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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 1-11903
MERISTAR HOSPITALITY CORPORATION
(Exact name of issuer as specified in its charter)
MARYLAND 75-2648842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 WISCONSIN AVENUE, N.W., 20007
WASHINGTON, D.C. (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 295-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
------------------- ------------------------------------------
Common Stock, par value New York Stock Exchange
$.01 per share
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ___.
Based on the average sale price at March 5, 2002, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$753,622,272.
The number of shares of the Registrant's common stock outstanding as of
March 5, 2002 was 44,502,187.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Those portions of the Registrant's definitive proxy statement
relating to Registrant's 2001 Annual Meeting of Stockholders which are
incorporated into Items 10, 11, 12, and 13.
PART I
ITEM 1. BUSINESS
MERISTAR HOSPITALITY CORPORATION
MeriStar Hospitality Corporation is a real estate investment trust and owns
a portfolio of upscale, full-service hotels. Our hotels are diversified
geographically as well as by franchise and brand affiliations. As of December
31, 2001, we owned 112 hotels with 28,653 rooms. Our hotels are located in major
metropolitan areas or rapidly growing secondary markets in the United States and
Canada. A majority of the hotels are operated under nationally recognized brand
names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Radisson(R),
Doubletree(R) and Embassy Suites(R).
We believe the upscale, full-service segment of the lodging industry offers
strong potential operating results and investment opportunites. The real estate
market has recently experienced a significant slowdown in the construction of
upscale, full-service hotels. Also, upscale, full-service hotels have particular
appeal to both business executives and upscale leisure travelers. We believe the
combination of these factors offers good potential ownership opportunities for
us in this sector of the lodging industry.
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, merged
with CapStar Hotel Company. In connection with the merger between CapStar and
American General, we created MeriStar Hotels & Resorts, Inc., a separate
publicly traded company, to be the lessee and manager of nearly all of our
hotels. At December 31, 2001, MeriStar Hotels managed all of our hotels. We
share certain key executive officers and five board members with MeriStar
Hotels. Also, an intercompany agreement aligns our interests with the interests
of MeriStar Hotels, with the objective of benefiting both companies'
shareholders.
Changes to the federal tax laws governing Real Estate Investment Trusts, or
REITs, were enacted in 1999 and became effective on January 1, 2001. Under those
changes, we are permitted to create subsidiaries that lease the properties we
currently own, and these subsidiaries are taxable in a manner similar to
subchapter C corporations. Because of these changes in the tax laws, we have
formed a number of wholly-owned taxable subsidiaries to which subsidiaries of
MeriStar Hotels assigned their participating leases. In connection with the
assignment, the taxable subsidiaries executed new management agreements with a
subsidiary of MeriStar Hotels to manage our hotels. Under these management
agreements, the taxable subsidiaries pay MeriStar Hotels a management fee. The
taxable subsidiaries in turn make rental payments to us under the participating
leases. The management agreements were structured to substantially mirror the
economics and terms of the former leases.
BUSINESS
Given the challenging operating environment that has resulted from a
slowing economy coupled with the disruptions caused by the events of September
11, 2001, we intend to focus on maximizing the profitability of our existing
hotels by actively overseeing their operation by MeriStar Hotels. In addition,
we have taken steps to strengthen our balance sheet and to maintain financial
flexibility and liquidity. We believe these steps will position us to take
advantage of opportunities that may arise in the future.
The Intercompany Agreement
We are a party to an intercompany agreement with MeriStar Hotels. So long
as the agreement remains in effect, MeriStar Hotels is prohibited from making
real property investments a REIT could make unless:
. We are first given the opportunity, but elect not to pursue the
investment;
. The investment is on land already owned or leased by MeriStar
Hotels or subject to a lease or purchase option in favor of
MeriStar Hotels;
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. MeriStar Hotels will operate the property under a trade name owned
by MeriStar Hotels; or
. The investment is a minority investment made as part of a lease or
management agreement arrangement. We have a right of first refusal
with respect to any real property investment to be sold by MeriStar
Hotels.
The intercompany agreement will generally grant MeriStar Hotels the right
of first refusal with respect to any management opportunity at any of our
properties we do not elect to have managed by a hotel brand owner. We will make
such an opportunity available to MeriStar Hotels only if we determine that:
. Consistent with our status as a REIT, we must enter into a
management agreement with an unaffiliated third party with respect
to the property;
. MeriStar Hotels is qualified to be the manager of that property;
and
. The property is not to be operated by the owner of a hospitality
trade name under that trade name.
Because of the provisions of the intercompany agreement, we are restricted
in the nature of our business and the opportunities we may pursue.
Provision of Services
We may provide each other with services as we may reasonably request from
time to time. These may include administrative, renovation supervision,
corporate, accounting, financial, risk management, legal, tax, information
technology, human resources, acquisition identification and due diligence, and
operational services. We believe we compensate each other in an amount that
would be charged by an unaffillated third party for comparable services. The
arrangements relating to the provision of these services were not subject to
arm's-length negotiation.
Equity Offerings
If we or MeriStar Hotels desire to engage in a securities issuance, the
issuing party will give notice to the other party as promptly as practicable of
its desire to engage in a securities issuance. The notice will include the
proposed material terms of such issuance, to the extent determined by the
issuing party, including whether the issuance is proposed to be pursuant to
public or private offering, the amount of securities proposed to be issued and
the manner of determining the offering price, and other terms of the securities.
The non-issuing party will cooperate with the issuing party 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 the
issuance and, in connection with that issuance, providing the issuing party with
such information as may be required to be included in the registration statement
or other document.
Term
The intercompany agreement will terminate upon the earlier of August 3,
2008, or the date of a change in ownership or control of MeriStar Hotels.
Loan to MeriStar Hotels
We are obligated to lend MeriStar Hotels up to $50 million for general
corporate purposes under a revolving credit agreement. The interest rate on the
revolving credit facility equals 650 basis points over the 30-day London
Interbank Offered Rate and the maturity date of the facility is the 91st day
following the maturity of MeriStar Hotels' senior credit facility, as amended,
restated, refinanced or renewed. As of December 31 2001, there was $36.0 million
outstanding under this revolving credit agreement. We
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amended the revolving credit agreement with MeriStar Hotels to include covenants
similar to those in its senior credit facility.
MeriStar Hotels also issued us a term note effective January 1, 2002. This
$13.1 million term note refinances outstanding accounts payable MeriStar Hotels
owed to us. The term note bears interest at 650 basis points over the 30-day
LIBOR. The maturity date is the same as that of the revolving credit agreement.
Recent Events
Amendment to our Senior Secured Credit Agreement
In December 2001, we amended our senior secured credit agreement to allow
us to extend the maturity of the revolving credit facility from July 2002 to
July 2003 and provide financial covenant relief through the maturity of the
facility, among other revisions.
On February 25, 2002, we amended our revolving credit agreement. The
amendment allows us to reduce the revolving commitments to below $300 million.
On March 1, 2002, we reduced the borrowing capacity on our revolving credit
agreement from $310 million to $150 million.
Senior Note Offerings
On February 7, 2002, our operating partnership and MeriStar Hospitality
Finance Corp. III, a wholly owed subsidiary of our operating partnership, issued
$200 million aggregate principal amount of 9.125% senior notes due 2011 to
"Qualified Institutional Buyers" as defined in Rule 144A under the Securities
Act of 1933.
On December 19, 2001, our operating partnership and MeriStar Hospitality
Finance Corp. II, a wholly owned subsidiary of our operating partnership, issued
$250 million aggregate principal amount of 10.50% senior notes due 2009 to
"Qualified Institutional Buyers" as defined in Rule 144A under the Securities
Act of 1933.
These notes are unsecured obligations of our operating partnership and the
wholly owned subsidiary. We and a number of our direct and indirect subsidiaries
guarantee payments of principal and interest on the notes on a senior unsecured
basis. We used the net proceeds of approximately $423.0 million from these
offerings to repay outstanding term loans and revolving indebtedness under our
senior secured credit agreement.
REIT Modernization Act
Until January 1, 2001, in order to maintain our tax status as a REIT, we
were not permitted to engage in the operations of our hotel properties. To
comply with this requirement, we leased all of our real property to third-party
lessee/managers - MeriStar Hotels and Prime Hospitality. On January 1, 2001,
changes to the U.S. federal tax laws governing REITs, commonly known as the
"REIT Modernization Act" became effective. As a result, we are now permitted to
create taxable subsidiaries, which are subject to taxation similar to a
subchapter C-Corporation, and are permitted to lease our real property.
Although a taxable subsidiary may lease real property, it is restricted
from being involved in certain activities prohibited by the REIT Modernization
Act. First, a taxable subsidiary is not permitted to manage the properties
itself; it must enter into an "arm's length" management agreement with an
independent third-party manager that is actively involved in the trade or
business of hotel management and manages properties on behalf of other owners.
Second, the taxable subsidiary is not permitted to lease a property that
contains gambling operations. Third, the taxable subsidiary is restricted from
owning a brand or franchise.
We believe establishing taxable subsidiaries to lease our properties
provides a more efficient alignment of and ability to capture the economic
interests of property ownership. In 2000, we established a subcommittee of
independent members of our Board of Directors to negotiate the transfer of our
existing leases with subsidiaries of MeriStar Hotels to our taxable
subsidiaries. Accordingly, effective January 1, 2001, our taxable subsidiaries
executed agreements with subsidiaries of MeriStar Hotels. These
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agreements assigned our existing leases to our taxable subsidiaries. In
connection with the assignment, the taxable subsidiaries executed new management
agreements with a subsidiary of MeriStar Hotels for each property they
previously leased. The management agreements were structured to substantially
mirror the economics of the former lease agreements.
The Management Agreements
MeriStar Hotels manages all 112 of our hotels under management agreements with
our taxable subsidiaries.
Management Fees and Performance Standards
Each taxable subsidiary pays MeriStar Hotels a management fee for each
hotel equal to a specified percentage of aggregate hotel operating revenues,
increased or reduced, as the case may be, by 20% of the positive or negative
difference between:
. The actual excess of total operating revenues over total operating
expenses; and
. A projected excess of total operating revenues over total operating
expenses.
The total management fee for a hotel in any fiscal year will not be less
than 2.5% or greater than 4.0% of aggregate hotel operating revenues.
Term and Termination
The management agreements with MeriStar Hotels generally have initial terms
of 10 years with three renewal periods of five years each, except for four
management agreements which have initial terms of one year which renew annually
thereafter. A renewal will not go into effect if a change in the federal tax
laws permits us or one of our subsidiaries to operate the hotel directly without
adversely affecting our ability to qualify as a REIT or if MeriStar Hotels
elects not to renew the agreement. We may elect not to renew the management
agreements only as provided below.
Our taxable subsidiaries have the right to terminate a management agreement
for a hotel upon the sale of the hotel to a third party or if the hotel is not
restored after a significant casualty loss. Upon that termination, the relevant
taxable subsidiary will be required to pay MeriStar Hotels the fair market value
of the management agreement. That fair market value will be equal to the present
value of the remaining payments (discounted using a 10% rate) of the existing
term under the agreement, based on the operating results for the 12 months
preceding the termination. Our taxable subsidiaries will be able to credit
against any termination payments, the present value of projected fees
(discounted using a 10% rate) under any management agreements or leases entered
into between MeriStar Hotels and us (or our subsidiaries) after August 3, 1998.
If a hotel's gross operating profit is less than 85% of the amount
projected in the hotel's budget in any fiscal year and gross operating profit
from that hotel is less than 90% of the projected amount in the next fiscal
year, our taxable subsidiaries will have the right to terminate the management
agreement for the hotel, unless:
. We did not materially comply with the capital expenditures
contemplated by the budget for either or both of the applicable
fiscal years; or
. MeriStar Hotels cures the shortfall by agreeing to reduce its
management fee for the next fiscal year by the amount of the
shortfall between the actual operating profit for the second fiscal
year and 90% of the projected gross operating profit for that year.
MeriStar Hotels can only use the cure right once during the term of each
management agreement.
Assignment
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MeriStar Hotels does not have the right to assign a management
agreement without the prior written consent of the relevant taxable subsidiary.
A change in control of MeriStar Hotels will require the consent of the relevant
taxable subsidiary, and that subsidiary may grant or withhold its consent in its
sole discretion.
Acquisition Strategy
We focus our attention on investments in hotels located in markets with
economic, demographic and supply dynamics favorable to hotel owners. Through an
extensive due diligence process, we select those acquisition targets where we
believe selective capital improvements and well selected third-party management
will increase the hotel's ability to attract key demand segments, enhance hotel
operations and increase long-term value. In order to evaluate the relative
merits of each investment opportunity, our senior management and MeriStar Hotels
create detailed plans covering all areas of renovation and operation. These
plans serve as the basis for our acquisition decisions and guide subsequent
renovation and operating plans.
Until January 1, 2001, in order to maintain our qualification as a REIT,
we were required to make annual distributions to our stockholders of at least
95% of our real estate investment trust taxable income, determined without
regard to the deduction for dividends paid and by excluding net capital gains.
After January 1, 2001, pursuant to the REIT Modernization Act, the percentage of
required annual distributions was reduced to 90%. As a result of this annual
distribution requirement, we rely heavily on our ability to raise new capital
through debt and equity offerings in order to complete acquisitions. That
ability is dependent on the then-current status of the capital markets.
Competition
We compete primarily in the upper upscale sector of the full-service
segment of the lodging industry. Each geographic market where we own hotels has
other full- and limited-service hotels that compete with our hotels. Competition
in the U.S. lodging industry is based on a number of factors, most notably
convenience of location, brand affiliation, price, range of services and guest
amenities offered, quality of customer service and overall product.
Employees
As of December 31, 2001, we employed approximately 30 persons, all of whom
work at our corporate headquarters.
Franchises
We employ a flexible branding strategy based on each particular hotel's
market environment and other unique characteristics. Accordingly, we use various
national brand names pursuant to licensing arrangements with national
franchisors. We have included a listing of all of our properties, along with the
affiliated brand names, under Item 2 of this Form 10-K.
Governmental Regulation
Americans with Disabilities Act - Under the Americans with Disabilities
Act, all public accommodations are required to meet certain requirements related
to access and use by disabled persons. These requirements became effective in
1992. Although significant amounts have been and continue to be invested in ADA
required upgrades to our hotels, a determination that we are not in compliance
with the ADA could result in a judicial order requiring compliance, imposition
of fines or an award of damages to private litigants. We are likely to incur
additional costs of complying with the ADA; however, such costs are not expected
to have a material adverse effect on our results of operations or financial
condition.
Environmental Laws - Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or
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remediation of hazardous or toxic substances on, under or in property. Laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. In addition, the
presence of contamination from hazardous or toxic substances, or the failure to
properly remediate contaminated property, may adversely affect the owner's
ability to sell or rent real property or to borrow funds using real property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
these substances at the disposal or treatment facility, whether or not the
facility is or ever was owned or operated by those persons.
Federal and state laws also regulate the operation and removal of
underground storage tanks. In connection with the ownership and operation of the
hotels, we could be held liable for the costs of remedial action with respect to
the regulated substances and storage tanks and claims related thereto.
Activities have been undertaken to close or remove storage tanks located on the
property of several of the hotels.
All of our hotels have undergone Phase I environmental site assessments,
which generally provide a nonintrusive physical inspection and database search,
but not soil or groundwater analyses, by a qualified independent environmental
engineer. The purpose of a Phase I is to identify potential sources of
contamination for which the hotels may be responsible and to assess the status
of environmental regulatory compliance. The Phase I assessments have not
revealed any environmental liability or compliance concerns that we believe
would have a material adverse effect on our results of operations or financial
condition, nor are we aware of any material environmental liability or concerns.
Nevertheless, it is possible that these environmental site assessments did not
reveal all environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which we are currently
unaware.
In addition, our hotels have been inspected to determine the presence of
asbestos. Federal, state and local environmental laws, ordinances and
regulations also require abatement or removal of asbestos-containing materials
and govern emissions of and exposure to asbestos fibers in the air.
Asbestos-containing materials are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
hotels. Operations and maintenance programs for maintaining asbestos-containing
materials have been or are in the process of being designed and implemented, or
the asbestos-containing materials have been scheduled to be or have been abated,
at these hotels. Any liability resulting from non-compliance or other claims
relating to environmental matters are not expected to have a material adverse
effect on our results of operations or financial condition.
The Operating Partnership
The following summary information is qualified in its entirety by the
provisions of the MeriStar Hospitality Operating Partnership, L.P. limited
partnership agreement. We have filed a copy of that agreement as an exhibit to
this Form 10-K.
MeriStar Hospitality Operating Partnership, L.P., our subsidiary operating
partnership, holds, both directly and indirectly, substantially all of our
assets. We are the sole general partner of our operating partnership; we and
approximately 104 other persons and entities are limited partners of the
operating partnership. The partnership agreement of our operating partnership
gives the general partner full control over the business and affairs of the
operating partnership. The agreement also gives the general partner 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. These issuances may have such
designations, preferences and participating or other special rights and powers
(including rights and powers senior to those of the existing partners) as the
general partner may determine.
Our operating partnership's partnership agreement provides for five classes
of partnership interests: Common OP Units, Class B OP Units, Class C OP Units,
Class D OP Units and Profits-Only OP Units. As of March 5, 2002, the
partners of the operating partnership own the following aggregate numbers of OP
Units:
. We and our wholly-owned subsidiaries own a number of Common OP Units
equal to the number of issued and outstanding shares of our common
stock, par value $0.01;
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. Independent third parties own 4,115,590 OP Units (consisting of
2,759,210 Common OP Units, 964,223 Class C OP Units and 392,157 Class
D OP Units).
. Certain of our executive officers and executive officers of MeriStar
Hotels, Inc. own 737,500 Profits-Only OP Units and 5,758 Common OP
units.
Holders of Common OP Units and Class B OP Units receive distributions per
OP Unit equivalent to the dividend paid on each of our common shares. Holders of
Class C OP Units receive a non-cumulative, quarterly distribution equal to
$0.5575 per Class C OP Unit so long as the Common OP Units and Class B OP Units
receive a distribution for such quarter and the dividend rate on our common
stock has not exceeded $0.5575. Class C OP Units automatically convert into
Common OP Units once that dividend rate is exceeded. Holders of Class D OP Units
receive a 6.5% cumulative annual preferred return based on an assumed price per
common share of $22.16; the return is compounded quarterly to the extent not
paid on a current basis, and holders are entitled to a liquidation preference of
$22.16 per Class D OP Unit. All net income and capital received by the operating
partnership (after payment of the annual preferred return and, if applicable,
the liquidation preference) will be shared by the holders of the Common OP Units
in proportion to the number of Common OP Units in the relevant operating
partnership owned by each such holder.
Each Common OP Unit, Class B OP Unit, Class C OP unit and Class D OP Unit
held by third parties is redeemable by the holder for one share of our common
stock or, at our option, for cash in an amount equal to the market value of a
share of common stock. In addition, we have the option to redeem the Class D OP
Units at any time after April 1, 2000 at a price of $22.16 per share for cash
or, at our option, for shares of common stock having a value equal to the
redemption price. The holders have the option to redeem the Class D OP Units at
any time after April 1, 2004 for cash or, at the holders' option, for shares of
common stock having a value equal to $22.16.
Profits-only OP Units are issued pursuant to our Profits-Only Operating
Partnership Units Plan. We have filed this plan as an exhibit to this Form 10-K.
Under that plan, holders of Profits-Only OP Units receive quarterly
distributions equivalent to the dividend paid on our common stock.
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RISK FACTORS
Financing Risks
Our significant amount of debt could limit our operational flexibility or
otherwise adversely affect our financial condition.
We are subject to the risks normally associated with debt financing, including
the risks that:
. Our cash flow from operations may be insufficient to make required
payments of principal and interest;
. We are unable to be able to refinance existing indebtedness, including
secured indebtedness; and
. The terms of any refinancing may not be as favorable as the terms of
existing indebtedness.
We may be required to refinance our indebtedness, and the failure to refinance
our indebtedness may have an adverse effect on us.
As of February 15, 2002, we had $15.3 million of debt maturing in 2002,
$75.6 million of debt maturing in 2003 and $171.2 million of debt maturing in
2004. If we do not have sufficient funds to repay our indebtedness at maturity,
we may have to refinance the indebtedness through additional debt financing.
This additional financing might include private or public offerings of debt
securities and additional non-recourse or other collateralized indebtedness. If
we are unable to refinance our indebtedness on acceptable terms, we might be
forced to dispose of hotels or other assets on disadvantageous terms. This could
potentially result in losses and adverse effects on cash flow from operating
activities. If we are unable to make required payments of principal and interest
on indebtedness secured by our hotels, these properties could be foreclosed upon
by the lender with a consequent loss of income and asset value.
Our senior secured credit facility and other debt instruments have restrictive
covenants that could affect our financial condition.
As of February 15, 2002, we had approximately $67.0 million outstanding
under our senior secured credit agreement. Our ability to borrow under the
credit agreement is subject to financial covenants, including leverage and
interest rate coverage ratios and minimum net worth requirements. Our credit
agreement limits our ability to effect mergers, asset sales and change of
control events, and limits dividends to the lesser of 90% of funds from
operations and 100% of funds from operations less a capital reserve equal to 4%
of gross room revenues. The credit agreement also contains a cross-default
provision which would be triggered by a default or acceleration of $20 million
or more of indebtedness secured by our assets or $5 million or more of any other
indebtedness. The recent amendment to our credit facility limits dividends paid
in each of the first three quarters of 2002 to the lesser of (1) $0.01 per share
of common stock of MeriStar Hospitality Corporation or (2) $750,000.
As of February 15, 2002, we had outstanding the following borrowings:
. $300 million of senior unsecured notes due 2008 bearing interest at
9%;
. $400 million of senior unsecured notes due 2011 bearing interest at
9.125%;
. $250 million of senior unsecured notes due 2009 bearing interest at
10.50%;
. $205 million of senior subordinated unsecured notes due 2007 bearing
interest at a weighted-average annual rate of 8.71%; and
. $154.3 million of outstanding convertible notes due 2004 bearing
interest at 4.75%.
Some of our indirect subsidiaries have guaranteed the issuers' payment
obligations under the senior unsecured notes on a senior unsecured basis. The
issuers and the subsidiary guarantors have guaranteed our payment obligations
under the senior subordinated notes on an unsecured, senior subordinated basis.
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The indentures relating to all of the notes contain limitations on our ability
to effect mergers and change of control events, as well as other limitations,
including limitations on:
. Incurring additional indebtedness and issuing capital stock;
. Declaring and paying dividends;
. Selling our assets;
. Conducting transactions with our affiliates; and
. Incurring liens.
Debt instruments we issue in future offerings will likely contain similar
restrictive covenants.
We may be able to incur substantially more debt, which would increase the risks
associated with our substantial leverage.
Although the terms of our debt instruments restrict our ability to incur
additional indebtedness, our organizational documents do not limit the amount of
indebtedness we may incur. If we add new debt to our current debt, the related
risks we now face could intensify and increase the risk of default on our
indebtedness.
Rising interest rates could have an adverse effect on our cash flow and interest
expense.
Some of our borrowings under our credit facility bear interest at a
variable rate. In addition, in the future we may incur indebtedness bearing
interest at a variable rate, or we may be required to retain our existing
indebtedness at higher interest rates. Accordingly, increases in interest rates
could increase our interest expense and adversely affect our cash flow, reducing
the amounts available to make payments on our other indebtedness.
Operating Risks
The recent economic slowdown and the September 11, 2001 terrorist attacks have
adversely affected our REVPAR performance and, if it worsens or continues, these
effects could be material.
We have experienced declines in revenue per available room, or RevPAR, as
follows:
. 16.1% decline during the third quarter of 2001, as compared to the
comparable period of 2000
. 24.1% decline during the fourth quarter of 2001, as compared to the
comparable period of 2000; and
. 10.4% decline during full year 2001, as compared to full year 2000.
These declines are due to the economic slowdown that began in 2001, as well as
the terrorist attacks of September 11, 2001. A sharper-than-anticipated decline
in business and leisure travel was the primary cause of the declines, which were
principally reflected in decreased occupancies. We expect that RevPAR in 2002
will decline approximately 2.5% compared to 2001. If the current economic
slowdown worsens significantly or continues for a protracted period of time, the
declines in occupancy could also lead to further declines in average daily room
rates and could have a material adverse effect on our EBITDA, funds from
operations and earnings.
The economic slowdown and the resulting declines in RevPAR began in March
2001. Those trends are currently continuing. The decline in occupancy during the
second, third and fourth quarters of 2001 has led to declines in room rates as
hotels compete more aggressively for guests.
If the hotel industry is negatively affected by one or more particular risks,
our operating results could suffer.
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Until January 1, 2001, we leased all but eight of our hotels to MeriStar
Hotels. Each of those leases was a 12-year participating lease under which
MeriStar Hotels was required to pay us a fixed base rent plus participating rent
based on a percentage of revenues at the hotel. As a result of changes to the
federal tax laws governing REITs, which became effective on January 1, 2001,
MeriStar Hotels assigned those leases to our taxable REIT subsidiaries and those
subsidiaries have entered into management agreements with MeriStar Hotels to
manage our hotels. As a result of this new lease structure, we report operating
revenues and expenses from the hotels subject to this new lease structure.
Therefore, we are subject to the risk of fluctuating hotel operating margins at
those hotels. Hotel operating expenses include but are not limited to wage and
benefit costs, supplies, repair and maintenance expenses, utilities, insurance
and other operating expenses. These operating expenses are more difficult to
predict and control than percentage lease revenue, resulting in increased
unpredictability in our operating margins.
Various factors could adversely affect our hotel revenues, which are
subject to all of the operating risks inherent in the lodging industry. These
risks include the following:
. changes in general and local economic conditions;
. cyclical overbuilding in the lodging industry;
. varying levels of demand for rooms and related services;
. competition from other hotels, motels and recreational
properties, some of which may be owned or operated by companies
having greater marketing and financial resources than we do;
. dependence on business and commercial travelers and tourism,
which may fluctuate and be seasonal;
. decreases in air travel;
. fluctuations in operating costs;
. the recurring costs of necessary renovations, refurbishment and
improvements of hotel properties;
. changes in governmental regulations that influence or determine
wages, prices and construction and maintenance costs; and
. changes in interest rates and the availability of credit.
In addition, demographic, geographic or other changes in one or more of the
markets of our hotels could impact the convenience or desirability of the sites
of some hotels, which would in turn affect their operations. Also, due to the
level of fixed costs required to operate full-service hotels, we generally
cannot reduce significant expenditures necessary for the operation of hotels
when circumstances cause a reduction in revenue.
Acts of terrorism, the threat of terrorism and the ongoing war against terrorism
have impacted and will continue to impact our industry and our results of
operations.
The terrorist attacks of September 11, 2001 have had a negative impact on
our hotel operations in the third and fourth quarters causing lower than
expected performance in an already slowing economy. The events of September 11
have caused a significant decrease in our hotels' occupancy and average daily
rate due to disruptions in business and leisure travel patterns, and concerns
about travel safety. Major metropolitan area and airport hotels have been
adversely affected by concerns about air travel safety and a significant overall
decrease in the amount of air travel.
Prior to the September 11 terrorist attacks, RevPAR at our hotels for the
third quarter was down 8.9% from the RevPAR for the same period in 2000 and
occupancy was down 4.5%. For the remainder of September following the terrorist
attacks, RevPAR was down 41.7% from the corresponding period in 2000 and
occupancy was down 34.3%. During October, November and December 2001, RevPAR was
down 25.6%, 24.1%, and 21.7% respectively, and occupancy was down 17.5%, 15.8%
and 13.2%, respectively, from the same periods in 2000.
In addition, the September 11, 2001 terrorist attacks have had a dramatic
effect on the insurance and reinsurance industries. Many countries are being
subjected to losses or cancellations of insurance policies,
11
or renewals of existing coverages but with extreme price increases. At our
insurance policy renewals in mid-2002, we may be subject to restrictions as
compared to our current coverage types or levels; price increases; or a
combination of both restrictions and price increases.
The September 11 terrorist attacks were unprecedented in scope, and in
their immediate, dramatic impact on travel patterns. We have not previously
experienced such events, and it is currently not possible to accurately predict
if and when travel patterns will be restored to pre-September 11 levels. While
we have had improvements in our operating levels from the period immediately
following the attacks, we believe the uncertainty associated with subsequent
incidents, threats and the possibility of future attacks will continue to hamper
business and leisure travel patterns for the next several quarters.
We have significant operational and financing relationships with MeriStar
Hotels, and MeriStar Hotels' operating or financial difficulties could
adversely affect our hotels' operations or our financial position.
MeriStar Hotels manages all 112 of our hotels. As a result, we depend
heavily on MeriStar Hotels' ability to provide efficient, effective management
services to our hotels. Although we monitor the peformance of our properties
on an on-going basis, MeriStar Hotels is responsible for the day-to-day
management of the properties. In addition to this operating relationship with
MeriStar Hotels, we have a revolving credit agreement that allows MeriStar
Hotels to borrow from us. That revolving credit agreement matures 91 days
following the maturity of MeriStar Hotels' senior credit facility. The
maturity date of MeriStar Hotels' senior credit facility is February 28, 2003.
MeriStar Hotels has borrowed $36 million as of December 31, 2001 under their
revolving credit agreement with us. MeriStar Hotels has incurred significant
net losses of $(18.9) million and $(9.4) million for the years ended December
31, 2001 and 2000, respectively. If MeriStar Hotels were unable to continue in
business as a hotel operator, we would have to find a new manager for our
hotels. This transition could significantly disrupt the operations of our
hotels, and lead to lower operating results from our properties. In addition,
if MeriStar Hotels was unable to repay its borrowings from us, we would
experience a loss from the write-off of this asset.
The lodging business is seasonal.
Generally, hotel revenues are greater in the second and third calendar
quarters than in the first and fourth calendar quarters. This may not be true,
however, for hotels in major tourist destinations. Revenues for hotels in
tourist areas generally are substantially greater during tourist season than
other times of the year. Because of the September 11 events, our operating
results for the 2001 third and fourth quarters were lower than expected.
Seasonal variations in revenue at our hotels will cause quarterly fluctuations
in our revenues. Events beyond our control, such as extreme weather conditions,
economic factors and other considerations affecting travel, may also adversely
affect our earnings.
We may be adversely affected by the limitations in our franchise and licensing
agreements.
As of December 31, 2001, approximately 88% of our hotels were operated
pursuant to existing franchise or license agreements with nationally recognized
hotel brands. The franchise agreements generally contain specific standards for,
and restrictions and limitations on, the operation and maintenance of a hotel in
order to maintain uniformity within the franchisor system. Those limitations may
conflict with our philosophy, shared with MeriStar Hotels, of creating specific
business plans tailored to each hotel and to each market. Standards are often
subject to change over time, in some cases at the discretion of the franchisor,
and may restrict a franchisee's ability to make improvements or modifications to
a hotel without the consent of the franchisor. In addition, compliance with
standards could require a franchisee to incur significant expenses or capital
expenditures. Action or inaction on our part or by our third-party operator
could result in a breach of standards or other terms and conditions of the
franchise agreements, and could result in the loss or cancellation of a
franchise license. Loss of franchise licenses without replacement would likely
have an adverse effect on our hotel revenues.
In connection with terminating or changing the franchise affiliation of a
currently-owned hotel or a subsequently acquired hotel, we may be required to
incur significant expenses or capital expenditures. Moreover, the loss of a
franchise license could have a material adverse effect upon the operations or
the
12
underlying value of the hotel covered by the franchise due to the loss of
associated name recognition marketing support and centralized reservation
systems provided by the franchisor. The franchise agreements covering the
hotels expire or terminate, without specified renewal rights, at various times
and have differing remaining terms. As a condition to renewal, the franchise
agreements frequently comtemplate a renewal application process, which may
require substantial capital improvements to be made to the hotel. Unexpected
capital expenditures could adversely affect our results of operations and our
ability to make payments on our indebtedness.
The lodging industry is highly competitive.
We have no single competitor or small number of competitors that are
considered to be dominant in the industry. We operate in areas that contain
numerous competitors, some of which may have substantially greater resources
than us. Competition in the lodging industry is based generally on location,
availability, room rates or accommodations price, range and quality of services
and guest amenities offered. New or existing competitors could significantly
lower rates, offer greater conveniences, services or amenities; or significantly
expand, improve or introduce new facilities in markets in which we compete. All
of these factors could adversely affect our operations and the number of
suitable business opportunities.
Costs of compliance with environmental laws could adversely affect our operating
results.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in property. Laws often impose liability whether or not the owner
or operator knew of, or was responsible for, the presence of hazardous or toxic
substances. In addition, the presence of contamination from hazardous or toxic
substances, or the failure to properly remediate contaminated property, may
adversely affect the owner's ability to sell or rent real property or to borrow
funds using real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of these substances at the disposal or treatment
facility, whether or not the facility is or ever was owned or operated by those
persons.
Federal and state laws also regulate the operation and removal of
underground storage tanks. In connection with the ownership and operation of the
hotels, we could be held liable for the costs of remedial action with respect to
the regulated substances and storage tanks and claims related thereto.
Activities have been undertaken to close or remove storage tanks located on the
property of several of the hotels.
All of our hotels have undergone Phase I environmental site assessments,
which generally provide a nonintrusive physical inspection and database search,
but not soil or groundwater analyses, by a qualified independent environmental
engineer. The purpose of a Phase I is to identify potential sources of
contamination for which the hotels may be responsible and to assess the status
of environmental regulatory compliance. The Phase I assessments have not
revealed any environmental liability or compliance concerns that we believe
would have a material adverse effect on our results of operations or financial
condition, nor are we aware of any material environmental liability or concerns.
Nevertheless, it is possible that these environmental site assessments did not
reveal all environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which we are currently
unaware.
In addition, our hotels have been inspected to determine the presence of
asbestos. Federal, state and local environmental laws, ordinances and
regulations also require abatement or removal of asbestos-containing materials
and govern emissions of and exposure to asbestos fibers in the air.
Asbestos-containing materials are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
hotels. Operations and maintenance programs for maintaining asbestos-containing
materials have been or are in the process of being designed and implemented, or
the asbestos-containing materials have been scheduled to be or have been abated,
at these hotels. Any liability resulting from non-compliance or other claims
relating to environmental matters could have a material adverse effect on our
results of operations or financial condition.
13
Aspects of our operations are subject to government regulation, and changes in
that regulation may have significant effects on our business.
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. MeriStar Hotels
believes our hotels are substantially in compliance with these requirements or,
in the case of liquor licenses, that they have or will promptly obtain the
appropriate licenses. Compliance with, or changes in, these laws could reduce
the revenue and profitability of our hotels and could otherwise adversely affect
our revenues, results of operations and financial condition.
Under the Americans with Disabilities Act, or ADA, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA required
upgrades to our hotels, a determination that our hotels are not in compliance
with the ADA could result in a judicial order requiring compliance, imposition
of fines or an award of damages to private litigants.
We invest in a single industry.
Our current strategy is to acquire interests only in hospitality and
lodging. As a result, we are subject to the risks inherent in investing in a
single industry. The effects on cash available for distribution resulting from a
downturn in the hotel industry may be more pronounced than if we had diversified
our investments.
We have a high concentration of hotels in the upscale, full-service segment,
which may increase our susceptibility to an economic downturn.
As a percentage of total rooms, we currently have 85% of our hotels in the
upper-upscale, full-service segment. This hotel segment generally demands higher
room rates. In an economic downturn, hotels in this segment may be more
susceptible to a decrease in revenues, as compared to hotels in other segments
that have lower room rates. This characteristic may result from hotels in this
segment generally targeting business and high-end leisure travelers. In periods
of economic difficulties, business and leisure travelers may seek to reduce
travel costs by limiting trips or seeking to reduce costs on their trips. This
could have a material adverse effect on our revenues and results of operations.
Corporate Structure Risks
We have overlapping officers and directors with MeriStar Hotels.
We share five of the ten members of our board of directors and several
senior executives with MeriStar Hotels. Our relationship with MeriStar Hotels is
governed by an intercompany agreement. That agreement restricts each party from
taking advantage of business opportunities without first presenting those
opportunities to the other party. We may have conflicting views with MeriStar
Hotels on operation and management of our hotels, and with respect to lease
arrangements, acquisitions and dispositions. Inherent potential conflicts of
interest will be present in all of the numerous transactions among MeriStar
Hotels and us.
We have restrictions on our business and on our future opportunities that could
affect our business.
We are a party to an intercompany agreement with MeriStar Hotels. So long
as the agreement remains in effect, MeriStar Hotels is prohibited from making
real property investments a REIT could make unless:
. We are first given the opportunity, but elect not to pursue the
investments;
. The investment is on land already owned or leased by MeriStar
Hotels or subject to a lease or purchase option in favor of
MeriStar Hotels;
. MeriStar Hotels will operate the property under a trade name
owned by MeriStar Hotels; or
. The investment is a minority investment made as part of a lease
or management agreement.
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The intercompany agreement generally grants MeriStar Hotels the right of
first refusal with respect to any management opportunity at any of our
properties we do not elect to have managed by a hotel brand owner. We will make
such an opportunity available to MeriStar Hotels only if we determine that:
. Consistent with our status as a real estate investment trust, we
must enter into a management agreement with an unaffiliated third
party with respect to the property;
. MeriStar Hotels is qualified to be the manager of that property;
and
. We decide to have the property operated by the owner of a
hospitality trade name under that trade name.
Because of the provisions of the intercompany agreement, we are restricted in
the nature of our business and the opportunities we may pursue.
In addition, under the intercompany agreement, each party must cooperate with
the other party to effect any securities issuance of the other party by
assisting in the preparation of any registration statement or other document
required in connection with the issuance.
We may have conflicts relating to sale of hotels subject to management
agreements.
Our management agreements with MeriStar Hotels require us to pay a
termination fee to MeriStar Hotels if we elect to sell a hotel or if we elect
not to restore a hotel after a casualty. We must pay this fee if we do not
replace the hotel with another hotel subject to a management agreement with a
fair market value equal to the fair market value of MeriStar Hotels' remaining
management fee due under the management agreement to be terminated. Where
applicable, the termination fee is equal to the present value of the remaining
payments (discounted using a 10% rate) of the existing term under the agreement,
based on the operating results of the hotel for the 12 months preceding
termination. Our decision to sell a hotel may, therefore, have significantly
different consequences for MeriStar Hotels and us.
We lack control over management and operations of the hotels.
We depend on the ability of MeriStar Hotels to operate and manage our
hotels. In order to maintain our REIT status, we cannot operate our hotels. As a
result, we are unable to directly implement strategic business decisions for the
operation and marketing of our hotels, such as decisions with respect to the
setting of room rates, food and beverage operations and similar matters.
Our relationship with MeriStar Hotels could have a negative impact on our
acquisitions.
Our relationship with MeriStar Hotels could negatively impact our ability
to acquire additional hotels because hotel management companies, franchisees and
others who would have approached us with acquisition opportunities in hopes of
establishing lessee or management relationships may not do so knowing that we
will rely primarily on MeriStar Hotels to manage the acquired properties. These
persons may instead provide acquisition opportunities to hotel companies that
will allow them to manage the properties following the sale. This could have a
negative impact on our acquisition activities in the future.
There are potential conflicts of interest relating to our relationship with
MeriStar Hotels
The terms of the intercompany agreement were not negotiated on an
arm's-length basis. Because the two companies share some of the same executive
officers and directors, there is a potential conflict of interest with respect
to the enforcement and termination of the intercompany agreement to our benefit
and to the detriment of MeriStar Hotels, or to the benefit of MeriStar Hotels
and to our detriment. Furthermore, because of the independent trading of the two
companies, stockholders in each company may develop divergent interests which
could lead to conflicts of interest. The divergence of interests could also
reduce the anticipated benefits of our intercompany agreement with MeriStar
Hotels.
15
Federal Income Tax Risks
We are a REIT, and our failure to qualify as a REIT will result in additional
tax liability and will likely reduce the amount available for payment on our
indebtedness.
We have operated and intend to continue to operate in a manner designed to
permit us to qualify as a REIT for federal income tax purposes. To qualify as a
REIT, we must apply highly technical and complex provisions of the Internal
Revenue Code of 1986. Some of these provisions have only limited judicial or
administrative interpretations. In addition, there are no judicial or
administrative interpretations with respect to the REIT Modernization Act. The
determination of various factual matters and circumstances not entirely within
our control may affect our ability to continue to qualify as a REIT. The
complexity of these provisions and of the applicable income tax regulations
promulgated under the Internal Revenue Code is greater in the case of a real
estate investment trust that holds its assets through a partnership, as we do.
Legislation, new regulations, administrative interpretations or court decisions
may change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of that qualification.
If we fail to qualify as a REIT in any taxable year, we will not be allowed
a deduction for distributions to our stockholders in computing our taxable
income. We will also be subject to federal income tax, including any applicable
alternative minimum tax, on our taxable income at the applicable corporate rate.
In addition, unless we were entitled to relief under statutory provisions, we
would be disqualified from treatment as a REIT for the four taxable years
following the year during which we lost our REIT qualification. This
disqualification would reduce our funds available for payments on our
indebtedness because of our additional tax liability for the year or years
involved.
We would likely cease to qualify as a REIT if the Internal Revenue Service
were successfully to determine:
. Our operating partnership should properly be treated as a
corporation for federal income tax purposes; or
. Any of the other partnerships or the joint ventures or limited
liability companies in which we or the operating partnership
holds an interest is properly treated as a corporation for
federal income tax purposes.
The imposition of a corporate tax on any of these entities, with an accompanying
loss of our real estate investment trust status, could substantially reduce the
amount of cash available for payment on our indebtedness.
If we were to fail to qualify as a REIT, we no longer would be subject to
the distribution requirements of the Internal Revenue Code. To the extent that
distributions to stockholders would have been made in anticipation of our
qualifying as a REIT, we might be required to borrow funds or to liquidate
assets to pay the applicable corporate income tax. Although we currently operate
in a manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause us to decide to revoke the
REIT election.
Because we are a REIT, we are required to distribute most of our taxable income.
This may have an effect on our ability to make payments on our indebtedness.
To obtain the favorable tax treatment accorded to REITs under the Internal
Revenue Code, we generally will be required each year to distribute to our
stockholders at least 90% of our REIT income, determined without regard to the
deduction for dividends paid and by excluding net capital gains. We will be
subject to income tax on any undistributed REIT taxable income and net capital
gain, and to a 4% nondeductible excise tax on the amount, if any, by which
distributions we pay with respect to any calendar year are less than the sum of:
. 85% of our ordinary income for the calendar year;
. 95% of our capital gain net income for that year; and
. 100% of our undistributed income from prior years.
16
The requirement to distribute a substantial portion of our net taxable income
could cause us to distribute amounts that otherwise would be spent on future
acquisitions, unanticipated capital expenditures or repayment of debt which
would require us to borrow funds or to sell assets to fund the cost of these
items.
We intend to make distributions to our stockholders to comply with the
distribution provisions of the Internal Revenue Code and generally to avoid
federal income taxes and the nondeductible 4% excise tax. Our income will
consist primarily of our share of income of our operating partnership and our
cash flow will consist primarily of our share of distributions from the
operating partnership. It is possible, however, that certain events could in the
future require us to borrow funds directly or through our operating partnership
on a short- or long-term basis to meet the distribution requirements necessary
for us to continue to qualify as a REIT, and avoid federal income taxes and the
4% nondeductible excise tax. These possible events include differences in timing
between the receipt of income and the payment of expenses in arriving at our
taxable income or the taxable income of our operating partnership, the effect of
nondeductible capital expenditures, and the creation of reserves or required
debt amortization payments. In these circumstances, we might need to borrow
funds directly in order to avoid adverse tax consequences even if we believe
that the then-prevailing market conditions generally are not favorable for those
borrowings or that those borrowings are not advisable in the absence of those
tax considerations.
We will determine our operating partnership's distributions. The amount of
those distributions is dependent on a number of factors, including:
. the amount of cash available for distribution;
. our operating partnership's financial condition;
. our decision to reinvest funds rather than to distribute the
funds;
. restrictions in our debt instruments;
. the operating partnership's capital expenditure requirements;
. the annual distribution requirements under the REIT provisions of
the Internal Revenue Code; and
. other factors as we deem relevant.
Although we intend to continue to satisfy the annual distribution requirement to
avoid corporate income taxation on the earnings that we distribute, we may not
be able to do so.
Other Risks
We rely on the knowledge and experience of some key personnel, and the loss of
these personnel may have a material adverse effect on our operations.
We place substantial reliance on the lodging industry knowledge and
experience and the continued services of our senior management, led by Paul W.
Whetsell and John Emery. While we believe that, if necessary, we could find
replacements for these key personnel, the loss of their services could have a
material adverse effect on our operations. In addition, Messrs. Whetsell and
Emery are currently engaged, and in the future will continue to engage, in the
management of MeriStar Hotels. Messrs. Whetsell and Emery may experience
conflicts of interest in allocating management time, services and functions
between MeriStar Hotels and us.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information both included and incorporated by reference in this annual
report on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, and as
such may involve known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe our future plans,
17
strategies and expectations, are generally identifiable by use of the words
"may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend"
or "project" or the negative thereof or other variations thereon or comparable
terminology. Factors which could have a material adverse effect on our
operations and future prospects include, but are not limited to:
. the current slowdown of the national economy;
. economic conditions generally and the real estate market
specifically;
. the impact of the September 11, 2001 terrorist attacks or actual
or threatened future terrorist incidents;
. legislative/regulatory changes, including changes to laws
governing the taxation of REITs;
. availability of capital;
. interest rates;
. competition;
. supply and demand for hotel rooms in our current and proposed
market areas; and
. changes in general accounting principles, policies and guidelines
applicable REITs.
These risks and uncertainties, along with the risk factors discussed above under
"Risk Factors", should be considered in evaluating any forward-looking
statements contained in this supplemental information.
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events, or otherwise,
other than as required by law.
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ITEM 2. PROPERTIES
We maintain our corporate headquarters in Washington, D.C. and own hotel
properties throughout the United States and Canada. As of December 31, 2001, we
owned 112 hotels. We lease land for thirteen of our hotels: Hilton Hotel -
Washington, DC; Hilton Hotel - San Pedro, California; Jekyll Inn - Jekyll
Island, Georgia; Hilton Hotel - Clearwater, Florida; Doral Forrestal -
Princeton, New Jersey; Hilton Hartford - Hartford, Connecticut; Hotel Maison de
Ville - New Orleans, Louisiana; Courtyard by Marriott Meadowlands - Secaucus,
New Jersey; Wyndham Hotel Albuquerque - Albuquerque, New Mexico; Hilton Hotel
Toledo -Toledo, Ohio; Wyndham Airport Hotel - San Jose, California; Courtyard by
Marriott - Lake Buena Vista, Florida; and Radisson Hotel - Rochester, New York.
We also lease part of the land for three of our hotels: Westin Morristown -
Morristown, New Jersey; Doral Palm Springs - Palm Springs, California; and
Westin Resort Key Largo - Key Largo, Florida. No one hotel property is material
to our operations. A typical hotel has meeting and banquet facilities, food and
beverage facilities, and guest rooms and suites.
Our hotels generally feature comfortable, modern guest rooms, extensive
meeting and convention facilities and full-service restaurant and catering
facilities. Our hotels are designed to attract meeting, convention, and
banquet/reception functions from groups and associations, upscale business and
vacation travelers, and the local community.
The following table sets forth certain information with respect to the
hotels for the year ended December 31, 2001:
Guest
Hotel Location Rooms
----- -------- -----
Sheraton Hotel .............. Mesa, AZ 273
Crowne Plaza Hotel .......... Phoenix, AZ 250
Embassy Suites .............. Tucson, AZ 204
Courtyard by Marriott ....... Century City, CA 134
Hilton Hotel ................ Irvine, CA 289
Marriott Hotel .............. Los Angeles, CA 469
Courtyard by Marriott ....... Marina Del Rey, CA 276
Hilton Hotel ................ Monterey, CA 204
Doral Palm Springs .......... Palm Springs, CA 285
Hilton Hotel ................ Sacramento, CA 331
Holiday Inn Select .......... San Diego, CA 317
Sheraton Hotel .............. San Francisco, CA 525
Crowne Plaza Hotel .......... San Jose, CA 239
Wyndham Hotel ............... San Jose, CA 355
Hilton Hotel ................ San Pedro, CA 226
Santa Barbara Inn ........... Santa Barbara, CA 71
Holiday Inn ................. Colorado Springs, CO 200
Sheraton Hotel .............. Colorado Springs, CO 500
Embassy Suites .............. Englewood, CO 236
Hilton Hotel ................ Hartford, CT 388
Ramada Hotel ................ Meriden, CT 150
Ramada Hotel ................ Shelton, CT 155
Doubletree Bradley Airport .. Windsor Locks, CT 200
Embassy Row Hilton Hotel .... Washington, DC 193
Georgetown Inn .............. Washington, DC 96
The Latham Hotel ............ Washington, DC 143
South Seas Plantation ....... Captiva, FL 579
Hilton Hotel ................ Clearwater, FL 426
Ramada Hotel................. Clearwater, FL 289
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Hilton Hotel ...................... Cocoa Beach, FL 296
Holiday Inn ....................... Ft. Lauderdale, FL 240
Howard Johnson Resort ............. Key Largo, FL 100
Westin Hotel ...................... Key Largo, FL 200
Courtyard by Marriott ............. Lake Buena Vista, FL 314
Sheraton Hotel .................... Lake Buena Vista, FL 489
Radisson Hotel .................... Marco Island, FL 268
Holiday Inn ....................... Madeira Beach, FL 149
Radisson Hotel .................... Orlando, FL 742
Safety Harbor Resort and Spa ...... Safety Harbor, FL 193
Best Western Hotel ................ Sanibel Island, FL 46
Sanibel Inn ....................... Sanibel Island, FL 96
Seaside Inn ....................... Sanibel Island, FL 32
Song of the Sea ................... Sanibel Island, FL 30
Sundial Beach Resort .............. Sanibel Island, FL 243
Doubletree Hotel .................. Tampa, FL 496
Doubletree Guest Suites ........... Atlanta, GA 155
Westin Atlanta Airport ............ Atlanta, GA 495
Jekyll Inn ........................ Jekyll Island, GA 262
Wyndham Hotel ..................... Marietta, GA 218
Radisson Hotel .................... Arlington Heights, IL 247
Radisson Hotel & Suites ........... Chicago, IL 350
Holiday Inn ....................... Rosemont, IL 507
Radisson Hotel .................... Schaumburg, IL 200
Doubletree Guest Suites ........... Indianapolis, IN 137
Radisson Plaza .................... Lexington, KY 367
Hilton Hotel ...................... Louisville, KY 321
Holiday Inn Select ................ Kenner, LA 303
Hilton Hotel & Towers ............. Lafayette, LA 327
Maison de Ville ................... New Orleans, LA 23
Radisson Hotel .................... Annapolis, MD 219
Radisson Hotel .................... Baltimore, MD 148
Sheraton Hotel .................... Columbia, MD 287
Hilton Hotel ...................... Detroit, MI 151
Hilton Hotel ...................... Grand Rapids, MI 224
Holiday Inn Sports Complex ........ Kansas City, MO 163
Sheraton Airport Plaza ............ Charlotte, NC 222
Hilton Hotel ...................... Durham, NC 194
Courtyard by Marriott ............. Durham, NC 146
Ramada Hotel ...................... Mahwah, NJ 139
Sheraton Hotel .................... Mahwah, NJ 225
Westin Hotel ...................... Morristown, NJ 199
Four Points Hotel ................. Mt. Arlington, NJ 124
Doral Forrestal ................... Princeton, NJ 290
Courtyard by Marriott ............. Secaucus, NJ 165
Marriott Hotel .................... Somerset, NJ 440
Doubletree Hotel .................. Albuquerque, NM 295
Wyndham Hotel ..................... Albuquerque, NM 276
Crowne Plaza Hotel ................ Las Vegas, NV 201
St. Tropez Suites ................. Las Vegas, NV 149
Radisson Hotel .................... Rochester, NY 171
Radisson Hotel .................... Middleburg Heights, OH 237
Hilton Hotel ...................... Toledo, OH 213
Westin Hotel ...................... Oklahoma City, OK 395
Crowne Plaza Hotel ................ Lake Oswego, OR 161
Sheraton Hotel .................... Frazer, PA 198
20
Embassy Suites ................... Philadelphia, PA 288
Holiday Inn Select ............... Trevose, PA 215
Hilton Hotel ..................... Arlington, TX 309
Doubletree Hotel ................. Austin, TX 350
Hilton & Towers .................. Austin, TX 320
Holiday Inn Select ............... Bedford, TX 243
Radisson Hotel ................... Dallas, TX 304
Renaissance Hotel ................ Dallas, TX 289
Sheraton Hotel ................... Dallas, TX 348
Hilton Hotel ..................... Houston, TX 291
Marriott Hotel ................... Houston, TX 302
Hilton Hotel ..................... Houston, TX 295
Sheraton Hotel ................... Houston, TX 382
Holiday Inn Select ............... Irving, TX 409
Hilton Hotel ..................... Midland, TX 249
Hilton Hotel ..................... Salt Lake City, UT 287
Holiday Inn ...................... Alexandria, VA 178
Radisson Hotel ................... Alexandria, VA 253
Hilton Hotel ..................... Arlington, VA 209
Hilton Hotel ..................... Arlington, VA 386
Hilton Hotel ..................... Bellevue, WA 179
Crowne Plaza Hotel ............... Madison, WI 226
Holiday Inn ...................... Madison, WI 194
Holiday Inn ...................... Calgary, Alberta, Canada 170
Sheraton Hotel ................... Guildford, B.C., Canada 278
Holiday Inn ...................... Vancouver, B.C., Canada 100
Ramada Hotel ..................... Vancouver, B.C., Canada 118
-------------
Total Rooms 28,653
=============
21
ITEM 3. LEGAL PROCEEDINGS
In the course of our normal business activities, various lawsuits, claims
and proceedings have been or may be instituted or asserted against us. Based on
currently available facts, we believe that the disposition of matters pending or
asserted will not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We have not submitted any matters to a vote of security holders during the
fourth quarter of 2001.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange under the symbol
"MHX." The following table sets forth for the periods indicated the high and low
closing sale prices for our common stock on the NYSE.
Price
-----
High Low
---- ---
2002:
First Quarter (through March 5, 2002) $17.55 $13.75
2001:
Fourth Quarter (ended December 31, 2001) 14.22 9.24
Third Quarter (ended September 30, 2001) 23.30 8.65
Second Quarter (ended June 30, 2001) 23.75 18.50
First Quarter (ended March 31, 2001) 22.00 19.08
2000:
Fourth Quarter (ended December 31, 2000) 20.63 18.38
Third Quarter (ended September 30, 2000) 22.81 20.25
Second Quarter (ended June 30, 2000) 21.02 17.63
First Quarter (ended March 31, 2000) 17.44 15.06
______________
The last reported sale price of our common stock on the NYSE on March 5,
2002 was $17.55. As of March 5, 2002, there were approximately 615 holders of
record of our common stock.
On December 17, 2001, we declared a dividend of $0.01 per share relating to
the fourth quarter of 2001. That dividend was paid on January 31, 2002 to
stockholders of record as of December 28, 2001.
We intend to make regular quarterly distributions to our stockholders.
Based on the current outlook, we expect to retain our quarterly dividend at
$0.01 per share through the third quarter of 2002. Any future distributions will
be at the discretion of our Board of Directors and will be determined by factors
including our operating results, capital expenditure requirements, the economic
outlook, the Internal Revenue Service dividend payout requirements for REITs and
such other factors as our Board of Directors deems relevant. Also, the
indentures related to our senior notes, senior unsubordinated unsecured notes
and convertible notes contain limitations on our ability to declare and pay
dividends. Therefore, we cannot provide assurance that any such distributions
will be made in the future.
In order to maintain our qualification as a REIT, we were required to make
annual distributions to our stockholders of at least 90% of our taxable income
(excluding net capital gains). Under certain circumstances, we may be required
to make distributions in excess of cash available for distribution in order to
meet these distribution requirements. In that event, we would seek to borrow the
amount to obtain the cash necessary to make distributions to retain our
qualification as a REIT for Federal income tax purposes. The distributions made
for 2001 were 59% return of capital and 41% ordinary income.
Recent Sales of Unregistered Securities
On January 7, 1999, our operating partnership privately issued 65,875
Common OP Units as part of the purchase of the Holiday Inn Madison, Wisconsin.
23
On March 29, 2000, our operating partnership issued 462,500 Profits-Only OP
Units, or POPs, to certain of our employees pursuant to our POPs Plan.
On April 16, 2001, our operating partnership issued 350,000 POPs to certain
of our employees pursuant to our POPs Plan.
24
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial data. We
have extracted the selected operating results and balance sheet data from our
consolidated financial statements for each of the periods presented. The
following information should be read in conjunction with our consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K.
Year Ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- -------- -------- --------
(amounts in thousands, except per share amounts and operating data)
Revenue:
Hotel operations:
Participating lease revenue ................................ $ 17,295 $ 391,729 $ 368,012 $ 135,994 $ -
Rooms ...................................................... 706,381 - - 275,610 207,736
Food, beverage, office rental and other .................... 361,212 9,049 6,892 110,519 103,521
Management services and other revenues ..................... - - - 3,174 5,136
----------- --------- --------- --------- --------
Total revenues .......................................... 1,084,888 400,778 374,904 525,297 316,393
----------- --------- --------- --------- --------
Operating expenses:
Departmental expenses:
Rooms ...................................................... 170,925 - - 65,048 51,075
Food, beverage and other ................................... 241,110 2,731 1,964 80,327 77,373
Undistributed operating expenses:
Administrative and general ................................. 169,279 9,445 5,749 62,350 50,332
Property and other operating costs ......................... 235,650 47,481 47,027 122,963 55,111
Depreciation and amortization .............................. 117,732 111,947 103,099 60,703 20,990
Write down of investment in STS Hotel Net .................. 2,112 - - - -
Loss on asset impairment ................................... 43,582 - - - -
Swap termination costs ..................................... 9,297 - - - -
Loss on fair value of non-hedging derivatives .............. 6,666 - - - -
FelCor merger costs ........................................ 5,817 - - - -
Costs to terminate leases with Prime Hospitality
Corporation ............................................. 1,315 - - - -
Restructuring charge ....................................... 1,080 - - - -
----------- --------- --------- --------- --------
Total operating expense ................................. 1,004,565 171,604 157,839 391,391 254,881
----------- --------- --------- --------- --------
Net operating income .......................................... 80,323 229,174 217,065 133,906 61,512
Interest expense, net ......................................... 122,376 117,524 100,398 64,378 21,024
Minority interests ............................................ (2,958) 10,240 11,069 5,121 1,425
Provision for income taxes .................................... (1,178) 2,028 2,102 15,699 14,911
----------- --------- --------- --------- --------
Income (loss) before gain (loss) on sale of assets,
extraordinary gain (loss) and cumulative effect of
accounting change .......................................... (37,917) 99,382 103,496 48,708 24,152
Gain (loss) on sale of assets, net of tax (A) ................. (2,132) 3,425 - - -
Extraordinary gain (loss), net of tax (B) ..................... (2,713) 3,054 (4,532) (4,080) (4,092)
Cumulative effect of accounting change, net of tax (C) ........ - - - (921) -
----------- --------- --------- --------- --------
Net income (loss) ....................................... $ (42,762) $ 105,861 $ 98,964 $ 43,707 $ 20,060
=========== ========= ========= ========= ========
Basic earnings per share before extraordinary gain (loss) ..... $ (0.91) $ 2.21 $ 2.19 $ 1.45 $ 1.29
Diluted earnings per share before extraordinary gain (loss) ... $ (0.91) $ 2.14 $ 2.11 $ 1.40 $ 1.27
Dividends per common share(D) ................................. $ 1.525 $ 2.02 $ 2.02 $ 0.82 $ -
Shares of common stock issued and outstanding (E) ............. 44,524 44,380 47,257 46,718 24,867
25
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Other Financial Data:
EBITDA (F) .................................................. $ 198,055 $ 341,121 $ 320,164 $ 194,609 $ 82,502
Net cash provided by operating activities ................... 150,135 224,037 229,193 162,796 59,882
Net cash used in investing activities ....................... (68,890) (14,286) (187,952) (785,505) (586,259)
Net cash (used in) provided by financing activities ......... (58,351) (212,121) (42,812) 543,256 588,428
Balance Sheet Data:
Investments in hotel properties, gross ...................... $3,183,677 $3,193,730 $3,118,723 $2,957,543 $ 950,052
Total assets ................................................ 3,009,860 3,013,008 3,094,201 2,998,460 1,124,642
Long-term debt .............................................. 1,700,134 1,638,319 1,676,771 1,602,352 492,771
Operating Data:
Owned Hotels and Properties:
Number of hotels (E) ..................................... 112 114 116 117 47
Number of guest rooms (E) ................................ 28,653 29,090 29,348 29,351 12,019
Total revenues (in thousands) ............................ $1,084,888 $400,778 $374,904 $525,297 $316,393
Average occupancy (G) .................................... 66.0% 72.2% 71.6% 71.5% 72.0%
ADR (H) .................................................. $ 105.04 $ 107.60 $ 101.14 $ 95.00 $ 86.87
RevPAR (I) ............................................... $ 69.37 $ 77.71 $ 72.44 $ 67.90 $ 62.55
________________
(A) During 2001, we sold two hotels and realized a loss on sales of the
assets. During 2000, we sold three limited service hotels and realized
a gain on sales of the assets.
(B) In accordance with generally accepted accounting principles, we have
recorded the following transactions as extraordinary items:
. During 1997, 1998, and 1999 we refinanced some loan facilities.
The write-offs of deferred costs associated with these facilities
were extraordinary.
. During 2000, we repurchased some of our convertible notes at a
discount. That gain on the repurchase was recorded as
extraordinary.
. During 2001, we repaid term loans under the credit facility. The
write-off of deferred financing costs associated with this
facility was recorded as extraordinary.
(C) We adopted AICPA Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities" on July 1, 1998. The cumulative effect
of this accounting change was a pre-tax reduction of income for the
year ended December 31, 1998 of $1,485 ($921 net of tax effect)
(D) We did not declare any dividends prior to August 3, 1998.
(E) As of December 31 for the periods presented.
(F) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a
useful measure of operating performance because (i) it is industry
practice to evaluate hotel properties based on operating income before
interest, depreciation and amortization and minority interests of
common and preferred OP Unit holders, which is generally equivalent to
EBITDA, and (ii) EBITDA is unaffected by the debt and equity structure
of the entity. EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles, or GAAP, is not
necessarily indicative of cash available to fund all cash flow needs,
should not be considered as an alternative to net income under GAAP
for purposes of evaluating our results of operations, and may not be
comparable to other similarly titled measures used by other companies.
(G) Represents total number of rooms occupied by hotel guests on a paid
basis divided by total available rooms.
(H) Represents total room revenue divided by total number of rooms
occupied by hotel guests on a paid basis.
26
(I) Represents total room revenue divided by total available rooms.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As of
December 31, 2001, we owned 112 hotels, with 28,653 rooms, all of which were
leased by our taxable subsidiaries and managed by MeriStar Hotels & Resorts,
Inc.
Prior to January 1, 2001, in order to maintain our tax status as a REIT, we
were not permitted to participate in the operations of our hotel properties. To
comply with this requirement through December 31, 2000, all of our properties
were subject to leases involving two third-party lessees, MeriStar Hotels and
Prime Hospitality Corporation.
On January 1, 2001, changes to the federal tax laws governing REITs became
effective. Those changes are commonly known as the REIT Modernization Act, or
RMA. The RMA permits real estate investment trusts to create taxable
subsidiaries that are subject to taxation similar to subchapter C-Corporations.
We have created a number of these taxable subsidiaries to lease our real
property. The RMA prohibits our taxable subsidiaries from engaging in the
following activities:
. Managing the properties they lease (our taxable subsidiaries must
enter into an "arm's length" management agreement with an independent
third-party manager that is actively involved in the trade or business
of hotel management and manages properties on behalf of other owners);
. Leasing a property that contains gambling operations; and
. Owning a brand or franchise.
We believe establishing taxable subsidiaries to lease the properties we own
provides a more efficient alignment of and ability to capture the economic
interests of property ownership. Under the prior lease structure with MeriStar
Hotels, we received lease payments based on the revenues generated by the
properties; MeriStar Hotels, however, operated the properties in order to
maximize net operating income from the properties. This inconsistency could
potentially result in the properties being operated in a way that did not
maximize revenues. With the assignment of the leases from MeriStar Hotels to our
taxable subsidiaries and the execution of the new management agreements (as
described below), we gained the economic risks and rewards usually associated
with ownership of real estate, and property revenues became the basis for
MeriStar Hotels' management fees.
Subsidiaries of MeriStar Hotels assigned the participating leases to our
wholly-owned taxable subsidiaries as of January 1, 2001. In connection with the
assignment, the taxable subsidiaries executed new management agreements with a
subsidiary of MeriStar Hotels to manage our hotels. Under these management
agreements, the taxable subsidiaries pay a management fee to MeriStar Hotels for
each property. The taxable subsidiaries in turn make rental payments to us under
the participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases. The assignment of the
leases from MeriStar Hotels to our taxable subsidiaries did not result in any
cash consideration exchanged among the parties except for the transfer of hotel
operating assets and liabilities to the taxable subsidiaries. Under the new
management agreements, the base management fee is 2.5% of total hotel revenue.
MeriStar Hotels can also earn incentive management fees, based on meeting
performance thresholds, of up to 1.5% of total hotel revenue. The agreements
have an initial term of 10 years with three renewal periods of five years each
at the option of MeriStar Hotels, subject to some exceptions. Because these
leases have been assigned to our taxable subsidiaries, we now bear the operating
risk associated with our hotels.
During 2001, we acquired the eight leases from Prime Hospitality for our
hotels that were previously leased and managed by Prime. These hotels are
managed by MeriStar Hotels. The management agreements with MeriStar Hotels are
identical to the other management agreements between MeriStar
27
Hotels and us except that the term on four of the agreements is one year with
additional one-year renewal periods.
The terrorist attacks of September 11, 2001 have had a severely negative
impact on our hotel operations in the third and fourth quarter, causing
lower-than-expected performance in an already slowing economy. The events of
September 11 have caused a significant decrease in our hotels' occupancy and
average daily rate due to disruptions in business and leisure travel patterns.
Our major metropolitan area and airport hotels have been particularly affected
due to concerns about air travel safety and a significant overall decrease in
the amount of air travel.
In response to the decline in operations following the terrorist attacks,
we have worked with MeriStar Hotels to aggressively review and reduce our
hotels' cost structure. We have implemented numerous cost-cutting strategies,
including the following items:
. reducing overall staffing, and reducing hours for remaining hourly
staff,
. instituting hiring and wage freezes for all properties,
. revising operating procedures to gain greater efficiencies and/or
reduce costs,
. closing underutilized or duplicative facilities and outlets,
. creating revised minimum staffing guides for each department in our
hotels; and
. reducing capital expenditures to focus primarily on life-safety
requirements, and deferring or terminating discretionary capital
outlays.
The September 11, 2001 terrorist attacks were unprecedented in scope, and
in their immediate, dramatic impact on travel patterns. We have not previously
experienced such events, and it is currently not possible to accurately predict
if and when travel patterns will be restored to pre-September 11 levels. While
we have had improvements in our operating levels from the period immediately
following the attacks, we believe the uncertainty associated with subsequent
incidents and the possibility of future attacks will continue to hamper business
and leisure travel patterns for the next several quarters. In addition, the
September 11, 2001 terrorist attacks have had a dramatic effect on the insurance
and reinsurance industries. Many companies are being subject to losses or
cancellations of insurance polices, or renewals of existing coverage but with
extreme price increases. At our insurance policy renewals in mid-2002, we may
be subject to restrictions as compared to our current coverages, price
increases, or a combination of both restrictions and increases.
On May 9, 2001, we and our operating partnership entered into an Agreement
and Plan of Merger with FelCor Lodging Trust Incorporated and its operating
partnership. On September 13, the SEC declared the S-4 registration statement
filed by Felcor effective. On September 21, 2001, we mutually agreed with FelCor
to terminate the merger agreement due to unfavorable market conditions. We
incurred $5.8 million of costs related to this merger through December 31, 2001
and these costs have been expensed in our statement of operations.
During the third quarter of 2001, we incurred a restructuring charge in
connection with personnel changes primarily as a result of the termination of
our merger agreement with FelCor. This restructuring is expected to reduce our
annualized corporate overhead expenditures by approximately 7.3%, or $0.8
million. The restructuring included eliminating corporate staff positions and
office space no longer needed under the new structure.
Critical Accounting Policies
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires us 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. On an on-going basis, we evaluate our estimates and judgments,
including those related to the impairment of long-lived assets and the recording
of certain accrued liabilities. Some of our estimates are material to the
financial statements.
28
These estimates are therefore particularly sensitive as future events could
cause the actual results to be significantly different from our estimates.
Our critical accounting policies are as follows:
. Impairment of long-lived assets;
. Estimating certain accrued liabilities; and
. Determining the impact of future interest rate changes on our statement
of operations.
Impairment of long-lived assets
Whenever events or changes in circumstances indicate that the carrying
values of long-lived assets (including property and equipment and all
intangibles) may be impaired, we perform an analysis to determine the
recoverability of the asset's carrying value. The carrying value of the asset
includes the original purchase price (net of depreciation) plus the value of all
capital improvements (net of depreciation). If the analysis indicates that the
carrying value is not recoverable from future cash flows, we write down the
asset to its estimated fair value and recognize an impairment loss. The
estimated fair value is based on what we estimate the current sale price of the
asset to be based on comparable sales information or other estimates of the
asset's value. Any impairment losses we recognize are recorded as operating
expenses. In 2001, we recognized $43.6 million of impairment losses. We did not
recognize any impairment losses in 2000 or 1999.
We review long-lived assets for impairment when one or more of the
following events have occurred:
a. Current or immediate short-term (future twelve months) projected cash
flows are significantly less than the most recent historical cash
flows.
b. The unplanned departure of an executive officer or other key personnel
which could adversely affect our ability to maintain our competitive
position and manage future growth.
c. A significant adverse change in legal factors or an adverse action or
assessment by a regulator, which could affect the value of our
long-lived assets.
d. Events which could cause significant adverse changes and uncertainty
in business and leisure travel patterns.
We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In projecting the expected future operations of the
asset, we base our estimates on future budgeted earnings before interest
expense, income taxes, depreciation and amortization, or EBITDA, amounts and use
growth assumptions to project these amounts out over the expected life of the
underlying asset. Our growth assumptions are based on assumed future
improvements in the national economy and improvements in demand for lodging; if
actual conditions differ from those in our assumptions, the actual results of
each asset's actual future operations could be significantly different from the
estimated results we used in our analysis. Our operating results are also
subject to the risks set forth under "Risk Factors-Operating Risks."
Estimating certain accrued liabilities
Estimates for certain accruals such as real and personal property taxes
could have a material effect on our financial statements. Currently, we estimate
real and personal property taxes based on a combination of preliminary estimates
from state and local jurisdictions and historical information. The assessed
values of these properties could change significantly from the values or rates
we use in our estimates. Property tax assessments are subject to periodic and
often lengthy appeals. For example, in instances where a jurisdiction increases
our assessed value, we frequently appeal that assessment. Similarly, when hotel
operations decline, we may appeal an assessment as too high if it is based on
past operating results. These appeals of assessed values are subject to a
potentially wide range of outcomes. As a result of the economic slowdown and
events of September 11, 2001, we have filed a number of appeals for lower
assessments. As of December 31, 2001, we had ongoing appeals in several
jurisdictions with respect to more than 20 properties. We accrue for these
liabilities based on our judgment of the most reasonably likely outcome of the
appeals. If we were unsuccessful in all of our current appeals, we would have to
recognize approximately $2 million of additional expense. We cannot predict with
certainty the outcome of these appeals, or their effect on our accruals for such
items. Also, actual property tax expense could vary greatly from our estimates
used for the current property tax accrual based on a change in the assessed
value, a change in the tax rate, and/or a different outcome of the appeals
process than we currently expect.
Determining impact of future interest rate changes on our statement of
operations
FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," requires a company to recognize all derivatives as either assets or
liabilities in the balance sheet and record those instruments at fair value. FAS
No. 137 and No. 138 amended certain provisions of FAS No. 133. We adopted these
accounting pronouncements effective January 1, 2001.
Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows. We assess interest rate cash
flow risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating
hedging opportunities. We do not enter into derivative instruments for any
purpose other than cash flow hedging purposes.
Our interest rate swap agreements were initially designated as hedges
against changes in future cash flows associated with specific variable rate debt
obligations. As of December 31, 2001, we had three swap agreements with notional
amounts totaling $300 million. A portion of these swap agreements ($148.6
29
million) provide cash flow hedges on our floating London Interbank Offered Rate
or LIBOR rate debt payments. The remaining swap agreements ($151.4 million) have
been converted to non-hedging derivatives due to our repayment of the
floating-rate borrowings they originally hedged and they are currently being
marked to market through our statement of operations. For our swap agreements
that provide hedges against future cash flows, the related change in fair value
is recorded as unrealized gains or losses in our stockholders' equity as a
component of accumulated other comprehensive income. For the portion of our
swaps that were redesignated to non-hedging derivatives, the related change in
fair value is recorded as realized gains or losses in our statement of
operations. We have interest rate exposure going forward as the change in fair
value of our non-hedging derivatives will have an impact on our statement of
operations. For more information regarding our interest rate hedging activities,
see "Quantitative and Qualitative Disclosures About Market Risk."
Financial Condition
December 31, 2001 compared with December 31, 2000
Our total assets decreased by $3.1 million to $3,009.9 million at December
31, 2001 from $3,013.0 million at December 31, 2000 primarily due to:
. the decrease of $13.3 million in due from MeriStar Hotels;
. the sale of two hotels and the use of the $9.7 million in proceeds to
pay down debt; and
. depreciation on hotel assets; partially offset by
. the note receivable from MeriStar Hotels for $36 million,
. capital expenditures of $44.5 million at the hotels, and
. the increase in operating assets of $62.5 million related to the
assignment of the hotel leases with MeriStar Hotels to our taxable
subsidiaries.
Total liabilities increased by $120.5 million to $1,897.5 million at
December 31, 2001 from $1,777.0 million at December 31, 2000 due mainly to:
. net borrowings of long-term debt of $61.8 million;
. a $16.6 million increase in accrued interest due to the issuance of
$500 million aggregate principal amount of senior secured notes sold
in January 2001;
. the adoption of FAS No. 133 and the related recording of a $12.1
million liability for our derivative instruments; and
. the increase in operating liabilities of $65.7 million related to the
assignment of the hotel leases with MeriStar Hotels and Prime
Hospitality to our taxable subsidiaries; partially offset by
. a decrease of $23.5 million in dividends and distributions payable due
to a lower fourth quarter dividend in 2001. (The fourth quarter
dividend was $0.01 per share in 2001 and $0.505 per share in 2000.)
Long-term debt increased by $61.8 million to $1,700.1 million at December
31, 2001 from $1,638.3 million at December 31, 2000 due primarily to:
. $500 million in senior unsecured notes issued in January,
. $250 million in senior unsecured notes issued in December; partially
offset by
. $674 million of net repayments of our revolving credit facility using
proceeds of the senior unsecured notes borrowings and cash generated
by operations.
Minority interests decreased $11.7 million to $89.8 million at December 31,
2001 from $101.5 million at December 31, 2000, due to:
. $6.9 million of net redemptions of operating partnership units for
common stock,
. $6.6 million of current year distributions to minority interest
holders, and
. $3.5 million of current year net losses allocated to minority interest
holders; partially offset by
. $5.4 million of POPs awarded to certain employees.
Stockholders' equity decreased $112.0 million to $1,022.6 at December 31,
2001 from $1,134.6 million at December 31, 2000 due primarily to:
. $68.2 million of dividends,
30
. $6.4 million increase in accumulated other comprehensive loss due
mainly to the adoption of FAS No. 133, and
. $42.8 million of net loss for 2001; partially offset by
. $5.4 million of net redemptions of operating partnership units for
common stock.
Results of Operations
Year ended December 31, 2001 compared with the year ended December 31, 2000
Until January 1, 2001, MeriStar Hotels leased substantially all of our
hotels from us. Under the leases, MeriStar Hotels assumed all of the operating
risks and rewards of these hotels and paid us a percentage of each hotel's
revenue under the lease agreements. Therefore, for financial statement purposes
through December 31, 2000, MeriStar Hotels recorded all of the operating
revenues and expenses of the hotels in its statements of operations, and we
recorded lease revenue earned under the lease agreements in our statement of
operations. Effective January 1, 2001, MeriStar Hotels assigned the hotel leases
to our newly created, wholly-owned, taxable REIT subsidiaries, and our taxable
REIT subsidiaries entered into management agreements with MeriStar Hotels to
manage the hotels. As a result of this change, our wholly-owned taxable REIT
subsidiaries have assumed the operating risks and rewards of the hotels and now
pay MeriStar Hotels a management fee to manage the hotels for us. For
consolidated financial statement purposes, effective January 1, 2001, we now
record all of the revenues and expenses of the hotels in our statements of
operations, including the management fee paid to MeriStar Hotels.
Our total revenues and total operating expenses increased $684.1 million
and $833.0 million, respectively, for the year ended December 31, 2001 as
compared to the same period in 2000. As described in the preceding paragraph,
the significant increases primarily result from the fact that we now record the
hotel operating revenue and expenses in our consolidated financial statements
effective January 1, 2001, while we only recorded lease revenue in 2000. As a
result, our operating results for the year ended December 31, 2001 are not
directly comparable to the same period in 2000.
For comparative purposes, the following shows the results for the year
ended December 31, 2000 on a pro forma basis assuming the leases with MeriStar
Hotels were converted to management contracts on January 1, 2000, compared to
actual results for the year ended December 31, 2001 (in thousands except for per
share data):
2001 2000
---- ----
Revenue $1,084,888 $1,197,182
Total expenses 1,126,941 1,085,532
Minority interest (2,958) 10,240
Taxes (1,178) 2,028
Net income (loss) before gain (loss) on
sale of assets and extraordinary items (37,917) 99,382
Net income (loss) (42,762) 105,861
Recurring FFO $ 147,044 $ 226,083
Recurring FFO per share, diluted $ 2.77 $ 4.11
The following table provides our hotels' operating statistics on a same-
store basis for the years ended December 31, 2001 and 2000.
2001 2000 Change
----------- ------------- -----------
Revenue per available room $ 69.37 $ 77.46 (10.4)%
Average daily rate $105.04 $107.69 (2.5)%
Occupancy 66.0% 71.9% (8.2)%
Overall, disruptions in business and leisure travel patterns and travel
safety concerns due to the terrorist attacks on September 11, 2001, coupled with
the slowing United States economy, had a major negative effect
31
on our hotels during the second half of 2001. The events have been marked by a
sharp reduction in business and leisure travel. This contributed to the 10.4%
reduction in revenue per available room and the 8.2% reduction in occupancy for
2001 compared to the 2000. These reductions became more pronounced during the
third and fourth quarters of 2001.
Total revenue decreased $112.3 million to $1,084.9 million in 2001 from
$1,197.2 million in 2000 due primarily to:
. $75.9 million decrease in room revenue related to the decrease in
occupancy,
. $21.4 million decrease in food and beverage revenue due to the
decrease in occupancy, and
. $10.2 million decrease in lease revenue due to a smaller number
of leased hotels compared to 2000.
Total expenses increased $41.4 million to $1,126.9 million for 2001 from
$1,085.5 million in 2000 due primarily to:
. $9.3 million payment to terminate $300 million on interest rate
swaps in conjunction with the sale of $500 million of senior
unsecured notes and the repayment of related term loans,
. $6.7 million charge to recognize the effect of interest rate
swaps that were converted to non-hedging derivatives upon the
repayment of portions of our senior secured credit facility in
December 2001 in conjunction with the sale of $250 million of
senior unsecured notes,
. $43.6 million loss on asset impairment related to the write-down
of certain hotel assets. These write-downs resulted from the
negative impact of changes in the economic climate on the value
of our assets,
. $2.1 million charge to write-off our investment in STS Hotel Net,
. $5.8 million in costs related to our terminated merger with
FelCor Lodging Trust,
. $1.3 million in costs to terminate leases with Prime Hospitality
Corporation,
. $1.1 million charge due to a restructuring at corporate
headquarters,
. $5.7 million increase in depreciation on hotel assets, and
. $3.3 million increase in property operating costs due primarily
to a $2.2 million increase in energy costs; partially offset by
. $13.9 million decrease in room expenses due to lower occupancy,
and
. $15.5 million decrease in food and beverage expenses due to lower
occupancy.
In 2001, we repaid our term loans under our revolving credit agreement
which resulted in an extraordinary loss of $1.6 million (net of tax) from the
write-off of deferred financing costs related to those term loans.
In December 2001 we amended the terms of our senior credit agreement. We
incurred $4.4 million of costs related to the amended agreement of which $3.2
million represents deferred financing costs and $1.1 million (net of tax)
resulted in an extraordinary loss.
The White Paper on Funds From Operations, or FFO, approved by the Board of
Governors of the National Association of Real Estate Investment Trusts or NAREIT
in October 1999 defines FFO as net income (loss), computed in accordance with
generally accepted accounting principles, also called GAAP, excluding gains (or
losses) from sales of properties, plus real estate related depreciation and
amortization and after comparable adjustments for our portion of these items
related to unconsolidated partnerships and joint ventures. Extraordinary items
under GAAP are excluded from the calculation of FFO. We believe FFO is helpful
to investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of our ability to incur and
service debt, to make capital expenditures and to fund other cash needs. FFO
does not represent cash generated from operating activities determined by GAAP
and should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of our financial performance or to cash
flow from operating activities determined in accordance with GAAP as a measure
of our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make cash distributions. FFO may include funds
that may not be available for management's discretionary use due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties.
We use recurring FFO as a measure of our performance. Recurring FFO
represents FFO, as defined above, adjusted for significant non-recurring items.
The following is a reconciliation between income (loss) before gain (loss) on
the sale of assets and extraordinary items and recurring FFO on a diluted basis
for the years ended December 31, 2001 and 2000 (in thousands):
32
2001 2000
------------ ------------
Income (loss) before gain (loss) on sale of assets and
extraordinary items $ (37,917) $ 99,382
Minority interest to Common OP Unit Holders (3,523) 9,675
Interest on convertible debt 7,329 7,488
Hotel depreciation and amortization 113,167 107,996
Deferred cost of sale of asset - 1,542
Non-recurring items (net of minority interests and
income taxes):
Swap termination costs 8,998 -
Loss on fair value of non-hedging derivatives 6,500 -
Write down of investment in STS Hotel Net 2,046 -
Loss on asset impairment 42,497 -
FelCor merger costs 5,622 -
Costs to terminate leases with Prime
Hospitality Corporation 1,272 -
Restructuring charges 1,053 -
----------- -----------
Recurring FFO $ 147,044 $ 226,083
=========== ===========
Year ended December 31, 2000 compared with the year ended December 31, 1999
Until January 1, 2001 substantially all of our hotels were leased to and
operated by MeriStar Hotels. Participating lease revenue represents lease
payments from the lessees pursuant to the participating lease agreements. Total
revenue increased by $25.9 million to $400.8 million in 2000 compared to $374.9
million in 1999. This increase was primarily attributable to an increase of
$23.7 million in participating lease revenue resulting from an increase in room
revenue at our hotels under lease. The following table provides our hotels'
operating statistics on a same-store basis for the year:
2000 1999 Change
----------- ----------- ----------
Revenue per available room $ 77.71 $ 73.51 5.71%
Average daily rate $107.60 $101.92 5.57%
Occupancy 72.2% 72.1% 0.14%
Operating expenses increased to $171.6 million for the year ended December
31, 2001 from $157.8 million for the same period in 1999 due primarily to:
. an increase in depreciation on hotel assets, and
. an increase in administrative costs, as we added personnel during
2000 to address the operating changes associated with RMA and
insurance costs.
Net interest expense increased $17.1 million to $117.5 million for the year
ended December 31, 2000, from $100.4 million in 1999 due mainly to:
. lower capitalized interest due to a decrease in qualifying
capital expenditures in 2000,
. an increase in variable interest rates during 2000 and higher
interest rates on swap arrangements executed in 2000; partially
offset by
. a lower average debt balance during 2000.
Minority interests decreased $0.9 million to $10.2 million in 2000 from
$11.1 million in 1999 due to:
. the net redemption of operating partnership units; partially
offset by
. the increase in the allocation of income to minority interest
holders.
In 2000, we repurchased $18.2 million of our convertible notes at a
discount. This resulted in an extraordinary gain of $3.1 million (net of tax
effect).
33
In 2000, we sold three limited-service hotels and received $24.1 million.
This resulted in a gain on sale of assets of $3.5 million ($3.4 million, net of
tax).
Liquidity and Capital Resources
Sources of Cash
We generated $150.1 million of cash from operations during 2001. Our
principal sources of liquidity are cash on hand, cash generated from operations,
and funds from external borrowings and debt offerings. We expect to fund our
continuing operations through cash generated by our hotels. We also expect to
finance hotel acquisitions, hotel renovations and joint venture investments
through a combination of internally generated cash, external borrowings, and the
issuance of OP Units and/or common stock.
Factors that may influence our liquidity include:
. Factors that affect our results of operations, including general
economic conditions, demand for business and leisure travel, public
concerns about travel safety and other operating risks described under
the caption, "Risk Factors--Our results of operations are dependent on
revenues generated by our hotels, which are subject to a number of
risks related to the lodging industry, and our current operating
structure (which became effective as of January 1, 2001) has
significantly increased our exposure to those risks";
. Factors that affect our access to bank financing and the capital
markets, including interest rate fluctuations, operational risks and
other risks described under the caption "Risk Factors--Financing
Risks"; and
. The other factors described under the caption, "Special Note Regarding
Forward-Looking Statements."
We must distribute to stockholders at least 90% of our taxable income,
excluding net capital gains to preserve the favorable tax treatment accorded to
real estate investment trusts under the Internal Revenue Code. We expect to fund
such distributions through cash generated from operations and borrowings on our
credit agreement. In light of the dramatic business declines since the September
11, 2001 terrorist attacks, we expect our taxable income to decrease
significantly in 2002. Any future distributions will be at the discretion of our
Board of Directors and will be determined by factors including our operating
results, capital expenditure requirements, the economic outlook, the Internal
Revenue Service dividend payout requirements for REITs and such other factors as
our Board of Directors deems relevant. We cannot provide assurance that any such
distributions will be made in the future.
Uses of Cash
We used $68.9 million of cash in investing activities during 2001 primarily
for:
. the $36.0 million note receivable with MeriStar Hotels; and
. $44.5 million of capital expenditures at hotels. These items were
partially offset by:
. $3.3 million of hotel operating cash received on lease conversions;
and
. $9.7 million of proceeds from selling two hotels.
We used $58.4 million of cash in financing activities during 2001 primarily
for:
. $89.5 million of payments of dividends, and
. $19.0 million from additional deferred financing costs related to
issuing the $500 million and $250 million of senior unsecured notes,
. $8.1 million of distributions to minority investors. These items were
partially offset by:
. $61.8 million of net borrowings of long-term debt.
Long-Term Debt
In January 2001, we issued $500 million aggregate principal amount of senior
unsecured notes. These senior unsecured notes are structured as:
. $300 million of 9.0% notes maturing in 2008, and
34
. $200 million of 9.13% notes maturing in 2011.
We used the proceeds from these notes to repay outstanding debt under our
revolving credit agreement and to make payments of $9.3 million to terminate
certain swap agreements that hedged variable rates on loans that we repaid. The
repayments of our term loans under our credit facility resulted in an
extraordinary loss of $1.2 million (net of tax) from the write-off of deferred
financing costs related to these term loans.
In December 2001, we issued $250 million aggregate principal amount of
senior unsecured notes. These notes have a 10.5% interest rate and mature in
June 2009. We used the net proceeds to repay outstanding debt under our term
loans and revolving credit agreement. The repayments of our term loans under our
credit agreement resulted in an extraordinary loss of $1.5 million (net of tax)
from the write-off of deferred financing costs related to those term loans.
In February 2002, we issued a further $200 million aggregate principal
amount of 9.13% senior unsecured notes due 2011. We used the proceeds from the
issuance of these notes to repay approximately $195.0 million of the outstanding
balance under our revolving credit agreement.
In February 2002, we amended our revolving credit agreement. The amendment
allows us to reduce the revolving commitments to below $300 million. In March,
2002, we reduced the borrowing capacity on our revolving credit agreement from
$310 million to 150 million.
Minimum payments due under our debt obligations as of December 31 (in
thousands):
2002 .................................................. $ 15,543
2003 .................................................. 232,589
2004 .................................................. 171,168
2005 .................................................. 9,265
2006 .................................................. 10,006
Thereafter ............................................ 1,261,563
----------
$1,700,134
==========
As of February 15, 2002, we had $67.0 million of debt outstanding under our
senior secured credit agreement. The weighted average interest rate on
borrowings outstanding under the senior secured credit agreement as of February
15, 2002 was 5.9%.
Our senior credit agreement requires us to meet or exceed certain financial
performance ratios at the end of each quarter. Travel disruptions and safety
concerns following the terrorist attacks on September 11, 2001 and the slowdown
of the national economy resulted in a significant negative impact to the lodging
industry and our operations. This decline in operations would have caused us to
be out of compliance with certain financial covenants specified in our senior
credit agreement. On October 24, 2001, however, we finalized a temporary waiver
on all affected financial covenants with our senior bank group and engaged in
discussions to amend our senior credit agreement further. This waiver to the
credit agreement allowed these financial covenants to be waived for the period
beginning September 30, 2001 and ending February 28, 2002. In December 2001 we
amended our senior credit agreement. This amendment relaxed our financial
covenants and allows us to extend the maturity date on our credit facility
from July 2002 to July 2003. We incurred $4.4 million of costs related to the
amendment.
Capital Resources
We must make ongoing capital expenditures in order to keep our hotels
competitive in their markets. We expect a combination of internally generated
cash and external borrowings to provide capital for renovation work. Initial
renovation programs for most of our hotels are complete or nearing completion.
Once initial renovation programs for a hotel are completed, we expect to spend
approximately 4% of hotel revenues annually for ongoing capital expenditure
programs. These ongoing programs will include room and facilities
refurbishments, renovations, and furniture and equipment replacements. For the
year ended December 31, 2001, we spent $45.8 million on renovation and ongoing
property capital expenditure programs. We intend to spend approximately $40
million during 2002 for our ongoing capital expenditure programs. In response to
the decline in our operations following the September 11, 2001 terrorist
attacks, we have significantly
35
curtailed our capital expenditure programs. We have taken the following steps:
. re-prioritized all capital expenditures to focus nearly exclusively
on life-safety requirements;
. deferred or canceled all discretionary capital expenditures that
did not cause us to incur a substantial penalty; and
. reviewed our estimated 2002 capital requirements in light of the
revised business levels we are currently experiencing.
We will continue to monitor our capital requirements as compared to
business levels, and will revise expenditures as necessary.
We believe cash generated by operations, together with anticipated
borrowing capacity under our senior credit agreements, will be sufficient to
fund our existing working capital requirements, ongoing capital expenditures,
and debt service requirements. We believe, however, that our future capital
decisions will also be made in response to specific acquisition and/or
investment opportunities, depending on conditions in the capital and/or other
financial markets.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns.
For non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season. For
resort properties, demand is generally higher in winter and early spring. Since
the majority of our hotels are non-resort properties, our operations generally
reflect non-resort seasonality patterns. We have lower revenue, operating income
and cash flow in the first and fourth quarters and higher revenue, operating
income and cash flow in the second and third quarters, although the disruptions
caused by the September 11, 2001 attacks and their aftermath may cause
disruptions to this pattern.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on long-term
debt obligations that impact the fair value of these obligations. Our policy is
to manage interest rates through the use of a combination of fixed and variable
rate debt. Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve our objectives, we borrow at a combination of fixed
and variable rates, and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks in order to mitigate our interest
rate risk on a related financial instrument. We do not enter into derivative or
interest rate transactions for speculative purposes. We have no cash flow
exposure due to general interest rate changes for our fixed long-term debt
obligations.
The table below presents, as of December 31, 2001, the principal amounts
(in thousands of dollars) for our fixed and variable rate debt instruments,
weighted-average interest rates, and fair values by year of expected maturity to
evaluate the expected cash flows and sensitivity to interest rate changes.
Long-term Debt
--------------------------------------------------------------------------
Average Variable Average
Expected Maturity Fixed Rate Interest Rate Rate Interest Rate
--------------------------- ---------------- ----------------- ------------- ----------------
2002 $ 15,543 8.6% $ - N/A
2003 8,589 8.2% 224,000 6.5%
2004 171,168 5.1% - N/A
2005 9,265 8.1% - N/A
2006 10,006 8.1% - N/A
Thereafter 1,261,563 9.0% - N/A
--------------- ----------------- -------------- ------------
Total $1,476,134 8.5% $224,000 6.5%
=============== ================= ============== ============
Fair Value at 12/31/01 $1,401,073 $224,000
=============== =============
Upon the issuance of our $250 million aggregate principal amount of senior
unsecured notes in December 2001, we reduced the term loans and our revolver
under our senior secured credit agreement by an aggregate amount of $245
million. At that time, we converted three swap agreements to non-hedging
derivatives. These swap agreements had notional principal amounts of
approximately $151.4 million and were originally designated to hedge variable
rate borrowings under our senior secured credit facility that were repaid. We
recognized a $6.7 million loss related to this swap conversion.
Upon the issuance of our $500 million aggregate principal amount of senior
unsecured notes in January 2001, we reduced the term loans under our senior
secured credit agreement by $300 million. At that time, we terminated three swap
agreements with a notional amount of $300 million. These swap agreements were
originally designated to hedge variable rate term loans that were repaid. We
made net payments totaling $9.3 million to our counter parties to terminate
these swap agreements, and recognized a $9.3 million loss related to those
terminated swaps.
As of December 31, 2001, we had three swap agreements with notional
principal amounts totaling $300 million. A portion of these swap agreements
($148.6 million) provide hedges against the impact future interest rates have on
our floating London Interbank Offered Rate, or LIBOR rate, debt instruments. The
remaining portion of the swap agreements ($151.4 million) has been converted to
non-hedging derivatives. The swap agreements effectively fix the 30-day LIBOR
between 4.77% and 6.38%. The swap agreements expire between December 2002 and
July 2003. For the years ended December 31, 2001 and 2000, we have
(made)/received net payments of approximately $(6,285) and $3,081, respectively.
In anticipation of the August 1999 completion of our mortgage-backed
secured facility, we entered into two separate hedge transactions during July
1999. Upon completion of the secured facility, we terminated the underlying
treasury lock agreements, resulting in a net payment to us of $5.1 million. This
37
amount was deferred and is being recognized as a reduction to interest expense
over the life of the underlying debt. As a result, the effective interest rate
on the secured facility is 7.76%.
Additionally, in anticipation of the August 1997 offering of $150 million
aggregate principal amount of our 8.75% senior subordinated notes due 2007, we
entered into separate hedge transactions during June and July 1997. Upon
completion of the subordinated notes offering, we terminated the underlying swap
agreements, resulting in a net payment to us of $836,000. This amount was
deferred and is being recognized as a reduction to interest expense over the
life of the underlying debt. As a result, the effective interest rate on the
subordinated notes is 8.69%.
As of December 31, 2001, after consideration of the hedge agreements
described above, 95.6% of our debt was fixed and our overall weighted average
interest rate was 8.49%.
Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows during the years ended December 31, 2001, 2000 and 1999. Additionally,
foreign currency transaction gains and losses were not material to our results
of operations for the years ended December 31, 2001, 2000 and 1999. Accordingly,
we were not subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currencies would have on our
future costs or on future cash flows we would receive from our foreign
subsidiaries. To date, we have not entered into any significant foreign currency
forward exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange rates.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, Supplementary Data and
Financial Statement Schedules are filed as part of this Annual Report on Form
10-K:
MeriStar Hospitality Corporation
Independent Auditors' Report ..................................................................... 40
Consolidated Balance Sheets as of December 31, 2001 and 2000 ..................................... 41
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 ....... 42
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and
1999. ......................................................................................... 44
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ....... 45
Notes to the Consolidated Financial Statements ................................................... 46
Schedule III - Real Estate and Accumulated Depreciation .......................................... 61
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
Notes thereto.
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hospitality Corporation:
We have audited the accompanying consolidated balance sheets of MeriStar
Hospitality Corporation and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2001. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule of real estate and
accumulated depreciation. These consolidated financial statements and financial
statement schedule are the responsibility of MeriStar Hospitality's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MeriStar
Hospitality Corporation and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Washington, D.C.
January 28,2002, except as to Note 16
which is as of February 7, 2002
40
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(in thousands, except per share amounts)
2001 2000
----------- -----------
ASSETS
Investments in hotel properties $ 3,183,677 $ 3,193,730
Accumulated depreciation (397,380) (287,229)
------------ ------------
2,786,297 2,906,501
Cash and cash equivalents 23,448 250
Accounts receivable, net of allowance for doubtful accounts of $973
and $0 47,178 2,833
Prepaid expenses and other 18,306 2,767
Note receivable from MeriStar Hotels 36,000 -
Due from MeriStar Hotels 8,877 22,221
Investments in and advances to affiliates 41,714 42,196
Restricted cash 21,304 19,918
Intangible assets, net of accumulated amortization of $11,224 and
$9,729 26,736 16,322
----------- ------------
$ 3,009,860 $ 3,013,008
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 129,786 $ 74,420
Accrued interest 45,009 28,365
Income taxes payable 350 1,151
Dividends and distributions payable 1,090 24,581
Deferred income taxes 9,031 10,140
Interest rate swaps 12,100 -
Long-term debt 1,700,134 1,638,319
----------- ------------
Total liabilities 1,897,500 1,776,976
----------- ------------
Minority interests 89,797 101,477
Stockholders' Equity:
Common stock, par value $0.01 per share
Authorized- 250,000 shares
Issued - 48,761 and 48,463 shares 487 485
Additional paid-in capital 1,183,463 1,177,218
Retained earnings (deficit) (68,241) 42,837
Accumulated other comprehensive income (12,503) (6,081)
Unearned stock-based compensation (5,287) (7,550)
Less common stock held in treasury - 4,237 and 4,083 shares (75,356) (72,354)
----------- ------------
Total stockholders' equity 1,022,563 1,134,555
----------- ------------
$ 3,009,860 $ 3,013,008
=========== ============
See accompanying notes to consolidated financial statements.
41
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except per share amounts)
2001 2000 1999
---------- ----------- ----------
Revenue:
Participating lease revenue $ 17,295 $ 391,729 $ 368,012
Hotel operations:
Rooms 706,381 - -
Food and beverage 269,382 - -
Other operating departments 81,971 - -
Office rental, parking and other revenue 9,859 9,049 6,892
---------- ----------- ----------
Total revenue 1,084,888 400,778 374,904
---------- ----------- ----------
Hotel operating expenses by department:
Rooms 170,925 - -
Food and beverage 194,495 - -
Other operating departments 43,558 - -
Office rental, parking and other operating expenses 3,057 2,731 1,964
Undistributed operating expenses:
Administrative and general 169,279 9,445 5,749
Property operating costs 160,041 - -
Property taxes, insurance and other 75,609 47,481 47,027
Depreciation and amortization 117,732 111,947 103,099
Write down of investment in STS Hotel Net 2,112 - -
Loss on asset impairment 43,582 - -
Swap termination costs 9,297 - -
Loss on fair value of non-hedging derivatives 6,666 - -
FelCor merger costs 5,817 - -
Costs to terminate leases with Prime Hospitality Corporation 1,315 - -
Restructuring charge 1,080 - -
---------- ----------- ----------
Total operating expenses 1,004,565 171,604 157,839
---------- ----------- ----------
Net operating income 80,323 229,174 217,065
Interest expense, net 122,376 117,524 100,398
---------- ----------- ----------
Income (loss) before minority interests, income taxes, gain (loss) on
sale of assets and extraordinary gain (loss) (42,053) 111,650 116,667
Minority interests (2,958) 10,240 11,069
---------- ----------- ----------
Income (loss) before income taxes, gain (loss) on sale of assets and
extraordinary gain (loss) (39,095) 101,410 105,598
Income tax expense (benefit) (1,178) 2,028 2,102
---------- ----------- ----------
Income (loss) before gain (loss) on sale of assets and extraordinary
gain (loss) (37,917) 99,382 103,496
Gain (loss) on sale of assets, net of tax effect of $(44) in 2001 and
$70 in 2000 (2,132) 3,425 -
Extraordinary gain (loss) on early extinguishment of debt, net of tax
effect of $(57) in 2001, $62 in 2000, ($93) in 1999 (2,713) 3,054 (4,532)
---------- ----------- ----------
Net income (loss) $ (42,762) $ 105,861 $ 98,964
========== =========== ==========
42
2001 2000 1999
--------- ----------- ----------
Earnings per share:
Basic:
Income (loss) before extraordinary gain (loss) $(0.91) $2.21 $ 2.19
Extraordinary gain (loss) (0.06) 0.07 (0.10)
--------- ----------- ----------
Net income (loss) $(0.97) $2.28 $ 2.09
========= =========== ==========
Diluted:
Income (loss) before extraordinary gain (loss) $(0.91) $2.14 $ 2.11
Extraordinary gain (loss) (0.06) 0.06 (0.08)
--------- ----------- ----------
Net income (loss) $(0.97) $2.20 $ 2.03
========= =========== ==========
See accompanying notes to consolidated financial statements.
43
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
Common Stock
--------------------------------------
Issued Treasury Accumlated
------------------ ------------------- Additional Other Unearned
Paid In Retained Comprehen- Stock-Based
Shares Amount Shares Amount Capital Earnings sive Income Compensation Total
-------- -------- --------- --------- ---------- --------- ------------ ------------- -----------
Balance, January 1, 1999 46,718 $ 467 - $ - $1,133,357 $ 27,222 $ (6,487) $ - $1,154,559
Net income for the year - - - - - 98,964 - - 98,964
Foreign currency
translation adjustment - - - - - - 1,240 - 1,240
----------
Comprehensive income 100,204
Issuances of common stock 95 1 - - 1,990 - - - 1,991
Shares repurchased - - (407) (6,252) - - - - (6,252)
Redemption of OP Units 851 9 - - 29,403 - - - 29,412
Dividends declared - - - - - (96,018) - - (96,018)
-------- ------- -------- -------- --------- --------- ------------ ------------- ----------
Balance, December 31,
1999 47,664 477 (407) (6,252) 1,164,750 30,168 (5,247) - 1,183,896
Net income for the year - - - - - 105,861 - - 105,861
Foreign currency
translation adjustment - - - - - - (834) - (834)
----------
Comprehensive income 105,027
Issuances of common stock 133 1 - - 1,831 - - - 1,832
Issuances of restricted
stock 589 6 - - 10,614 - - (10,620) -
Amortization on unearned
stock-based compensation - - - - - - - 3,070 3,070
Shares repurchased - - (3,676) (66,102) - - - - (66,102)
Redemption of OP Units 77 1 - - 23 - - - 24
Dividends declared - - - - - (93,192) - - (93,192)
-------- ------- -------- -------- --------- --------- ------------ ------------- ----------
Balance, December 31,
2000 48,463 485 (4,083) (72,354) 1,177,218 42,837 (6,081) (7,550) 1,134,555
Net income (loss) for
the year - - - - - (42,762) - - (42,762)
Foreign currency
translation adjustment - - - - - - (1,176) - (1,176)
Derivative instruments
transition adjustment (2,842) (2,842)
Change in valuation of
derivative instruments (2,404) (2,404)
----------
Comprehensive income (loss) (49,184)
Issuances of common stock 48 - - 847 - - - 847
Forfeiture of restricted stock (28) (28)
Amortization on unearned
stock-based compensation - - - - - - - 2,263 2,263
Shares repurchased - - (154) (3,002) - - - - (3,002)
Redemption of OP Units 250 2 - - 5,426 - - - 5,428
Dividends declared - - - - - (68,316) - - (68,316)
-------- ------- -------- -------- --------- --------- ------------ ------------- ----------
Balance, December 31, 2001 48,761 $ 487 (4,237) $(75,356) $1,183,463 $ (68,241) $ (12,503) $ (5,287) $1,022,563
======== ======= ======== ======== ========== ========= ============ ============= ==========
See accompanying notes to the consolidated financial statements.
44
MERISTAR HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
2001 2000 1999
------------ ----------- -----------
Operating activities:
Net income (loss) $ (42,762) $ 105,861 $ 98,964
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 117,732 111,947 103,099
(Gain) loss on assets sold, before tax effect 2,176 (3,495) -
Extraordinary (gain) loss on early extinguishment of debt,
before tax effect 2,770 (3,116) 4,625
Loss on asset impairment 43,582 - -
Loss on fair value of non-hedging derivatives 6,666 - -
Write down of investment in STS Hotel Net 2,112 - -
Minority interests (2,958) 10,240 11,069
Amortization of unearned stock-based compensation 2,263 3,070 -
Deferred income taxes (1,109) 795 892
Changes in operating assets and liabilities:
Accounts receivable, net 2,855 (1,505) 1,716
Prepaid expenses and other (2,039) 6,370 (5,260)
Income tax receivable - - 339
Intangible assets, net - - (245)
Due from MeriStar Hotels 13,344 (10,745) (4,039)
Accounts payable, accrued expenses, accrued interest and
other liabilities 6,304 4,194 17,303
Income taxes payable (801) 421 730
------------ ----------- -----------
Net cash provided by operating activities 150,135 224,037 229,193
------------ ----------- -----------
Investing activities:
Investment in hotel properties, net (44,476) (90,703) (170,063)
Proceeds from disposition of assets 9,715 24,148 8,900
Investments in and advances to affiliates, net - (2,111) (31,298)
Hotel operating cash received in lease conversions 3,257 - -
Purchases of minority interests - - (72)
Notes receivable from MeriStar Hotels (36,000) 57,110 9,890
Change in restricted cash (1,386) (2,730) (5,309)
------------ ----------- -----------
Net cash used in investing activities (68,890) (14,286) (187,952)
------------ ----------- -----------
Financing activities:
Deferred financing costs (18,927) (1,615) (6,899)
Proceeds from issuance of long-term debt 933,250 179,388 484,924
Principal payments on long-term debt (871,467) (214,724) (410,217)
Proceeds from issuances of common stock, net 847 1,741 1,991
Purchases of OP units (1,513) (7,535) -
Purchases of treasury stock (3,002) (66,102) (6,252)
Dividends paid to stockholders (89,470) (94,062) (94,774)
Distributions to minority investors (8,069) (9,212) (11,585)
------------ ----------- -----------
Net cash used in financing activities (58,351) (212,121) (42,812)
------------ ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 304 64 (53)
Net increase (decrease) in cash and cash equivalents 23,198 (2,306) (1,624)
Cash and cash equivalents, beginning of year 250 2,556 4,180
------------ ----------- -----------
Cash and cash equivalents, end of year $ 23,448 $ 250 $ 2,556
============ =========== ===========
See accompanying notes to consolidated financial statements.
45
MERISTAR HOSPITALITY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(dollars in thousands, except per share amounts)
1. Organization
We own a portfolio of primarily upscale, full-service hotels in the United
States and Canada. Our portfolio is diversified by franchise and brand
affiliations. As of December 31, 2001, we owned 112 hotels, with 28,653 rooms,
all of which were leased by our taxable subsidiaries and managed by MeriStar
Hotels & Resorts, Inc.
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, or REIT,
merged with CapStar Hotel Company. In connection with the merger between CapStar
and American General, we created MeriStar Hotels, a separate publicly traded
company, to be the lessee and manager of nearly all of our hotels.
On January 1, 2001, changes to the federal tax laws governing real estate
investment trusts became effective. Those changes are commonly known as the REIT
Modernization Act, or RMA. The RMA permits real estate investment trusts to
create taxable subsidiaries that are subject to taxation similar to subchapter
C-Corporations. Because of the RMA, we have created a number of these taxable
subsidiaries to lease our real property. The RMA prohibits our taxable
subsidiaries from engaging in the following activities:
. Managing the properties they lease (our taxable subsidiaries must
enter into an "arm's length" management agreement with an independent
third-party manager that is actively involved in the trade or business
of hotel management and manages properties on behalf of other owners);
. Leasing a property that contains gambling operations; and
. Owning a brand or franchise.
We believe establishing taxable subsidiaries to lease the properties we own
provides a more efficient alignment of and ability to capture the economic
interests of property ownership. Under the prior lease structure with MeriStar
Hotels, we received lease payments based on the revenues generated by the
properties; MeriStar Hotels, however, operated the properties in order to
maximize net operating income from the properties. This inconsistency could
potentially result in the properties being operated in a way that did not
maximize revenues. With the assignment of the leases from MeriStar Hotels to our
taxable subsidiaries and the execution of the new management agreements (as
described below), we gained the economic risks and rewards usually associated
with ownership of real estate, and property revenues became the basis for
MeriStar Hotels' management fees.
Subsidiaries of MeriStar Hotels assigned the participating leases to our
wholly-owned taxable subsidiaries as of January 1, 2001. In connection with the
assignment, the taxable subsidiaries executed new management agreements with a
subsidiary of MeriStar Hotels to manage our hotels. Under these management
agreements, the taxable subsidiaries pay a management fee to MeriStar Hotels for
each property. The taxable subsidiaries in turn make rental payments to us under
the participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases. The assignment of the
leases from MeriStar Hotels to our taxable subsidiaries did not result in any
cash consideration exchanged among the parties except for the transfer of hotel
operating assets and liabilities to the taxable subsidiaries. Under the new
management agreements, the base management fee is 2.5% of total hotel revenue.
MeriStar Hotels can also earn incentive management fees, based on meeting
performance thresholds, of up to 1.5% of total hotel revenue. The agreements
have an initial term of 10 years with three renewal periods of five years each
at the option of MeriStar Hotels, subject to some exceptions. Because these
leases have been assigned to our taxable subsidiaries, we now bear the operating
risk associated with our hotels.
On May 9, 2001, our operating partnership and we entered into an Agreement
and Plan of Merger with FelCor Lodging Trust Incorporated and its operating
partnership. On September 13, the Securities and
46
Exchange Commission rendered our S-4 document effective. On September 21, 2001,
we mutually agreed with FelCor to terminate the merger agreement due to
unfavorable market conditions. We have incurred $5,817 of costs related to this
merger through December 31, 2001 and these costs have been expensed in our
statement of operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation - Our consolidated financial statements include
the accounts of all of our majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
We use the equity method to account for investments in unconsolidated joint
ventures and affiliated companies in which we hold a voting interest of 50% or
less and exercise significant influence. We use the cost method to account for
our investment in entities in which we do not have the ability to exercise
significant influence.
Cash Equivalents and Restricted Cash - We consider all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Restricted cash represents amounts required to be maintained in
escrow under certain of our credit facilities.
Investments in Hotel Properties - We record investments in hotel properties
at cost (the allocated purchase price for hotel acquisitions) or at fair value
at the time of contribution (for contributed property). We depreciate property
and equipment balances using the straight-line method over lives ranging from
five to 40 years. For the years ended December 31, 2001, 2000 and 1999, we
capitalized interest of $6,098, $8,613, and $12,540, respectively. We carry
properties held for sale at the lower of their carrying values or estimated fair
values less costs to sell. We discontinue depreciation of these properties when
a property is classified as held for sale. Our properties held for sale are not
material and, therefore, are included in investments in hotel properties.
Intangible Assets - Intangible assets consist primarily of deferred
financing fees. We amortize these deferred fees on a straight-line basis over
the lives of the related borrowings.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of -
Whenever events or changes in circumstances indicate that the carrying values of
long-lived assets (including property and equipment and all intangibles) may be
impaired, we perform an analysis to determine the recoverability of the asset's
carrying value. The carrying value of the asset includes the original purchase
price (net of depreciation) plus the value of all capital improvements (net of
depreciation). If the analysis indicates that the carrying value is not
recoverable from future cash flows, we write down the asset to its estimated
fair value and recognize an impairment loss. The estimated fair value is based
on what we estimate the current sale price of the asset to be based on
comparable sales information or other estimates of the asset's value. Any
impairment losses we recognize are recorded as operating expenses. In 2001, we
recognized $43.6 million of impairment losses. We did not recognize any
impairment losses in 2000 or 1999.
We review long-lived assets for impairment when one or more of the
following events have occurred:
a. Current or immediate short-term (future twelve months) projected cash
flows are significantly less than the most recent historical cash
flows.
b. The unplanned departure of an executive officer or other key personnel
which could adversely affect our ability to maintain our competitive
position and manage future growth.
c. A significant adverse change in legal factors or an adverse action or
assessment by a regulator, which could affect the value of our
long-lived assets.
d. Events which could cause significant adverse changes and uncertainty
in business and leisure travel patterns.
We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In projecting the expected future operations of the
asset, we base our estimates on future budgeted earnings before interest
expense, income taxes, depreciation and amortization, or EBITDA, amounts and use
growth assumptions to project these amounts out over the expected life of the
underlying asset. Our growth assumptions are based on assumed future
improvements in the national economy and improvements in demand for lodging.
Income Taxes - We account for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards or SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts.
In conjunction with the merger on August 3, 1998, we became a REIT and were
therefore no longer subject to federal income taxes, provided that we comply
with various requirements necessary to maintain REIT status. REITs are subject
to state and local taxes in certain jurisdictions.
When RMA became effective on January 1, 2001, we created taxable
subsidiaries that are subject to taxation similar to subchapter C-corporations.
Because of the RMA, we have created a number of these taxable subsidiaries as
the lessees of our real property. The income of these taxable subsidiaries is
subject to federal income tax.
47
Foreign Currency Translation - We maintain results of operations for our
Canadian hotels in Canadian dollars and translate those results using the
average exchange rates during the period. We translate assets and liabilities to
U.S. dollars using the exchange rate in effect at the balance sheet date. We
reflect resulting translation adjustments in accumulated other compensation
income (loss).
Revenue Recognition - Prior to January 1, 2001, we earned participating
lease revenue from the leasing of all of our hotel operating properties. We
earned participating lease revenue from only eight hotels in 2001. Participating
lease revenue represented lease payments from lessees pursuant to participating
lease agreements. Effective January 1, 2001, in conjunction with RMA, we began
to earn rooms, food and beverage, and other revenue through the operations of
our hospitality properties. We recognize those revenues as hotel services are
delivered. Office, retail and parking rental is generally recognized on a
straight-line basis over the terms of the respective leases.
Paticipating Lease Agreement-Changes to the federal tax laws governing
REITs became effective on January 1, 2000. Under those changes, we have created
a number of taxable subsidiaries to lease our real property. Our taxable
susidiaries are wholly-owned and are similar to a subchapter C-corporation. As a
result, on January 1, 2001, MeriStar Hotels assigned their participating leases
to our taxable subsidiaries and the taxable subsidiaries entered into management
agreements with MeriStar Hotels to manage our properties. Under these management
agreements, the taxable subsideries pay MeriStar Hotels a management fee. The
taxable subsidiaries in turn make rental payments to us under the participating
leases. The management agreements have been structured to substantially mirror
the economics and terms of the former leases.
Use of Estimates - Preparing financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segment Information - SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires public entities to report selected
information about operating segments in financial reports issued to
shareholders. Based on the guidance provided in the standard, we have determined
that our business is conducted in one reportable segment. The standard also
establishes requirements for related disclosures about products and services,
geographic areas and major customers.
The following table summarizes geographic information required to be disclosed
under SFAS No. 131:
2001 2000 1999
------------- ------------- ------------
Revenue:
U.S. $1,061,621 $ 394,257 $367,893
Foreign 23,267 6,521 7,011
------------- ------------- ------------
$1,084,888 $ 400,778 $374,904
============= ============= ============
Investments in hotel
properties, net:
U.S. $2,734,028 $2,850,348
Foreign 52,269 56,153
------------- -------------
$2,786,297 $2,906,501
============= =============
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive Income,"
requires an enterprise to display comprehensive income and its components in a
financial statement to be included in an enterprise's full set of annual
financial statements or in the notes to financial statements. Comprehensive
income represents a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events for the period
other than transactions with owners in their capacity as owners. Our
comprehensive income includes net income and other comprehensive income from
foreign currency items and derivative instruments.
48
Derivative Instruments and Hedging Activity - SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires an entity to recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 137 and No. 138 amended certain
provisions of SFAS No. 133. We adopted these accounting pronouncements effective
January 1, 2001.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations," SFAS No. 142,
"Goodwill and Other Intangible Assets," and SFAS No. 143 "Accounting for Asset
Retirement Obligations." In August 2001, the FASB issued SFAS No. 144
"Accounting for the Impairment of Disposal of Long-Lived Assets," which
supersedes SFAS No. 121. We are currently in the process of evaluating the
effect these new standards will have on our financial statements.
3. Investments in Hotel Properties
Investments in hotel properties consists of the following:
December 31,
--------------------------------
2001 2000
-------------- -------------
Land $ 310,921 $ 317,072
Buildings 2,473,651 2,461,089
Furniture, fixtures and equipment 354,392 338,350
Construction-in-progress 44,713 77,219
-------------- -------------
Total $3,183,677 $3,193,730
============== =============
4. Investments in and Advances to Affiliates
We have ownership interests in certain unconsolidated joint ventures and
affiliated companies.
In conjunction with the lease assignments from MeriStar Hotels on January
1, 2001, we acquired the ownership interest in Ballston Parking Associates of
$1,629. We account for this investment using the cost method.
In 1999, we invested $40,000 in MeriStar Investment Partners, LP ("MIP"), a
joint venture established to acquire upscale, full-service hotels. Our
investment is in the form of a preferred partnership interest. We receive a
16% preferred return on our investment. We account for this investment using the
cost method.
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
-------------------------------
2001 2000
-------------- --------------
Senior unsecured notes ......................... $ 750,000 $ -
Credit facility ................................ 224,000 898,000
Secured facility ............................... 330,000 330,000
Subordinated notes ............................. 205,000 205,000
Convertible notes .............................. 154,300 154,300
Mortgage debt and other ........................ 52,335 59,036
Unamortized issue discount ..................... (15,501) (8,017)
-------------- --------------
$1,700,134 $1,638,319
============== ==============
49
Future Maturities- Aggregate future maturities of the above obligations are
as follows:
2002 ............................................................ $ 15,543
2003 ............................................................ 232,589
2004 ............................................................ 171,168
2005 ............................................................ 9,265
2006 ............................................................ 10,006
Thereafter ...................................................... 1,261,563
--------------
$1,700,134
==============
Senior Unsecured Notes - In December 2001, we issued $250,000 aggregate
principal amount of 10.5% senior notes due June 2009. The notes are unsecured
obligations of certain subsidiaries of ours and we guarantee payment of
principal and interest on the notes. The net proceeds from the sale of $248,420
were used to repay amounts outstanding under the credit facility. The repayments
of term loans under the credit facility resulted in an extraordinary loss of
$1,527 ($1,489, net of tax) from the write-off of deferred financing costs.
In January 2001, we issued $300,000 aggregate principal amount of 9.0%
senior notes due 2008 and $200,000 of 9.13% senior notes due 2011. The notes are
unsecured obligations of certain subsidiaries of ours and we guarantee payment
of principal and interest on the notes. The net proceeds from the sale of
$492,000 were used to repay amounts outstanding under the credit facility and to
make payments to terminate certain swap agreements that hedged variable rate
loans that were repaid. The repayments of term loans under the credit facility
resulted in an extraordinary loss of $1,243 ($1,224, net of tax) from the
write-off of deferred financing costs.
Credit Facility - In conjunction with the merger, we entered into a
$1,000,000 senior secured credit facility. The credit facility was structured as
a $300,000, five-year term loan facility; a $200,000, five-and-a-half year term
loan facility; and a $500,000, three-year revolving credit facility with two,
one-year optional extensions. We used the proceeds from the sales of senior
unsecured notes in 2001 to repay amounts outstanding under the two term loans.
The credit facility is secured by our common stock and our general partnership,
limited partnership and limited liability ownership interests in our
subsidiaries. The interest rate on the term loans and revolving facility ranges
from 100 to 200 basis points over the 30-day LIBOR, depending on certain
financial performance covenants and long-term senior unsecured debt ratings. The
weighted average interest rate on borrowings outstanding under our credit
facility as of December 31, 2001 and 2000 was 8.3%. As of December 31, 2001, we
had $76,000 available to borrow under the credit facility.
Our senior credit facility requires us to meet or exceed certain financial
performance ratios at the end of each quarter. Travel disruptions and safety
concerns following the terrorist attacks on September 11, 2001 and the slowdown
of the national economy resulted in a significant negative impact to the lodging
industry and our operations. This decline in operations would have caused us to
be out of compliance with certain financial covenants specified in our senior
credit agreement. On October 24, 2001, however, we finalized a temporary waiver
on all affected financial covenants with our senior bank group and engaged in
discussions to amend our senior credit agreement further. This waiver to the
credit agreement allowed these financial covenants to be waived for the period
beginning September 30, 2001 and ending February 28, 2002. In December 2001, we
amended the terms of our senior credit facility. This permanently relaxed the
financial covenants required under the loan and allows us to extend the
maturity date of the credit facility from July 2002 until July 2003. We incurred
$4,382 of costs related to the amended agreement.
Secured Facility - In 1999 we completed a $330,000, 10-year non-recourse
financing secured by a portfolio of 19 hotels. The loan bears a fixed interest
rate of 8.01% and matures in 2009. We used most of the net proceeds to repay
amounts outstanding under our prior credit facilities.
50
Subordinated Notes - In 1999 we issued $55,000 aggregate principal amount
(issue price of $51,906, net of discount) of 8.75% senior subordinated notes due
2007. The net proceeds of $51,219 were used to repay amounts outstanding under
our credit facility and to invest in MIP. These notes are our unsecured
obligations and provide for semi-annual payments of interest on February 15 and
August 15, commencing on August 15, 1999.
In 1997, we completed the offering of $150,000 aggregate principal amount
(issue price of $149,799, net of discount) of 8.75% senior subordinated notes
due 2007, generating net proceeds of $144,620. The indenture pursuant to which
the subordinated notes were issued contains certain covenants, including
maintenance of certain financial ratios, reporting requirements, and other
customary restrictions. The subordinated notes are our unsecured obligations and
provide for semi-annual payments of interest on February 15 and August 15,
commencing on February 15, 1998.
Convertible Notes - In 1997, we completed the offering of $172,500
aggregate principal amount of 4.75% convertible subordinated notes due 2004,
generating net proceeds of $167,581. The proceeds were used to repay amounts
outstanding under our prior credit facility and to finance certain hotel
acquisitions. The convertible notes are unsecured obligations and provide for
semi-annual payments of interest on April 15 and October 15, commencing on April
15, 1998. During 2000, we repurchased $18,200 of our convertible notes at a
discount. This resulted in an extraordinary gain of $3,116 ($3,054, net of tax
effect).
Mortgage Debt - In connection with the merger, we assumed mortgage debt
secured by seven hotels. The mortgage debt matures between 2001 and 2012, and
the interest rates on the mortgages range from 7.5% to 10.5%.
Hedge Agreements and Other Derivatives- Our interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows. We assess interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows, and by evaluating hedging opportunities. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes.
We recognized a transition adjustment of $2,842 as the fair value of our
derivative instruments at January 1, 2001. We recorded a liability and
corresponding charge to other comprehensive loss for this amount. As of December
31, 2001, the fair value of the derivative instruments represents a liability of
$12,100.
Upon the sale of our $250,000 senior unsecured notes in December 2001, we
reduced the term loans and our revolver under our senior secured credit facility
by an aggregate amount of $248,400. At that time, we converted three swap
agreements to non-hedging derivatives. These swap agreements had notional
principal amounts of approximately $151,400 and were originally designated to
hedge interest rates on borrowings under our senior secured credit facility that
were repaid. We recognized a $6,666 loss when this amount was transferred out of
accumulated other comprehensive income because the debt being hedged was repaid.
Upon the sale of our $500,000 senior unsecured notes in January 2001, we
reduced the term loans under our senior secured credit facility by $300,000. At
that time, we terminated three swap agreements with a notional amount of
$300,000. These swap agreements were originally designated as cash flow hedges
of interest rates on the variable rate term loans that were repaid. We made net
payments totaling $9,297 million to our counter parties to terminate these swap
agreements, and recognized a $9,297 million loss related to those terminated
swaps.
As of December 31, 2001, we had three swap agreements with notional amounts
totaling $300,000. A portion of these swap agreements ($148,600) provide hedges
against the impact future interest rates have on our floating LIBOR debt
instruments. The remaining portion of the swap agreements ($151,400) have been
converted to non-hedging derivatives. The swap agreements effectively fix the
30-day LIBOR between 4.77% and 6.4%. The swap agreements expire between December
2002 and July 2003. For the year ended December 31, 2001 and 2000, we have
(made)/received net payments of approximately $(6,285) and $3,081, respectively.
51
The fair value of swap agreements designated as cash flow hedges is $5,246
at December 31, 2001 and recorded in accumulated other comprehensive income. The
estimated amount recorded in accumulated other comprehensive income expected to
be reclassified to the statement of operations during 2002 is $4,735.
In anticipation of the August 1999 completion of our mortgage-backed
secured facility, we entered into two separate hedge transactions during July
1999. Upon completion of the secured facility, we terminated the underlying
treasury lock agreements, resulting in a net payment to us of $5,100. This
amount was deferred and is being recognized as a reduction to interest expense
over the life of the underlying debt. As a result, the effective interest rate
on the secured facility is 7.76%.
Additionally, in anticipation of the August 1997 offering of $150,000
aggregate principal amount of our 8.75% senior subordinated notes due 2007, we
entered into separate hedge transactions during June and July 1997. Upon
completion of the subordinated notes offering, we terminated the underlying swap
agreements, resulting in a net payment to us of $836. This amount was deferred
and is being recognized as a reduction to interest expense over the life of the
underlying debt. As a result, the effective interest rate on the subordinated
notes is 8.69%.
As of December 31, 2001, after consideration of the hedge agreements
described above, 95.6% of our debt was fixed and our overall weighted average
interest rate was 8.49%.
We have determined the fair value of our outstanding balance of long-term
debt approximates $1,625,000 at December 31, 2001.
6. Income Taxes
When the RMA became effective on January 1, 2001, we created taxable
subsidiaries to lease certain of our properties. These subsidiaries are subject
to taxation similar to C-corporations. The income of these taxable subsidiaries
is subject to federal income tax.
Our income taxes were allocated as follows:
2001 2000 1999
------------ ------------ ------------
Taxes on income (loss) before gain (loss) on sale of
assets and extraordinary gain (loss) .................... $(1,178) $2,028 $2,102
Taxes on gain (loss) on sale of assets .................. (44) 70 -
Tax expense (benefit) on extraordinary gain (loss) ...... (57) 62 (93)
------------ ------------ ------------
Total income tax expense (benefit) .................... $(1,279) $2,160 $2,009
============ ============ ============
Our income (loss) before taxes (including the gain (loss) on sale of assets
and extraordinary items, and net of minority interests) was $(44,940), $107,889,
and $101,066 in 2001, 2000 and 1999, respectively. Our total income tax expense
(benefit) was $(1,279), $2,160 and $2,009, respectively. Therefore, our
effective income tax rates were 2.7%, 2.0% and 2.0%, respectively.
Our effective income tax rate differs from the federal statutory income tax rate
as follows:
2001 2000 1999
------------ ------------ ------------
Statutory tax rate 35.0% 35.0% 35.0%
Effect of REIT dividends paid deduction (34.3) (35.0) (35.0)
State and local taxes 1.8 1.7 1.7
Difference in effective rate on foreign subsidiaries 0.2 0.3 0.3
------------ ------------ ------------
2.7% 2.0% 2.0%
============ ============ ============
52
The components of income tax expense (benefit) related to income (loss)
before gain (loss) on sale of assets and extraordinary gain (loss) are as
follows:
2001 2000 1999
------------ ------------ ------------
Current:
Federal $ - $ - $ -
State 400 800 1,020
Foreign 100 433 190
------------ ------------ ------------
500 1,233 1,210
Deferred:
Federal (337) - -
State (1,231) 685 842
Foreign (110) 110 50
------------ ------------ ------------
(1,678) 795 892
------------ ------------ ------------
$ (1,178) $ 2,028 $ 2,102
============ ============ ============
The tax effects of the principal temporary differences that give rise to
our net deferred tax liability are as follows:
December 31,
---------------------------
2001 2000
------------ ------------
Accelerated depreciation/basis difference $ 2,130 $ 2,611
Fair value of hotel assets acquired 6,800 6,800
Allowance for doubtful accounts 82 (30)
Accrued vacation (15) (15)
Accrued expenses 482 482
Net operating loss (449) -
Other 1 292
------------ ------------
Net deferred tax liability $ 9,031 $10,140
============ ============
Our taxable subsidiaries had a net operating loss in 2001. We have not
recorded a valuation allowance against the deferred tax assets this loss creates
as of December 31, 2001 as we believe it is more likely than not we will realize
these deferred tax assets.
In conjunction with the merger and related transactions, we had several
significant events that affect income tax-related balances for the years ended
December 31, 2001 and 2000. These events are summarized below:
. REITs are subject to federal income taxes in certain instances for asset
dispositions occurring within 10 years of electing REIT status. We do not
expect to incur federal tax liability resulting from the disposition of
assets with built-in gain. The 2001 and 2000 asset dispositions were not
subject to the built-in gain rules.
. At the time of the merger in 1998, we established a new accounting basis
for American General's assets and liabilities based on their fair values.
In accordance with generally accepted accounting principles, we have
provided a deferred income tax liability for the estimated future tax
effect of differences between the accounting and tax bases of assets
acquired from American General. This deferred income tax liability, related
to future state and local income taxes, is estimated as $6,800, based on
information available at the date of the merger and subsequently.
7. Stockholders' Equity and Minority Interests
Common Stock Transactions- We are authorized to issue up to 100,000 shares
of our preferred stock, par value $0.01 per share, from time to time with such
rights, preferences and priorities as the Board of Directors shall designate. We
have not issued any preferred stock.
53
In September 1999, our Board of Directors authorized the repurchase of up
to 5,000 shares of our common stock from time to time in open market or
privately negotiated transactions. As of December 31, 2001 we have repurchased a
total of 4,200 shares for $75,356.
In May 2000, we implemented a stock purchase plan that allowed eligible
employees to purchase our common stock at a discount to market value. We had
reserved 500,000 shares of common stock for issuance under this plan. In
September 2001, we discontinued the stock purchase plan.
OP Units - Substantially all of our assets are held indirectly by and
operated through MeriStar Hospitality Operating Partnership, L.P., our
subsidiary operating partnership.
Our operating partnership's partnership agreement provides for five classes
of partnership interests: Common OP Units, Class B OP Units, Class C OP Units,
Class D OP Units and Profits-Only OP Units. Holders of Common OP Units and Class
B OP Units receive distributions per OP Unit equivalent to the dividend paid on
each of our common shares. Holders of Class C OP Units receive a non-cumulative,
quarterly distribution equal to $0.5575 per Class C OP Unit so long as the
common OP Units and Class B OP Units receive a distribution for such quarter and
the dividend rate on our common stock does not exceed $0.5575. The Class C OP
Units automatically convert into Common OP Units when that dividend rate is
exceeded. Holders of Class D OP Units receive a 6.5% cumulative annual preferred
return based on an assumed price per common share of $22.16; the return is
compounded quarterly to the extent not paid on a current basis, and holders are
entitled to a liquidation preference of $22.16 per Class D OP Unit. All net
income and capital proceeds earned by the operating partnership (after payment
of the annual preferred return and, if applicable, the liquidation preference)
will be shared by the holders of the Common OP Units in proportion to the number
of Common OP Units in the relevant operating partnership owned by each such
holder.
During 1999, we issued 65,875 Common OP Units to partially finance the
purchase of a hotel, and we issued 974,588 Common OP units as a conditional
component of a purchase agreement for a hotel we purchased in 1998.
On March 21, 2001, June 28, 2001, September 18, 2001 and December 17, 2001,
we declared our first, second, third and fourth quarter dividends, respectively,
equivalent to an annual rate of $1.525 per share of common stock and Common OP
Unit. The amount of the dividend for each quarter was $0.505 per share of common
stock or Common OP Unit for the first, second and third quarters and $0.01 per
share of common stock and OP unit for the fourth quarter. These dividends were
paid on April 30, 2001, July 31, 2001, October 12, 2001 and January 31, 2002.
On March 21, 2000, June 21, 2000, September 25, 2000 and December 20, 2000,
we declared our first, second, third and fourth quarter dividends, respectively,
equivalent to an annual rate of $2.02 per share of common stock or Common OP
Unit. The amount of the dividend for each quarter was $0.505 per share of common
stock or Common OP Unit. These dividends were paid on April 28, 2000, July 31,
2000, October 31, 2000 and January 31, 2001.
On March 17, 1999, June 21, 1999, September 15, 1999 and December 6, 1999,
we declared our first, second, third and fourth quarter dividends, respectively,
equivalent to an annual rate of $2.02 per share of common stock and OP Unit. The
amount of the dividend for each quarter was $0.505 per share of common stock or
OP Unit. These dividends were paid on April 30, 1999, July 30, 1999, October 29,
1999 and January 31, 2000.
54
8. Earnings Per Share
The following table presents the computation of basic and diluted earnings
per share:
Year Ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Basic Earning Per Share Computation:
Net income (loss) before extraordinary
gain (loss) $ (40,049) $ 102,807 $ 103,496
Dividends paid on unvested restricted stock (502) (1,168) -
---------- ---------- ----------
Income (loss) available to common stockholders (40,551) 101,639 103,496
Weighted average number of shares
of Common Stock outstanding 44,507 45,958 47,276
---------- ---------- ----------
Basic earnings per share before extraordinary
gain (loss) $ (0.91) $ 2.21 $ 2.19
========== ========== ==========
Diluted Earnings Per Share Computation:
Income (loss) available to common shareholders $ (40,551) $ 101,639 $ 103,496
Minority interest, net of tax - 554 10,143
Interest on convertible debt, net of tax - 7,338 8,137
Dividends on unvested restricted stock - 254 -
---------- ---------- ----------
Adjusted net income $ (40,551) $ 109,785 $ 121,776
---------- ---------- ----------
Weighted average number of shares
of common stock outstanding 44,507 45,958 47,276
Common stock equivalents:
Operating partnership units - 441 5,205
Stock options - 208 102
Convertible debt - 4,612 5,066
Restricted stock - 176 -
---------- ---------- ----------
Total weighted average number of diluted
shares of common stock outstanding 44,507 51,395 57,649
---------- ---------- ----------
Diluted earnings per share before extraordinary
gain (loss) $ (0.91) $ 2.14 $ 2.11
========== ========== ==========
9. Related-Party Transactions
Pursuant to an intercompany agreement, we and MeriStar Hotels provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, MeriStar Hotels has a
right of first refusal to become the manager of any real property we acquire.
We also may provide each other with certain services. These may include
administrative, renovation supervision, corporate, accounting, finance, risk
management, legal, tax, information technology, human resources, acquisition
identification and due diligence, and operational services, for which MeriStar
Hotels is compensated in an amount that we would be charged by a third party for
comparable services. During the years ended December 31, 2001, 2000 and 1999, we
paid MeriStar Hotels a net amouunt of $151, $1,165 and $1,600 respectively, for
such services.
MeriStar Hotels has a revolving credit facility with us. On March 1, 2000,
MeriStar repaid the remaining balance of $57,100 on its revolving credit
agreement with us upon closing its bank revolving credit facility. At that time,
the revolving credit facility was amended to reduce the maximum borrowing
55
limit from $75,000 to $50,000 and to increase the interest rate on the facility
from LIBOR plus 350 basis points to LIBOR plus 650 basis points. During 2001,
2000 and 1999, we earned interest of $5,005, $955, and $4,907, respectively,
from this facility. As of December 31, 2001, MeriStar Hotels had $36,000 of
borrowings outstanding under this facility.
Certain members of our management and our respective affiliates owned
equity interests relating to a hotel that we acquired in January 1999. These
persons and affiliates received an aggregate of $1,488 of our OP Units in
exchange for their interests in the hotel.
Of the $300,000 aggregate principal amount of 9.0% senior unsecured notes
due in 2008 we sold in January 2001, $30,000 principal amount was sold at a
price of 99.688% to an affiliate of Oak Hill Capital Partners. The notes
purchased were identical to those purchased by third parties.
Of the $200,000 aggregate principal amount of 9.13% senior unsecured notes
due in 2011 we sold in January 2001, $20,000 principal amount was sold at a
price of 99.603% to an affiliate of Oak Hill Capital Partners. The notes
purchased were identical to those purchased by third parties.
Of the $250,000 aggregate principal amount of 10.5% senior unsecured notes
due in 2009 we sold in December 2001, $23,000 principal amount was sold at a
price of 99.368% to an affiliate of Oak Hill Capital Partners. The notes
purchased are identical to those purchased by third parties.
10. Stock-Based Compensation
Stock Options
In connection with the merger, we adopted a new equity incentive plan. This
plan authorizes us to award up to 5,565,518 options on shares of common stock.
We may grant awards to officers or other of our key employees or an affiliate.
These options are exercisable in three annual installments and expire 10 years
from the grant date.
In addition, we adopted a new equity incentive plan for non-employee
directors. The directors' plan authorizes us to award up to 500,000 options.
These options are exercisable in three annual installments and expire 10 years
from the grant date.
56
Stock option activity for 2001, 2000 and 1999 is as follows:
Equity Incentive Plan Directors' Plan
--------------------------------- --------------------------------
Number of Average Number Average
Shares Option Price of Shares Option Price
------------- ---------------- ------------ ----------------
Balance, January 1, 1999 3,703,379 $24.80 45,000 $21.38
Granted 1,015,750 19.37 35,000 23.63
Exercised (94,012) 15.64 - -
Canceled (264,064) 27.87 - -
------------- ---------------- ------------ ----------------
Balance, December 31, 1999 4,361,053 23.56 80,000 22.36
Granted 584,875 16.13 35,000 19.00
Exercised (47,153) 17.26 - -
Canceled (113,441) 28.62 - -
------------- ---------------- ------------ ----------------
Balance, December 31, 2000 4,785,334 22.68 115,000 21.34
Granted 88,500 13.33 47,500 23.00
Exercised (41,839) 16.12 - -
Canceled (2,194,165) 26.87 - -
------------- ---------------- ------------ ----------------
Balance, December 31, 2001 2,637,830 $19.47 162,500 $21.83
============= ================ ============ ================
Shares exercisable at December 31, 1999 2,577,620 $24.53 15,000 $21.38
============= ================ ============ ================
Shares exercisable at December 31, 2000 3,482,816 $23.99 26,667 $22.56
============= ================ ============ ================
Shares exercisable at December 31, 2001 2,020,759 $20.09 80,000 $21.69
============= ================ ============ ================
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------
Weighted Weighted
Average Weighted Average
Range of exercise Number Remaining Average Number Exercise
prices outstanding Contractual Life Exercise Price exercisable Price
- --------------------- ------------- ------------------- ----------------- ------------- -------------
$13.33 to $15.64 1,031,598 6.46 $15.13 801,434 $15.37
$16.25 to $19.00 72,750 7.89 17.43 39,169 17.02
$19.19 to 19.19 925,000 7.10 19.19 616,667 19.19
$19.75 to $29.44 624,407 6.62 25.25 496,914 26.10
$29.55 to $31.61 146,575 5.87 30.93 146,575 30.93
------------- ------------------- ----------------- ------------- -------------
$13.33 to $31.61 2,800,330 6.71 $19.61 2,100,759 $20.15
============= =================== ================= ============= =============
We have adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Accordingly, we apply 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 diluted earnings per share
is required by SFAS No. 123, and has been determined as if we have accounted for
our employee stock options under the fair value method. We estimated the fair
value for these options at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 2001, 2000 and
1999:
2001 2000 1999
--------------- ---------------- --------------
Risk-free interest rate 3.6% 6.71% 6.70%
Dividend rate $1.525 $2.02 $2.02
Volatility factor 0.57 0.27 0.31
Weighted average expected life 3.10 years 3.06 years 3.07 years
57
Our pro forma net income (loss) and diluted earnings (loss) per share as if
the fair value method had been applied were $(45,215) and $(1.02) for 2001,
$98,216 and $2.07 for 2000, $98,273 and $2.02 for 1999. The effects of applying
SFAS No. 123 for disclosing compensation costs may not be representative of the
effects on reported net income and diluted earnings per share for future years.
Other Stock-Based Compensation
As of December 31, 2001, we have granted 479,000 shares of restricted stock
to employees. This restricted stock vests ratably over three-year or five-year
periods. The issuance of restricted stock has resulted in $5,287 of unearned
stock-based compensation recorded as a reduction to stockholders' equity on our
balance sheet as of December 31, 2001.
In 2000, we granted 462,500 Profits-Only OP Units, or POPs, to some of our
employees pursuant to our POPs Plan. As of December 31, 2001, 387,500 POPs are
outstanding. These POPs were originally eligible for vesting based on us
achieving certain financial performance criteria. During 2001, we converted
these POPs to fixed awards and extended the vesting period to 2004. In 2001, we
granted 350,000 POPs to some of our employees pursuant to our POPs Plan. These
POPs are fixed awards and vest ratably over three years.
11. Restructuring Charges
During 2001, we incurred a restructuring charge of $1,080 in connection
with operational changes at our corporate headquarters. The restructuring
included eliminating seven corporate staff positions and office space no longer
needed under the new structure.
The restructuring charge consists of:
Severance $ 168
Noncancelable lease cost 912
------
Total $1,080
======
During 2001, we applied $168 and $520 in severance and lease termination
costs, respectively, against the restructuring reserve. Approximately $392 of
the restructuring accrual remains at December 31, 2001.
12. Commitments and Contingencies
We lease land at certain hotels from third parties. Certain leases contain
contingent rent features based on gross revenues at the respective property.
Future minimum lease payments required under these operating leases as of
December 31, 2001 were as follows:
2002 $ 1,446
2003 1,446
2004 1,446
2005 1,449
2006 1,449
Thereafter 52,315
-------------
$59,551
=============
58
We lease certain office, retail and parking space to outside parties under
non-cancelable operating leases with initial or remaining terms in excess of one
year. Future minimum rental receipts under these leases as of December 31, 2001
were as follows:
2002 $ 4,969
2003 4,190
2004 3,915
2005 2,398
2006 1,217
Thereafter 1,896
-------------
$18,585
=============
In the course of our normal business activities, various lawsuits, claims
and proceedings have been or may be instituted or asserted against us. Based on
currently available facts, we believe that the disposition of matters that are
pending or asserted will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
13. Acquisitions and Dispositions
During 2001, we sold two hotels and received proceeds of $9,715. The sales
resulted in a loss of $2,176 ($2,132, net of tax).
During 2001, we terminated the leases of eight of our hotels from
affiliates of Prime Hospitality Corporation for a total cost of $1,315.
Concurrently, we signed long-term management agreements with MeriStar Hotels for
four of these properties. The term on the remaining four management agreements
is one year with additional one-year renewal periods.
During 2000, we sold three limited-service hotels and received proceeds of
$24,148. This resulted in a gain on sale of assets of $3,495 ($3,425, net of
tax). We also purchased a full-service hotel for $19,400. Of the purchase
amount, we paid $11,400 in cash and we will pay $8,000 from the hotel's future
cash flow within the next five years. We funded the acquisition using existing
cash and borrowings under our revolving credit facility.
During 1999, we acquired one hotel for a purchase price of $10,642 of cash
and $1,488 of OP Units. We funded the acquisition using existing cash and
borrowings on our credit facility. We also sold two hotels during 1999 for a
total price of $8,900. The resulting gain on the sales was immaterial.
14. Quarterly Financial Information (Unaudited)
The following is a summary of our quarterly results of operations:
2001 2000
------------------------------------------ -------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Total revenue ..................... $302,684 $307,167 $247,538 $227,499 $67,100 $81,539 $117,631 $134,508
Total operating expenses .......... 256,742 249,667 234,003 264,153 41,698 43,631 42,506 43,769
Net operating income
(loss) ......................... 45,942 57,500 13,535 (36,654) 25,402 37,908 75,125 90,739
Income (loss) before
extraordinary gain (loss) ...... 13,039 24,560 (17,302) (60,346) (3,426) 10,424 41,259 54,550
Net income (loss) ................. 11,815 24,560 (17,302) (61,835) (372) 10,424 41,259 54,550
Diluted earnings (loss)
per share ...................... $ 0.25 $ 0.52 $ (0.39) $ (1.37) $ (0.01) $ 0.22 $ 0.83 $ 1.13
59
15. Supplemental Cash Flow Information
2001 2000 1999
---------- ----------- ----------
Cash paid for interest and income taxes:
Interest, net of capitalized interest of $6,098, $8,613, and $12,540,
respectively $105,732 $120,539 $93,491
Income taxes 698 874 1,261
Non-cash investing and financing activities:
OP Units issued in purchase of property and equipment - - 1,488
Redemption of OP Units 5,428 24 29,412
Dividends reinvested - 91 -
Issuance of restricted stock - 10,620 -
Deferred purchase price - 8,000 -
Operating assets received and liabilities assumed from lease conversion:
Accounts receivable 47,200 - -
Prepaid expenses and other 13,500 - -
Furniture and fixtures, net 152 - -
Investment in affiliates, net 1,629 - -
----------
Total operating assets received 62,481 - -
==========
Accounts payable and accrued expenses 65,706 - -
Long-term debt 32 - -
----------
Total liabilities acquired 65,738 - -
==========
16. Subsequent Event
On February 7, 2002, we sold $200,000 of senior unsecured notes. These
notes have an interest rate of 9.13% and mature in January 2011. We used the
proceeds to pay down our revolving credit facility. As a result of this
financing, we redesignated some swap agreements as non-hedging derivatives. We
recognized a $4,700 loss when this amount was transferred out of accumulated
other comprehensive income because the debt being hedged was repaid.
60
MERISTAR HOSPITALITY CORPORATION
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(dollars in thousands)
Costs subsequent Gross amount
Initial cost to Company to acquisition at end of year
----------------------- --------------- --------------
Building Building Building Accum-
and and and ulated Year of
Encum- Improve Improve- Improve Deprecia Construc- Date
Description brances Land ments Land ments Land ments tion tion Acquired Life
- -------------------------------------------------------- --------------- -------------- --------------------------------
Hotel Assets:
Salt Lake Airport Hilton, UT - 770 12,828 - 4,185 770 17,013 2,579 1980 3/3/1995 40
Radisson Hotel, Schaumburg, IL - 1,080 5,131 (230) 938 850 6,069 1,107 1979 6/30/1995 40
Sheraton Hotel, Colorado
Springs, CO (1) 1,071 14,592 1 4,526 1,072 19,118 2,848 1974 6/30/1995 40
Hilton Hotel, Bellevue, WA 48 5,211 6,766 (441) 3,686 4,770 10,452 1,358 1979 8/4/1995 40
Marriott Hotel, Somerset, NJ (1) 1,978 23,001 - 4,811 1,978 27,812 4,092 1978 10/3/1995 40
Westin Atlanta Airport, Atlanta,
GA - 2,650 15,926 (300) 9,517 2,350 25,443 3,734 1982 11/15/1995 40
Sheraton Hotel, Charlotte, NC (1) 4,700 11,057 - 4,032 4,700 15,089 2,123 1985 2/2/1996 40
Radisson Hotel Southwest,
Cleveland, OH - 1,330 6,353 - 5,537 1,330 11,890 1,479 1978 2/16/1996 40
Orange County Airport Hilton,
Irvine, CA (1) 9,990 7,993 - 3,723 9,990 11,716 1,544 1976 2/22/1996 40
The Latham Hotel, Washington,
DC - 6,500 5,320 - 4,233 6,500 9,553 1,169 1981 3/8/1996 40
Hilton Hotel, Arlington, TX (1) 1,836 14,689 79 3,766 1,915 18,455 2,479 1983 4/17/1996 40
Hilton Hotel, Arlington, VA - 4,000 15,069 - 851 4,000 15,920 2,117 1990 8/23/1996 40
Southwest Hilton, Houston, TX - 2,300 15,665 (613) (2,871) 1,687 12,794 2,168 1979 10/31/1996 40
Embassy Suites, Englewood, CO (1) 2,500 20,700 - 3,537 2,500 24,237 2,973 1986 12/12/1996 40
Holiday Inn, Colorado Springs, CO - 1,600 4,232 (426) (257) 1,174 3,975 619 1974 12/17/1996 40
Embassy Row Hilton,
Washington, DC - 2,200 13,247 - 3,276 2,200 16,523 1,888 1969 12/17/1996 40
Hilton Hotel & Towers,
Lafayette, LA (1) 1,700 16,062 - 2,169 1,700 18,231 2,164 1981 12/17/1996 40
Hilton Hotel, Sacramento, CA (1) 4,000 16,013 - 2,686 4,000 18,699 2,236 1983 12/17/1996 40
Santa Barbara Inn, Santa
Barbara, CA - 2,600 5,141 - 1,497 2,600 6,638 770 1959 12/17/1996 40
San Pedro Hilton, San Pedro,
CA - 640 6,047 - 2,517 640 8,564 975 1989 1/28/1997 40
Doubletree Hotel, Albuquerque,
NM (1) 2,700 15,075 - 2,376 2,700 17,451 1,957 1975 1/31/1997 40
Westchase Hilton & Towers,
Houston, TX (1) 3,000 23,991 - 1,578 3,000 25,569 3,113 1980 1/31/1997 40
Sheraton Great Valley Inn,
Frazer, PA - 2,150 11,653 11 3,610 2,161 15,263 1,576 1971 3/27/1997 40
Holiday Inn Calgary Airport,
Calgary, Alberta, Canada - 751 5,011 (77) 1,675 674 6,686 666 1981 4/1/1997 40
Sheraton Hotel Dallas, Dallas,
TX - 1,300 17,268 (569) (5,551) 731 11,717 2,389 1974 4/1/1997 40
Radisson Hotel Dallas, Dallas,
TX - 1,800 17,580 (868) (7,542) 932 10,038 2,236 1972 4/1/1997 40
Sheraton Hotel Guildford,
Surrey, BC, Canada - 2,366 24,008 (244) (1,335) 2,122 22,673 2,650 1992 4/1/1997 40
Doubletree Guest Suites,
Indianapolis, IN - 1,000 8,242 - 999 1,000 9,241 1,057 1987 4/1/1997 40
Ramada Vancouver Centre,
Vancouver, BC, Canada - 4,400 7,840 (451) 1,877 3,949 9,717 1,057 1968 4/1/1997 40
Holiday Inn Sports Complex,
Kansas City, MO - 420 4,742 - 2,129 420 6,871 715 1975 4/30/1997 40
Hilton Crystal City, Arlington,
VA - 5,800 29,879 - 1,674 5,800 31,553 3,464 1974 7/1/1997 40
Doral Palm Springs, Cathedral
City, CA - 1,604 16,141 - 3,022 1,604 19,163 2,045 1985 7/1/1997 40
Radisson Hotel & Suites,
Chicago, IL - 4,870 39,175 - 3,619 4,870 42,794 4,586 1971 7/15/1997 40
Georgetown Inn, Washington, DC - 6,100 7,103 - 1,824 6,100 8,927 884 1962 7/15/1997 40
Embassy Suites Center City,
Philadelphia, PA (1) 5,500 26,763 - 3,529 5,500 30,292 3,085 1963 8/12/1997 40
61
Doubletree Hotel Austin,
Austin, TX (1) 2,975 25,678 - 3,288 2,975 28,966 3,003 1984 8/14/1997 40
Radisson Plaza Hotel,
Lexington, KY - 1,100 30,375 - 6,315 1,100 36,690 3,780 1982 8/14/1997 40
Jekyll Inn, Jekyll Island, GA - - 7,803 - 3,548 - 11,351 1,148 1971 8/20/1997 40
Holiday Inn Metrotown,
Burnaby, BC, Canada - 1,115 5,303 (114) 796 1,001 6,099 620 1989 8/22/1997 40
Embassy Suites International
Airport, Tucson, AZ - 1,640 10,444 - 2,392 1,640 12,836 1,230 1982 10/23/1997 40
Westin Morristown, NJ - 2,500 19,128 100 3,835 2,600 22,963 2,195 1962 11/20/1997 40
Doubletree Hotel Bradley
International Airport, Windsor
Locks, CT - 1,013 10,228 87 1,861 1,100 12,089 1,142 1985 11/24/1997 40
Sheraton Hotel, Mesa, AZ - 1,850 16,938 - 2,650 1,850 19,588 2,140 1985 12/5/1997 40
Metro Airport Hilton & Suites,
Detroit, MI - 1,750 12,639 - 1,371 1,750 14,010 1,355 1989 12/16/1997 40
Marriott Hotel, Los Angeles,
CA - 5,900 48,250 - 7,615 5,900 55,865 5,362 1983 12/18/1997 40
Austin Hilton & Towers, TX - 2,700 15,852 - 2,876 2,700 18,728 1,758 1974 1/6/1998 40
Dallas Renaissance North, TX - 3,400 20,813 - 3,826 3,400 24,639 2,320 1979 1/6/1998 40
Houston Sheraton Brookhollow
Hotel, TX - 2,500 17,609 - 2,562 2,500 20,171 1,959 1980 1/6/1998 40
Seelbach Hilton, Louisville, KY - 1,400 38,462 - 7,265 1,400 45,727 4,117 1905 1/6/1998 40
Midland Hilton & Towers, TX - 150 8,487 - 1,814 150 10,301 968 1976 1/6/1998 40
Westin Oklahoma, OK - 3,500 27,588 - 2,745 3,500 30,333 2,908 1977 1/6/1998 40
Sheraton Hotel, Columbia, MD - 3,600 21,393 - 3,871 3,600 25,264 2,141 1972 3/27/1998 40
Radisson Cross Keys,
Baltimore, MD - 1,500 5,615 - 1,566 1,500 7,181 598 1973 3/27/1998 40
Sheraton Fisherman's Wharf,
San Francisco, CA (1) 19,708 61,751 - 4,984 19,708 66,735 5,983 1975 4/2/1998 40
Hartford Hilton, CT - 4,073 24,458 - 3,051 4,073 27,509 2,158 1975 5/21/1998 40
Holiday Inn Dallas DFW
Airport South,TX 12,211 3,388 28,847 - 274 3,388 29,121 2,499 1974 8/3/1998 40
Courtyard by Marriott
Meadowlands, NJ - - 9,649 - 144 - 9,793 829 1993 8/3/1998 40
Hotel Maison de Ville, New
Orleans, LA - 292 3,015 - 58 292 3,073 261 1778 8/3/1998 40
Hilton Hotel Toledo, OH - - 11,708 - 90 - 11,798 1,017 1987 8/3/1998 40
Holiday Inn Select Dallas DFW
Airport West, TX - 947 8,346 (270) (2,083) 677 6,263 828 1974 8/3/1998 40
Holiday Inn Select New Orleans
International Airport LA (1) 3,040 25,616 - 2,786 3,040 28,402 2,317 1973 8/3/1998 40
Crowne Plaza Madison, WI (1) 2,629 21,634 - 441 2,629 22,075 1,875 1987 8/3/1998 40
Wyndham Albuquerque Airport
Hotel, NM - - 18,889 - 241 - 19,130 1,628 1972 8/3/1998 40
Wyndham San Jose Airport
Hotel, TX - - 35,743 - 1,296 - 37,039 3,120 1974 8/3/1998 40
Holiday Inn Select Mission
Valley, CA - 2,410 20,998 - 302 2,410 21,300 1,822 1970 8/3/1998 40
Sheraton Safari Resort, Lake
Buena Vista, FL - 4,103 35,263 - 9,058 4,103 44,321 3,528 1985 8/3/1998 40
Hilton Monterey, CA - 2,141 17,666 - 5,252 2,141 22,918 1,799 1971 8/3/1998 40
Hilton Hotel Durham, NC - 1,586 15,577 - 3,052 1,586 18,629 1,438 1987 8/3/1998 40
Wyndham Garden Hotel
Marietta, GA - 1,900 17,077 - 694 1,900 17,771 1,486 1985 8/3/1998 40
Westin Resort Key Largo, FL - 3,167 29,190 - 675 3,167 29,865 2,542 1985 8/3/1998 40
Doubletree Guest Suites
Atlanta, GA 8,393 2,236 18,514 - 3,900 2,236 22,414 1,831 1985 8/3/1998 40
Radisson Hotel Arlington
Heights, IL - 1,540 12,645 - 8,291 1,540 20,936 1,443 1981 8/3/1998 40
Holiday Inn Select Bucks
County, PA - 2,610 21,744 - 3,161 2,610 24,905 1,943 1987 8/3/1998 40
Hilton Hotel Cocoa Beach, FL - 2,783 23,076 - 1,925 2,783 25,001 2,123 1986 8/3/1998 40
Radisson Universal Orlando, FL - 9,555 73,486 - 8,484 9,555 81,970 6,747 1972 8/3/1998 40
Crowne Plaza Phoenix, AZ - 1,852 15,957 - 3,485 1,852 19,442 1,632 1981 8/3/1998 40
62
Hilton Airport Hotel Grand
Rapids, MI (1) 2,049 16,657 - 1,116 2,049 17,773 1,481 1979 8/3/1998 40
Marriott West Loop Houston, TX (1) 2,943 23,934 - 4,409 2,943 28,343 2,229 1976 8/3/1998 40
Courtyard by Marriott Durham, NC - 1,406 11,001 - 76 1,406 11,077 946 1996 8/3/1998 40
Courtyard by Marriott, Marina
Del Rey, CA - 3,450 24,534 - 2,659 3,450 27,193 2,148 1976 8/3/1998 40
Courtyard by Marriott, Century
City, CA - 2,165 16,465 - 1,142 2,165 17,607 1,424 1986 8/3/1998 40
Courtyard by Marriott,
Orlando, FL - - 41,267 - 2,593 - 43,860 3,653 1972 8/3/1998 40
Crowne Plaza, San Jose, CA (1) 2,130 23,404 (24) 1,676 2,106 25,080 2,128 1975 8/3/1998 40
Doubletree Hotel Westshore,
Tampa, FL - 2,904 23,476 - 9,689 2,904 33,165 2,361 1972 8/3/1998 40
Howard Johnson Resort Key
Largo, FL - 1,784 12,419 - 1,195 1,784 13,614 1,101 1971 8/3/1998 40
Radisson Annapolis, MD - 1,711 13,671 - 2,012 1,711 15,683 1,228 1975 8/3/1998 40
Holiday Inn Fort Lauderdale,
FL - 2,381 19,419 - 2,192 2,381 21,611 1,763 1969 8/3/1998 40
Holiday Inn Madeira Beach, FL - 1,781 13,349 - 123 1,781 13,472 1,159 1972 8/3/1998 40
Holiday Inn Chicago O'Hare, IL 18,038 4,290 72,631 - 15,883 4,290 88,514 6,777 1975 8/3/1998 40
Holiday Inn & Suites
Alexandria, VA - 1,769 14,064 - 1,639 1,769 15,703 1,242 1985 8/3/1998 40
Hilton Clearwater, FL - - 69,285 - 4,318 - 73,603 6,126 1980 8/3/1998 40
Radisson Rochester, NY - - 6,499 - 2,934 - 9,433 675 1971 8/3/1998 40
Radisson Old Towne
Alexandria, VA - 2,241 17,796 - 3,824 2,241 21,620 1,632 1975 8/3/1998 40
Ramada Inn Clearwater, FL - 1,270 13,453 - 160 1,270 13,613 1,616 1969 8/3/1998 40
Crowne Plaza Las Vegas, NV - 3,006 24,011 - (206) 3,006 23,805 2,059 1989 8/3/1998 40
Crowne Plaza Portland, OR 4,754 2,950 23,254 - 211 2,950 23,465 2,047 1988 8/3/1998 40
Four Points Hotel, Mt.
Arlington, NJ 3,932 6,553 6,058 - (1,562) 6,553 4,496 537 1984 8/3/1998 40
Ramada Inn Mahwah, NJ - 1,117 8,994 (312) (2,385) 805 6,609 801 1972 8/3/1998 40
Ramada Plaza Meriden, CT - 1,247 10,057 - (53) 1,247 10,004 864 1985 8/3/1998 40
Ramada Plaza Shelton, CT 4,416 2,040 16,235 - 41 2,040 16,276 1,395 1989 8/3/1998 40
Sheraton Crossroads Mahwah, NJ - 3,258 26,185 - 309 3,258 26,494 2,320 1986 8/3/1998 40
St. Tropez, Las Vegas, NV - 3,027 24,429 - 42 3,027 24,471 2,096 1986 8/3/1998 40
Doral Forrestal, Princeton, NJ - 9,578 57,555 - 8,551 9,578 66,106 5,364 1981 8/11/1998 40
South Seas Resort, Captiva, FL 543 3,084 83,573 - 8,623 3,084 92,196 7,187 1975 10/1/1998 40
Radisson Suites Beach Resort,
Marco Island, FL - 7,120 35,300 - 2,253 7,120 37,553 2,983 1983 10/1/1998 40
Best Western Sanibel Island, FL - 3,868 3,984 17 338 3,885 4,322 260 1967 10/1/1998 40
The Dunes Golf & Tennis Club,
Sanibel Island, FL - 7,705 3,043 9 31 7,714 3,074 252 1964 10/1/1998 40
Sanibel Inn, Sanibel Island, FL - 8,482 12,045 - 167 8,482 12,212 979 1964 10/1/1998 40
Seaside Inn, Sanibel Island, FL - 1,702 6,416 22 80 1,724 6,496 525 1964 10/1/1998 40
Song of the Sea, Sanibel Island,
FL - 339 3,223 19 70 358 3,293 266 1964 10/1/1998 40
Sundial Beach Resort, Sanibel
Island, FL - 320 12,009 - 1,974 320 13,983 1,043 1975 10/1/1998 40
Holiday Inn Madison, WI - 4,143 6,692 - 526 4,143 7,218 516 1965 1/11/1999 40
Safety Harbor Resort and Spa,
Safety Harbor, FL - 732 19,618 - 1,639 732 21,257 934 1926 5/31/2000 40
-------- ---------- ------- --------- -------- ---------- --------
$315,515 $2,199,762 $(4,594) $273,889 $310,921 $2,473,651 $233,612
======== ========== ======= ========= ======== ========== ========
(1) These properties secure the Secured Facility which, as of December 31, 2001,
had an outstanding balance of $319,788.
The components of our hotel property and equipment are as follows:
Property and Accumulated
Equipment Depreciation
------------------- -------------------
Land $ 310,921 $ -
Building and Improvements 2,473,651 233,612
Furniture and equipment 354,392 163,768
Construction in progress 44,713 -
------------------ ------------------
Total property and equipment $3,183,677 $ 397,380
================== ==================
A reconciliation of our investment in hotel property and equipment and related
accumulated depreciation is as follows:
------------------- ------------------- -------------------
2001 2000 1999
------------------- ------------------- -------------------
Hotel property and equipment
Balance, beginning of period $3,193,730 $3,118,723 $ 2,957,543
Acquisitions during period - 19,618 12,081
Improvements and construction
-in-progress 47,467 78,911 160,294
Loss on asset impairment (43,582)
Cost of real estate sold (13,938) (23,522) (11,195)
------------------ ------------------ ------------------
Balance, end of period 3,183,677 3,193,730 3,118,723
------------------ ------------------ ------------------
Accumulated depreciation
Balance, beginning of period 287,229 182,430 83,797
Additions-depreciation expense 112,465 107,363 99,297
Cost of real estate sold (2,314) (2,564) (664)
------------------ ------------------ ------------------
Balance, end of period 397,380 287,229 182,430
------------------ ------------------ ------------------
Net hotel property and equipment, end of period $2,786,297 $2,906,501 $ 2,936,293
================== ================== ==================
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 405 of Regulation S-K with respect to
Directors and Executive Officers of the Company is incorporated herein by
reference to the sections entitled "Management" and "Principal Stockholders" in
our 2002 Annual Stockholder Meeting proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the sections entitled "Executive Compensation," "Compensation of Directors"
and "Stock Option Grants" in our 2002 Annual Stockholder Meeting proxy
statement.
64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the section entitled "Principal Stockholders" in our 2002 Annual Stockholder
Meeting proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" in our
2002 Annual Stockholder Meeting 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. Reports on Form 8-K
Current report on Form 8-K dated and filed on August 16, 2001,
regarding the first amendment to the merger agreement with FelCor
Lodging Trust Incorporated.
Current report on Form 8-K dated and filed on September 21, 2001,
regarding the termination of the merger agreement with FelCor
Lodging Trust Incorporated.
(b). Financial Statement Schedules
The Financial Statement Schedules included in the Annual Report on Form
10-K are listed in Item 8.
65
(b). Exhibits
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other
documents previously filed with the Commission.
Exhibit No. Description of Document
- ----------- -----------------------
3.1 Second Articles of Amendment and Restatement of
Incorporation of the Registrant (incorporated by reference
to Exhibit 3.4 to our Registration Statement No. 333-4568).
3.1.1 Articles of Amendment of Second Articles of Amendment and
Restatement of Incorporation dated August 11, 2000.
3.1.2 Articles of Amendment of Second Articles of Amendment and
Restatement of Incorporation dated June 30, 2001.
3.2 Amended and Restated By-laws of the Registrant
(incorporated by reference to Exhibit 3.2 on our Form S-3
(Registration Statement No. 333-66229) filed with the
Securities and Exchange Commission on October 28, 1998).
4.1 Form of Share Certificate (incorporated by reference to
Exhibit 4.1 on our Registration Statement No. 333-4568).
4.2 Indenture, dated as of August 19, 1997 (the "August 1997
Indenture"), between CapStar Hotel Company and IBJ Schroder
Bank & Trust Company, as Trustee (incorporated by reference
to Exhibit 4.4 to our Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission on
March 15, 2000).
4.2.1 Specimen Subordinated Note to August 1997 Indenture
(incorporated by reference to Exhibit 4.2 to our Form 10-K
for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 15, 2000).
4.2.2 First Supplemental Indenture to the August 1997 Indenture.
4.2.3 Second Supplemental Indenture to the August 1997 Indenture
(incorporated by reference to Exhibit 4.5 to our Form 10-K
for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 15, 2000).
4.2.4 Third Supplemental Indenture to the August 1997 Indenture
(incorporated by reference to Exhibit 4.15 to our Form 10-K
for the year ended December 31, 2000 filed with the
Securities and Exchange Commission on March 6, 2001).
4.2.5 Fourth Supplemental Indenture to the August 1997 Indenture.
4.2.6 Fifth Supplemental Indenture to the August 1997 Indenture.
4.3 Indenture (the "Convertible Notes Indenture"), dated as of
October 16, 1997, between CapStar Hotel Company and First
Trust, National Association, as Trustee (incorporated by
reference to Exhibit 4.6 to our Form 10-K filed with the
Securities and Exchange Commission on March 15, 2000).
4.3.1 Specimen Convertible Note to the Convertible Notes
Indenture (incorporated by reference to Exhibit 4.7 to our
Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 15, 2000).
4.3.2 First Supplemental Indenture to the Convertible Notes
Indenture (incorporated by reference to Exhibit 4.8 to our
Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 15, 2000)
4.4 Indenture (the "March 1999 Indenture"), dated as of
March 18, 1999, between MeriStar Hospitality Corporation and
IBJ Whitehall Bank & Trust Company, as Trustee (incorporated
by reference to Exhibit B to our Form S-4 (Registration
Statement No. 333-78163) filed with the Securities and
Exchange Commission on May 10, 1999).
4.4.1 Specimen Subordinated Note to March 1999 Indenture
(incorporated by reference to Exhibit A to our Form S-4
(Registration Statement No. 333-78163) filed with the
Securities and Exchange Commission on May 10, 1999).
4.4.1 First Supplemental Indenture to the March 1999 Indenture
(incorporated by reference to Exhibit 4.13 to our Form 10-K
for the year ended December 31, 2000 filed with the
Securities and Exchange Commission on March 6, 2001).
4.4.2 Second Supplemental Indenture to the March 1999 Indenture.
4.4.3 Third Supplemental Indenture to the March 1999 Indenture.
4.5 Indenture (the "January 2001 Indenture"), dated January 26,
2001, between MeriStar Hospitality Operating Partnership,
L.P., MeriStar Hospitality Finance Corp., MeriStar
Hospitality Corporation, and U.S. Bank Trust National
Association (incorporated by reference to Exhibit 4.14 to
our Form 10-K for the year ended December 31, 2000 filed with
the Securities and Exchange Commission on March 6, 2001).
4.5.1 Specimen Senior Note to the January 2001 Indenture
4.5.2 First Supplemental Indenture to the January 2001 Indenture.
4.5.3 Second Supplemental Indenture to the January 2001 Indenture.
4.6 Indenture (the "December 2001 Indenture"), dated
December 19, 2001, between MeriStar Hospitality Operating
Partnership, L.P., MeriStar Hospitality Finance Corp.,
MeriStar Hospitality Corporation, and U.S. Bank Trust
National Association.
4.6.1 Specimen Senior Note to the December 2001 Indenture.
4.6.2 Registration Rights Agreement, dated December 19, 2001,
between MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hospitality Finance Corp. II, MeriStar Hospitality
Corporation, and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. and Lehman Brothers
Inc., SG Cowen Securities Corporation and certain other
parties.
4.6.3 First Supplemental Indenture to the December 2001 Indenture.
4.7 Indenture (the "February 2002 Indenture"), dated
February 7, 2002, between MeriStar Hospitality Operating
Partnership, L.P., MeriStar Hospitality Finance Corp.,
MeriStar Hospitality Corporation, and U.S. Bank Trust
National Association.
4.7.1 Specimen Senior Note to the February 2002 Indenture.
4.7.2 Registration Rights Agreement, dated February 7, 2002,
between MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hospitality Finance Corp. II, MeriStar Hospitality
Corporation, and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. and Lehman Brothers
Inc., SG Cowen Securities Corporation and certain other
parties.
10.1 Second Amended and Restated Agreement of Limited
Partnership of MeriStar Hospitality Operating Partnership,
L.P. dated as of August 3, 1998 (incorporated by reference
to Exhibit 10.3 to our Form 10-K for the year ended December
31, 1998 filed with the Securities and Exchange Commission
filed on March 2, 1999).
10.2 Second Amended and Restated Senior Secured Credit Agreement
dated as of August 3, 1998 (the "Senior Credit Agreement"
(incorporated by reference to Exhibit 10.4 to our Form 10-K
filed with the Securities and Exchange Commission filed on
March 2, 1999).
10.2.1 First Amendment to the Second Amended and Restated Senior
Secured Credit Agreement.
10.2.2 Second Amendment to the Second Amended and Restated Senior
Secured Credit Agreement.
10.2.3 Third Amendment to the Second Amended and Restated Senior
Secured Credit Agreement.
10.2.4 Fourth Amendment to the Second Amended and Restated Senior
Secured Credit Agreement.
10.2.5 Fifth Amendment to the Second Amended and Restated Senior
Secured Credit Agreement.
10.3 Loan Agreement, dated as of August 12, 1999, between
MeriStar Hospitality Operating Partnership, L.P. and Lehman
Brothers Holdings Inc. D/B/A Lehman Capital, a division of
Lehman Brothers Holdings Inc. (incorporated by reference to
Exhibit 10.13 to our Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission on
March 15, 2000)
10.4 Intercompany Agreement between MeriStar Hospitality
Corporation, MeriStar Hospitality Operating Partnership,
L.P., MeriStar Hotels & Resorts, Inc. and MeriStar H&R
Operating Company L.P. ("Intercompany Agreement")
10.4.1 Amendment to the Intercompany Agreement (incorporated by
reference to Exhibit 10.15 to our Form 10-K for the year
ended December 31, 2000 filed with the Securities and
Exchange Commission on March 6, 2001).
10.5 Revolving Credit Agreement (the "MeriStar Hotels Revolving
Credit Agreement"), dated as of August 3, 1998, by and
between MeriStar H&R Operating Company, L.P. and MeriStar
Hospitality Operating Partnership, L.P.
10.5.1 Amendment to MeriStar Hotels Revolving Credit Agreement
10.5.2 Second Amendment to MeriStar Hotels Revolving Credit
Agreement
10.6 Term Note by MeriStar H&R Operating Company, L.P. to
MeriStar Hospitality Operating Partnership, L.P.
10.7 MeriStar Hospitality Corporation Incentive Plan (the
"Incentive Plan") (incorporated by reference to Exhibit
10.1 to our Form S-4/A (Registration Statement No. 333-49611)
filed with the Securities and Exchange Commission on June 22,
1998).
10.7.1 Amendment to the Incentive Plan.
10.8 MeriStar Hospitality Corporation Non-Employee Directors'
Incentive Plan (the "Directors' Plan") (incorporated by
reference to Exhibit 10.2 to our Form S-4/A (Registration
Statement No. 333-49611) filed with the Securities and
Exchange Commission on June 22, 1998).
10.8.1 Amendment to the Directors' Plan.
66
10.9 Profits-Only Operating Partnership Units Plan (incorporated
by reference to Exhibit 10.14 to our Form 10-Q for the
quarter ended March 31, 2000 filed with the Securities and
Exchange Commission on May 12, 2000).
10.10 MeriStar Hospitality Corporation Employee Stock Purchase
Plan.
10.11 Employment Agreement between MeriStar Hospitality
Corporation and Paul W. Whetsell (incorporated by reference
to Exhibit 10.6 to our Form 10-Q for the quarter ended
September 30, 2000 filed with the Securities and Exchange
Commission on November 13, 2000).
10.12 Employment Agreement between MeriStar Hospitality
Corporation and Steven D. Jorns (incorporated by reference
to Exhibit 10.4 to our Form S-4/A (Registration Statement
No. 333-49611) filed with the Securities and Exchange
Commission on June 22, 1998)..
10.13 Employment Agreement between MeriStar Hospitality
Corporation and Bruce G. Wiles (incorporated by reference
to Exhibit 10.10 to our Form 10-K for the year ended
December 31, 1998 filed with the Securities and Exchange
Commission on March 2, 1999) .
10.14 Employment Agreement between MeriStar Hospitality
Corporation and John Emery (incorporated by reference to
Exhibit 10.9 to our Form 10-Q for the quarter ended
September 30, 2000 filed with the Securities and Exchange
Commission on November 13, 2000).
12 Schedule Regarding the Computation of Ratios.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Power of Attorney (see signature page).
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MeriStar Hospitality Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERISTAR HOSPITALITY CORPORATION
BY:
/s/ Paul W. Whetsell
------------------------------
Paul W. Whetsell
Chief Executive Officer and
Chairman of the Board
Dated: March 5, 2002
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul W. Whetsell, Bruce G. Wiles and John Emery,
such person's true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this report filed pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same
with all exhibits thereto, and the other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and things requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and the foregoing Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Paul W. Whetsell Chief Executive Officer and Chairman of the March 5, 2002
-------------------- Board of Directors (Principal Executive Officer)
Paul W. Whetsell
/s/ Steven D. Jorns Vice Chairman of the Board of Directors March 5, 2002
-------------------
Steven D. Jorns
/s/ Bruce G. Wiles Chief Investment Officer and Director March 5, 2002
------------------
Bruce G. Wiles
/s/ John Emery President, Chief Operating Officer and Director March 5, 2002
--------------
John Emery
68
/s/ James A. Calder Chief Accounting Officer March 5, 2002
-------------------
James A. Calder
/s/ J. Taylor Crandall Director March 5, 2002
----------------------
J. Taylor Crandall
/s/ James F. Dannhauser Director March 5, 2002
-----------------------
James F. Dannhauser
/s/ William S. Janes Director March 5, 2002
--------------------
William S. Janes
/s/ H. Cabot Lodge III Director March 5, 2002
----------------------
H. Cabot Lodge III
/s/ James R. Worms Director March 5, 2002
------------------
James R. Worms
____________________ Director March ___, 2002
D. Ellen Shuman
69