High Low
---------- -------------
1999:
First Quarter (through March 1, 1999)............................................................ $ 19 3/8 $17 11/16
1998:
Fourth Quarter (ended December 31, 1998)......................................................... 20 1/4 12 15/16
Third Quarter (from Merger on August 3, 1998 through September 30, 1998) 21 3/8 14 9/16
Third Quarter (from July 1, 1998 through August 2, 1998)(1) 29 7/8 25 1/16
Second Quarter (ended June 30, 1998) (1) 34 7/16 27 1/8
First Quarter (ended March 31, 1998) (1) 36 1/2 31 1/8
_____________
(1) Represents the share prices of CapStar Hotel Company which, pursuant to
generally accepted accounting principles, is the predecessor of the
Company.
The last reported sale price of the Common Stock on the NYSE on March 1, 1999
was $17 15/16. As of March 1, 1999, there were approximately 297 holders of
record of the Common Stock.
On November 4, 1998, the Company declared a dividend of $0.505 per share
relating to the fourth quarter of 1998 that was paid on January 29, 1999 to
stockholders of record as of December 30, 1998.
The Company intends to make regular quarterly distributions to its
stockholders. Future distributions by the Company will be at the discretion of
the Board of Directors and will depend on the Company's financial condition, its
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant. There can be no assurance that any such distributions will be made by
the Company.
In order to maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 95% of its taxable income
(excluding net capital gains). Under certain circumstances, the Company may be
required to make distributions in excess of cash available for distribution in
order to meet these distribution requirements. In that event, the Company would
seek to borrow the amount to obtain the cash necessary to make distributions to
retain its qualification as a REIT for federal income tax purposes. The
distributions made in 1998 represent a 33% return of capital.
Recent Sales of Unregistered Securities
CapStar Hotel Company
Each of CapStar's private issuances of shares of Common Stock and the
Operating Partnership's private issuances of OP Units has been in reliance on an
exemption from registration under Section 4(2) of the Act in the amounts and for
the consideration set forth below.
On May 29, 1996, CapStar issued 100 shares of Common Stock to Cherwell
Investors, Inc., a wholly-owned subsidiary of Acadia Partners, L.P. for nominal
consideration.
12
On June 20, 1996, CapStar entered into a formation agreement pursuant to which
it became obligated to issue 3,504,221 shares of Common Stock to the beneficial
owners of EquiStar Hotel Investors, L.P. ("EquiStar") and the CapStar operating
partnership. In August 1996, in connection with CapStar's initial public
offering, CapStar issued 3,504,221 shares of Common Stock to such beneficial
owners.
On April 1, 1997, CapStar issued 809,523 Common OP Units and 392,157 Class D
OP Units to affiliates of Highgate Hotels, Inc. ("Highgate") in connection with
CapStar's purchase of a portfolio of six hotels from certain affiliates of
Highgate.
On November 17, 1997, CapStar issued 674,236 Common OP Units to affiliates of
Winston Hospitality, Inc. ("Winston") in connection with CapStar's acquisition
of substantially all of the assets of Winston.
American General Hospitality Corporation
Each of AGH's private issuances of shares of Common Stock and the Operating
Partnership's private issuances of OP Units has been in reliance on an exemption
from registration under Section 4(2) of the Act in the amounts and for the
consideration set forth below.
On June 27, 1997, AGH privately issued 225,690 Class B OP Units as part of the
purchase of the Hilton Hotel Cocoa Beach. On July 16, 1997 the Class B OP Units
automatically converted into Common OP Units.
On July 14, 1997, as part of the terms of the strategic alliance between
Wyndham International and AGH, an affiliate of Wyndham purchased 95,741 shares
of restricted Common Stock. The shares were purchased in connection with the
conversion of the LeBaron Airport Hotel to the Wyndham San Jose Airport Hotel.
On October 14, 1997, AGH issued under the Company's Non-Employee Directors'
Incentive Plan, 1,109 shares of Common Stock to the Board of Directors for
compensation in accordance with their agreement to serve as directors of the
Company.
On November 30, 1997, AGH privately issued 11,568 Class B OP Units as part of
the purchase of the Courtyard by Marriott Durham. On December 31, 1997, these
Class B OP Units automatically converted into Common OP Units.
On December 31, 1997, AGH privately sold an additional 1,159,546 shares of its
Common Stock to certain investment funds and separate accounts advised by
ABKB/LaSalle Securities Limited Partnership and LaSalle Advisors Limited
Partnership.
On January 2, 1998, AGH privately sold an additional 420,106 shares of Common
Stock to certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership.
On January 8, 1998, AGH privately issued 439,375 Class B OP Units as part of
the purchase price of a portfolio hotels owned by Prime. On April 16, 1998 the
Class B OP Units converted into Common OP Units.
On January 15, 1998, AGH privately sold the balance of 100,829 shares of its
Common Stock to certain investment funds and separate accounts advised by
ABKB/LaSalle Securities Limited Partnership and LaSalle Advisors Limited
Partnership.
13
On February 3, 1998, AGH privately issued 1,108,874 Class C OP Units as part
of the purchase price of the Holiday Inn O'Hare International Hotel. The Class C
OP Units bear a preferred annual distribution rate of $2.23 per Class C OP Unit
until such time as the dividend distribution rate for the Class C OP Units will
equal the distribution rate on the Common Stock. In addition, the holders of the
Class C OP Units received 974,588 additional OP Units due to the fact that the
fair market value of the Common Stock (as reported on the New York Stock
Exchange, Inc.) was trading below $35 per share on the anniversary date of the
closing of the acquisition.
The Company
On August 21, 1998, the Company privately issued 46,628 Class B OP Units as
part of the purchase of the land under the Four Points Hotel in Mt. Arlington,
New Jersey. On October 14, 1998 the Class B OP Units automatically converted
into Common OP Units.
On October 1, 1998, the Company privately issued 916,230 Common OP Units as
part of the purchase of a portfolio of assets from South Seas Properties Company
Limited Partnership and its affiliates.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information for
the Company. The selected Operating Results and Balance Sheet Data have been
extracted from the consolidated financial statements for each of the periods
presented. The following information should be read in conjunction with the
consolidated financial statements and notes thereto for the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ------------ ----------- ------------
(dollars in thousands, except per share amounts and Operating Data)
Revenue:
Hotel operations:
Participating lease revenue............................. $ 135,994 $ - $ - $ - $ -
Rooms....................................................... 275,610 207,736 68,498 14,456 0
Food, beverage, office rental and other..................... 110,519 103,521 36,949 7,471 0
Management services and other revenues...................... 3,174 5,136 4,345 4,436 4,418
------------- ----------- --------- ---------- -------
Total revenues............................................ 525,297 316,393 109,792 26,363 4,418
------------- ----------- ---------- ---------- -------
Operating expenses:
Departmental expenses:
Rooms....................................................... 65,048 51,075 17,509 4,190 0
Food, beverage and other.................................... 80,327 77,373 27,102 5,437 0
Undistributed operating expenses:
Administrative and general.................................. 62,350 50,332 20,448 8,078 4,508
Property and other operating costs.......................... 122,963 55,111 17,151 3,934 0
Depreciation and amortization............................... 60,703 20,990 8,248 2,097 23
------------- ----------- ---------- ---------- -------
Total operating expenses.................................. 391,391 254,881 90,458 23,736 4,531
------------- ----------- ---------- ---------- -------
Net operating income (loss).................................. 133,906 61,512 19,334 2,627 (113)
Interest expense, net........................................ 64,378 21,024 12,346 2,414 0
Minority interest............................................ 5,121 1,425 (39) (18) 0
Provision for income taxes (A)............................... 15,699 14,911 2,674 0 0
------------- ----------- ---------- ---------- -------
Income (loss) before extraordinary loss...................... 48,708 24,152 4,353 231 (113)
Extraordinary loss, net of tax (B).......................... (4,080) (4,092) (1,956) (888) 0
Cumulative effect of accounting change, net of tax (C) (921) - - - -
------------- ----------- ---------- ---------- -------
Net income (loss)......................................... $ 43,707 $ 20,060 $ 2,397 $ (657) $ (113)
============ =========== ========= ========= =======
Basic earnings per share before extraordinary loss (D)....... $1.45 $1.29 $0.31 - -
Diluted earnings per share before extraordinary loss (D)..... $1.40 $1.27 $0.31 - -
Number of shares of common stock issued and outstanding (E).. 46,718 24,867 12,754 - -
Other Financial Data:
EBITDA (F)................................................... $ 194,609 $ 82,502 $ 27,582 $ 4,724 $ (90)
Net cash provided by operating activities.................... 162,796 59,882 13,373 4,357 66
Net cash used in investing activities........................ (785,505) (586,259) (225,251) (116,573) (41)
Net cash provided by financing activities.................... 543,256 588,428 226,830 119,048 0
Balance Sheet Data:
Investments in hotel properties, gross....................... $2,909,439 $ 950,052 $ 343,092 $ 110,883 $ 176
Total assets................................................. 2,998,460 1,124,642 379,161 132,650 1,232
Long term debt............................................... 1,602,352 492,771 200,361 73,574 0
15
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating Data:
Owned Hotels:
Number of hotels (E)........................................... 117 47 19 6 -
Number of guest rooms (E)...................................... 29,351 12,019 5,166 2,101 -
Total revenues................................................. $522,123 $311,257 $105,447 $21,927 -
Average occupancy (G).......................................... 71.5% 72.0% 71.6% 72.3% -
ADR (H)........................................................ $ 95.00 $ 86.87 $ 82.84 $ 71.58 -
RevPAR (I)..................................................... $ 67.90 $ 62.55 $ 59.31 $ 51.75 -
___________
(A) No provision for federal income taxes was included prior to the August 1996
initial public offering as the Company's predecessor entities were
partnerships and all federal income tax liabilities were passed through to
the individual partners.
(B) During 1995, 1996, 1997 and 1998 certain loan facilities were refinanced
and the write-offs of deferred costs associated with the prior facilities
were recorded as extraordinary losses.
(C) Pursuant to AICPA Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities" which the Company adopted on July 1, 1998,
the effect of this accounting change was a pre-tax charge against income
for the year ended December 31, 1998 of $1,485 ($921 net of tax effect).
(D) Basic and diluted earnings per share before extraordinary item for the year
ended December 31, 1996 is based on earnings for the period from August 20,
1996 through December 31, 1996.
(E) As of December 31 for the periods presented.
(F) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a useful
measure of operating performance because (i) it is industry practice to
evaluate hotel properties based on operating income before interest,
depreciation and amortization and minority interests of common and
preferred OP Unit holders, which is generally equivalent to EBITDA, and
(ii) EBITDA is unaffected by the debt and equity structure of the entity.
EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles ("GAAP"), is not necessarily indicative of
cash available to fund all cash flow needs, and should not be considered as
an alternative to net income under GAAP for purposes of evaluating the
Company's results of operations and may not be comparable to other
similarly titled measures used by other companies.
(G) Represents total number of rooms occupied by hotel guests on a paid basis
divided by total available rooms.
(H) Represents total room revenues divided by total number of rooms occupied by
hotel guests on a paid basis.
(I) Represents total room revenues divided by total available rooms.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
MeriStar Hospitality Corporation (the "Company") owns a portfolio of primarily
upscale, full-service hotels, diversified by franchise and brand affiliations,
in the United States and Canada. Substantially all of the Company's hotels are
leased to and operated by MeriStar Hotels & Resorts, Inc. ("OPCO"). As of
December 31, 1998, the Company owned 117 hotels (with 29,351 rooms), 109 of
which are leased and operated by OPCO.
On March 15, 1998, CapStar Hotel Company ("CapStar") and American General
Hospitality Corporation ("AGH") entered into a definitive agreement (the "Merger
Agreement") pursuant to which the parties agreed, subject to stockholder
approval and other conditions and covenants, to the merger of CapStar with and
into AGH (the "Merger"), with the surviving entity being named "MeriStar
Hospitality Corporation". The Merger was approved at a special meeting of
stockholders of CapStar and the annual meeting of stockholders of AGH on July
28, 1998. The Merger and related transactions became effective August 3, 1998.
Pursuant to the Merger Agreement, CapStar also distributed on a pro rata basis
to its stockholders all of the capital stock of OPCO (the "Spin-Off"), whose
assets consisted of CapStar's hotel operations (including leased hotels) and
management business. On August 3, 1998, the Company's common stock, par value
$.01 per share ("Common Stock"), and the common stock of OPCO began trading on
the New York Stock Exchange.
The Merger was accounted for as a purchase for financial reporting purposes.
In accordance with the provisions of Accounting Principles Board Opinion No. 16,
"Business Combinations," CapStar was considered the acquiring enterprise for
financial reporting purposes. The Company established a new accounting basis
for AGH's assets and liabilities based on their fair values. For financial
reporting purposes, the results of operations of AGH were included in the
Company's statement of operations from August 3, 1998. The Company has included
expenditures related directly to the acquisition of AGH as part of the cost of
acquiring AGH and those expenditures relating to the Spin-Off as expenses
incurred (see - Results of Operations).
The Company purchased AGH for approximately $1.3 billion through the issuance
of 23.9 million shares of common stock and units of limited partnership interest
("OP Units") in the Company's subsidiary operating partnership, valued at $795
million and assumption of debt and other liabilities of $550 million. The
acquisition has been recorded at the fair value of the net assets acquired.
Prior to August 3, 1998, the Company's consolidated financial statements
included the operating results for the owned and leased hotels as well as
management fees from hotels managed for third-party owners. Subsequent to
August 3, 1998, the Company owns certain hotels that are leased to hotel
operators and no longer manages hotels. Therefore, the financial statements for
the periods ended December 31, 1998 reflect differing numbers of owned, leased,
and managed hotels throughout the periods. The following table outlines the
Company's portfolio of owned, leased and managed hotels:
Owned Leased Managed Total
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
---------- ---------- --------- --------- --------- ---------- --------- ---------
December 31, 1998 117 29,351 - - - - 117 29,351
December 31, 1997 47 12,019 40 5,687 27 4,631 114 22,337
December 31, 1996 19 5,166 - - 28 4,619 47 9,785
17
Financial Condition
December 31, 1998 compared with December 31, 1997
Total assets increased by $1,873.9 million to $2,998.5 million at December 31,
1998 from $1,124.6 million at December 31, 1997. This growth was due to the
acquisition of 70 hotels during 1998, including 53 hotels pursuant to the
Merger.
Total liabilities increased by $1,152.5 million to $1,708.9 million at
December 31, 1998 from $556.4 million at December 31, 1997 due mainly to an
increase in long-term debt. Long-term debt increased by $1,109.6 million to
$1,602.4 million at December 31, 1998 from $492.8 million at December 31, 1997
as a result of the debt assumed in connection with the Merger and borrowings
under new credit facilities to finance the acquisitions of certain hotels.
Minority interests increased $89.7 million to $138.5 million at December 31,
1998 from $48.8 million at December 31, 1997, reflecting the value of OP Units
of the Company's operating partnership subsidiaries issued in conjunction with
the Merger and with the acquisitions of certain hotels and South Seas Properties
Company, Limited Partnership. The increase in additional paid-in capital
resulted primarily from the Merger and the redemption of OP Units.
Results of Operations
Year Ended December 31, 1998 compared with the Year Ended December 31, 1997
Subsequent to August 3, 1998, the Company earned participating lease revenue
of $136.0 million. Substantially all of the Company's hotels are leased to and
operated by OPCO. Participating lease revenue represents lease payments to the
Company from the lessees pursuant to the Company's participating lease
agreements. Total revenue increased by $208.9 million or 66% to $525.3 million
in 1998 compared to $316.4 million in 1997. This increase was primarily
attributable to the Merger, the acquisition of new hotels and revenue growth
from hotels in the Company's portfolio that benefited from renovation and
repositioning programs. On a pro forma basis for the year ended December 31,
1998, revenue per available room ("REVPAR") increased 7.0% to $67.90 compared to
1997. On a pro-forma basis same-store average daily rate ("ADR") for the hotels
rose 5.7% to $95.00, coupled with a 1% increase in occupancy to 71.5%.
Hotel department and other operating expenses increased slightly for the year
ended December 31, 1998 compared to the prior year. Hotel operations for the
year are only reflected through August 3, 1998. Subsequent to that date, in
conjunction with the Merger and Spin-Off, hotel operations were leased to OPCO.
The increase in hotel department and other operating expenses is primarily due
to an increase in the number of owned and leased hotels in 1998 prior to the
Merger and Spin-Off.
Undistributed operating expenses increased significantly in 1998 as a result
of the acquisition of new properties in 1998 and the Merger. Subsequent to
August 3, 1998, the Company is responsible for real estate taxes, property
insurance and various other undistributed expenses that are not included in
hotel operations which are leased to OPCO.
Net interest expense increased $43.4 million to $64.4 million for the year
ended December 31, 1998, from $21.0 million in 1997. This increase was
attributable to the borrowings made to finance the acquisition of hotels during
1998 and the debt assumed in connection with the Merger.
Minority interests increased $3.7 million to $5.1 million from $1.4 million in
1997 due to the issuance of OP Units in conjunction with the Merger and the
acquisition of certain hotels. Income taxes increased $0.8 million in 1998 to
$15.7 million from $14.9 million in 1997. Subsequent to August 3, 1998, the
Company's overall effective tax rate decreased to 3% as a result of the
elimination of federal income taxes as a result of the Company becoming a real
estate investment trust ("REIT"). The slight increase in income taxes compared
to prior year is a result of the substantial increase in pre-tax income in 1998
coupled with an overall effective tax rate of 38.2% through August 2, 1998.
18
On August 3, 1998, the Company recognized extraordinary losses of $4,080 (net
of a tax benefit of $2,083), due to the write-off of unamortized deferred
financing fees in conjunction with refinancing certain credit facilities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that all non-governmental entities expense costs of
start-up activities, including organizational costs, as those costs are incurred
and requires the write-off of any unamortized balances upon implementation. SOP
98-5 is effective for financial statements issued for periods beginning after
December 15, 1998. The Company chose to adopt SOP 98-5 effective July 1, 1998.
The effect of this accounting change was a charge against income for the year
ended December 31, 1998 of $921 (net of tax benefit of $564).
Earnings before interest expense, income taxes, depreciation and amortization
("EBITDA") grew $112.1 million to $194.6 million in 1998 from $82.5 million in
1997. This growth reflects both the increases in the number of hotels owned and
improved operating margins on the Company's overall hotel portfolio.
The White Paper on Funds From Operations ("FFO") approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 defines FFO as net income (loss) (computed in
accordance with generally accepted accounting principles ("GAAP")), excluding
gains (or losses) from debt restructuring and sales of properties, plus real
estate related depreciation and amortization and after comparable adjustments
for the Company's portion of these items related to unconsolidated entities and
joint ventures. The Company believes that FFO is helpful to investors as a
measure of the performance of an equity real estate investment trust ("REIT")
because, along with cash flow from operating activities, financing activities
and investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital expenditures
and to fund other cash needs. FFO does not represent cash generated from
operating activities determined by GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's cash
needs, including its ability to make cash distributions. FFO may include funds
that may not be available for management's discretionary use due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties.
Pro forma information for the company is presented as if the Merger, the Spin-
Off, and the acquisition of all hotels of CapStar and AGH had occurred as of the
beginning of the period presented. The following is a reconciliation between
pro forma net income and pro forma FFO for the year ended December 31, 1998 (in
thousands);
1998
----
Pro forma net income $ 96,232
Minority interest 9,883
Interest on convertible debt 8,194
Hotel depreciation and amortization 85,117
--------
Pro forma FFO $199,426
========
19
Year Ended December 31, 1997 compared with the Year Ended December 31, 1996
Total revenue increased by $206.6 million or 188% to $316.4 million in 1997
compared to $109.8 million in 1996. This increase resulted from acquiring 28
hotels and leasing 40 hotels during the year, and revenue growth from hotels in
the Company's portfolio that benefited from renovation and repositioning
programs. Operating expenses increased $164.4 million to $254.9 million in 1997
from $90.5 million in 1996 due to the increase in the number of hotels owned and
leased during 1997. Net operating income as a percentage of total revenue
increased to 19.4% in 1997 from 17.6% in 1996, reflecting increased operational
efficiencies in the Company's hotel portfolio.
Net interest expense increased $8.7 million to $21.0 million in 1997 from
$12.3 million in 1996. This increase was attributable to the borrowings made to
finance the acquisition of hotels during 1997, partially offset by the use of
proceeds from Common Stock offerings to repay outstanding indebtedness in 1997
and lower average interest rates charged on the Company's borrowings in 1997 as
compared to 1996.
Minority interests of $1.4 million in 1997 were significantly higher than in
1996 due to the minority interest related to the OP Units issued in 1997.
Income taxes increased $12.2 million to $14.9 million in 1997 compared to $2.7
million in 1996, due to substantially higher levels of pre-tax income in 1997.
The Company's overall effective tax rate decreased to 38.2% in 1997 from 40.0%
in 1996 as a result of lower state and local taxes.
EBITDA grew $54.9 million to $82.5 million in 1997 from $27.6 million in 1996.
This growth reflects both the increase in the number of hotels owned and
operated, and improved operating margins on the Company's overall hotel
portfolio.
During 1997 and 1996, the Company recognized extraordinary losses of $4.1
million and $2.0 million (net of tax benefits of $2.5 million and $1.3 million),
respectively, related to the write-off of unamortized loan costs in connection
with expanding the Company's credit facilities.
Liquidity and Capital Resources
Prior to the Merger and related transactions, CapStar's primary sources of
liquidity were cash on hand, cash generated from operations, and funds from
external borrowings and debt and equity offerings. CapStar's continuing
operations were funded through cash generated from hotel operations. Hotel
acquisitions and joint venture improvements were financed through a combination
of internally generated cash, external borrowings and the issuance of OP Units
and/or Common Stock. CapStar did not pay dividends to stockholders.
Following the Merger and Spin-Off, the Company's principal sources of
liquidity are cash on hand, cash generated from operations, and funds from
external borrowings and debt and equity offerings. The Company expects to fund
its continuing operations through cash generated by its participating leases.
The Company also expects to finance future hotel acquisitions and joint venture
investments through a combination of internally generated cash, external
borrowings and the issuance of OP Units and/or common stock. Additionally, the
Company will be required, in order to maintain favorable tax treatment accorded
to a REIT under the Internal Revenue Code of 1986, as amended, to distribute to
stockholders at least 95% of its REIT taxable income. The Company expects to
fund such distributions through cash generated from operations or borrowings on
the Company's credit facility.
Operating activities provided $162.8 million of net cash for the year ended
December 31, 1998 mainly due to higher levels of net income and depreciation and
amortization. The Company used $785.5 million of cash in investing activities
for the year ended December 31, 1998, primarily for the acquisition of hotels
and capital expenditures at the Company's hotels and a note receivable from
OPCO. Net cash provided by financing activities of $543.3 million resulted
primarily from net borrowings under the Company's credit facilities.
20
In conjunction with the Merger, CapStar terminated its existing credit
facility effective August 3, 1998, and the Company entered into a $1.0 billion
senior secured credit facility (the "New Credit Facility"). The New Credit
Facility is structured as a $300 million, five-year term loan facility; a $200
million, five-and-a-half year term loan facility; and a $500 million, three-year
revolving credit facility with two one-year optional extensions. The interest
rate on the term loans and revolving facility ranges from 100 to 200 basis
points over 30-day LIBOR, depending on certain financial performance covenants
and long-term senior unsecured debt ratings. The weighted average interest rate
on borrowings outstanding under the New Credit Facility as of December 31, 1998
was 7.4%. The initial proceeds from the New Credit Facility were used to
refinance CapStar's and AGH's existing credit facilities. As of December 31,
1998, the company had available $90 million under the New Credit Facility's
revolving facility.
Effective August 3, 1998, the Company also entered into a $250 million secured
facility ("Secured Facility"), which is expected to be converted into a
commercial mortgage-backed security secured by 16 hotels. The interest rate on
the Secured Facility is 110 basis points over 30-day LIBOR. The weighted
average interest rate on the Secured Facility as of December 31, 1998 was 6.8%.
Capital for renovation work has historically been and is expected to continue
to be provided by a combination of internally generated cash and external
borrowings. Once initial renovation programs for a hotel are completed, the
Company expects to spend approximately 4% annually of hotel revenues for ongoing
capital expenditure programs, including room and facilities refurbishment's,
renovations, and furniture and equipment replacements. For the year ended
December 31, 1998, the Company spent (including expenditures by both CapStar and
AGH prior to the Merger) $200 million on initial renovation and ongoing capital
expenditure programs. The Company expects to spend $175 million in 1999, with
$125 million used for renovations and $50 million in recurring refurbishment
projects.
The Company believes cash generated by operations, together with anticipated
borrowing capacity under the New Credit Facility, will be sufficient to fund its
existing working capital, ongoing capital expenditures, and debt service
requirements. The Company believes, however, that its future capital decisions
will also be made in response to specific acquisition and/or investment
opportunities, depending on conditions in the capital and or other financial
markets. Accordingly, the Company may consider increasing its borrowing
capacity or issuing additional debt or equity securities, the proceeds of which
could be used to finance acquisitions or investments, or to refinance existing
debt.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns.
Demand is lower in the winter months due to decreased travel and higher in the
spring and summer months during peak travel season. Accordingly, the Company's
operations are seasonal in nature, with lower participating lease payments to
the Company in the first and fourth quarters and higher participating lease
payments to the Company in the second and third quarters.
Year 2000 Conversion
The Company is in the process of conducting a review of its computer systems
to identify the systems that could be affected by the "Year 2000" problem and
has initiated an implementation plan to address the problem. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. If not corrected, this could result in a major
systems failure or miscalculations.
The Company's hotel properties contain various information technology and
embedded technology systems. Both types of systems contain microprocessors and
microcontrollers that must be assessed for Year 2000 compliance. The Company has
developed a comprehensive implementation plan to address the potential Year 2000
problems caused by such systems. This plan involves six stages: increase
awareness of issue; assign responsibility for coordinating response to issue;
information collection; analysis; modification, repair or replacement; and
testing. The Company is currently in its analysis stage, and
21
expects to complete this stage by March 1999. The subsequent stages are expected
to be completed as follows: modification, repair or replacement -- June 1999;
and testing -- August 1999. As an additional part of its implementation plan to
address the Year 2000 problem, the Company has also initiated communications
with third parties with which it has material relationships to determine the
extent of potential Year 2000 problems with these parties' services provided to
the Company. The most critical of these services involve such items as
reservations systems for the Company's hotels. Without such systems, the Company
could suffer a material decline in business at many of its properties. The
Company expects to complete its communications and assessment of these outside
parties' services by March 1999. Also, the Company expects to develop
contingency plans in 1999 to allow for manual or other alternative operation of
certain computerized systems, in the event that modification, repair, and
replacement efforts are not completed timely.
The Company anticipates completing its Year 2000 implementation plan no later
than August 31, 1999, which is prior to any anticipated impact on its operating
systems. Historical costs incurred to address the Year 2000 problem include
approximately $0.8 million. The Company has not yet developed a final cost
estimate related to fixing Year 2000 issues, but an initial estimate of these
remediation costs for its properties is $10-20 million. This cost estimate is
based on the Company's preliminary assessment, and will be refined and adjusted
as the Company continues to complete the stages of its implementation plan to
address the potential Year 2000 problems.
Based on its preliminary assessment, the Company believes that its risks of
Year 2000 non-compliance (that is, its "most reasonably likely worst case
scenario"), with modifications to existing software and converting to new
software, will not pose significant operational problems for the Company's
computer systems as so modified and converted. If, however, such modifications
and conversions are not completed timely, the Year 2000 problem could have a
material impact on the Company's financial position and operations. The
Company's operations are highly dependent upon participating lease revenue
earned from the lessees of its properties. These participating lease revenue
amounts are based upon revenues generated at the leased properties. To the
extent that the Year 2000 problems materially affect the conduct of operations
at those properties, it is likely that those lessees' revenues would be
affected, and that the Company's participating lease revenues would ultimately
be affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on long-
term debt obligations that impact the fair value of these obligations. The
Company's policy is to manage interest rates through the use of a combination of
fixed and variable rate debt. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve its objectives, the
Company borrows at a combination of fixed and variable rates, and may enter into
derivative financial instruments such as interest rate swaps, caps and treasury
locks in order to mitigate its interest rate risk on a related financial
instrument. The Company does not enter into derivative or interest rate
transactions for speculative purposes. The Company has no cash flow exposure
due to general interest rate changes for its fixed long-term debt obligations.
All items described are non-trading (in thousands of dollars).
22
The table below presents the principal amounts, weighted average interest rates,
and fair values by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes.
Long-term Debt
------------------------------------------------------------------------------------
Average Interest Variable Rate Average
Expected Maturity Fixed Rate Rate Interest Rate
- -------------------------- ------------------ ------------------- ---------------- ---------------
1999 $ 5,109 7.1% $ 54,750 7.4%
2000 3,420 7.1% 252,000 6.4%
2001 6,513 7.1% 427,000 7.3%
2002 10,731 7.1% 32,000 6.9%
2003 2,994 7.1% 257,000 6.9%
Thereafter 360,835 6.7% 190,000 6.9%
------------------ ------------------- ---------------- ---------------
Total $389,602 6.7% $1,212,750 7.0%
================== =================== ================ ===============
Fair Value at 12/31/98 $389,602 $1,212,750
================== ================
During 1998, the Company entered into six separate $100,000 swap agreements
with financial institutions in order to hedge against the impact future interest
rate fluctuations may have on the Company's existing floating rate debt
instruments. The swap agreements effectively fix 30-day LIBOR at between 4.9%
and 5.4%. During the period ended December 31, 1998, the Company made payments
totaling $211 relating to these hedges. This amount is included in interest
expense. The hedge agreements terminate at various times between November 1999
and September 2000.
On February 18, 1997, the Company entered into a $40,000 swap agreement and a
$40,000 collar agreement with Lehman Brothers Special Financing, Inc. and
Canadian Imperial Bank of Commerce, respectively. The swap agreement
effectively fixes 30-day LIBOR at 5.9% while the collar agreement creates a 30-
day LIBOR floor of 5.1% and ceiling of 7.5%. During the years ended December
31, 1998 and 1997 the Company made payments totaling $56 and $88, respectively
relating to these hedges. This amount is included in interest expense. Both
hedge agreements terminate in September 1999.
Additionally, in anticipation of the August 1997 offering of $150,000
aggregate principal amount of its 8.75% senior subordinated notes due 2007 ( the
"Subordinated Notes"), the Company entered into separate hedge transactions
during June and July 1997. Upon completion of the Subordinated Notes offering,
the Company terminated the underlying swap agreements, resulting in a net
payment to the Company of $836. This amount was deferred and is being recognized
as a reduction to interest expense over the life of the underlying debt. As a
result, the effective interest rate on the Subordinated Notes has been reduced
to 8.69%.
Although the Company conducts business in Canada, the Canadian operations were
not material to the Company's consolidated financial position, results of
operations or cash flows as of December 31, 1998. Additionally, foreign
currency transaction gains and losses were not material to the Company's results
of operations for the year ended December 31, 1998. Accordingly, the Company
was not subject to material foreign currency exchange rate risk from the effects
that exchange rate movements of foreign currencies would have on the Company's
future costs or on future cash flows it would receive from its foreign
subsidiaries. To date, the Company has not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, Supplementary Data and
Financial Statement Schedules are filed as part of this Annual Report on Form
10-K:
MeriStar Hospitality Corporation
Independent Auditors' Report............................................................................................ 25
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................................ 26
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 27
Consolidated Statements of Stockholders' Equity and Partners' Capital for the years ended December 31, 1998, 1997 and
1996................................................................................................................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 29
Notes to the Consolidated Financial Statements.......................................................................... 30
Schedule III. Real Estate and Accumulated Depreciation.................................................................. 47
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
Notes thereto.
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hospitality Corporation:
We have audited the accompanying consolidated balance sheets of MeriStar
Hospitality Corporation and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity and
partners' capital, and cash flows for each of the years in the three-year period
ended December 31, 1998, and the supplementary schedule. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MeriStar
Hospitality Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles, and the supplementary schedule, in our opinion,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Washington, D.C.
February 1, 1999
25
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(in thousands, except per share amounts)
1998 1997
---------- ---------
ASSETS
Investments in hotel properties $2,909,439 $ 950,052
Accumulated depreciation (83,797) (27,275)
---------- ----------
2,825,642 922,777
Cash and cash equivalents 4,180 83,429
Accounts receivable, net 3,044 24,731
Income taxes receivable 339 -
Deposits 1,618 16,173
Prepaid expenses, inventory and other 2,259 8,496
Note receivable from Lessee 67,000 -
Due from Lessee 7,437 -
Investments in and advances to affiliates 8,787 11,970
Restricted cash 11,879 3,111
Properties held for sale 48,104 -
Intangible assets, net of accumulated amortization of $2,666 and $2,032 18,171 53,955
---------- ----------
$2,998,460 $1,124,642
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,111 $ 16,726
Accrued expenses and other liabilities 45,549 31,996
Accrued interest 24,472 8,250
Income taxes payable - 565
Dividends and distributions payable 25,988 -
Deferred income taxes 8,453 6,098
Long-term debt 1,602,352 492,771
---------- ------------
Total liabilities 1,708,925 556,406
---------- ------------
Minority interests 138,543 48,824
Stockholders' Equity:
Common stock, par value $0.01 per share
Authorized- 250,000 shares
Issued and outstanding- 46,718 and 24,867 shares 467 249
Additional paid-in capital 1,133,357 499,576
Retained earnings 23,655 22,114
Accumulated other comprehensive income (6,487) (2,527)
---------- -------
Total stockholders' equity 1,150,992 519,412
---------- -------
$2,998,460 $1,124,642
========== =========
See accompanying notes to consolidated financial statements.
26
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
1998 1997 1996
------------ ------------- -------------
Revenue:
Participating lease revenue $135,994 $ - $ -
Hotel operations:
Rooms 275,610 207,736 68,498
Food and beverage 85,374 86,298 30,968
Other operating departments 19,496 15,049 5,981
Office rental, parking and other revenue 5,649 2,174 -
Hotel management and other fees 3,174 5,136 4,345
------------ ------------- -------------
Total revenue 525,297 316,393 109,792
------------ ------------- -------------
Hotel operating expenses by department:
Rooms 65,048 51,075 17,509
Food and beverage 67,493 68,036 24,589
Other operating departments 10,121 8,492 2,513
Office rental, parking and other operating expenses 2,713 845 -
Undistributed operating expenses:
Administrative and general 62,350 50,332 20,448
Property operating costs 50,027 38,437 12,586
Property taxes, insurance and other 29,814 12,558 4,565
Lease expense 34,641 4,116 -
Depreciation and amortization 60,703 20,990 8,248
Spin-off costs 8,481 - -
------------ ------------- -------------
Total operating expenses 391,391 254,881 90,458
------------ ------------- -------------
Net operating income 133,906 61,512 19,334
Interest expense, net 64,378 21,024 12,346
------------ ------------- -------------
Income before minority interests, income taxes, extraordinary
loss and cumulative effect of accounting change 69,528 40,488 6,988
Minority interests 5,121 1,425 (39)
------------ ------------- -------------
Income before income taxes, extraordinary loss and cumulative
effect of accounting change 64,407 39,063 7,027
Income taxes 15,699 14,911 2,674
------------ ------------- -------------
Income before extraordinary loss and cumulative effect of
accounting change 48,708 24,152 4,353
Extraordinary loss on early extinguishment of debt, net of tax
benefit of $2,083 in 1998, $2,508 in 1997, and $1,304 in 1996 4,080 4,092 1,956
Cumulative effect of change in accounting principle, net of
tax benefit of $564 921 - -
------------ ------------- -------------
Net income $ 43,707 $ 20,060 $ 2,397
============ ============= =============
Earnings per share:
Basic:
Income before extraordinary loss and cumulative
effect of accounting change $ 1.45 $ 1.29 $ 0.31
Extraordinary loss (0.12) (0.22) (0.15)
Cumulative effect of accounting change (0.03) - -
------------ ------------- -------------
Net income $ 1.30 $ 1.07 $ 0.16
============ ============= =============
Diluted:
Income before extraordinary loss and cumulative
effect of accounting change $ 1.40 $ 1.27 $ 0.31
Extraordinary loss (0.11) (0.21) (0.15)
Cumulative effect of accounting change (0.03) - -
------------ ------------- -------------
Net income $ 1.26 $ 1.06 $ 0.16
============ ============= =============
See accompanying notes to consolidated financial statements.
27
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Accumulated Partner's Capital
Common Stock Additional Other -------------------
----------------- Paid-in Retained Comprehensive General Limited
Shares Amount Capital Earnings Income Parnters Partners Total
------- ------- ---------- -------- ------------- -------- -------- ----------
Balance, January 1, 1996 - $ - $ - $ - $ - $ 2,432 $ 46,206 $ 48,638
Capital distributions - - - - - (2) (170) (172)
Repayment of notes
receivable from
management - - - - - - 987 987
Net income for period
January 1, 1996 through
August 19, 1996 - - - - - 45 298 343
------ ------- ---------- -------- ------------- -------- -------- ----------
Balance, August 19, 1996 - - - - - 2,475 47,321 49,796
Issuance of common stock 6,750 68 110,044 - - - - 110,112
Shares issued for partners'
capital on August 20, 1996 6,004 60 49,736 (2,475) (47,321) -
Deferred tax liability
assumed from partners on
August 20, 1996 - - (1,247) - - - - (1,247)
Net income for period
August 20, 1996 through
December 31, 1996 - - - 2,054 - - - 2,054
------ ------- ---------- -------- ------------- -------- -------- ----------
Balance, December 31, 1996 12,754 128 158,533 2,054 - - - 160,715
Net income for the year - - - 20,060 - - - 20,060
Foreign currency translation
adjustment - - - - (2,527) - (2,527)
------ ------- ---------- -------- ------------- -------- -------- ----------
Comprehensive income 17,533
------ ------- ---------- -------- ------------- -------- -------- ----------
Issuances of common stock 11,713 117 330,047 - - - - 330,164
Redemption of OP Units 400 4 10,996 - - - - 11,000
------ ------- ---------- -------- ------------- -------- -------- ----------
Balance, December 31, 1997 24,867 249 499,576 22,114 (2,527) 519,412
Net income for the year - - - 43,707 - 43,707
Foreign currency translation
adjustment - - - - (3,960) (3,960)
------ ------- ---------- -------- ------------- -------- -------- ----------
Comprehensive income 39,747
------ ------- ---------- -------- ------------- -------- -------- ----------
Issuances of common stock 20,839 208 654,671 - - - - 654,879
Distribution to spun-off
affiliate - - (52,310) - - (52,310)
Redemption of OP Units 1,012 10 31,420 - - - - 31,430
Dividends paid and declared - - - (42,166) - - - (42,166)
------ ------- ---------- -------- ------------- -------- -------- ----------
Balance, December 31, 1998 46,718 $ 467 $1,133,357 $ 23,655 $(6,487) $ - $ - $1,150,992
====== ======= ========== ======== ============= ======== ======== ==========
See accompanying notes to the consolidated financial statements.
28
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
1998 1997 1996
----------------------------------------
Operating activities:
Net income $ 43,707 $ 20,060 $ 2,397
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 60,703 20,990 8,248
Extraordinary loss on early extinguishment of debt 6,163 6,600 3,260
Cumulative effect of accounting change 1,485 - -
Minority interests 5,121 1,425 (39)
Non-cash spin-off costs 3,205 - -
Deferred income taxes (4,445) 4,917 (66)
Changes in operating assets and liabilities:
Accounts receivable, net 29,673 (17,900) (5,360)
Deposits, prepaid expenses, inventory and other 24,760 (17,449) (4,011)
Accounts payable (7,100) 12,601 1,797
Accrued expenses and other liabilities 7,865 29,509 5,711
Due from lessee (7,437) - -
Income taxes payable (904) (871) 1,436
--------- --------- ---------
Net cash provided by operating activities 162,796 59,882 13,373
--------- --------- ---------
Investing activities:
Purchases of property and equipment (701,710) (558,265) (231,885)
Purchases of intangible assets (5,584) (13,476) -
Investments in and advances to affiliates (2,320) (11,320) (650)
Purchases of minority interests (44) (87) (67)
Funding of notes receivable (67,000) - -
Change in restricted cash (8,847) (3,111) 7,351
--------- --------- ---------
Net cash used in investing activities (785,505) (586,259) (225,251)
--------- --------- ---------
Financing activities:
Proceeds from long-term debt 1,407,261 844,192 372,778
Principal payment on long-term debt (821,051) (568,828) (248,387)
Release of restricted deposits for hedge agreement - - 2,559
Deferred financing fees (4,251) (16,612) (10,943)
Repayments of loans to management - - 987
Proceeds from issuances of common stock, net 1,870 330,164 110,112
Spin-off to stockholders (23,745) - -
Dividends paid to stockholders (16,178) - -
Distributions to limited partners - - (172)
Distributions to minority investors (650) (488) (104)
--------- --------- ---------
Net cash provided by financing activities 543,256 588,428 226,830
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 204 (406) -
Net increase (decrease) in cash and cash equivalents (79,249) 61,645 14,952
Cash and cash equivalents, beginning of year 83,429 21,784 6,832
--------- --------- ---------
Cash and cash equivalents, end of year $ 4,180 $ 83,429 $ 21,784
========= ========= =========
See accompanying notes to consolidated financial statements.
29
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands, except per share amounts)
1. Organization
MeriStar Hospitality Corporation (the "Company") was formed on August 3, 1998,
as a result of the merger (the "Merger") of the CapStar Hotel Company
("CapStar") with and into American General Hospitality Corporation ("AGH"), a
Maryland corporation operating as a real estate investment trust ("REIT"). The
Company owns a portfolio of primarily upscale, full-service hotels, diversified
by franchise and brand affiliations, in the United States and Canada.
Substantially all of the Company's hotels are leased to and operated by MeriStar
Hotels & Resorts, Inc. ("OPCO"). As of December 31, 1998, the Company owned 117
hotels with 29,351 rooms located in 27 states, the District of Columbia and
Canada.
The following table outlines the Company's portfolio of owned, leased and
managed hotels:
Owned Leased Managed Total
------------------------ ------------------------ ------------------------ ----------------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------
December 31, 1998 117 29,351 - - - - 117 29,351
December 31, 1997 47 12,019 40 5,687 27 4,631 114 22,337
December 31, 1996 19 5,166 - - 28 4,619 47 9,785
On March 15, 1998, CapStar and AGH entered into a definitive agreement (the
"Merger Agreement") pursuant to which the parties agreed, subject to stockholder
approval and other conditions and covenants, to the Merger, with the surviving
entity being named "MeriStar Hospitality Corporation." The Merger was approved
at a special meeting of stockholders of CapStar and the annual meeting of
stockholders of AGH on July 28, 1998. The Merger and related transactions became
effective August 3, 1998.
Pursuant to the Merger Agreement, CapStar also distributed on a pro rata basis
to its stockholders all of the capital stock of OPCO (the "Spin-Off"), whose
assets consisted of CapStar's hotel operations (including leased hotels) and
management business. The Spin-Off occurred on August 3, 1998. On August 3, 1998,
the Company's common stock, par value $.01 per share ("Common Stock"), and the
common stock of OPCO began trading on the New York Stock Exchange.
The Merger was accounted for as a purchase for financial reporting purposes
and, accordingly, the operating results of AGH have been included in the
Company's consolidated financial statements since August 3, 1998, the date of
acquisition. In accordance with the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations," CapStar was considered the acquiring
enterprise for financial reporting purposes. The Company established a new
accounting basis for AGH's assets and liabilities based on their fair values.
Prior to August 3, 1998, the financial statements of the Company include hotel
operations and operations of OPCO; subsequent to August 3, 1998, the hotel
operations are leased to OPCO following the Spin-Off and are no longer reflected
in the Company's operating results. The Company has included expenditures
related directly to the acquisition of AGH as part of the cost of acquiring AGH
and those expenditures relating to the Spin-Off as expenses as incurred.
Pursuant to an intercompany agreement, the Company and OPCO provide each other
with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, OPCO has a right of
first refusal to become the lessee of any real property acquired by the Company.
OPCO also provides the Company with certain services including administrative,
corporate, accounting, finance, insurance, legal, tax, data processing, human
resources, acquisition identification and due diligence, and operational
services, for which OPCO is compensated in an amount that the Company would be
charged by an unaffiliated third party for comparable services.
30
2. Summary of Significant Accounting Policies
Principles of Consolidation- The consolidated financial statements include the
accounts of the Company and all of its majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated joint ventures and affiliated companies in which
the Company holds a voting interest of 50% or less and exercises significant
influence are accounted for using the equity method. The Company uses the cost
method to account for its investment in entities in which it does not have the
ability to exercise significant influence.
Cash Equivalents and Restricted Cash- The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Restricted cash represents amounts required to be maintained in
escrow under certain of the Company's credit facilities.
Deposits- Deposits primarily represent amounts escrowed during the negotiation
of potential and pending hotel acquisitions.
Investments in Hotel Properties- Investments in hotel properties are recorded
at cost, which includes the allocated purchase price for hotel acquisitions, or
at fair value at the time of contribution for contributed property. Property
and equipment balances are depreciated using the straight-line method over lives
ranging from five to 40 years. For the years ended December 31, 1998, 1997 and
1996, the Company capitalized interest of $5,182, $442, and $461, respectively.
Properties Held for Sale- Properties held for sale are carried at the lower of
their carrying values or estimated fair values less costs to sell. Although
depreciation of these properties is discontinued when an operating property is
classified as held for sale, operations continue to be recognized until the
property is sold. Depreciation that would have been recorded had the properties
not been recorded as held for sale was $700 in 1998.
Intangible Assets- Intangible assets consist of the value of goodwill and
lease contracts purchased, deferred financing fees, and franchise costs.
Goodwill represents the excess of cost over the fair value of the net assets of
acquired businesses. Intangibles are amortized on a straight-line basis over
the estimated useful lives of the underlying assets ranging from five to 40
years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of- The
carrying values of long-lived assets, which include property and equipment and
all intangibles, are evaluated periodically in relation to the operating
performance and future undiscounted cash flows of the underlying assets.
Adjustments are made if the sum of expected undiscounted future net cash flows
is less than book value. No impairment losses were recorded during 1998, 1997
or 1996.
Income Taxes- Prior to CapStar's initial public offering (the "IPO"), on
August 20, 1996, no provision for income taxes was made since the Company's
predecessor entities were partnerships, and, therefore, all income, losses, and
credits for tax purposes were passed through to the individual partners.
Concurrent with the IPO the Company implemented Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred
income taxes reflect the tax consequences on future years of differences between
the tax basis of assets and liabilities and their financial reporting amounts.
In conjunction with the Merger on August 3, 1998, the Company became a REIT
and is therefore no longer subject to federal income taxes provided that it
complies with various requirements necessary to maintain REIT status. The
Company will be subject to state and local taxes in certain jurisdictions.
31
2. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation- Results of operations for the Company's Canadian
hotels are maintained in Canadian dollars and translated using the average
exchange rates during the period. Assets and liabilities are translated to U.S.
dollars using the exchange rate in effect at the balance sheet date. Resulting
translation adjustments are reflected in stockholders' equity as a cumulative
foreign currency translation adjustment. Transaction gains and losses are
included in the results of operations as incurred.
Revenue Recognition- Prior to August 3, 1998, revenue was earned through the
operations and management of the hotel properties and was recognized when
earned. Subsequent to August 3, 1998, the Company earned participating lease
revenue. Participating lease revenue represents lease payments from lessees to
the Company pursuant to the Company's participating lease agreements. Office,
retail and parking rental is generally recognized on a straight-line basis over
the terms of the respective leases.
Participating Lease Agreements- The Company's Participating Leases have non-
cancelable remaining terms ranging from 10 to 12 years, subject to earlier
termination on the occurrence of certain contingencies, as defined. The rent
due under each percentage lease is the greater of base rent or percentage rent,
as defined. Percentage rent applicable to room and food and beverage revenue
varies by lease and is calculated by multiplying fixed percentages by the total
amounts of such revenues over specified threshold amounts. Both the minimum
rent and the revenue thresholds used in computing percentage rents are subject
to annual adjustments based on increases in the United States Consumer Price
Index. Percentage rent applicable to other revenues is calculated by
multiplying fixed percentages by the total amounts of such revenues.
In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods."
This issue addresses lessor revenue and lessee expense recognition in interim
periods related to rental agreements which provide for minimum rental payments,
plus contingent rents based on the lessee's operations, such as a percentage of
sales in excess of an annual specified sales target. The EITF reached a final
consensus that lessors, such as the Company, should defer recognition of
contingent rental income until specified targets are met. The Company adopted
EITF No. 98-9 effective July 1, 1998.
Financial Instruments- From time to time the Company enters into swap and
collar agreements that are designated as, and are effective as, hedges against
the impact of interest rate fluctuation on certain of the Company's existing and
probable future long-term debt instruments. Because these agreements qualify for
hedge accounting treatment, any gains or losses are recognized as adjustments to
interest expense over the lives of the underlying debt instruments. For hedge
agreements that are terminated early or that are associated with anticipated
future debt instruments, gains or losses are deferred until those debt
instruments are entered into. If the Company determines it is no longer
probable that the Company will enter into an anticipated debt instrument, any
related deferred gains or losses are recognized in the current period.
Use of Estimates- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Segment Information- In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which requires a public entity to report selected
information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
product and services, geographic areas and major customers. Based on the
guidance provided in the standard, the Company has determined that its business
is conducted in one operating segment.
32
2. Summary of Significant Accounting Policies (Continued)
The following table summarizes geographic information required to be disclosed
under SFAS No. 131:
1998 1997 1996
----------- --------- ---------
Revenue:
U.S. $ 510,344 $300,028 $109,792
Foreign 14,953 16,365 -
----------- --------- ---------
$ 525,297 $316,393 $109,792
=========== ========= =========
Investments in hotel
properties, net:
U.S. $2,769,870 $866,541
Foreign 55,772 56,236
----------- ---------
$2,825,642 $922,777
=========== =========
Comprehensive Income-SFAS No. 130, "Reporting Comprehensive Income," requires
an enterprise to display comprehensive income and its components in a financial
statement to be included in an enterprise's full set of annual financial
statements or in the notes to financial statements. Comprehensive income
represents a measure of all changes in equity of an enterprise that result from
recognized transactions and other economic events for the period other than
transactions with owners in their capacity as owners. Comprehensive income of
the Company includes net income and other comprehensive income from foreign
currency items. For the year ended December 31, 1998, net income was $43,707,
other comprehensive income (loss), net of tax, was $ (3,960) and comprehensive
income (loss) was $39,747. For the year ended December 31, 1997, net income was
$20,060, other comprehensive income (loss), net of tax, was $ (2,527 ) and
comprehensive income (loss) was $17,533.
Cumulative Effect of Accounting Change-In April 1998, the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," which requires that all non-
governmental entities expense costs of start-up activities, including
organizational costs, as those costs are incurred and requires the write-off of
any unamortized balances upon implementation. SOP 98-5 is effective for
financial statements issued for periods beginning after December 15, 1998. The
Company chose to adopt SOP 98-5 effective July 1, 1998. The effect of this
accounting change was a charge against income for the year ended December 31,
1998 of $921 (net of tax benefit of $564).
New Accounting Pronouncements- In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which requires
that an entity recognize all derivatives as either assets or liabilities in
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently in the process of evaluating the
effect this new standard will have on its financial statements.
Reclassifications- Certain 1997 and 1996 amounts have been reclassified to
conform to 1998 presentation.
33
3. Investments in Hotel Properties
Investments in hotel properties consists of the following:
1998 1997
-------------- ------------
Land $ 309,810 $125,140
Buildings 2,254,953 737,095
Furniture, fixtures and equipment 230,710 75,226
Construction-in-progress 113,966 12,591
-------------- ------------
Total $2,909,439 $950,052
============== ============
4. Investments in and Advances to Affiliates
The Company has ownership interests in certain unconsolidated corporate joint
ventures and affiliated companies. As of December 31, 1998, the Company had an
investment in one joint venture in which it had a 50% ownership interest. As of
December 31, 1997, the Company had investments in four joint ventures, three of
which were contributed to OPCO pursuant to the Spin-Off. Prior to 1997, the
Company did not have any investments in joint ventures.
Combined summarized financial information of the Company's unconsolidated
corporate joint ventures and affiliated companies is as follows:
Balance sheet data: 1998 1997
------------ ----------
Current assets $ 748 $ 2,964
Non-current assets 29,458 41,333
Current liabilities 558 1,788
Non-current liabilities 445 168
Operating data: 1998 1997
------------ ----------
Revenue $ 8,884 $10,140
Net income $ 186 $ 1,425
The Company's equity in the earnings of these affiliates was $369 and $0 in
1998 and 1997, respectively.
5. Intangible Assets
Intangible assets consist of the following:
December 31,
------------------------
1998 1997
--------- ----------
Deferred financing fees $17,575 $16,704
Goodwill - 27,847
Lease contracts - 6,576
Other 3,262 4,860
--------- -----------
20,837 55,987
Less accumulated amortization (2,666) (2,032)
--------- -----------
$18,171 $53,955
========= ===========
On August 3, 1998, July 1, 1997, and September 30, 1996, the Company
recognized extraordinary losses of $4,080, $4,092, and $1,956 (net of tax
benefits of $2,083, $2,508, and $1,304), respectively, due to the write-off of
unamortized deferred financing fees in conjunction with refinancing certain
credit facilities.
34
6. Long-Term Debt
Long-term debt consists of the following:
December 31,
----------------------------------
1998 1997
-------------- -------------
New Credit Facility............... $ 910,000 $ -
Prior Credit Facility............. - 100,000
Secured Facility.................. 250,000 -
Convertible Notes................. 172,500 172,500
Subordinated Notes................ 149,826 149,805
Non-Recourse Facility............. 52,750 52,750
Mortgage Debt and Other........... 67,276 17,716
-------------- -------------
$1,602,352 $492,771
============== =============
New Credit Facility-In conjunction with the Merger, CapStar terminated its
existing credit facility ("Prior Credit Facility") effective August 3, 1998, and
the Company entered into a $1,000,000 senior secured credit facility (the "New
Credit Facility") with a syndicate of lenders led by Societe Generale. The New
Credit Facility is structured as a $300,000, five-year term loan facility; a
$200,000, five-and-a-half year term loan facility; and a $500,000, three-year
revolving credit facility with two one-year optional extensions. The New Credit
Facility is secured by the Company's common stock and its general partnership,
limited partnership and limited liability company ownership interests in its
subsidiaries. The interest rate on the term loans and revolving facility ranges
from 100 to 200 basis points over 30-day London Interbank Offered Rate
("LIBOR"), depending on certain financial performance covenants and long-term
senior unsecured debt ratings. The weighted average interest rate on borrowings
outstanding under the New Credit Facility as of December 31, 1998 was 7.4%. The
initial proceeds from the New Credit Facility were used to refinance CapStar's
and American General's existing credit facilities.
Effective August 3, 1998, the Company also entered into an 18-month, $250,000
secured loan facility ("Secured Facility"), which is expected to be converted
into a commercial mortgage-backed security secured by sixteen hotels. The
interest rate on the Secured Facility is 110 basis points over 30-day LIBOR.
The weighted average interest rate on the Secured Facility as of December 31,
1998 was 6.8%.
Convertible Notes-On October 9, 1997, the Company completed the offering of
$172,500 aggregate principal amount of its 4.75% convertible subordinated notes
due 2004 (the "Convertible Notes"), generating net proceeds to the Company of
$167,581. The proceeds were used to repay outstanding indebtedness under the
Prior Credit Facility and to finance certain hotel acquisitions. The Convertible
Notes are unsecured obligations of the Company and provide for semi-annual
payments of interest in April and October, commencing in April 1998.
Subordinated Notes-On August 19, 1997, the Company completed the offering of
$150,000 aggregate principal amount (issue price of $149,799, net of discount)
of its 8.75% senior subordinated notes due 2007 (the "Subordinated Notes"),
generating net proceeds to the Company of $144,620. The proceeds were used to
repay outstanding indebtedness under the Prior Credit Facility. The indenture
pursuant to which the Subordinated Notes were issued contains certain covenants,
including maintenance of certain financial ratios, reporting requirements, and
other customary restrictions. The Subordinated Notes are unsecured obligations
of the Company and provide for semi-annual payments of interest on February 15
and August 15, commencing on February 15, 1998.
Non-Recourse Facility-On August 12, 1997, the Company and Lehman Brothers
entered into a $100,000 non-recourse facility (the "Non-Recourse Facility"). The
Non-Recourse Facility has an 18-month initial term that can be extended an
additional 12 months, at the Company's option, subject to payment of additional
fees and compliance with certain financial ratios. In January 1999, the Company
extended the initial term of the facility to August 1999; the Company paid $132
of fees in connection with this extension. The facility contains certain
covenants, including maintenance of certain financial ratios,
35
reporting requirements, and other customary restrictions. The Non-Recourse
Facility is secured by three hotels owned by the Company and bears interest at a
rate of between 1.75% and 2.70% over 30-day LIBOR, based upon compliance with
certain ratios. At December 31, 1998, the interest rate on the Non-Recourse
Facility was 7.0%.
Mortgage Debt- In connection with the Merger, the Company assumed mortgage
debt secured by seven hotels. The mortgage debt matures between 2001 and 2012
and the interest rates on the mortgages range from 7.5% to 10.5%.
Prior Credit Facility- On July 1, 1997, the Company entered into the Prior
Credit Facility, a $450,000 senior secured credit facility with a syndicate of
lenders led by Lehman Brothers Holdings Inc. The Prior Credit Facility was
structured as a $350,000, 5-year revolving credit facility and a $100,000, 7-
year term loan facility and was secured by substantially all of the Company's
assets, except those assets securing the Non-Recourse Facility and the mortgage
debt. The Prior Credit Facility provided for acquisition loans, working and
renovation capital and letters of credit. The initial proceeds from the Prior
Credit Facility were used to repay outstanding indebtedness under certain
existing credit facilities.
Borrowings under the Prior Credit Facility bore interest, at the Company's
option, at a rate equal to the lender's prime rate plus a spread of between 0.5%
and 1.125% or one, two, three or nine month LIBOR plus a spread of between 1.5%
and 2.125%. The interest rate spread was determined based upon the Company's
compliance with certain financial ratios. At December 31, 1997, the interest
rate on the Prior Credit Facility was 7.6%. As discussed above, in conjunction
with the Merger and entering into the New Credit Facility, the Company
terminated the Prior Credit Facility on August 3, 1998.
Hedge Agreements- During 1998, the Company entered into six separate $100,000
swap agreements with financial institutions in order to hedge against the impact
future interest rate fluctuations may have on the Company's existing floating
rate debt instruments. The swap agreements effectively fix 30-day LIBOR at
between 4.9% and 5.4%. During the period ended December 31, 1998, the Company
made payments totaling $211 relating to these hedges. The hedge agreements
terminate at various times between November 1999 and September 2000.
On February 18, 1997, the Company entered into a $40,000 swap agreement and a
$40,000 collar agreement with Lehman Brothers Special Financing, Inc. and CIBC,
respectively. The swap agreement effectively fixes 30-day LIBOR at 5.9% while
the collar agreement creates a 30-day LIBOR floor of 5.1% and ceiling of 7.5%.
During the years ended December 31, 1998 and 1997 the Company made payments
totaling $56 and $88, respectively relating to these hedges. This amount is
included in interest expense. Both hedge agreements terminate in September
1999.
Additionally, in anticipation of the August 1997 Subordinated Notes offering,
the Company entered into separate hedge transactions during June and July 1997.
Upon completion of the Subordinated Notes offering, the Company terminated the
underlying swap agreements, resulting in a net payment to the Company of $836.
This amount was deferred and is being recognized as a reduction to interest
expense over the life of the underlying debt. As a result, the effective
interest rate on the Subordinated Notes has been reduced to 8.69%.
Future Maturities- Aggregate future maturities of the above obligations are as
follows:
1999..................................... $ 59,859
2000..................................... 255,420
2001..................................... 433,513
2002..................................... 42,731
2003..................................... 259,994
Thereafter............................... 550,835
------------
$1,602,352
============
36
Management has determined that the outstanding balance of the Company's long-
term debt approximates its fair value by discounting the future cash flows under
the debt arrangements using rates currently available for debt with similar
terms and maturities.
7. Income Taxes
The Company's income taxes were allocated as follows:
1998 1997 1996
------------ ------------ -------------
Taxes on income before extraordinary loss............. $15,699 $14,911 $ 2,674
Tax benefit on extraordinary loss..................... (2,083) (2,508) (1,304)
Tax benefit on cumulative effect of accounting change. (564) - -
------------ ------------ -------------
$13,052 $12,403 $ 1,370
============ ============ =============
The Company's 1996 income taxes are based on pretax income since the IPO and
the associated change in the Company's tax status to a C Corporation on August
20, 1996. Income before income taxes and extraordinary loss for the period
August 20, 1996 through December 31, 1996 was $6,684.
The Company's effective income tax rate differs from the federal statutory
income tax rate as follows:
1998 1997 1996
------------ ------------ ------------
Statutory tax rate 35.0% 35.0% 34.0%
Effect of REIT dividends paid deduction (35.0) - -
Effect of federal taxes in pre-REIT period 17.9 - -
State and local taxes 2.1 2.6 6.0
Difference in effective rate on foreign
subsidiaries 2.8 0.6 -
Other 0.2 - -
------------ ------------ ------------
23.0% 38.2% 40.0%
============== ============== ==============
The components of income tax expense related to income before extraordinary
loss are as follows:
1998 1997 1996
------------ ------------- --------------
Current:
Federal $14,873 $ 7,542 $2,118
State 3,771 899 622
Foreign 1,500 1,553 -
------------ ------------- --------------
20,144 9,994 2,740
Deferred:
Federal (3,546) 4,243 (51)
State (899) 505 (15)
Foreign - 169 -
------------ ------------- --------------
(4,445) 4,917 (66)
------------ ------------- --------------
$15,699 $14,911 $2,674
============ ============= ==============
37
The tax effects of the principal temporary differences that give rise to the
Company's net deferred tax liability are as follows:
December 31,
----------------------------------------------
1998 1997 1996
------------ ------------- -------------
Accelerated depreciation $1,111 $5,788 $1,515
Fair market value of hotel assets acquired 6,800 - -
Allowance for doubtful accounts (29) (219) (75)
Accrued vacation (14) (385) (252)
Accrued expenses 311 570 -
Other 274 344 (7)
------------ ------------- -------------
Net deferred tax liability $8,453 $6,098 $1,181
============ ============= =============
There is no valuation allowance for deferred tax assets as of December 31,
1998 or 1997 as management believes it is more likely than not that these
deferred tax assets will be fully realized.
In conjunction with the Merger and related transactions, the Company had several
significant events that affect income tax-related balances for the year ended
December 31, 1998. These events are summarized below:
. The Spin-Off was treated as a taxable event to the Company and CapStar's
shareholders. As a result, the Company experienced a taxable gain equal to
the excess of the fair market value of the OPCO stock over the Company's tax
basis in that stock. The taxable gain associated with this transaction is
estimated as approximately $47,378.
. As a result of the Merger, the combined entity will continue to file as REIT.
REITs are generally not subject to federal income taxes, provided that they
comply with various requirements necessary to maintain REIT status. Since the
Company expects to maintain its REIT status, the tax effect of cumulative
temporary differences as of August 3, 1998 has been reversed as a charge to
deferred income tax expense and reduction in deferred income taxes payable.
This reversal reduced deferred income taxes payable by approximately $19,290
as of August 3, 1998.
. REITs are subject to federal income taxes in certain instances for asset
dispositions occurring within 10 years of electing REIT status. The Company
does not expect to incur federal tax liability resulting from the disposition
of assets with built-in gain.
. REITs are subject to state and local income taxes in certain jurisdictions.
The Company has estimated the state and local income taxes associated with
the reversal of temporary differences as $1,653; this amount is included in
the deferred income tax liability as of December 31, 1998.
. As described above, for purposes of preparing the Company's financial
statements, the Company established a new accounting basis for AGH's assets
and liabilities based on their fair values. In accordance with generally
accepted accounting principles, the Company has provided a deferred income
tax liability for the estimated future tax effect of differences between the
accounting and tax bases of assets acquired from AGH. This deferred income
tax liability, related to future state and local income taxes, is estimated
as $6,800, based on information available at the date of the Merger, and may
be adjusted upon the final determination of the estimated tax liability.
8. Stockholders' Equity and Minority Interests
Common Stock Transactions- In connection with its formation, CapStar issued
6,004,321 shares of common stock to the partners of its predecessor entities.
On August 20, 1996, the Company completed its IPO of 9,250,000 shares of
common stock at a price of $18 per share. The Company sold 6,750,000 of the
initial shares, which, after underwriting discounts, commissions and other IPO
expenses, produced net proceeds to the Company of $110,112. The remaining
2,500,000 shares were sold by Acadia Partners, L.P. ("Acadia Partners") and
certain related entities which
38
received all of the net proceeds from the sale of their shares. The Company used
the proceeds of the IPO to repay a portion of the Company's outstanding
indebtedness.
On March 12, 1997, the Company completed a follow-on offering of 5,750,000
shares of common stock at a price of $24.75 per share. After underwriting
discounts, commissions and other offering expenses, net proceeds to the Company
were $134,051, and were used to fund certain hotel acquisitions and repay a
portion of the Company's outstanding indebtedness.
On October 9, 1997, the Company completed an additional follow-on offering of
5,953,722 shares of common stock at $34.625 per share. Concurrent with the
common stock offering, the Company also completed the Convertible Notes
offering. The notes were initially convertible into shares of the Company's
common stock, any time after 90 days following issuance, at the option of the
holders at $43 per share. After underwriting discounts, commissions and other
offering expenses, net proceeds to the Company from the Convertible Notes
offering and the common stock offering were $167,581 and $195,766, respectively.
The proceeds were used to fund certain acquisitions and repay certain
indebtedness. In conjunction with the Merger, the conversion price was adjusted
to $34 per share.
On March 15, 1998, CapStar and AGH entered into the Merger Agreement.
Pursuant to the Merger, CapStar shareholders received one share each in the
Company and OPCO, for each CapStar share owned. AGH shareholders received
0.8475 shares of the Company for each AGH share owned. To effect the Merger,
the Company issued 20,607,611 shares valued at $755,907 to former AGH
shareholders.
CapStar also distributed on a pro rata basis to its stockholders all of the
capital stock of OPCO, which consisted of CapStar's hotel operations (including
leased hotels) and management business (the "Spin-Off"). In conjunction with
the Spin-Off, the Company distributed $23,745 of cash and $28,565 of net assets
to the new shareholders of OPCO.
In May 1997, CapStar implemented a stock purchase plan that allowed eligible
employees to purchase the Company's common stock at a discount to market value.
The Company had reserved 500,000 shares of common stock for issuance under this
plan. In June 1998, the plan was terminated in accordance with the Merger
Agreement.
OP Units- Substantially all of the Company's assets are held indirectly by and
operated through MeriStar Hospitality Operating Partnership, L.P. (the
"Operating Partnership"), the Company's subsidiary operating partnership.
The Operating Partnership's partnership agreement provides four classes of
partnership interests ("OP Units"): Common OP Units, Class B OP Units, Class C
OP Units and Class D OP Units. Common OP Units and Class B OP Units receive
quarterly distributions per OP Unit equal to the dividend paid on each of the
Company's Common Shares. Class C OP Units receive a non-cumulative, quarterly
distribution equal to $0.5575 per Class C OP Unit until such time as the
dividend rate on the Company's Common Shares exceeds $0.5575 whereupon the Class
C OP Units automatically convert into Common OP Units. Class D OP Units pay a
6.5% cumulative annual preferred and are entitled to a liquidation preference of
$22.16 per Class D OP Unit. All net income and capital proceeds earned by the
Operating Partnership, after payment of the annual preferred return and, if
applicable, the liquidation preference, are shared by the holders of the Common
OP Units.
During 1998, 962,858 Common and Class B OP Units were issued to partially
finance the purchases of certain hotels and 3,305,175 Common OP Units were
issued to former holders of AGH OP Units. During 1997, the Company issued
1,483,759 Common and Class B OP Units and 392,157 Class D OP Units to partially
finance the purchases of both certain hotels and lease contracts on hotels.
Each OP Unit is redeemable by the holder for one share of Common Stock (or, at
the Company's option, for cash in an amount equal to the market value of a share
of Common Stock). In addition, the Class D OP Units may be redeemed by the
Operating Partnership at a price of $22.16 per Class D OP Unit (or, at the
Company's option, for a number of shares of Common Stock having a value equal to
such redemption price)
39
at any time after April 1, 2000 or by the holders of the Class D OP Units at a
price of $22.16 per Class D OP Unit (in cash or, at the holder's option, for a
number of shares of Common Stock having a value equal to the redemption price)
at any time after April 1, 2004.
On September 2, 1998 and November 4, 1998, respectively, the Company declared
its third and fourth quarter dividends, equivalent to an annual rate of $2.02
per share of common stock, par value of $0.01 per share ("Common Stock") and
unit of limited partnership interest ("OP Unit") in the Company's subsidiary
operating partnership. The third quarter dividend was paid on a prorated basis
from August 4, 1998 (the first day of operations following the Merger), through
September 30, 1998. The amount of the dividend was $0.31837 per share of Common
Stock and OP Unit and was paid on October 30, 1998. The fourth quarter dividend
of $.505 per share of Common Stock and OP Unit and was paid on January 29, 1999.
9. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for income before
extraordinary loss and cumulative effect of accounting change:
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
BASIC EPS COMPUTATION:
Net income before extraordinary loss and
cumulative effect of accounting change $ 48,708 $ 24,152 $ 4,010
Weighted average number of shares
of Common Stock outstanding 33,653,154 18,784,763 12,754,321
----------- ----------- -----------
Basic EPS $ 1.45 $ 1.29 $ 0.31
=========== =========== ===========
DILUTED EPS COMPUTATION:
Net income before extraordinary loss and
cumulative effect of accounting change $ 48,708 $ 24,152 $ 4,010
Minority interest, net of tax 2,633 368 -
----------- ----------- -----------
Adjusted net income $ 51,341 $ 24,520 $ 4,010
----------- ----------- -----------
Weighted average number of shares
of Common Stock outstanding 33,653,154 18,784,763 12,754,321
Common Stock equivalents:
Stock options 382,448 188,900 -
OP Units 2,624,151 380,433 -
----------- ----------- -----------
Total weighted average number of diluted
shares of Common Stock outstanding 36,659,753 19,354,096 12,754,321
----------- ----------- -----------
Diluted EPS $ 1.40 $ 1.27 $ 0.31
=========== =========== ===========
The effects of certain OP Units and convertible debt were not included in the
computation of diluted EPS as their effect was anti-dilutive.
EPS for 1996 has been calculated using actual income before extraordinary
loss, extraordinary loss, and net income amounts for the period from the IPO on
August 20, 1996 through December 31, 1996. Earnings per share is not presented
for periods prior to the IPO because the Company's predecessor entities were
partnerships.
40
10. Related-Party Transactions
Pursuant to an intercompany agreement, the Company and OPCO provide each other
with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, OPCO has a right of
first refusal to become the lessee of any real property acquired by the Company.
OPCO also provides the Company with certain services including administrative,
corporate, accounting, finance, insurance, legal, tax, data processing, human
resources, acquisition identification and due diligence, and operational
services, for which OPCO is compensated in an amount that the Company would be
charged by an unaffiliated third party for comparable services. During the year
ended December 31, 1998, OPCO provided $781 of such services to the Company.
Summarized financial information of the Company's significant lessee, OPCO, is
as follows:
Balance sheet data: 1998
---------
Total assets $247,529
Total liabilities $174,002
Operating data:
Revenue $562,437
Net income $ 3,950
OPCO has a $75,000 revolving credit facility with the Company. Borrowings by
OPCO bear interest at 30-day LIBOR plus 350 basis points. During 1998, the
Company earned interest of $1,967 from this facility. As of December 31, 1998,
$67,000 was outstanding on the facility. The Company has determined that the
fair value of this note receivable approximates its carrying value.
In order for AGH to qualify as a REIT prior to the Merger, AGH's operating
partnership sold certain personal property relating to certain of the hotels
acquired by AGH in connection with its initial public offering to AGH Leasing,
L.P. (which has since come under the control of OPCO) for $315, which amount was
paid by issuance of a promissory note to AGH's operating partnership. The note
was transferred to the Company in connection with the Merger. The promissory
note bears interest at the rate of 10.0% per annum and requires the payment of
quarterly installments of principal and interest over a five-year period ending
on July 31, 2001. At December 31, 1998, the balance outstanding on the note was
$175.
Certain members of management and their respective affiliates owned equity
interests relating to the Courtyard by Marriott in Durham, North Carolina
acquired by AGH in November 1997. Such persons and affiliates received an
aggregate of 13,650 operating partnership units in AGH's operating partnership
("AGH OP Units") in exchange for such interests in the Durham hotel; which
converted to 11,568 OP Units at the Merger. The AGH OP Units were converted into
11,568 shares of Common Stock in December 1998.
Of the $150,000 aggregate principal amount of Subordinated Notes sold by the
Company in August 1997, $50,000 principal amount was sold at a price of 97.866%
per note to Oak Hill Securities Fund, L.P. ("OHSF"). The investment advisor to
OHSF is Oak Hill Advisors, Inc., one of the principal stockholders of which is a
director of the Company. The director is also a principal stockholder of Oak
Hill Partners which is the investment advisor to Acadia Partners, which was a
principal stockholder of CapStar. The Subordinated Notes purchased by OHSF are
identical to those purchased by third parties, including voting rights.
In April 1997, the Company acquired two properties for an aggregate purchase
price of $10,128 from two partnerships in which certain members of management
owned beneficial interests. The purchase price for these hotels was determined
through arm's-length negotiations between the Company and representatives of
41
the holders of the majority of the beneficial interest in the partnerships.
Those representatives were not affiliated with the Company.
On March 8, 1996, the Company acquired a hotel for a purchase price of $12,000
from a partnership whose general partner was wholly-owned by certain members of
the Company's management. Directly or indirectly, these members of management
owned a 9.7% beneficial interest in the partnership and received $806 of the net
sale proceeds paid to the partnership. The purchase price for this hotel was
determined through arm's-length negotiations between the Company and
representatives of the holders of the majority of the beneficial interests in
the partnership. Those representatives were not affiliated with the Company.
11. Stock-Based Compensation
On August 20, 1996, CapStar adopted an equity incentive plan that
authorized CapStar to issue and award up to 1,740,000 shares of common stock as
options to purchase shares, stock appreciation rights, or restricted shares.
Awards could be granted to directors, officers or other key employees of CapStar
or an affiliate.
On August 20, 1996, in connection with its IPO, CapStar granted certain
executive officers and other members of management 745,254 options to purchase
shares of the CapStar's common stock at the initial public offering price of $18
per share. Of such options, 54,254 were exercisable immediately upon their
grant. The remaining options were exercisable in three annual installments. All
options granted lapse ten years from the date of grant.
At the date of the Merger, CapStar had outstanding approximately 1,758,000
options (the "CapStar Options"). As a result of the Merger, all holders of
CapStar Options received one option in the Company and one option of OPCO, and
the original exercise price of the CapStar Options was allocated between the two
companies. In addition, approximately 1,060,000 of the CapStar Options became
fully vested as of the Merger date.
In connection with the Merger, a new equity incentive plan (the "Equity
Incentive Plan") was adopted. This plan authorizes 4,549,561 shares of common
stock to be awarded. Awards may be granted to officers or other key employees of
the Company or an affiliate. These shares are exercisable in three annual
installments and expire ten years from the grant date.
In addition, the Company adopted a new equity incentive plan for non-employee
directors (the "Directors' Plan"). The Directors' Plan authorizes up to 125,000
options to be awarded. These shares are exercisable in three annual installments
and expire ten years from the grant date. As of December 31, 1998, 45,000
options had been awarded.
In conjunction with the Merger, holders of CapStar options were granted a
total of 150,000 shares of stock with a value of $3,205. This restricted stock
vests ratably over a three-year period.
42
Stock option activity for 1998, 1997 and 1996 is as follows:
Equity Incentive Plan Directors' Plan
--------------------------------------- --------------------------------------
Number of Average Option Number of Average Option
Shares Price Shares Price
--------------- ------------------ --------------- ------------------
Balance, August 20, 1996 - - - -
Granted 764,841 $18.00 - -
Exercised - - - -
Forfeited - - - -
--------------- ------------------ --------------- ------------------
Balance, December 31, 1996 764,841 18.00 - -
Granted 855,050 33.11 - -
Exercised (235) 18.00 - -
Forfeited (18,250) 18.00 - -
--------------- ------------------ --------------- ------------------
Balance, December 31, 1997 1,601,406 26.28 - -
Granted 2,171,796 24.78 45,000 $21.38
Exercised (37,823) 17.45 - -
Forfeited (32,000) 29.44 - -
--------------- ------------------ --------------- ------------------
Balance, December 31, 1998 3,703,379 $24.80 45,000 $21.38
=============== ================== =============== ==================
Shares exercisable at December 31, 1996 54,254 $18.00 - -
=============== ================== =============== ==================
Shares exercisable at December 31, 1997 291,116 $18.00 - -
=============== ================== =============== ==================
Shares exercisable at December 31, 1998 2,231,072 $24.63 - -
=============== ================== =============== ==================
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
----------------------------------------------------------------- -----------------------------------
Weighted Average Average
Range of exercise Number Remaining Weighted Average Number Exercise
prices outstanding Contractual Life Exercise Price exercisable Price
- ------------------ --------------- --------------------- ------------------- --------------- ---------------
$15.64 to $20.94 1,068,760 7.14 $17.31 862,301 $17.18
$20.97 to $24.99 721,901 9.05 21.77 109,500 23.93
$25.10 to $29.93 952,088 8.71 28.47 672,279 28.48
$30.15 to $33.30 1,005,630 8.90 31.48 586,992 31.29
--------------- --------------------- ------------------- --------------- ---------------
$15.64 to $33.30 3,748,379 8.38 $24.80 2,231,072 $24.63
=============== ===================== =================== =============== ===============
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies
Accounting Principles Board Opinion No. 25 in accounting for the Equity
Incentive Plan and therefore no compensation cost has been recognized for the
Equity Incentive Plan.
Pro forma information regarding net income and EPS is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1998, 1997 and 1996:
1998 1997 1996
---------- ----------- ---------
Risk-free interest rate 5.51% 5.81% 5.96%
Dividend rate $2.02 - -
Volatility factor 0.35 0.26 0.25
Weighted average expected life 6.09 years 3.72 years 3.11 years
43
The Company's pro forma net income and EPS as if the fair value method had
been applied were $35,035 and $0.96 for 1998, $18,273 and $0.96 for 1997, and
$2,111 and $0.14 for 1996. The effects of applying SFAS No. 123 for disclosing
compensation costs may not be representative of the effects on reported net
income and EPS for future years.
12. Commitments and Contingencies
The Company leases land at certain hotels from third parties. Certain leases
contain contingent rent features based on gross revenues at the respective
property. Future minimum lease payments required under these operating leases
as of December 31, 1998 were as follows:
1999 $ 1,715
2000 1,537
2001 1,537
2002 1,537
2003 1,537
Thereafter 66,577
-------
$74,440
=======
The Company also leases office equipment under non-cancelable operating
leases. These amounts are insignificant to the financial statements.
The Company leases its hotels to MeriStar Hotels and Resorts and Prime
Hospitality Corp. under noncancellable participating leases that expire from
2010 to 2012. The Company also leases certain office, retail and parking space
to outside parties under non-cancelable operating leases with initial or
remaining terms in excess of one year. Future minimum rental receipts under
these leases as of December 31, 1998 were as follows:
1999 $ 236,479
2000 242,809
2001 249,119
2002 256,084
2003 263,364
Thereafter 2,013,776
----------
$3,261,631
==========
In the course of the Company's normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or asserted against the
Company. Based on currently available facts, management believes that the
disposition of matters that are pending or asserted will not have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of the Company.
13. Acquisitions
During 1998, the Company acquired 70 hotels (containing 17,332 rooms), of
which 53 were acquired pursuant to the Merger. The Company purchased AGH for
approximately $1,306,000 through the issuance of approximately 23,913,000 shares
of Common Stock and OP Units in the Company's subsidiary operating partnership.
The total purchase price for the remaining 17 acquired hotels during 1998 was
$549,068 of cash and $16,932 of OP Units. The cash portions of these
acquisitions were funded through borrowings on the New Credit Facility and Prior
Credit Facility.
44
The following unaudited pro forma summary presents information as if the
Merger, the Spin-Off and all 117 hotels owned at December 31, 1998 had been
acquired at the beginning of the periods presented. The pro forma information
is provided for informational purposes only. It is based on historical
information and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
Company.
PRO FORMA INFORMATION (UNAUDITED)
1998 1997
--------------- ---------------
Total revenue.................................................................. $332,632 $280,482
Net income..................................................................... $ 96,232 $ 67,487
Diluted EPS.................................................................... $ 2.05 $ 1.48
14. Quarterly Financial Information (Unaudited)
The following is a summary of the Company's quarterly results of operations:
1998 1997
-------------------------------------- ----------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- --------- ------- ------- ------- ------- --------
Total revenue................... $143,602 $184,145 $104,301 $93,249 $48,108 $73,711 $90,040 $104,534
Total operating expenses........ 125,890 147,209 81,827 36,465 40,574 55,809 69,822 88,676
Net operating income............ 17,712 36,936 22,474 56,784 7,534 17,902 20,218 15,858
Income before extraordinary loss 4,451 14,905 3,868 25,484 1,940 8,148 8,077 5,987
Net income (loss)............... 4,451 14,905 (1,133) 25,484 1,940 8,148 3,985 5,987
Diluted earnings (loss) per
share.......................... $0.18 $ 0.55 $ (0.03) $ 0.54 $0.14 $ 0.43 $ 0.21 $ 0.25
15. Supplemental Cash Flow Information
1998 1997 1996
------------ ------------- -------------
Cash paid for interest and income taxes:
Interest, net of capitalized interest of $5,182, $442,
and $461, respectively $48,156 $15,734 $11,644
Income taxes 18,591 7,606 807
Non-cash investing and financing activities:
Additions to equipment through capital leases - $ 40 $ 324
Long-term debt assumed in purchase of property and equipment 543 16,478 -
OP Units issued in purchase of property and equipment 16,932 32,264 -
OP Units issued in purchase of intangible assets - 24,000 -
Redemption of OP Units 31,430 11,000 -
Deferred financing fees not yet paid - 528 -
Issuance of common stock for partners' capital - - 49,796
45
Book value of assets distributed to spun-off affiliate $ 41,449 - -
Book value of liabilities distributed to spun-off affiliate (11,768) - -
Book value of debt distributed to spun-off affiliate (1,116) - -
------------ ------------- -------------
Book value of net assets distributed to spun-off affiliate $ 28,565 - -
============ ============= =============
Fair value of assets acquired in Merger $1,306,018 - -
Fair value of liabilities assumed in Merger (26,167) - -
Fair value of debt assumed in Merger (523,944) - -
------------ ------------- ------------
Fair value of net assets acquired in Merger $ 755,907 - -
============ ============= =============
16. Subsequent Events
On January 11, 1999, the Company completed the acquisition of the Holiday Inn
Madison, a 194-room hotel located in Madison, Wisconsin, for a purchase price of
$11,961. The acquisition was funded using existing cash and borrowings on the
New Credit Facility.
On January 21, 1999, the Company sold The Lodge at the Seaport, a 77-room
hotel in Mystic, Connecticut, for $3,000.
46
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(dollars in thousands)
Costs
Initial cost to subsequent Gross amount
Company to acquisition at end of year
---------------- --------------- --------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
------- ----- -------- ----- -------- ----- -------- --------- --------- -------- -----
Hotel Assets:
Salt Lake
Airport Hilton, UT (1) $ 770 $12,828 $ - $ 2,774 $ 770 $ 15,602 $ 1,373 1980 3/3/95 40
Radisson Hotel,
Schaumburg, IL - 1,080 5,131 - 1,625 1,080 6,756 553 1979 6/30/95 40
Sheraton Hotel,
Colorado Springs, CO (1) 1,071 14,592 1 3,231 1,072 17,823 1,457 1974 6/30/95 40
Hilton Hotel, Bellevue, WA - 5,211 6,766 - 1,542 5,211 8,308 653 1979 8/4/95 40
Marriott Hotel, Somerset, NJ - 1,978 23,001 - 3,677 1,978 26,678 1,996 1978 10/3/95 40
Westin Atlanta Airport,
Atlanta, GA - 2,650 15,926 (300) 8,834 2,350 24,760 1,813 1982 11/15/95 40
Sheraton Hotel,
Charlotte, NC - 4,700 11,057 - 3,354 4,700 14,411 998 1985 2/2/96 40
Radisson Hotel Southwest,
Cleveland, OH - 1,330 6,353 - 4,158 1,330 10,511 641 1978 2/16/96 40
Orange County Airport
Hilton, Irvine, CA (1) 9,990 7,993 - 3,029 9,990 11,022 691 1976 2/22/96 40
The Latham Hotel,
Washington, DC - 6,500 5,320 - 2,981 6,500 8,301 475 1981 3/8/96 40
Hilton Hotel, Arlington, TX (1) 1,836 14,689 79 2,801 1,915 17,490 1,117 1983 4/17/96 40
Hilton Hotel, Arlington, VA - 4,000 15,069 - 165 4,000 15,234 934 1990 8/23/96 40
Southwest Hilton, Houston, TX - 2,300 15,665 - 910 2,300 16,575 879 1979 10/31/96 40
Embassy Suites, Englewood, CO (1) 2,500 20,700 - 1,685 2,500 22,385 1,182 1986 12/12/96 40
Holiday Inn, Colorado
Springs, CO - 1,600 4,232 - 467 1,600 4,699 228 1974 12/17/96 40
Embassy Row Hilton,
Washington, DC - 2,200 13,247 - 1,731 2,200 14,978 708 1969 12/17/96 40
Hilton Hotel & Towers,
Lafayette, LA (1) 1,700 16,062 - 963 1,700 17,025 829 1981 12/17/96 40
Hilton Hotel, Sacramento, CA (1) 4,000 16,013 - 1,648 4,000 17,661 854 1983 12/17/96 40
Santa Barbara Inn,
Santa Barbara, CA - 2,600 5,141 - 1,108 2,600 6,249 289 1959 12/17/96 40
San Pedro Hilton,
San Pedro, CA - 640 6,047 - 1,803 640 7,850 347 1989 1/28/97 40
Doubletree Hotel,
Albuquerque, NM (1) 2,700 15,075 - 784 2,700 15,859 739 1975 1/31/97 40
Westchase Hilton & Towers,
Houston, TX - 3,000 23,991 - 1,308 3,000 25,299 1,194 1980 1/31/97 40
Four Points Hotel,
Cherry Hill, NJ - 1,700 4,178 - 1,857 1,700 6,035 242 1991 3/20/97 40
Sheraton Great Valley Inn,
Frazer, PA - 2,150 11,653 11 484 2,161 12,137 518 1971 3/27/97 40
Holiday Inn Calgary
Airport, Calgary,
Alberta, Canada - 751 5,011 (50) 456 701 5,467 342 1981 4/1/97 40
Sheraton Hotel Dallas,
Dallas, TX - 1,300 17,268 - 2,038 1,300 19,306 788 1974 4/1/97 40
Radisson Hotel Dallas,
Dallas, TX - 1,800 17,580 - 1,054 1,800 18,634 793 1972 4/1/97 40
Sheraton Hotel Guildford,
Surrey, BC, Canada - 2,366 24,008 (157) (975) 2,209 23,033 1,520 1992 4/1/97 40
Doubletree Guest Suites,
Indianapolis, IN (1) 1,000 8,242 - 616 1,000 8,858 373 1987 4/1/97 40
Ramada Vancouver Centre,
Vancouver, BC, Canada - 4,400 7,840 (291) 1,810 4,109 9,650 550 1968 4/1/97 40
Holiday Inn Sports
Complex, Kansas City, MO - 420 4,742 - 1,195 420 5,937 230 1975 4/30/97 40
Hilton Crystal City,
Arlington, VA - 5,800 29,879 - 503 5,800 30,382 1,129 1974 7/1/97 40
Doubletree Resort Hotel,
Cathedral City, CA - 1,604 16,141 - 1,256 1,604 17,397 632 1985 7/1/97 40
Radisson Hotel & Suites,
Chicago, IL (1) 4,870 39,175 - 554 4,870 39,729 1,482 1971 7/15/97 40
Georgetown Inn,
Washington, DC - 6,100 7,103 - 170 6,100 7,273 270 1962 7/15/97 40
Embassy Suites Center City,
Philadelphia, PA (2) 5,500 26,763 - 113 5,500 26,876 950 1963 8/12/97 40
Doubletree Hotel Austin,
Austin, TX (2) 2,975 25,678 - 218 2,975 25,896 912 1984 8/14/97 40
Radisson Plaza Hotel,
Lexington, KY (2) 1,100 30,375 - 3,713 1,100 34,088 1,156 1982 8/14/97 40
Jekyll Inn, Jekyll Island, GA - - 7,803 - 2,777 - 10,580 308 1971 8/20/97 40
Holiday Inn Metrotown,
Burnaby, BC, Canada - 1,115 5,303 (74) 349 1,041 5,652 274 1989 8/22/97 40
Embassy Suites
International Airport,
Tucson, AZ - 1,640 10,444 - 325 1,640 10,769 311 1982 10/23/97 40
Westin Morristown, NJ - 2,500 19,128 100 808 2,600 19,936 535 1962 11/20/97 40
Doubletree Hotel Bradley
International Airport,
Windsor Locks, CT - 1,013 10,228 87 284 1,100 10,512 279 1985 11/24/97 40
Sheraton Hotel, Mesa, AZ - 1,850 16,938 - 363 1,850 17,301 460 1985 12/5/97 40
Metro Airport Hilton &
Suites, Detroit, MI - 1,750 12,639 - 285 1,750 12,924 321 1989 12/16/97 40
Marriott Hotel,
Los Angeles, CA - 5,900 48,250 - 3,451 5,900 51,701 1,280 1983 12/18/97 40
47
Costs
Initial cost to subsequent Gross amount
Company to acquisition at end of year
---------------- --------------- --------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
------- ----- -------- ----- -------- ------ -------- --------- --------- -------- -----
Austin Hilton & Towers, TX - 2,700 15,852 - 653 2,700 16,505 404 1974 1/6/98 40
Dallas Renaissance North, TX - 3,400 20,813 - 1,384 3,400 22,197 543 1979 1/6/98 40
Houston Sheraton
Brookhollow Hotel, TX - 2,500 17,609 - 1,761 2,500 19,370 467 1980 1/6/98 40
Seelbach Hilton,
Louisville, KY - 1,400 38,462 - 295 1,400 38,757 964 1905 1/6/98 40
Midland Hilton & Towers, TX - 150 8,487 - 735 150 9,222 225 1976 1/6/98 40
Westin Oklahoma , OK - 3,500 27,588 - 656 3,500 28,244 698 1977 1/6/98 40
Sheraton Hotel, Columbia, MD - 3,600 21,393 - (40) 3,600 21,353 400 1972 3/27/98 40
Radisson Cross Keys,
Baltimore, MD - 1,500 5,615 - (24) 1,500 5,591 105 1973 3/27/98 40
Sheraton Fisherman's Wharf,
San Francisco, CA (1) 19,708 61,751 - 371 19,708 62,122 1,159 1975 4/2/98 40
Hartford Hilton, CT - 4,073 24,458 - (15) 4,073 24,443 376 1975 5/21/98 40
Holiday Inn Dallas DFW
Airport South, TX 13,376 3,223 27,542 - 84 3,223 27,626 288 1974 8/3/98 40
Courtyard by Marriott
Meadowlands, NJ 4,570 - 8,758 - 46 - 8,804 92 1993 8/3/98 40
Hampton Inn Richmond
Airport, VA - 895 6,425 - 516 895 6,941 68 1972 8/3/98 40
Hotel Maison de Ville,
New Orleans, LA - 272 2,860 - 14 272 2,874 30 1778 8/3/98 40
Hilton Hotel Toledo, OH - - 11,241 - 85 - 11,326 118 1987 8/3/98 40
Holiday Inn Select Dallas
DFW Airport West, TX - 1,387 11,764 - 97 1,387 11,861 123 1974 8/3/98 40
Holiday Inn Select New
Orleans International
Airport, LA (1) 2,895 24,502 - 176 2,895 24,678 257 1973 8/3/98 40
Hampton Inn Ocean City, MD - 911 8,995 - 59 911 9,054 94 1989 8/3/98 40
Crowne Plaza Madison, WI (1) 2,518 20,783 - 154 2,518 20,937 218 1987 8/3/98 40
Holiday Inn Park Center
Plaza, St. Louis, MO - 684 6,159 5 121 689 6,280 - 1975 8/3/98 -
Wyndham Albuquerque
Airport Hotel, NM - - 18,078 - 221 - 18,299 189 1972 8/3/98 40
Wyndham San Jose Airport
Hotel, CA - - 33,797 - 228 - 34,025 353 1974 8/3/98 40
Holiday Inn Select Mission
Valley, CA (1) 2,301 20,164 - 228 2,301 20,392 211 1970 8/3/98 40
Sheraton Safari Hotel,
Lake Buena Vista, FL - 3,900 33,703 - 413 3,900 34,116 354 1985 8/3/98 40
Hilton Monterey, CA - 2,040 16,884 - 204 2,040 17,088 177 1971 8/3/98 40
Hilton Hotel Durham, NC - 1,508 14,981 - 198 1,508 15,179 157 1987 8/3/98 40
Wyndham Garden Hotel
Marietta, GA - 1,835 16,577 - 83 1,835 16,660 161 1985 8/3/98 40
Westin Resort Key Largo, FL - 3,034 28,170 - 630 3,034 28,800 295 1985 8/3/98 40
Doubletree Guest Suites
Atlanta, GA 9,150 2,166 17,975 - 3,406 2,166 21,381 190 1985 8/3/98 40
Radisson Hotel Arlington
Heights, IL - 1,462 12,040 - 94 1,462 12,134 126 1981 8/3/98 40
Holiday Inn Select Bucks
County, PA - 2,507 20,951 - 138 2,507 21,089 220 1987 8/3/98 40
Hilton Hotel
Cocoa Beach, FL - 2,661 22,137 - 1,771 2,661 23,908 233 1986 8/3/98 40
Radisson Twin Towers
Orlando, FL - 9,191 70,711 7 543 9,198 71,254 743 1972 8/3/98 40
Crowne Plaza Phoenix, AZ - 1,782 15,427 - 3,460 1,782 18,887 163 1981 8/3/98 40
Hilton Airport Hotel
Grand Rapids, MI (1) 1,968 16,041 - 121 1,968 16,162 168 1979 8/3/98 40
Marriott West Loop
Houston, TX - 2,793 22,779 - 171 2,793 22,950 239 1976 8/3/98 40
Courtyard by Marriott
Durham, NC - 1,351 10,574 - 72 1,351 10,646 111 1996 8/3/98 40
Courtyard by Marriott,
Marina Del Rey, CA - 3,323 23,557 - 161 3,323 23,718 247 1976 8/3/98 40
Courtyard by Marriott,
Century City, CA - 2,079 15,806 - 137 2,079 15,943 166 1986 8/3/98 40
Courtyard by Marriott,
Lake Buena Vista, FL - - 39,764 - 260 - 40,024 418 1972 8/3/98 40
Crowne Plaza, San Jose, CA (1) 1,977 22,229 - 614 1,977 23,843 234 1975 8/3/98 40
Doubletree Hotel
Westshore, Tampa, FL - 2,788 22,587 - 153 2,788 22,740 237 1972 8/3/98 40
Howard Johnson Resort
Key Largo, FL - 1,728 11,991 - 194 1,728 12,185 126 1971 8/3/98 40
Holiday Inn Annapolis, MD - 1,629 13,041 - 90 1,629 13,131 137 1975 8/3/98 40
Holiday Inn
Fort Lauderdale, FL - 2,291 18,731 - 128 2,291 18,859 197 1969 8/3/98 40
Holiday Inn Express
Hanover, MD - 1,159 9,286 - 59 1,159 9,345 97 1988 8/3/98 40
Holiday Inn
Madeira Beach, FL - 1,725 12,918 - 86 1,725 13,004 136 1972 8/3/98 40
Holiday Inn Chicago
O'Hare, IL 20,943 3,989 70,320 - 613 3,989 70,933 738 1975 8/3/98 40
Holiday Inn & Suites
Alexandria, VA - 1,675 13,344 - 113 1,675 13,457 140 1985 8/3/98 40
Hilton Clearwater, FL - - 66,828 - 484 - 67,312 702 1980 8/3/98 40
Radisson Rochester, NY - - 6,131 - 48 - 6,179 64 1971 8/3/98 40
Ramada Plaza Old Towne
Alexandria, VA 5,186 2,154 17,124 - 112 2,154 17,236 180 1975 8/3/98 40
Ramada Inn Clearwater, FL - 2,297 21,143 - 420 2,297 21,563 - 1969 8/3/98 -
Lodge at the Seaport,
Mystic, CT - 614 4,490 - 90 614 4,580 - 1967 8/3/98 -
Holiday Inn Richmond, VA - 1,056 9,498 - 182 1,056 9,680 - 1975 8/3/98 -
48
Costs
Initial cost to subsequent Gross amount
Company to acquisition at end of year
------------------- --------------- ----------------------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve- Improve- Improve- Deprecia- Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
------- ------- -------- ----- -------- -------- --------- --------- --------- -------- ----
Crowne Plaza Las Vegas, NV - 2,934 23,460 - 166 2,934 23,626 246 1989 8/3/98 40
Crowne Plaza Portland, OR - 2,872 22,655 - 285 2,872 22,940 238 1988 8/3/98 40
Four Points Hotel, Mt.
Arlington, NJ 5,032 6,603 5,762 - 46 6,603 5,808 60 1984 8/3/98 40
Ramada Inn Mahwah, NJ - 1,060 8,557 - 137 1,060 8,694 90 1972 8/3/98 40
Ramada Plaza Meriden, CT - 1,190 9,623 - 65 1,190 9,688 101 1985 8/3/98 40
Ramada Plaza Shelton, CT 4,817 1,934 15,423 - 92 1,934 15,515 162 1989 8/3/98 40
Sheraton Crossroads
Mahwah, NJ - 3,093 24,916 - 292 3,093 25,208 262 1986 8/3/98 40
St. Tropez Suites, Las Vegas, NV - 2,942 23,774 - 266 2,942 24,040 250 1986 8/3/98 40
Doral Forrestal,
Princeton, NJ - 9,578 57,555 - - 9,578 57,555 598 1981 /11/98 40
South Seas Plantation,
Captiva, FL - 3,084 83,573 - 489 3,084 84,062 517 1975 0/1/98 40
Radisson Suites Beach
Resort, Marco Island, FL - 7,120 35,300 - 234 7,120 35,534 219 1983 0/1/98 40
Best Western Sanibel
Island, FL - 3,868 3,984 - 45 3,868 4,029 25 1967 0/1/98 40
The Dunes Golf & Tennis
Club, Sanibel Island, FL - 7,705 3,043 - 53 7,705 3,096 19 1964 0/1/98 40
Sanibel Inn, Sanibel
Island, FL - 8,482 12,045 - 85 8,482 12,130 75 1964 0/1/98 40
Seaside Inn, Sanibel
Island, FL - 1,702 6,416 - 41 1,702 6,457 40 1964 0/1/98 40
Song of the Sea, Sanibel
Island, FL - 339 3,223 - 19 339 3,242 20 1964 0/1/98 40
Sundial Beach Resort,
Sanibel Island, FL - 320 12,009 - 61 320 12,070 76 1975 0/1/98 40
------- ------- --------- ----- -------- ------- --------- --------- --------- -------- ---
315,085 2,193,419 (582) 100,711 314,503 2,294,130 53,141
======= ========= ===== ======== ======= ========= =========
(1) These properties secure the Secured Facility which, as of December 31, 1998,
had an outstanding balance of $250,000.
(2) These properties secure the Non-Recourse Facility which, as of December 31,
1998 had an outstanding balance of $52,750.
Property Accumulated
and Equipment Depreciation
-------------- ------------
Land $ 314,503 $ -
Building and Improvements 2,294,130 53,141
Furniture and equipment 234,403 30,656
Construction in progress 114,507 -
-------------- ------------
Total property and equipment $2,957,543 $ 83,797
============== ============
1998 1997 1996
------------ ------------ -------------
Hotel property and equipment
Balance, beginning of period $ 947,597 $ 342,366 $ 110,455
Acquisitions during period 1,865,142 550,913 204,740
Improvements and construction
-in-progress 144,804 54,318 27,171
------------ ------------ -------------
Balance, end of period 2,957,543 947,597 342,366
------------ ------------ -------------
Accumulated depreciation
Balance, beginning of period 26,858 8,432 1,743
Additions-depreciation expense 56,939 18,426 6,689
------------ ------------ -------------
Balance, end of period 83,797 26,858 8,432
------------ ------------ -------------
Net hotel property and equipment,
end of period $2,873,746 $920,739 $333,934
============ ============ ============
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 405 of Regulation S-K with respect to
Directors and Executive Officers of the Company is incorporated herein by
reference to the sections entitled "Management" and "Principal Stockholders" in
the Company's definitive proxy for its 1999 Annual Meeting of Stockholders (the
"1999 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the sections entitled "Executive Compensation," "Compensation of Directors" and
"Stock Option Grants" in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the section entitled "Principal Stockholders" in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Index to Financial Statements and Financial Statement Schedules
1. Financial Statements
The Financial Statements included in the Annual Report on Form 10-K are listed
in Item 8.
2. Financial Statement Schedules
The Financial Statement Schedules included in the Annual Report on Form 10-K
are listed in Item 8.
50
3. Exhibits
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other documents
previously filed with the Commission.
Exhibit No. Description of Document
- ----------- ----------------------------------------------------------------------------------------------------------------------
3.1* Amended and Restated Articles of Incorporation of the Registrant
(Articles of Merger between American General Hospitality Corporation and CapStar Hotel Company).
3.2* Amended and Restated By-laws of the Registrant.
4.1 ** Form of Share Certificate.
10.1* Agreement and Plan of Merger, dated as of March 15, 1998, by and among the Registrant and American General
Hospitality Operating Partnership, L.P. on the one hand, and CapStar Hotel Company, CapStar Management Company,
L.P., and CapStar Management Company II, L.P., on the other hand.
10.2* Amendment No.1 to the Agreement and Plan of Merger, dated as of June 5, 1998, by and among the Registrant and
American General Hospitality Operating Partnership, L.P. on the one hand, and CapStar Hotel Company, CapStar
Management Company, L.P., and CapStar Management Company II, L.P., on the other hand.
10.3 Second Amended and Restated Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P. dated
as of August 3, 1998
10.4 Second Amended and Restated Senior Secured Credit Agreement dated as of August 3, 1998
10.5 Loan Agreement made as of August 3, 1998 between MeriStar Hospitality Corporation and its affiliates and
Secore Financial Corporation.
10.6* Form of MeriStar Incentive Plan.
10.7* Form of MeriStar Non-Employee Directors' Incentive Plan.
10.8* Form of Employment Agreement between MeriStar Hospitality Corporation and Paul W. Whetsell.
10.9* Form of Employment Agreement between MeriStar Hospitality Corporation and Steven D. Jorns.
10.10 Form of Employment Agreement between MeriStar Hospitality Corporation and Bruce G. Wiles
10.11 Form of Employment Agreement between MeriStar Hospitality Corporation and John Emery
10.12* Form of Exchange Rights Agreement, by and among MeriStar Hospitality Corporation, MeriStar Hospitality Operating
Partnership, L.P., and the Persons set forth therein.
10.13* Form of Contribution, Assumption and Indemnity Agreement between CapStar Hotel Company and CMC Operating Company.
10.14* Form of Intercompany Agreement, among MeriStar Hospitality Corporation, MeriStar Hospitality Operating Partnership,
L.P., CMC Operating Company and CMC Operating Partnership, L.P.
10.15* Form of Operating Lease
12 Schedule Regarding the Computation of Ratios
21 Subsidiaries of the Company
23 Consent of KPMG LLP
27 Financial Data Schedule
29 Power of Attorney (see signature page)
___________
* Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-49611), filed with the Securities and Exchange Commission
on April 7, as amended.
** Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 333-66229), filed with the Securities and Exchange Commission
on October 28, 1998, as amended.
___________
B. Reports on Form 8-K:
None
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MeriStar Hospitality Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MERISTAR
HOSPITALITY CORPORATION
By: /s/ PAUL W. WHETSELL
-------------------------------
Paul W. Whetsell
Chief Executive Officer and
Chairman of the Board
Dated: March 1, 1999
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Paul W. Whetsell, Bruce G. Wiles and John Emery, such
person's true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this report filed pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same
with all exhibits thereto, and the other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and things requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and the foregoing Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------- -------------------------------------------- ---------------------
/s/ PAUL W. WHETSELL Chief Executive Officer and Chairman of the March 1, 1999
- ------------------------------- Board of Directors (Principal Executive
Paul W. Whetsell Officer)
/s/ STEVEN D. JORNS
- ------------------------------- Vice Chairman of the Board of Directors March 1, 1999
Steven D. Jorns
/s/ BRUCE G. WILES
- ------------------------------- President and Director March 1, 1999
Bruce G. Wiles
/s/ JOHN EMERY Chief Financial Officer (Principal March 1, 1999
- ------------------------------- Financial and Accounting Officer)
John Emery
52
/s/ JAMES F. DANNHAUSER
- ------------------------------- Director March 1, 1999
James F. Dannhauser
- ------------------------------- Director March 1, 1999
Daniel L. Doctoroff
- ------------------------------- Director March 1, 1999
William S. Janes
/s/ MAHMOOD KHIMJI
- ------------------------------- Director March 1, 1999
Mahmood Khimji
- ------------------------------- Director March 1, 1999
H. Cabot Lodge III
/s/ JAMES R. WORMS
- ------------------------------- Director March 1, 1999
James R. Worms
53