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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[_]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the 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 1-14331
MERISTAR HOTELS & RESORTS, INC.
(Exact name of issuer as specified in its charter)
Delaware 1010 Wisconsin Avenue, N.W., 52-2101815
(State or other Washington, D.C. 20007 (I.R.S. Employer
jurisdiction of Identification Number)
(Address of principal executive offices)
incorporation or (Zip code)
organization)
(202) 965-4455
Registrant's telephone number, including area code
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 17, 1999, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$69,835,000.
The number of shares of the Registrant's common stock outstanding as of
March 17, 1999 was 25,525,400.
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.
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PART I
ITEM 1. BUSINESS
THE COMPANY
MeriStar Hotels & Resorts, Inc. (the "Company") is the lessee, manager and
operator of various hotel assets, including nearly all of the hotel assets
owned by MeriStar Hospitality Corporation (the "REIT"). The Company was formed
on August 3, 1998 when it was spun off (the "Spin-off") by CapStar Hotel
Company ("CapStar"). CapStar transferred or caused to be transferred certain
assets and liabilities constituting the hotel management and leasing business
operated by CapStar and its subsidiaries to the Company, which was a wholly
owned subsidiary of CapStar. CapStar distributed, on a share-for-share basis,
to its stockholders of record on August 3, 1998, all of the outstanding
capital stock of the Company.
After the Spin-Off, pursuant to an Agreement and Plan of Merger, dated as of
March 15, 1998 (the "Merger Agreement"), among American General Hospitality
Corporation, a Maryland corporation operating as a real estate investment
trust ("AGH"), and certain of its affiliates and CapStar and certain of its
affiliates, CapStar merged with AGH (the "Merger") creating the REIT. The
Company then acquired 100% of the partnership interests in AGH Leasing, Inc.
("AGH Leasing"), the third party lessee of most of the hotels owned by AGH and
substantially all of the assets and certain liabilities of American General
Hospitality Inc. ("AGHI"), the third-party manager of most of the hotels owned
by AGH (the "Acquisitions"). CapStar and AGHI were two of the fastest growing
operators of upscale, full-service hotels in North America, based on rooms
under management. The Company is the successor-in-interest and has assumed all
of the rights and liabilities with respect to hotel management contracts and
operating leases of CapStar, AGHI and AGH Leasing.
The Company is one of the largest independent hotel management companies in
the United States, based on rooms under management. As of December 31, 1998,
the Company leased and/or managed 203 hotels (the "MeriStar Hotels")
containing 42,466 rooms. Of the MeriStar Hotels, the Company (i) leases and
manages 109 REIT owned hotels (the "REIT Owned Hotels"), containing 28,058
rooms, (ii) leases 53 additional hotels containing 7,608 rooms, (the "Leased
Hotels") and (iii) manages an additional 41 hotels containing 6,800 rooms (the
"Managed Hotels"). The MeriStar Hotels are located throughout the United
States and Canada including most major metropolitan areas and rapidly growing
secondary cities. The MeriStar Hotels include hotels operated under nationally
recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R),
Doubletree(R), Embassy Suites(R) and Holiday Inn(R). The Company's business
strategy is to manage the renovation, repositioning and operations of each
hotel according to a business plan specifically tailored to the
characteristics of the hotel and its market.
The Company has capitalized on its management experience and expertise by
continuing to secure additional management contracts and improving the
operating performance of the hotels under its management. The Company's senior
management team, with an average of more than 20 years of lodging industry
experience, has successfully managed hotels in all segments of the lodging
industry. Management attributes its management success to its ability to
analyze each hotel as a unique property and to identify particular cash flow
growth opportunities present at each hotel. The Company's principal operating
objectives are to continue to analyze each hotel as a unique property in order
to generate higher revenue per available room ("RevPAR"), increase average
daily rates ("ADR") and increase net operating incomes while providing its
hotel guests with high-quality service and value.
In addition to assuming the rights and obligations under all of the
operating leases and management agreements of CapStar, AGHI and AGH Leasing,
the Company assumed CapStar's interests in two joint ventures. The Company
expects to form additional strategic alliances with institutional and private
hotel owners and to secure additional management fee arrangements. From time
to time, the Company may also acquire certain hotel assets that the REIT could
not, or for strategic reasons does not wish to, own.
The Company currently operates in various sectors within the hospitality
industry. The Company leases and manages properties primarily within the
upscale full-service and premium limited-service sectors, and performs
2
third-party management services for owners of both sectors as well. Management
believes concentrating on the upscale, full-service and premium limited-
service sectors of the lodging industry for leasing and management activities
is appropriate because these sectors are among the most attractive available
in today's current hospitality market. These sectors are attractive for
several reasons. First, these hotels appeal to a wide variety of customers,
thus reducing the risk of decreasing demand from any particular customer
group. Secondly, such hotels have appeal to both business executives and
upscale leisure travelers, customers who are generally less price sensitive
than travelers who use non-premium, limited-service hotels. Finally, full-
service and premium limited-service hotels require a greater depth of
management expertise than non-premium limited-service hotels, and the Company
believes that its superior management skills provide it with a significant
competitive advantage in their operation.
The Company expects to expand into related sectors of the hospitality
industry such as leasing and/or managing additional resort properties, time
share properties, golf courses and conference centers. The Company believes
these parts of the hospitality industry are currently characterized by
fragmented, relatively smaller management companies without the broad range of
management, operational, and financial resources the Company possesses. By
bringing its expertise in other property management activities and these
resources to bear, management believes it can realize significant economic
benefit for the owners/lessors of such properties through increased
profitability of the properties' operations.
THE INTERCOMPANY AGREEMENT
The Company and the REIT have entered into an intercompany agreement (the
"Intercompany Agreement") which aligns the interests of the two companies with
the objective of benefiting the shareholders of both Companies.
Rights of First Refusal
The Intercompany Agreement provides that the Company has a right of first
refusal to become the lessee of any real property acquired by the REIT if the
REIT determines that, consistent with its status as a real estate investment
trust, the REIT is required to enter into a lease; provided that the Company
or an entity controlled by the Company is qualified to be the lessee based on
experience in the industry and financial and legal qualifications.
The Intercompany Agreement provides that the REIT must provide the Company
with written notice of a lessee opportunity. During the 30 days following such
notice, the Company has a right of first refusal with regard to the offer to
become a lessee and the right to negotiate with the REIT on an exclusive basis
regarding the terms and conditions of the lease. If after 30 days, the Company
and the REIT are unable to agree on the terms of a lease or if the Company
indicates that it is not interested in pursuing the opportunity, the REIT 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 the Company. After this
one year period, if the REIT has not leased the property, the REIT must again
offer the opportunity to the Company in accordance with the procedures
specified above.
Each company has established a leasing committee that 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.
The Company has agreed not to acquire or make (i) investments in real estate
or (ii) any other investments that may be made by the REIT under the federal
income tax rules governing real estate investment trusts unless they have
provided written notice to the REIT of the material terms and conditions of
the acquisition or investment opportunity, and the REIT has determined not to
pursue such acquisitions or investments either by providing written notice to
the Company rejecting the opportunity within 20 days or by allowing such 20-
day period to lapse. The Company has also agreed to assist the REIT in
structuring and consummating any acquisition or investment that the REIT
elects to pursue.
3
The Intercompany Agreement provides the Company and the REIT 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 the REIT, 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
The Company provides the REIT with certain services as the REIT 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 REIT compensates the Company for services provided in an amount
determined in good faith by the Company as the amount an unaffiliated third
party would charge the REIT for comparable services.
Equity Offerings
If either the Company or the REIT 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 a public or private offering, the amount of
securities proposed to be issued and the manner of determining the offering
price and other terms thereof. The non-issuing party will cooperate with the
issuing party in every way to effect any securities issuance of the issuing
party by assisting in the preparation of any registration statement or other
document required in connection with such issuance and, in connection
therewith, providing the issuing party with such information as may be
required to be included in such registration statement or other document.
Term
The Intercompany Agreement will terminate upon the earlier of (a) August 3,
2008, or (b) a change in ownership or control of the Company.
Intercompany Loan
The REIT may lend the Company up to $75 million for general corporate
purposes pursuant to a revolving credit agreement. Amounts outstanding under
the facility bear interest at the 30-day London Interbank Offered Rate plus
350 basis points. As of December 31, 1998, the interest rate was 8.56% and the
Company had drawn $67 million on the facility.
4
BUSINESS
The Company seeks to increase shareholder value by (i) implementing its
operating strategy to improve hotel operations and increase cash flow; (ii)
expanding its leasing and management business in its three existing operating
segments--upscale, full-service hotels, premium limited-service hotels and
inns, and resort properties; and (iii) utilizing its property management
expertise to expand into related areas such as golf course and conference
center management.
Segments
During 1998, the Company operated within three segments of the hospitality
industry: (a) upscale, full-service hotels ("Hotels"), (b) premium limited-
service hotels and inns ("Inns") and (c) resort properties ("Resorts"). The
Company's has senior executives that specialize in each of these segments and
uses its primary strategy of creating and executing management plans that are
specifically tailored for each individual property to create and realize each
property's full potential.
The Company's financial position and results of operations as of and for
each of the three years in the three-year period ended December 31, 1998,
reflect significantly differing numbers of managed and leased hotels
throughout the periods. Consequently, the Company has determined that it is
not practicable to present the segment information of the management and
leasing operations of CapStar, its predecessor entity, for the years ended
December 31, 1997 and December 31, 1996. Also, prior to the Spin-Off, the
management and leasing operations of CapStar conducted its business primarily
in only one operating segment. Therefore, the segment disclosures presented
below are for the period August 3, 1998 through December 31, 1998.
The following table summarizes certain segment financial data as of December
31, 1998 and for the period August 3, 1998 through December 31, 1998 (amounts
in thousands):
December 31, 1998
----------------------------------
Total
Hotels Inns Resorts Segments
-------- ------- ------- --------
Revenues.................................... $322,720 $72,267 $73,878 $468,865
Participating Lease Expense................. $101,423 $29,430 $24,187 $155,040
EBITDA...................................... $ 4,710 $ 172 $ (882) $ 4,000
Total Assets................................ $ 48,264 $42,091 $16,276 $106,631
The Company leased and managed 4 properties in Canada as of December 31,
1998. Revenues for Canadian operations totaled $8,865 for the period August 3,
1998 through December 31, 1998.
Expansion Strategy
The Company anticipates that it will continue to expand its portfolio of
hotels under management and/or lease by securing additional management
contracts and/or leases. The Company seeks to expand its management operations
into other hospitality-related businesses, such as time share properties,
resorts, golf courses and conference centers. The Company attempts to identify
properties that are promising management candidates located in markets with
economic, demographic and supply dynamics favorable to hotel lessees and
operators. Through its extensive due diligence process, the Company selects
those expansion targets where it believes selective capital improvements and
intensive 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
and individual operations teams create detailed plans covering all areas of
renovation and operation. These plans serve as the basis for the Company's
expansion decisions and guide subsequent renovation and operating plans.
The Company seeks to lease and/or manage hotels that meet the following
criteria:
5
Market Criteria
Economic Growth. The Company focuses on metropolitan areas that are
approaching, or have already entered, periods of economic growth. Such areas
generally show above average growth in the business community as measured by
(i) job formation rates, (ii) population growth rates, (iii) tourism and
convention activity, (iv) airport traffic volume, (v) local commercial real
estate occupancy, and (vi) retail sales volume. Markets that exhibit these
characteristics typically have strong demand for hotel facilities and
services.
Supply Constraints. The Company seeks lodging markets with favorable supply
dynamics for hotel owners and operators, including an absence of current new
hotel development and barriers to future development such as zoning
constraints, the need to undergo lengthy local development approval processes
and a limited number of suitable sites. Other factors limiting the supply of
new hotels are the current lack of financing available for new development and
the inability to generate adequate returns on investment to justify new
development.
Geographic Diversification. The MeriStar Hotels are located in 32 states
across the nation, the District of Columbia, the U.S. Virgin Islands and
Canada. See "Properties" for additional information regarding the Hotels. The
Company seeks to maintain a geographically diverse portfolio of managed hotels
to offset the effects of regional economic cycles.
Hotel Criteria
Location and Market Appeal. The Company seeks to operate hotels that are
situated near both business and leisure centers that generate a broad base of
demand for hotel accommodations and facilities. These demand generators
include (i) airports, (ii) convention centers, (iii) business parks, (iv)
shopping centers and other retail areas, (v) sports arenas and stadiums, (vi)
major highways, (vii) tourist destinations, (viii) major universities, and
(ix) cultural and entertainment centers with nightlife and restaurants. The
confluence of nearby business and leisure centers enables the Company to
attract both weekday business travelers and weekend leisure guests. Attracting
a balanced mix of business, group and leisure guests to the Hotels helps to
maintain stable occupancy rates and high ADRs.
Size and Facilities. The Company seeks to operate hotels that contain 200 to
500 guest rooms and include accommodations and facilities that are, or are
capable of being made, attractive to key demand segments such as business,
group and leisure travelers. These facilities typically include large, upscale
guest rooms, food and beverage facilities, extensive meeting and banquet
space, and amenities such as health clubs, swimming pools and adequate
parking.
Potential Performance Improvements. The Company seeks to operate
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. These hotels represent
opportunities where a systematic management approach and targeted renovations
should result in improvements in revenue and cash flow.
The Company expects that its relationships throughout the industry will
continue to provide it with a competitive advantage in identifying, evaluating
and managing hotels that meet its criteria. The Company has a record of
successfully managing the renovation and repositioning of hotels, in
situations with varying levels of service, room rates and market types, and
the Company plans to continue to manage such renovation programs as its
acquires new leases and management contracts.
Operating Strategy
The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives
by creating and executing management plans that are specifically tailored for
each individual MeriStar Hotel rather than by implementing an operating
strategy that is designed to maintain a uniform corporate image or brand.
Management believes that custom-tailored business plans are the most effective
means of addressing
6
the needs of a given hotel or market. The Company believes that skilled
management of hotel operations is the most critical element in maximizing
revenue and cash flow in hotels, especially in upscale, full-service hotels.
The Company's corporate headquarters carry out financing and investment
activities and provide services to support as well as monitor the Company's
on-site hotel operating executives. Each of the Company's executive
departments, including Sales and Marketing, Human Resources and Training, Food
and Beverage, Technical Services, Development and Corporate Finance, is headed
by an executive with significant experience in that area. These departments
support decentralized decision-making by the hotel operating executives by
providing accounting and budgeting services, property management software and
other resources which cannot be economically maintained at the individual
MeriStar Hotels.
Key elements of the Company's management programs include the following:
Comprehensive Budgeting and Monitoring. The Company's operating strategy
begins with an integrated budget planning process that is implemented by
individual on-site managers and monitored by the Company's corporate staff.
Management sets targets for cost and revenue categories at each of the
MeriStar Hotels based on historical operating performance, planned
renovations, operational efficiencies and local market conditions. On-site
managers coordinate with the central office staff to ensure that such targets
are realistic. Through effective and timely use of its comprehensive financial
information and reporting systems, the Company is able to monitor actual
performance and rapidly adjust prices, staffing levels and sales efforts to
take advantage of changes in the market and to improve yield.
Targeted Sales and Marketing. The Company employs a systematic approach
toward identifying and targeting segments of demand for each Hotel in order to
maximize market penetration. Executives at the Company's corporate
headquarters and property-based managers divide such segments into smaller
subsegments, typically ten or more for each MeriStar Hotel, and develop
narrowly tailored marketing plans to suit each such segment. The Company
supports each MeriStar Hotel's local sales efforts with corporate sales
executives who develop new marketing concepts and monitor and respond to
specific market needs and preferences. These executives are active in
implementing on-site marketing programs developed in the central management
office. The Company employs computerized revenue yield management systems to
manage each MeriStar Hotel's use of the various distribution channels in the
lodging industry. Management control over those channels, which include
franchisor reservation systems and toll-free numbers, travel agent and airline
global distribution systems, corporate travel offices and office managers, and
convention and visitor bureaus, enables the Company to maximize revenue yields
on a day-to-day basis. Sales teams are recruited locally and receive
incentive-based compensation bonuses. All of the Company's sales managers
complete a highly developed sales training program.
Strategic Capital Improvements. The Company and the REIT (through the
Intercompany Agreement) and other third-party owners plan renovations
primarily to enhance a MeriStar Hotel's appeal to targeted market segments,
thereby attracting new customers and generating increased revenue and cash
flow. For example, in many of the MeriStar Hotels, the banquet and meeting
spaces have been or are intended to be renovated and guest rooms have been
upgraded with computer ports and comfortable work spaces to better accommodate
the needs of business travelers and to increase ADRs. Capital spending
decisions will be based on both strategic needs and potential rate of return
on a given capital investment. Owners of the MeriStar Hotels are primarily
responsible for funding capital expenditures.
Selective Use of Multiple Brand Names. Management believes that the
selection of an appropriate franchise brand is essential in positioning a
hotel optimally within its local market. The Company selects brands based on
local market factors such as local presence of the franchisor, brand
recognition, target demographics and efficiencies offered by franchisors.
Management believes that its relationships with many major hotel franchisors
places the Company in a favorable position when dealing with those franchisors
and allows it to negotiate favorable franchise agreements with franchisors.
Management believes that its growth in acquiring management contracts will
further strengthen its relationship with franchisors.
7
The following chart summarizes certain information with respect to the
national franchise affiliations of the MeriStar Hotels:
REIT Owned Hotels
and
Leased Hotels Managed Hotels
------------------- ------------------
Guest % of Guest % of
Franchise Rooms Hotels Rooms Rooms Hotels Rooms
- --------- ------ ------ ----- ----- ------ -----
Hilton(R).............................. 6,309 23 17.7% 225 1 3.3%
Sheraton(R)............................ 3,501 10 9.8% 167 1 2.4%
Radisson(R)............................ 2,988 10 8.4% 569 2 8.4%
Holiday Inn(R)......................... 2,936 14 8.2% 1,078 6 15.9%
Hampton Inn(R)......................... 2,257 18 6.3% -- -- --
Independent............................ 2,136 13 6.0% 1,017 9 15.0%
Doubletree(R).......................... 2,014 6 5.7% 643 3 9.5%
Courtyard(R)........................... 1,648 9 4.6% 455 2 6.7%
Marriott(R)............................ 1,500 4 4.2% -- -- --
Holiday Inn Select(R).................. 1,488 5 4.2% -- -- --
Comfort Inn(R)......................... 1,293 9 3.6% -- -- --
Westin(R).............................. 1,289 4 3.6% 226 1 3.3%
Wyndham(R)............................. 850 3 2.4% -- -- --
Homewood Suites(R)..................... 795 7 2.2% -- -- --
Embassy Suites(R)...................... 728 3 2.0% 248 1 3.6%
Crowne Plaza(R)........................ 715 3 2.0% 318 1 4.7%
Ramada(R).............................. 660 3 1.9% 309 2 4.5%
Hilton Garden Inn(R)................... 474 3 1.3% -- -- --
Holiday Inn Express(R)................. 367 3 1.0% 83 1 1.2%
Doubletree Guest Suites(R)............. 292 2 0.8% -- -- --
Comfort Suites(R)...................... 277 2 0.8% 244 2 3.6%
Best Western(R)........................ 254 2 0.7% 75 1 1.1%
Four Points(R)......................... 213 1 0.6% -- -- --
Quality Suites(R)...................... 168 1 0.5% 281 2 4.1%
Residence Inn(R)....................... 168 1 0.5% 223 2 3.3%
Hampton Inn & Suites(R)................ 136 1 0.4% -- -- --
Fairfield Inn(R)....................... 110 1 0.3% 200 1 2.9%
Howard Johnson(R)...................... 100 1 0.3% -- -- --
Quality Inn(R)......................... -- -- -- 265 2 3.9%
Hilton Suites(R)....................... -- -- -- 174 1 2.6%
------ --- ----- ----- --- -----
Total................................ 35,666 162 100.0% 6,800 41 100.0%
====== === ===== ===== === =====
Emphasis on Food and Beverage. Management believes popular food and beverage
ideas are a critical component in the overall success of a hotel. The Company
utilizes its food and beverage operations to create local awareness of its
hotel facilities, to improve the profitability of its hotel operations and to
enhance customer satisfaction. The Company is committed to competing for
patrons with restaurants and catering establishments by offering high-quality
restaurants that garner positive reviews and strong local and/or national
reputations. The Company has engaged food and beverage experts to develop
several proprietary restaurant concepts. The REIT Owned Hotels contain
restaurants ranging from Michel Richard's highly acclaimed CITRONELLE(R), to
Morgan's(R), a Company-designed concept which offers popular, moderately-
priced American cuisine. The Company has also successfully placed national
food franchises such as Starbuck's Coffee(R) and "TCBY"(R) Yogurt in casual,
delicatessen-style restaurants in several of the REIT Owned Hotels. Popular
food concepts will strengthen the Company's ability to attract business
travelers and group meetings and improve the name recognition of the Hotels.
8
Commitment to Service and Value. The Company is dedicated to providing
exceptional service and value to its customers on a consistent basis. The
Company conducts extensive employee training programs to ensure personalized
service at the highest levels. Programs such as "Be A Star" have been created
and implemented by the Company to ensure the efficacy and uniformity of its
employee training. The Company's practice of tracking customer comments,
through the recording of guest comment cards and the direct solicitation
(during check-in and check-out) of guest opinions regarding specific items,
allows investment in services and amenities where they are most effective. The
Company's focus on these areas has enabled it to attract lucrative group
business.
Distinct Management Culture. The Company has a distinct management culture
that stresses creativity, loyalty and entrepreneurship. Management believes in
realistic solutions to problems, and innovation is always encouraged.
Incentive programs and awards have been established to encourage individual
property managers to seek new ways of increasing revenues and operating cash
flow. This creative, entrepreneurial spirit is prevalent from the corporate
staff and the general managers down to the operations staff. Individual
general managers work closely with the corporate staff and they and their
employees are rewarded for achieving target operating and financial goals.
Computerized Reporting Systems. The Company employs computerized reporting
systems at each of the MeriStar Hotels and at its corporate offices to monitor
the financial and operating performance of the hotels. Management information
services have been fully integrated through the installation of Novell and
Unix networks at many of the REIT Owned Hotels. Management also utilizes daily
reporting and electronic mail programs to facilitate daily communication
between the MeriStar Hotels and the Company's corporate headquarters. Such
programs enable the Company to create and implement detailed reporting systems
at each of the MeriStar Hotels and its corporate headquarters. Corporate
executives utilize information systems that track each MeriStar Hotel's daily
occupancy, ADR, and revenue from rooms, food and beverage. By having the
latest hotel operating information available at all times, management is
better able to respond to changes in the market of each hotel.
Competition
The Company competes primarily in the following segments of the lodging
industry: (a) the upscale full-service segment, (b) the premium limited-
service segment and (c) resorts. In each geographic market in which the
MeriStar Hotels are located, there are other full- and limited-service hotels
and/or resorts 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.
Employees
As of December 31, 1998, the Company employed approximately 27,000 persons,
of whom approximately 24,300 were compensated on an hourly basis. Some of the
employees at 22 of the MeriStar Hotels are represented by labor unions.
Management believes that labor relations with its employees are generally
good. The REIT reimburses the Company for work performed by the Company's
employees on behalf of the REIT. During 1998, the REIT reimbursed the Company
$781,000 for worked performed by the Company's employees on behalf of the
REIT.
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
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. The Company
believes that it is substantially in compliance with these requirements.
Managers of hotels are also subject to
9
laws governing their relationship with hotel employees, including minimum wage
requirements, overtime, working conditions and work permit requirements.
Compliance with, or changes in, these laws could reduce the revenue and
profitability of the Hotels and could otherwise adversely affect the Company's
operations.
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 MeriStar 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. Certain
environmental laws and common law principles could 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 REIT Owned Hotels, and Phase II ESAs have been conducted at some of the
REIT Owned 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
REIT Owned 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
authority of any material noncompliance, liability or claim relating to
hazardous or toxic substances or other environmental substances in any of the
REIT Owned Hotels.
10
THE OPERATING PARTNERSHIP
The following summary information is qualified in its entirety by the
provisions of the amended and restated agreement of Limited Partnership, as
amended, of MeriStar H&R Operating Company, L.P., 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
H&R Operating Company, 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, two officers and directors of the
Company and approximately 85 independent third-parties are limited partners of
the Operating Partnership. The partnership agreement of the Operating
Partnership gives the general partner full control over the business and
affairs of the Operating Partnership. The general partner is also given the
right, in connection with the contribution of property to the Operating
Partnership or otherwise, to issue additional partnership interests in the
Operating Partnership in one or more classes or series, with such
designations, preferences and participating or other special rights and powers
(including rights and powers senior to those of the existing partners) as the
general partner may determine.
The Operating Partnership's partnership agreement currently has three
classes of partnership interests ("OP Units"): Class A OP Units, Class B OP
Units and Preferred OP Units. As of March 17, 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") (ii) the officers and directors
of the Company own 1,409,753 Class A OP Units and (ii) independent third
parties own 4,366,362 OP Units (consisting of 1,325,753 Class A OP Units,
2,648,452 Class B OP Units and 392,157 Preferred OP Units). No dividend was
paid during 1998 and no dividend is expected to be paid during 1999 to the
Class A OP Units and Class B OP Units. Preferred OP Units receive a 6.5%
cumulative annual preferred return based on an assumed price per Common Share
of $3.34, compounded quarterly to the extent not paid on a current basis, and
are entitled to a liquidation preference of $3.34 per Preferred 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 Class A OP Units and Class B
OP Units in proportion to the number of OP Units owned by each such holder.
Each OP Unit held by the two officers and directors and 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 Preferred OP Units may be redeemed by
the Operating Partnership at a price of $3.34 per Preferred 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 Preferred OP Units at a price of $3.34 per Preferred 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.
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference in this
annual report on Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, and as such may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Forward-
looking statements, which are based on certain assumptions and describe our
future plans, strategies and expectations are generally identifiable by use of
the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative thereof or other variations
thereon or comparable terminology. Factors which could have a material adverse
effect on the operations and future prospects of our Company include, but are
not limited to, changes in: economic conditions generally and the real estate
market specifically,
11
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. with
satellite offices in Florida, North Carolina and Texas. The Company leases its
offices. The Company leases and/or manages hotel properties throughout the
United States and Canada. No one leased or managed hotel property is material
to the operation of the Company. A typical full-service MeriStar Hotel has
meeting and banquet facilities, food and beverage facilities and guest rooms
and suites.
The REIT Owned Hotels and Leased Hotels feature, or after contemplated
renovation programs have been completed will feature, comfortable, modern
guest rooms, extensive meeting and (for Hotels and Resorts) 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 the 1998 operating information
with respect to the REIT Owned Hotels and Leased Hotels:
Guest
Type Number of Hotels Rooms ADR Occupancy RevPAR
- ---- ---------------- ------ ------ --------- ------
Inns............................ 57 8,299 $72.93 74.2% $54.12
Hotels.......................... 83 22,365 94.28 71.3% 67.22
Resorts......................... 22 5,002 97.44 70.7% 68.89
--- ------ ------ ---- ------
Total/weighted average........ 162 35,666 $90.12 71.8% $64.71
=== ====== ====== ==== ======
The following table sets forth the 1998 operating information with respect
to the hotels managed by the Company:
Guest
Type Number of Hotels Rooms
- ---- ---------------- -----
Inns..................................................... 27 3,857
Hotels................................................... 11 2,620
Resorts.................................................. 3 323
--- -----
Total.................................................. 41 6,800
=== =====
The Participating Leases
Subsidiaries of the Company are the lessees (each, a "Lessee") of 109 of the
REIT's 117 hotels. Each lease (a "Participating Lease") provides for an
initial term of 12 years. Each Participating Lease provides the Lessee 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 REIT to operate the hotel directly;
(b) if the Lessee elects not to renew a Participating Lease for any applicable
Hotel, then the REIT 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 Lessee and the REIT 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 REIT on such terms as the REIT may have
agreed upon with a third-party lessee.
12
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 REIT, 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.
Capitalization Requirements of the Company
The Participating Leases require the Company, 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 the Company is less than 17.5% of the aggregate rents payable under
the Participating Leases for the prior calendar year, the Company 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 REIT has the right to terminate the applicable Participating Lease upon
the sale of a hotel to a third party or, upon the REIT'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 identified by the Company and
the REIT at the Merger as properties slated to be sold). The fair market value
of the leasehold estate is 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 REIT 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 the REIT 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 REIT 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
13
the Company the difference between the rent that would have been paid to the
REIT 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 REIT. For purposes of the
Participating Lease, a change in control of the Company or the Lessees will be
deemed an assignment of the Participating Lease and will require the REIT'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.
14
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 "MMH." 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 17, 1999)....................... $3 3/16 $2 3/8
1998:
Fourth Quarter (ended December 31, 1998)..................... 2 11/16 1 15/16
Third Quarter (from Spin-Off on August 3, 1998 through
September 30, 1998)......................................... 3 3/4 2
The last reported sale price of the Common Stock on the NYSE on March 17,
1999 was $2 13/16. As of March 17, 1999, there were approximately 149 holders
of record of the Common Stock.
The Company has not paid any cash dividends on the Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company intends
to retain earnings to provide funds for the continued growth and development
of the Company's business. The Company's lease agreements with the REIT
restrict the Company's ability to pay dividends on the Common Stock. Any
determination to pay cash dividends in the future will be at the discretion of
the Board of Directors and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
On August 3, 1998, the Company privately issued 3,414,872 Class B OP Units
as part of the purchase of 100% of the partnership interests in AGH Leasing
and substantially all of the assets and certain liabilities of AGHI.
On October 1, 1998, the Company privately issued 916,230 Class A OP Units as
part of the purchase of a portfolio of assets from South Seas Properties
Company Limited Partnership and its affiliates.
15
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)
Operating Results:
Revenues:
Rooms.................. $ 395,633 $ 9,880 $ -- $ -- $ --
Food, beverage, office
rental and other...... 152,276 1,871 -- -- --
Management services and
other revenues........ 14,528 12,088 7,050 5,354 4,418
---------- --------- --------- -------- --------
Total revenues........ 562,437 23,839 7,050 5,354 4,418
---------- --------- --------- -------- --------
Operating expenses:
Departmental expenses:
Rooms.................. 95,627 2,533 -- -- --
Food, beverage and
other................. 107,860 1,170 -- -- --
Undistributed operating
expenses:
Administrative and
general............... 84,881 10,473 6,140 4,745 4,508
Participating lease
expense............... 186,601 4,135 -- -- --
Property and other
operating costs....... 76,300 1,917 -- -- --
Depreciation and
amortization.......... 3,372 636 349 84 23
---------- --------- --------- -------- --------
Total operating
expenses............. 554,641 20,864 6,489 4,829 4,531
---------- --------- --------- -------- --------
Net operating income
(loss)................. 7,796 2,975 561 525 (113)
Interest expense, net... 2,017 56 123 44 --
Minority interest....... 155 103 -- -- --
Provision for income
taxes(A)............... 337 -- -- -- --
Equity in earnings of
affiliates............. (1,337) 46 -- -- --
---------- --------- --------- -------- --------
Net income (loss)..... $ 3,950 $ 2,862 $ 438 $ 481 $ (113)
---------- --------- --------- -------- --------
Basic earnings per
share(B)............... $ 0.02 -- -- -- --
Diluted earnings per
share(B)............... $ 0.02 -- -- -- --
Number of shares of
common stock issued and
outstanding(C)......... 25,437 -- -- -- --
Other Financial Data:
EBITDA(D)............... $ 11,168 $ 3,611 $ 910 $ 609 $ (90)
Net cash provided by
operating activities... 10,125 11,167 19,069 208 66
Net cash used in
investing activities... (102,105) (6,501) (1,826) (61) (41)
Net cash provided by
financing activities... 76,113 4,208 699 59 --
Balance Sheet Data:
Total assets............ $ 247,529 $ 84,419 $ 24,366 $ 2,881 $ 1,232
Debt.................... 67,812 981 885 950 --
- --------
(A) No provision for federal income taxes was included prior to 1998 because
the Company's predecessor entities were partnerships and all federal
income tax liabilities were passed through to the individual partners.
(B) Basic and diluted earnings per share for the year ended December 31, 1998
is based on earnings for the period from August 3, 1998 through December
31, 1998.
(C) As of December 31 for the period presented.
(D) 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.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
On August 3, 1998, the management and leasing operations of CapStar Hotel
Company ("CapStar") were spun-off (the "Spin-Off") in a taxable transaction in
which CapStar distributed on a share-for-share basis all shares of common
stock, par value $0.01 per share, ("Common Stock") of MeriStar Hotels &
Resorts, Inc. (the "Company"). The Company thereby became the lessee, manager
and operator of various hotel assets, including those which were previously
owned, leased and managed by CapStar and certain of its affiliates. On August
3, 1998, CapStar merged (the "Merger") with and into American General
Hospitality Corporation ("AGH"), a Maryland corporation operating as a real
estate investment trust, to form MeriStar Hospitality Corporation (the
"REIT").
Immediately following the Spin-Off and the Merger, the Company acquired 100%
of the partnership interests in AGH Leasing, L.P., ("AGH Leasing"), the third-
party lessee of most of the hotels owned by AGH, and substantially all of the
assets and liabilities of American General Hospitality, Inc. ("AGHI"), the
third-party manager of most of the AGH hotels. As a result, the Company became
the lessee and manager of most of the hotels owned by the REIT. The purchase
price of $95.0 million was paid with a combination of cash and units of
limited partnership interest ("OP Units") in the Company's subsidiary
operating partnerships. In accordance with generally accepted accounting
principles, the acquisitions have been accounted for as a purchase and
therefore, the operating results of AGHI and AGH Leasing have been included in
the Company's consolidated financial statements since the date of acquisition.
The Company's financial statements include the historical results of the
Company's predecessor entity, the management and leasing operations of
CapStar, for all periods and include the operating results of AGH Leasing and
AGHI since August 3, 1998. In addition, prior to August 3, 1998, the Company
managed substantially all of the hotels owned by CapStar and received
management fee revenues from such hotels. Since August 3, 1998, the Company
has leased these hotels from the REIT and therefore records no management fees
from such hotels but instead records room, food and beverage and other
operating department revenues and expenses from such leases. Therefore, the
Company's financial condition and results of operations as of December 31,
1998 and December 31, 1997 and for the periods ended December 31, 1998, 1997
and 1996 reflect significantly differing numbers of managed and leased hotels
throughout the periods. The following table outlines the Company's historical
portfolio of managed and leased hotels:
REIT CapStar Third Party Other
Leased Owned Managed Leased Total
------------- ------------- ------------ ------------ -------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
------ ------ ------ ------ ------ ----- ------ ----- ------ ------
December 31, 1998....... 109 28,058 -- -- 41 6,800 53 7,608 203 42,466
December 31, 1997....... -- -- 47 12,019 27 4,631 40 5,687 114 22,337
December 31, 1996....... -- -- 19 5,166 28 4,619 -- -- 47 9,785
Financial Condition
December 31, 1998 compared with December 31, 1997
Total assets increased by $163.1 million to $247.5 million at December 31,
1998 from $84.4 million at December 31, 1997. Total liabilities increased by
$143.4 million to $183.1 million from $39.7 million. The increases in assets
and liabilities result primarily from the August 3, 1998 purchase of AGHI and
AGH Leasing. Minority interests increased by $15.9 million from $3.8 million
to $19.7 million primarily due to the issuance of OP Units in conjunction with
the acquisitions of AGHI and AGH Leasing.
17
Results of Operations
Year Ended December 31, 1998 compared with the Year Ended December 31, 1997
Total revenue increased by $538.6 million or 2,259% to $562.4 million in
1998 compared to $23.8 million in 1997. This increase results from the
increase in the number of hotels leased as described above.
Operating expenses increased $533.7 to $554.6 million in 1998 compared to
$20.9 million in 1997. The increase reflects the increase in the number of
leased and managed hotels, which resulted in and includes the costs of
additional personnel and other administrative costs incurred in conjunction
with the Company's growth.
Net operating income increased $4.8 million, or 162%, to $7.8 million in
1998 compared to $3.0 million in 1997. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") increased $7.6 million to $11.2
million in 1998 compared to $3.6 million in 1997. These increases resulted
primarily from the increase in the number of leased and managed hotels, offset
partially by the costs of additional personnel and other administrative costs
incurred as described above.
EBITDA for the Company's three operating segments for the period August 3,
1998 through December 31, 1998 is as follows:
Total
Hotels Inns Resorts Segments
------ ---- ------- --------
EBITDA............................................. $4,710 $172 $(882) $4,000
Year Ended December 31, 1997 compared with the Year Ended December 31, 1996
Total revenue increased by $16.7 million or 235% to $23.8 million 1997
compared to $7.1 million in 1996. This increase results from revenue of $11.8
million from hotel leases acquired in 1997 and an increase of $4.9 million in
management fees and other revenue is primarily due to the increase in the
number of managed hotels in 1997 and additional fees resulting from improved
operations of the managed hotels. Hotel management and other revenue earned by
the Company from hotels owned by CapStar were $7.2 million or 30% of total
revenue in 1997, and $2.6 million or 37% of total revenue in 1996.
Operating expenses increased to $20.9 million in 1997 from $6.5 million in
1996. This increase reflects the increase in the number of managed hotels and
the hotel leases acquired in 1997, offset partially by the costs of additional
personnel and other administrative costs incurred as described above.
Net operating income increased by 430% to $3.0 million in 1997 compared to
$0.6 million in 1996 and EBITDA grew to $3.6 million in 1997 from $0.9 million
in 1996. The increases resulted primarily from the increase in the number of
managed hotels and the leases acquired in 1997, offset partially by the costs
of additional personnel and other administrative costs incurred as described
above.
Liquidity and Capital Resources
The Company's continuing operations are funded through cash generated from
hotel management and leasing operations. Business acquisitions and investments
in affiliates are financed through a combination of internally generated cash,
external borrowings and the issuance of OP Units and/or common stock.
On August 3, 1998, the Company entered into a three-year, $75.0 million
revolving credit facility (the "Credit Facility") with the REIT. The Credit
Facility contains certain covenants, including maintenance of financial
ratios, reporting requirements and other customary restrictions. Interest on
the facility is the 30-day London Interbank Offered Rate plus 350 basis
points. As of December 31, 1998, the Company had $67.0 million in outstanding
borrowings under the Credit Facility, at an interest rate of 8.56%. The
Company incurred interest expense of $2.0 million on this facility during
1998.
Operating activities provided $10.1 million of net cash in 1998, mainly due
to higher levels of net income, depreciation and amortization, and accrued
expenses and other liabilities due to the increase in hotels leased.
18
The Company used $102.1 million of cash in investing activities for 1998,
primarily for the purchase of AGHI and AGH Leasing. Net cash provided by
financing activities of $76.1 million resulted from borrowings under the
Credit Facility and contributions from CapStar. In conjunction with the Spin-
Off, the operating assets and liabilities of the hotels leased from the REIT
were transferred to the Company, resulting in a payable to the REIT of $7.4
million at December 31, 1998.
Under the terms of the participating leases between the Company and its
lessors, the lessors will generally be required to fund significant capital
expenditures at the hotels leased by the Company.
The Company believes cash generated by operations, together with anticipated
borrowing capacity under the credit facility, will be sufficient to fund its
existing working capital, ongoing capital expenditures, and debt service
requirements. In addition, the Company expects to continue to seek
acquisitions of hotel management businesses and management contracts. The
Company expects to finance these future acquisitions through a combination of
anticipated borrowing capacity under its credit facility and the issuance of
OP Units and/or Common Stock. The Company believes these sources of capital
will be sufficient to provide for the Company's long-term capital needs.
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. Therefore, the Company's
operations are seasonal in nature. Assuming other factors remain constant, the
Company has lower revenue, operating income and cash flow in the first and
fourth quarters and higher revenue, operating income and cash flow in the
second and third quarters.
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 leased and managed 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 expects to complete this stage by March 1999. The
following 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 third 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.
19
The Company anticipates completing its Year 2000 implementation plan no
later than September 30, 1999, which is prior to any anticipated impact on its
operating systems. As of December 31, 1998, historical costs incurred to
address the Year 2000 problem approximate $0.2 million. The Company expects
that essentially all of the future expenditures required to modify, repair,
and replace computerized systems at its leased and managed hotel properties
will be the financial responsibility of the owners of those properties. 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 all of its
leased and managed properties (including those properties leased from the
REIT) is $15-25 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 efficient operating systems at
its properties. To the extent that the Year 2000 problems materially affect
the conduct of operations at those properties, it is likely that the Company's
ability to efficiently manage operations would be materially affected. Also,
as discussed above, the vast majority of expenditures related to Year 2000
problems at the Company's leased and managed properties will be the financial
responsibility of the owners of those properties. To the extent that those
owners are unable or unwilling to modify, repair, and replace systems with
potential Year 2000 problems, the Company could suffer material adverse
financial consequences.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on its
Credit Facility that impacts the fair value of this obligation. 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. The Company has not entered into any derivative or interest rate
transactions.
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. All items described are
non-trading (in thousands of dollars).
Variable Average
Expected Maturity Rate Interest Rate
- ----------------- -------- -------------
1999.................................................... $ -- $--
2000.................................................... -- --
2001.................................................... 67,000 8.6%
2002.................................................... -- --
2003.................................................... -- --
Thereafter.............................................. -- --
------- ----
Total................................................... $67,000 8.6%
======= ====
Fair Value at 12/31/98.................................. $67,000 8.6%
======= ====
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
20
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.
ITEM 8. FINANCIAL STATEMENTS
The following Consolidated Financial Statements are filed as part of this
Annual Report on Form 10-K:
MeriStar Hotels & Resorts, Inc.
Independent Auditors' Report.............................................. 22
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. 23
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996...................................................... 24
Consolidated Statements of Stockholders' Equity and Owners' Equity for the
Years Ended December 31, 1998, 1997 and 1996............................. 25
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996...................................................... 26
Notes to the Consolidated Financial Statements............................ 27
All Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hotels & Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of MeriStar
Hotels & Resorts, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity and
owners' equity, and cash flows for each of the years in the three-year period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MeriStar
Hotels & Resorts, Inc. and subsidiaries as of December 31, 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.
KPMG LLP
Washington, D.C.
February 1, 1999
22
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
INCLUDING PREDECESSOR ENTITY
(in thousands, except per share amounts)
1998 1997
-------- -------
Assets
Current Assets:
Cash and cash equivalents.................................. $ 11,155 $27,022
Accounts receivable, net of allowance for doubtful accounts
of $2,285 and $72......................................... 61,987 7,162
Prepaid expenses........................................... 4,193 1,097
Deposits and other......................................... 11,085 2,856
-------- -------
Total current assets........................................ 88,420 38,137
Fixed assets:
Furniture, fixtures, and equipment......................... 7,325 2,701
Accumulated depreciation................................... (1,099) (418)
-------- -------
Total fixed assets, net..................................... 6,226 2,283
Investments in and advances to affiliates................... 5,495 8,058
Intangible assets, net of accumulated amortization of $3,338
and $719................................................... 146,782 35,941
Restricted cash............................................. 606 --
-------- -------
$247,529 $84,419
======== =======
Liabilities, Minority Interests, Stockholders' Equity and
Owners' Equity
Current Liabilities:
Accounts payable........................................... $ 28,401 $ 2,082
Accrued expenses and other liabilities..................... 70,016 14,360
Due to affiliates, net..................................... 7,437 22,287
Income taxes payable....................................... 69 --
Long-term debt, current portion............................ 27 392
-------- -------
Total current liabilities................................... 105,950 39,121
Deferred income taxes....................................... 9,367 --
Long-term debt.............................................. 67,785 589
-------- -------
Total liabilities........................................... 183,102 39,710
Minority interests.......................................... 19,693 3,800
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized--100,000 shares Issued and outstanding--25,437
shares 254 --
Paid-in capital........................................... 43,929 --
Retained earnings......................................... 551 --
-------- -------
Total Stockholders' equity.................................. 44,734 --
-------- -------
Owners' equity.............................................. -- 40,909
-------- -------
$247,529 $84,419
======== =======
See accompanying notes to consolidated financial statements.
23
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCLUDING PREDECESSOR ENTITY
(in thousands, except per share amounts)
1998 1997 1996
-------- ------- ------
Revenue:
Rooms................................................ $395,633 $ 9,880 --
Food and beverage.................................... 119,295 1,397 --
Other operating departments.......................... 32,981 474 --
Management and other fees............................ 14,528 12,088 7,050
-------- ------- ------
Total revenue......................................... 562,437 23,839 7,050
-------- ------- ------
Operating expenses by department:
Rooms................................................ 95,627 2,533 --
Food and beverage.................................... 90,662 909 --
Other operating expenses............................. 17,198 261 --
Undistributed operating expenses:
Administrative and general........................... 84,881 10,473 6,140
Participating lease expense.......................... 186,601 4,135 --
Property operating costs............................. 76,300 1,917 --
Depreciation and amortization........................ 3,372 636 349
-------- ------- ------
Total operating expenses.............................. 554,641 20,864 6,489
-------- ------- ------
Net operating income.................................. 7,796 2,975 561
Interest expense, net................................. 2,017 56 123
Equity in earnings of affiliates...................... (1,337) 46 --
-------- ------- ------
Income before minority interests and income taxes..... 4,442 2,965 438
Minority interests.................................... 155 103 --
Income taxes.......................................... 337 -- --
-------- ------- ------
Net income............................................ $ 3,950 $ 2,862 $ 438
======== ======= ======
Earnings per share:
Basic............................................... $ 0.02 -- --
Diluted............................................. $ 0.02 -- --
======== ======= ======
See accompanying notes to consolidated financial statements.
24
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCLUDING PREDECESSOR ENTITY
(in thousands)
Common Stock Additional
------------- Paid-in Retained Owners'
Shares Amount Capital Earnings Equity Total
------ ------ ---------- -------- ------- -------
Balance, January 1, 1996.. -- $-- $ -- $-- $ 763 $ 763
Capital contributions..... -- -- -- -- 1,806 1,806
Net income for the year... -- -- -- -- 438 438
------ ---- ------- ---- ------- -------
Balance, December 31,
1996..................... -- -- -- -- 3,007 3,007
Capital contributions..... -- -- -- -- 35,040 35,040
Net income for the year... -- -- -- -- 2,862 2,862
------ ---- ------- ---- ------- -------
Balance, December 31,
1997..................... -- -- -- -- 40,909 40,909
Net income for period
January 1, 1998 through
August 2, 1998........... -- -- -- -- 3,399 3,399
Spin-Off and Issuances of
common stock............. 24,952 249 42,949 -- (44,308) (1,110)
Issuances of common stock
under Stock Purchase
Plan..................... 5 -- 11 -- -- 11
Rights offering........... 480 5 952 -- -- 957
Proceeds from exercise of
stock options, net....... -- -- 17 -- -- 17
Net income for period
August 3, 1998 through
December 31, 1998........ -- -- -- 551 -- 551
------ ---- ------- ---- ------- -------
Balance, December 31,
1998..................... 25,437 $254 $43,929 $551 $ -- $44,734
====== ==== ======= ==== ======= =======
See accompanying notes to the consolidated financial statements.
25
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCLUDING PREDECESSOR ENTITY
(in thousands)
1998 1997 1996
--------- ------- -------
Operating activities:
Net income....................................... $ 3,950 $ 2,862 $ 438
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization................... 3,372 636 349
Equity in earnings of affiliates................ 1,337 (46) --
Minority interests.............................. 155 103 --
Deferred income taxes........................... 267 -- --
Changes in operating assets and liabilities:
Accounts receivable, net....................... (54,825) (5,459) (412)
Prepaid expenses............................... (3,096) (320) (724)
Deposits and other............................. (8,229) (645) (111)
Accounts payable............................... 26,319 1,539 276
Due to affiliates, net......................... (14,850) 3,638 18,344
Accrued expenses and other liabilities......... 55,656 8,859 909
Income taxes payable........................... 69 -- --
--------- ------- -------
Net cash provided by operating activities......... 10,125 11,167 19,069
--------- ------- -------
Investing activities:
Purchases of fixed assets........................ (4,624) (2,046) (382)
Purchases of intangible assets................... (99,438) (924) (824)
Investments in and advances to affiliates........ 2,563 (2,078) (150)
Distribution from investments in affiliates...... -- 147 30
Additions to notes receivable.................... -- (1,600) (500)
Change in escrows and restricted funds........... (606) -- --
--------- ------- -------
Net cash used in investing activities............. (102,105) (6,501) (1,826)
--------- ------- -------
Financing activities:
Proceeds from long-term debt..................... 67,000 96 662
Principal payments on long-term debt............. (169) 4,112 --
Repayments to affiliate.......................... -- -- (950)
Repayments of loans to management................ -- -- 987
Proceeds from issuances of common stock, net..... 974 -- --
Contributions from CapStar....................... 8,383 -- --
Distributions to minority investors.............. (75) -- --
--------- ------- -------
Net cash provided by financing activities......... 76,113 4,208 699
--------- ------- -------
Net increase (decrease) in cash and cash
equivalents...................................... (15,867) 8,874 17,942
Cash and cash equivalents, beginning of year...... 27,022 18,148 206
--------- ------- -------
Cash and cash equivalents, end of year............ $ 11,155 $27,022 $18,148
========= ======= =======
See accompanying notes to consolidated financial statements.
26
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands, except per share amounts)
1. Organization
MeriStar Hotels & Resorts, Inc. (the "Company") was spun off by CapStar
Hotel Company ("CapStar") on August 3, 1998 (the "Spin-Off") to become the
lessee, manager and operator of various hotel assets, including those which
were previously owned, leased and managed by CapStar and certain of its
affiliates. CapStar distributed to its stockholders, on a share-for-share
basis, all of the outstanding shares of the Company's common stock, par value
$0.01 per share ("Common Stock"). On August 3, 1998, CapStar merged (the
"Merger") with and into American General Hospitality Corporation ("AGH"), a
Maryland corporation operating as a real estate investment trust, to form
MeriStar Hospitality Corporation (the "REIT").
Immediately following the Spin-Off and the Merger, the Company acquired 100%
of the partnership interests in AGH Leasing L.P. ("AGH Leasing"), the third-
party lessee of most of the hotels owned by AGH, and acquired substantially
all of the assets and certain liabilities of American General Hospitality,
Inc. ("AGHI"), the third-party manager of most of the hotels owned by AGH and
certain other hotels. The Company thereby became the lessee, manager and
operator of most of the hotels owned by AGH. The purchase price of $95,000 was
funded with a combination of cash and units of limited partnership interest
("OP Units") in the Company's subsidiary operating partnership. In accordance
with generally accepted accounting principles ("GAAP"), the acquisitions have
been accounted for as purchases and, therefore, the operating results of AGHI
and AGH Leasing are included in the Company's consolidated financial
statements from the date of acquisition.
The Company's financial statements include the historical results of the
Company's predecessor entity, the management and leasing operations of
CapStar, for all periods and include the operating results of AGH Leasing and
AGHI since August 3, 1998. In addition, prior to August 3, 1998, the Company
managed substantially all of the hotels owned by CapStar and received
management fee revenues from such hotels. Since August 3, 1998, the Company
has leased these hotels from the REIT and therefore records no management fees
from such hotels but instead records room, food and beverage and other
operating department revenues and expenses from such leased properties.
Therefore, the Company's results of operations for each of the years in the
three-year period ended December 31, 1998 reflect significantly differing
numbers of managed and leased hotels throughout the periods. The following
table outlines the Company's historical portfolio of managed and leased
hotels:
REIT CapStar Third Party Other
Leased Owned Managed Leased Total
------------- ------------- ------------ ------------ -------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
------ ------ ------ ------ ------ ----- ------ ----- ------ ------
December 31, 1998....... 109 28,058 -- -- 41 6,800 53 7,608 203 42,466
December 31, 1997....... -- -- 47 12,019 27 4,631 40 5,687 114 22,337
December 31, 1996....... -- -- 19 5,166 28 4,619 -- -- 47 9,785
Pursuant to an intercompany agreement, the Company and the REIT provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, the Company has a
right of first refusal to become the lessee of any real property acquired by
the REIT. The Company also provides the REIT with certain services including
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources, acquisition identification and due diligence, and
operational services, for which the Company is compensated in an amount that
the REIT would be charged by an unaffiliated third party for comparable
services.
27
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
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.
Fixed Assets--Fixed assets are recorded at cost and are depreciated using
the straight-line method over lives ranging from five to seven years.
Intangible Assets--Intangible assets consist of the value of goodwill and
lease contracts purchased, franchise costs, and costs incurred to obtain
management contracts. Goodwill represents the excess of cost over the fair
value of the net assets of the acquired businesses. Intangible assets 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 intangible assets are evaluated periodically in
relation to the operating performance and expected future undiscounted cash
flows of the underlying assets. Adjustments are made if the sum of expected
future undiscounted net cash flows is less than book value. The impairment
loss to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. No impairment losses were
recorded during 1998, 1997 or 1996.
Income Taxes--Prior to the Spin-Off, no provision for income taxes was made
since the Company's predecessor entities were partnerships and limited
liability companies, and, therefore, all income, losses, and credits for tax
purposes were passed through to the individual partners. Concurrent with the
Spin-Off, 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.
Foreign Currency Translation--Results of operations for the Company's
Canadian leased and managed 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.
At December 31, 1998, the translation adjustment was $35. Transaction gains
and losses are included in the results of operations as incurred.
Stock-Based Compensation--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 its stock-based plans and therefore no compensation cost has
been recognized for these plans.
28
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
Revenue Recognition--Revenue is earned through the operations and management
of the hotel properties and is recognized when earned.
Participating Lease Agreements--The Company's participating leases have non-
cancelable initial terms ranging from 10 to 15 years, subject to earlier
termination on the occurrence of certain contingencies, as defined. The rent
payable under each participating lease is the greater of base rent or
percentage rent, as defined. Percentage rent applicable to room and food and
beverage revenue varies by lease and is calculated by multiplying fixed
percentages by the total amounts of such revenues over specified threshold
amounts. Both the minimum rent and the revenue thresholds used in computing
percentage rents are subject to annual adjustments based on increases in the
United States Consumer Price Index. Percentage rent applicable to other
revenues is calculated by multiplying fixed percentages by the total amounts
of such revenues.
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".
EITF No. 98-9 affects the recognition of contingent rental expense in interim
periods. This pronouncement requires a lessee to recognize contingent rental
expense in interim periods prior to the achievement of the specified target
that triggers the contingent rental expense, if the achievement of that target
by the end of the fiscal year is considered probable. This new accounting
pronouncement relates only to the Company's recognition of lease expense in
interim periods for financial reporting purposes; it has no effect on the
timing of rent payments under the Company's leases or the Company's annual
lease expense calculations. The Company adopted EITF No. 98-9 effective July
1, 1998.
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.
Reclassifications--Certain 1997 and 1996 amounts have been reclassified to
conform to 1998 presentation.
3. Investments in and Advances to Affiliates
The Company has ownership interests in certain unconsolidated corporate
joint ventures and affiliated companies. The Company's net investment in and
advances to these corporate joint ventures and affiliated companies are
summarized as follows:
December 31,
-------------
1998 1997
------ ------
CapStar Wyandotte Company LLC................................. $1,837 $3,023
HGI Holdings, LLC............................................. -- 1,895
BoyStar Ventures, L.P. ....................................... 1,367 1,175
Ballston Parking Associates................................... 1,629 1,629
Other......................................................... 662 336
------ ------
$5,495 $8,058
====== ======
29
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
Combined summarized financial information of the Company's unconsolidated
corporate joint ventures and affiliated companies is as follows:
December 31,
----------------
1998 1997
------- -------
Balance sheet data:
Current assets............................................. $ 902 $ 1,773
Non-current assets......................................... 18,332 32,766
Current liabilities........................................ 1,082 1,094
Non-current liabilities.................................... 157 7,000
Operating data:
Revenue.................................................... $11,159 $ 1,742
Net loss................................................... (933) (110)
4. Intangible Assets
Intangible assets consist of the following:
December 31,
-----------------
1998 1997
-------- -------
Goodwill.................................................. $109,213 $27,605
Lease contracts........................................... 33,216 6,576
Management contracts...................................... 2,992 867
Other..................................................... 4,699 1,612
-------- -------
150,120 36,660
-------- -------
Less accumulated amortization............................. (3,338) (719)
$146,782 $35,941
======== =======
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
--------------
1998 1997
------- -----
Credit Facility.............................................. $67,000 $ --
Other........................................................ 812 981
------- -----
67,812 981
Less current portion......................................... (27) (392)
------- -----
$67,785 $ 589
======= =====
Credit Facility--On August 3, 1998, the Company entered into a three-year,
$75,000, unsecured revolving credit facility (the "Credit Facility") with the
REIT. The Credit Facility contains certain covenants, including maintenance of
financial ratios, reporting requirements and other customary restrictions.
Interest on the facility is variable, based on the 30-day London Interbank
Offered Rate plus 350 basis points. As of December 31, 1998, the Company had
$67,000 in outstanding borrowings under the Credit Facility, at an interest
rate of 8.56%. The Company has determined that the fair value of this note
payable approximates its carrying value. The Company incurred interest expense
of $1,967 on this facility during 1998.
30
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
Future Maturities--Aggregate future maturities of the above obligations are
as follows: 1999-$27; 2001-$67,785.
6. Income Taxes
Prior to the Spin-Off, the Company's predecessor entity conducted its
operations in partnerships and limited liability companies; these operations,
therefore, were not subject to income taxes. The Company is taxable as a C
Corporation. Accordingly, the Company's 1998 income taxes are based on pretax
income since the Spin-Off. Pretax income for the period August 3, 1998 through
December 31, 1998 was $887.
The Company's effective income tax rate for the period from August 3, 1998
through December 31, 1998 differs from the federal statutory income tax rate
as follows:
Statutory tax rate.................................................... 35.0%
State and local taxes................................................. 4.2
Difference in rates on foreign subsidiaries........................... 2.3
Business meals and entertainment...................................... 5.2
Compensation expense.................................................. (77.8)
Valuation allowance................................................... 69.0
-----
37.9%
=====
The components of income tax expense are as follows:
Current:
Federal............................................................... $--
State................................................................. 27
Foreign............................................................... 42
----
69
----
Deferred:
Federal............................................................... 234
State................................................................. 33
Foreign............................................................... --
----
267
----
$336
====
31
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
The tax effects of the temporary differences and carryforwards that give
rise to the Company's net deferred tax liability at December 31, 1998 are as
follows:
Deferred tax assets:
Allowance for doubtful accounts.................................. $ 236
Accrued vacation................................................. 545
Net operating loss............................................... 613
--------
Total gross deferred tax assets.................................. 1,394
Less valuation allowance......................................... (613)
--------
Net deferred tax assets.......................................... 781
--------
Deferred tax liabilities:
Accrued expenses................................................. (7)
OP Units......................................................... (9,100)
Amortization expense............................................. (580)
Prepaid expenses................................................. (461)
--------
Total gross deferred tax liabilities............................. (10,148)
--------
Net deferred tax liability........................................ $ (9,367)
========
At December 31, 1998, the Company had potential federal income tax benefits
of $613 from a net operating loss carryforward that expires in 2018. For
financial reporting purposes, the Company has established a valuation
allowance of $613 due to the uncertainty associated with realizing this
deferred tax asset.
As part of the Spin-Off, the Company received certain assets that CapStar
had acquired, in part, through the issuance of OP Units. These assets were
acquired by CapStar prior to August 3, 1998. At August 3, 1998 the tax basis
of these assets differed from the financial reporting amounts that the Company
recorded as part of the Spin-Off. The Company has recorded a deferred income
tax liability of $9,100 for the estimated future tax effect of this basis
difference. The amount of the basis difference and corresponding deferred
income tax liability have been estimated based on information available as of
the date of the Spin-Off. The deferred income tax liability may be adjusted
upon the final determination of the basis difference. Any such adjustment,
however, would be recorded as an increase or decrease to the deferred income
tax liability balance, and a corresponding decrease or increase in the capital
CapStar contributed to the Company as part of the Spin-Off.
7. Stockholders' Equity and Minority Interests
Common Stock--In conjunction with the Spin-Off, CapStar distributed to its
stockholders, on a share-for-share basis, all of the 24,948,754 outstanding
shares of the Company's Common Stock.
In connection with the Spin-Off the Company distributed to holders of the
REIT's common stock and the REIT's OP Units, one right for every six shares or
units owned. Each right entitled its holder to purchase a share of Common
Stock at a subscription price of $2.84 per share, during a subscription period
from August 13, 1998 through August 31, 1998. The Rights Offering resulted in
the sale of approximately 480,000 shares of Common Stock with net proceeds to
the Company of $957.
In November 1998, the Company implemented a stock purchase plan that allows
eligible employees to purchase the Company's common stock at a discount to
market value. The Company has reserved 1,500,000 shares of Common Stock for
issuance under this plan. The Company has sold 5,384 shares under this plan in
1998.
OP Units--Substantially all of the Company's assets are held indirectly by
MeriStar H&R Operating Company, L.P. (the "Operating Partnership"), the
Company's subsidiary operating partnership.
32
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
The Operating Partnership's partnership agreement currently has three
classes of OP Units: Class A OP Units, Class B OP Units and Preferred OP
Units. No dividends were paid during 1998 and no dividends are expected to be
paid during 1999 to the Class A OP Unit holders and Class B OP Unit holders.
Preferred OP Unit holders receive a 6.5% cumulative annual preferred return
based on an assumed price per Common Share of $3.34, compounded quarterly to
the extent not paid on a current basis, and are entitled to a liquidation
preference of $3.34 per Preferred 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 Class A OP Units and Class B OP Units in proportion to the
number OP Units owned by each such holder.
Each Class A and Class B 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 Preferred OP
Units may be redeemed by the Operating Partnership at a price of $3.34 per
Preferred 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 Preferred OP Units at a price of $3.34
per Preferred 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.
In conjunction with the Spin-Off and Merger, the Company issued to holders
of CapStar OP Units, 1,083,759 Class A and B OP Units and 392,157 Class C OP
Units.
Immediately following the Spin-Off and the Merger, the Company acquired 100%
of the partnership interests in AGH Leasing and acquired substantially all of
the assets and certain liabilities of AGHI. The purchase price of $95,000 was
funded with a combination of cash and the issuance of 3,414,872 Class B OP
Units.
In October 1998, in conjunction with the purchase of certain assets of South
Seas Properties Company, L.P., the Company issued 916,230 Class A OP Units.
8. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for net income for
the period August 3, 1998 through December 31, 1998:
Basic EPS Computation:
Net income.......................................................... $ 551
Weighted average number of shares of Common Stock outstanding....... 25,335
-------
Basic EPS........................................................... $ .02
=======
Diluted EPS Computation:
Net income.......................................................... $ 551
Minority interest, net of tax....................................... (90)
-------
Adjusted net income................................................. $ 461
-------
Weighted average number of shares of Common Stock outstanding....... 25,335
Common Stock equivalents:
Stock options..................................................... 18
OP Units.......................................................... 1,308
-------
Total weighted average number of diluted shares of Common Stock
outstanding........................................................ 26,661
-------
Diluted EPS......................................................... $ .02
=======
Certain OP Units were not included in the computation of diluted EPS as
their effect was anti-dilutive.
33
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
EPS for 1998 has been calculated using net income amounts for the period
from the Spin-Off on August 3, 1998 through December 31, 1998. EPS is not
presented for periods prior to the Spin-Off because the Company's predecessor
entities were partnerships.
9. Related-Party Transactions
Pursuant to an intercompany agreement, the Company and the REIT provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, the Company has a
right of first refusal to become the lessee of any real property acquired by
the REIT. The Company also provides the REIT 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 the Company is compensated in an amount that
the REIT would be charged by an unaffiliated third party for comparable
services. During the year ended December 31, 1998, the Company provided $781
of such services to the REIT.
10. Stock-Based Compensation
On August 3, 1998, the Company adopted an equity incentive plan that
authorized the Company to issue and award up to 4,000,000 shares of common
stock. Awards under the plan may be granted to directors, officers, or other
key employees.
On August 8, 1998, the Company adopted an equity incentive plan for non-
employee directors that authorized the Company to issue and award options for
up to 125,000 shares of common stock. These options will vest in three annual
installments beginning on the date of grant and on subsequent anniversaries
thereof, provided the eligible director continues to serve as a director of
the Company on each such anniversary. Options granted under the Plan are
exercisable for ten years from the grant date.
In November 1998, the Company implemented a stock purchase plan that allows
eligible employees to purchase the Company's common stock at a discount to
market value. The Company has reserved 1,500,000 shares of Common Stock for
issuance under this plan.
Stock option activity for 1998 is as follows:
Equity Incentive Plan Directors' Plan
----------------------- ----------------------
Number Average Number Average
of Shares Option Price of Shares Option Price
--------- ------------ --------- ------------
Balance, August 3, 1998..... -- -- -- $ --
Granted..................... 2,805,955 $3.37 45,000 $3.28
Exercised................... (2,235) -- -- --
Forfeited................... -- -- -- --
--------- ----- ------ -----
Balance, December 31, 1998.. 2,803,720 $3.37 45,000 $3.28
========= ===== ====== =====
Shares exercisable at
December 31, 1998.......... 1,415,044 $3.43 -- $ --
========= ===== ====== =====
34
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------- --------------------
Weighted Weighted
Average Weighted Average
Range of Number Remaining Average Number Exercise
exercise prices outstanding Contractual Life Exercise Price exercisable Price
--------------- ----------- ---------------- -------------- ----------- --------
$2.00 to $2.36.......... 737,892 6.87 $2.36 602,515 $2.36
$2.38 to $3.28.......... 1,115,753 9.55 3.21 39,317 2.72
$3.44 to $3.93.......... 211,750 7.19 3.74 178,217 3.72
$4.06 to $5.01.......... 783,325 8.91 4.45 594,995 4.46
--------- ---- ----- --------- -----
$2.00 to $5.01.......... 2,848,720 8.50 $3.37 1,415,044 $3.43
========= ==== ===== ========= =====
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:
1998
----------
Risk-free interest rate.......................................... 5.51%
Dividend rate.................................................... --
Volatility factor................................................ 0.50
Weighted average expected life................................... 6.15 years
The Company's pro forma net loss and basic EPS as if the fair value method
had been applied were $(2,324) and $(0.09) for 1998. The effects of applying
SFAS No. 123 for disclosing compensation costs may not be representative of
the effects on reported net income and EPS for future years.
11. Commitments and Contingencies
The Company leases certain hotels under non-cancelable participating leases
with initial terms ranging from 10 to 15 years, expiring through 2013. The
total amount payable on these participating leases was $11,100 and $5,682 at
December 31, 1998 and December 31, 1997, respectively. The Company also leases
corporate office space. Future minimum lease payments required under these
operating leases as of December 31, 1998 were as follows:
1999.............................................................. $ 254,797
2000.............................................................. 261,648
2001.............................................................. 268,353
2002.............................................................. 275,395
2003.............................................................. 282,651
Thereafter........................................................ 2,217,099
----------
$3,559,943
==========
35
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
The Company also leases office equipment under non-cancelable operating
leases. These amounts are insignificant to the financial statements.
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.
12. Segments
The Company is organized into three primary operating divisions. Each
division is managed separately because of its distinctive products and
services offered by the hotel properties within the operating division. These
operating divisions are the Company's three reportable operating segments:
upscale, full-service hotels ("Hotels"); premium limited-service hotels and
inns ("Inns"); and resort properties ("Resorts"). The Company's management
evaluates performance of each segment based on earnings before interest taxes,
depreciation, and amortization ("EBITDA"). The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.
The Company's financial condition and results of operations as of December
31, 1998 and December 31, 1997 and for the years ended December 31, 1998, 1997
and 1996 reflect significantly differing numbers of managed and leased hotels
throughout the periods. Consequently, the Company has determined that it is
not practicable to present the segment information of the management and
leasing operations of CapStar, its predecessor entity, for the years ended
December 31, 1997 and December 31, 1996. Also, prior to the Spin-Off, the
management and leasing operations of CapStar conducted its business primarily
in only one operating segment. Therefore, the segment disclosures presented
below are for the period August 3, 1998 through December 31, 1998.
Total
Hotels Inns Resorts Segments
-------- ------- ------- --------
Revenues.................................... $322,720 $72,267 $73,878 $468,865
Participating Lease Expense................. $101,423 $29,430 $24,187 $155,040
EBITDA...................................... $ 4,710 $ 172 $ (882) $ 4,000
Total Assets................................ $ 48,264 $42,091 $16,276 $106,631
The following is a reconciliation of the segment information to the
Company's consolidated data:
Participating
Lease
Revenues Expense EBITDA Assets
-------- ------------- ------- --------
Total Segments..................... $468,865 $155,040 $ 4,000 $106,631
Other Items........................ 7,526 -- 1,164 140,898
-------- -------- ------- --------
Total August 3, 1998 through
December 31, 1998................. $476,391 $155,040 $ 5,164 $247,529
-------- -------- ------- --------
Total Pre-Spin-Off (January 1, 1998
through August 2, 1998)........... 86,046 31,561 6,004 --
-------- -------- ------- --------
Per Financial Statements........... $562,437 $186,601 $11,168 $247,529
======== ======== ======= ========
The other items in the table above represent non-operating segment activity
and assets. These are primarily unallocated corporate expenses and non-segment
activities, and intangible and other miscellaneous assets.
36
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998, 1997 AND 1996
Revenues for Canadian operations totaled $8,865 for the period August 3,
1998 through December 31, 1998.
13. Acquisitions
Pursuant to the Spin-Off and Merger, the Company acquired 100% of the
partnership interests in AGH Leasing, the third-party lessee of most of the
hotels owned by AGH, and substantially all of the assets and liabilities of
AGHI, the third-party manager of most of the AGH hotels. As a result, the
Company became the lessee and manager of most of the hotels owned by the REIT.
The purchase price of $95,000 was paid with a combination of cash and OP Units
in the Company's subsidiary operating partnerships.
The following unaudited pro forma summary presents information if AGH
Leasing and AGHI had been acquired, and the Spin-Off had occurred, 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............................................... $1,083,348 $938,613
Net income.................................................. $ 3,295 $ 3,097
Diluted EPS................................................. $ 0.13 $ 0.12
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........... $30,130 $41,101 $195,498 $295,708 $1,838 $2,816 $4,794 $14,391
Total operating
expenses............... 28,798 38,462 187,890 299,491 1,390 2,129 3,911 13,434
Net operating income
(loss)................. 1,332 2,639 7,608 (3,783) 448 687 883 957
Net income (loss)....... 758 2,223 3,605 (2,636) 424 650 861 927
Diluted earnings (loss)
per share.............. -- -- $ 0.12 $ (0.10) -- -- -- --
15. Supplemental Cash Flow Information
1998 1997 1996
------- ------- ----
Cash paid for interest and income taxes:
Interest............................................... $ 2,017 $ 56 $138
Income taxes........................................... -- -- --
Non-cash investing and financing activities:
OP Units issued in purchase of intangible assets....... $14,022 $ -- $--
Assets contributed by CapStar............................ $ 2,605 $38,844 $--
Liabilities contributed by CapStar....................... (7,549) (4,219) --
Debt contributed by CapStar.............................. (1,116) -- --
------- ------- ----
Net assets contributed by CapStar........................ $(6,060) $34,625 $--
======= ======= ====
37
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.
38
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
----------- -----------------------
2.1* Acquisition Agreement, dated as of March 15, 1998, among MeriStar
H&R Operating Company, L.P., American General Hospitality
Corporation, American General Hospitality, Inc., AGHL GP, Inc.,
the general partner of AGH Leasing, L.P., and the limited partners
of AGH Leasing, Inc.
2.2** Form of Contribution, Assumption and Indemnity Agreement between
CapStar Hotel Company and MeriStar H&R Operating Company, L.P.
2.3** Agreement and Plan of Merger, dated as of March 15, 1998, among
American General Hospitality Corporation, American General
Hospitality Operating Partnership, L.P., CapStar Hotel Company,
CapStar Management Company, L.P. and CapStar Management Company
II, L.P.
2.4*** Amendment No. 1 to the Agreement and Plan of Merger, dated as of
June 5, 1998, by and among American General Hospitality
Corporation, American General Hospitality Operating Partnership,
L.P., CapStar Hotel Company, CapStar Management Company, L.P. and
CapStar Management Company II, L.P.
2.5* Form of Dealer-Manager Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-laws of the Company
4.1* Specimen Common Stock certificate
4.4* Form of Rights Agreement
10.1* Form of Employment Agreement between the Company and Paul W.
Whetsell
10.2* Form of Employment Agreement between the Company and Steven D.
Jorns
10.3* Form of Employment Agreement between the Company and David E.
McCaslin
10.4* Form of Employment Agreement between the Company and James A.
Calder
10.5* Form of Employment Agreement between the Company and John E.
Plunket
10.6* Form of Equity Incentive Plan of the Company
10.7* Form of Non-Employee Directors' Incentive Plan of the Company
10.8** Form of Intercompany Agreement among MeriStar Hotels & Resorts,
Inc., MeriStar H&R Operating Company, L.P., MeriStar Hospitality
Corporation and MeriStar Hospitality Operating Partnership, L.P.
10.9 Revolving Credit Agreement, dated as of August 3, 1998 between
MeriStar H&R Operating Company, L.P., and MeriStar Hospitality
Operating Partnership, L.P.
10.10**** Form of Employee Stock Purchase Plan
10.11 Amended and Restated Agreement of Limited Partnership, Agreement
of MeriStar H&R Operating Company, L.P., dated as of August 3,
1998
21 Subsidiaries of the Company
23.1 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-
1 (File No. 333-49881), filed with the Securities and Exchange Commission on
August 12, 1998.
** Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's Report
on Form 8-K dated March 17, 1998, No. 1-11903.
*** Incorporated by reference to American General Hospitality Corporation's
Registration Statement on Form S-4 (File No. 333-49611), filed with the
Securities and Exchange Commission on June 22, 1998.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8, filed with the Securities and Exchange Commission on August 18,
1998.
B. Reports on Form 8-K:
A current report on Form 8-K was filed with the Securities and Exchange
Commission on October 16, 1998, as amended, reporting events required to be
reported pursuant to Items 5 and 7 of the current report on Form 8-K.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MeriStar Hotels & Resorts, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MERISTAR HOTELS & RESORTS, INC.
BY: /s/ Paul W. Whetsell_____________
Paul W. Whetsell
Chief Executive Officer and
Chairman of the Board
Dated: March , 1999
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul W. Whetsell and David E. McCaslin, such
person's true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this report filed pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the
same with all exhibits thereto, and the other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and things requisite and necessary to be done,
as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and the foregoing Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Paul W. Whetsell Chief Executive Officer March 22, 1999
______________________________________ and Chairman of the Board
Paul W. Whetsell of Directors (Principal
Executive Officer)
/s/ Steven D. Jorns Vice Chairman of the Board March 22, 1999
______________________________________ of Directors
Steven D. Jorns
/s/ David E. McCaslin President and Director March 22, 1999
______________________________________
David E. McCaslin
/s/ James A. Calder Chief Financial Officer March 22, 1999
______________________________________ (Principal Financial and
James A. Calder Accounting Officer)
/s/ Daniel L. Doctoroff Director March 22, 1999
______________________________________
Daniel L. Doctoroff
40
Signature Title Date
--------- ----- ----
Director March 22, 1999
______________________________________
Kent R. Hance
/s/ S. Kirk Kinsell Director March 22, 1999
______________________________________
S. Kirk Kinsell
/s/ Joseph McCarthy Director March 22, 1999
______________________________________
Joseph McCarthy
Director March 22, 1999
______________________________________
James McCurry
/s/ James R. Worms Director March 22, 1999
______________________________________
James R. Worms
41
March 22, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549-1004
Re: MeriStar Hotels & Resorts, Inc.-Form 10-K for the year ended December
31, 1998
Ladies and Gentlemen:
We are electronically transmitting herewith for filing with the Securities
and Exchange Commission, pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 and Rule 901(d) of Regulation S-T, the Form 10-K of
MeriStar Hotels & Resorts, Inc. for the year ended December 31, 1998.
One copy of the enclosed Form 10-K has also been sent to the New York Stock
Exchange, the only exchange on which the Company's common stock, par value
$.01 per share, is listed.
Sincerely,
/s/ Christopher L. Bennett
-------------------------------------
Christopher L. Bennett
Secretary
42