UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______
Commission File Number 1-14331
MERISTAR HOTELS & RESORTS, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 52-2101815
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 WISCONSIN AVENUE, N.W. 20007
WASHINGTON, D.C. (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 965-4455
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
------------------- ------------------------------------------
Common Stock, par value New York Stock Exchange
$0.01 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 13, 2000, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$48,470,539.
The number of shares of the Registrant's common stock outstanding as of
March 13, 2000 was 29,875,528.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Those portions of the Registrant's definitive proxy statement
relating to Registrant's 2000 Annual Meeting of Stockholders which are
incorporated into Items 10, 11, 12, and 13.
PART I
ITEM 1. BUSINESS
THE COMPANY
MeriStar Hotels & Resorts, Inc. (the "Company") is the lessee, manager and
operator of various hospitality-related assets, including nearly all of the
hotels owned by MeriStar Hospitality Corporation (the "REIT"). The Company is
the largest independent hotel management company in the United States, based on
rooms under management. As of December 31, 1999, the Company leased and/or
managed 215 hotels (the "MeriStar Hotels") containing 45,348 rooms. Of the
MeriStar Hotels, the Company (i) leases and manages 108 REIT owned hotels (the
"REIT Owned Hotels") containing 28,055 rooms, (ii) leases 53 additional hotels
containing 7,600 rooms (the "Leased Hotels") and (iii) manages an additional 54
hotels containing 9,693 rooms (the "Managed Hotels"). The MeriStar Hotels are
located throughout the United States and Canada including most major
metropolitan areas and rapidly growing secondary cities. The MeriStar Hotels
include hotels operated under nationally recognized brand names such as
Hilton(R), Sheraton(R), Westin(R), Radisson(R), Marriott(R), Doubletree(R),
Embassy Suites(R), and Holiday Inn(R). The Company's business strategy is to
manage the renovation, repositioning and operations of each hotel according to a
business plan specifically tailored to the characteristics of the hotel and its
market.
The Company leases and manages properties primarily within the upscale,
full-service and premium limited-service sectors, and performs third-party
management services for owners of both sectors as well. Management believes
concentrating on the upscale, full-service and premium limited-service sectors
of the lodging industry for leasing activities is appropriate because these
sectors are among the most attractive sectors available in today's current
hospitality market. These sectors are attractive for several reasons. First,
these hotels appeal to a wide variety of customers, thus reducing the risk of
decreasing demand from any particular customer group. Secondly, such hotels have
particular appeal to both business executives and upscale leisure travelers,
customers who are generally less price sensitive than travelers who use non-
premium, limited-service hotels. Finally, full-service and premium limited-
service hotels require a greater depth of management expertise than non-premium
limited-service hotels, and the Company believes that its superior management
skills provide it with a significant competitive advantage in their operation.
The Company has capitalized on its hospitality management experience and
expertise by continuing to secure additional management contracts and improving
the operating performance of the hotels under its management. The Company's
senior management team, with an average of more than 20 years of hospitality
industry experience, has successfully managed hotels in all segments of the
lodging industry. Management attributes its management success to its ability
to analyze each hotel as a unique property and to identify particular cash flow
growth opportunities present at each hotel. The Company's principal operating
objectives are to continue to analyze each hotel as a unique property in order
to generate higher revenue per available room ("RevPAR"), increase average daily
rate ("ADR"), and increase net operating income while providing its hotel guests
with high-quality service and value.
The Company also expects to capitalize on its hospitality management
experience as it continues to expand into related sectors of the hospitality
industry, such as leasing and/or managing golf courses, time-share properties,
resorts and conferences centers, and corporate (extended-stay) housing. The
Company believes these parts of the hospitality industry are currently
characterized by fragmented, relatively smaller management companies without the
broad range of management, operational, and financial resources the Company
possesses. By bringing its expertise in other property management activities the
Company believes it can realize significant economic benefit for the
owners/lessors of such properties through increased profitability of the
properties' operations. During 1999, the Company secured five golf course
management contracts, and, as of December 31, 1999, the Company leased, managed
or was otherwise affiliated with 10 golf courses. Also during 1999, the Company
established a time-share management division to develop, sell, and manage time-
share properties. Resort hotels and conference centers also offer additional
growth opportunities. As of December 31, 1999, the Company leased or managed 31
resort hotels and 1 conference center. In addition, the Company expects to
expand its own brand, Doral Hotels & Resorts, through a combination of licensing
and management agreements for hotels, resorts, conference centers, and golf
courses. During 1999, the Company entered into 26 hospitality and leisure
management contracts.
During 1999, the Company invested $5.6 million as an equity investment in
MeriStar Investment Partners ("MIP Lessee, L.P."), a joint venture with Oak Hill
Capital Partners, L.P. ("Oak Hill") established to acquire upscale, full-service
hotels. The Company's ultimate investment in this joint venture may increase up
to $10 million. The Company will manage all hotels acquired by the joint
venture. As part of the joint venture transaction, the Company sold 1,818,182
shares of the Company's common stock to Oak Hill for $5 million ($2.75 per
share) on April 15, 1999. On January 6, 2000, pursuant to the terms of the joint
venture, the Company sold another 1,818,182 shares of the Company's common stock
to Oak Hill for $5 million ($2.75 per share). There are no further agreements
pursuant to the terms of the joint venture for Oak Hill to purchase additional
shares of the Company's common stock.
2
The Company was formed on August 3, 1998 when it was spun off (the "Spin-
off") by CapStar Hotel Company ("CapStar"). CapStar transferred or caused to be
transferred certain assets and liabilities constituting the hotel management and
leasing business operated by CapStar and its subsidiaries to the Company, which
was a wholly owned subsidiary of CapStar. CapStar distributed, on a share-for-
share basis, to its stockholders of record on August 3, 1998, all of the
outstanding capital stock of the Company.
After the Spin-Off, pursuant to an Agreement and Plan of Merger, dated as
of March 15, 1998 (the "Merger Agreement"), among American General Hospitality
Corporation ("AGH"), a Maryland corporation operating as a real estate
investment trust, and certain of its affiliates and CapStar and certain of its
affiliates, CapStar merged with AGH (the "Merger") creating the REIT. The
Company then acquired 100% of the partnership interests in AGH Leasing, Inc.
("AGH Leasing"), the third party lessee of most of the hotels owned by AGH, and
substantially all of the assets and certain liabilities of American General
Hospitality Inc. ("AGHI"), the third-party manager of most of the hotels owned
by AGH (the "Acquisitions"). CapStar and AGHI were two of the fastest growing
operators of upscale, full-service hotels in North America, based on rooms under
management. The Company is the successor-in-interest and has assumed all of the
rights and liabilities with respect to hotel management contracts and operating
leases of CapStar, AGHI and AGH Leasing.
In addition to assuming the rights and obligations under all of the
operating leases and management agreements of CapStar, AGHI and AGH Leasing, the
Company assumed CapStar's interests in two joint ventures. The Company expects
to form additional strategic alliances with institutional and private hotel
owners and to secure additional management fee arrangements. From time to time,
the Company may also acquire certain hotel assets that the REIT could not, or
for strategic reasons does not wish to, own.
THE INTERCOMPANY AGREEMENT
The Company and the REIT have entered into an intercompany agreement (the
"Intercompany Agreement") which aligns the interests of the two companies with
the objective of benefiting the shareholders of both Companies.
Rights of First Refusal
The Intercompany Agreement provides that the Company has a right of first
refusal to become the lessee of any real property acquired by the REIT if the
REIT determines that, consistent with its status as a real estate investment
trust, the REIT is required to enter into a lease; provided that the Company or
an entity controlled by the Company is qualified to be the lessee based on
experience in the industry and financial and legal qualifications.
The Intercompany Agreement provides that the REIT must provide the Company
with written notice of a lessee opportunity. During the 30 days following such
notice, the Company has a right of first refusal with regard to the offer to
become a lessee and the right to negotiate with the REIT on an exclusive basis
regarding the terms and conditions of the lease. If after 30 days, the Company
and the REIT are unable to agree on the terms of a lease or if the Company
indicates that it is not interested in pursuing the opportunity, the REIT may
offer the opportunity to other hotel operators for a period of one year
thereafter, at a price and on terms and conditions that are not more favorable
than the price and terms and conditions proposed to the Company. After this one
year period, if the REIT has not leased the property, the REIT must again offer
the opportunity to the Company in accordance with the procedures specified
above.
Each company has established a leasing committee that reviews all hotel
leases to be entered into between the companies. Both leasing committees consist
of directors that are not directors of the other company.
The Company has agreed not to acquire or make (i) investments in real
estate or (ii) any other investments that may be made by the REIT under the
federal income tax rules governing real estate investment trusts unless they
have provided written notice to the REIT of the material terms and conditions of
the acquisition or investment opportunity, and the REIT has determined not to
pursue such acquisitions or investments either by providing written notice to
the Company rejecting the opportunity within 20 days or by allowing such 20-day
period to lapse. The Company has also agreed to assist the REIT in structuring
and consummating any acquisition or investment that the REIT elects to pursue.
The Intercompany Agreement provides the Company and the REIT with a symbiotic
relationship so that investors in both companies may enjoy the economic benefit
of the entire enterprise. Investors should be aware, however, that because of
the independent trading of the shares of the Company and the shares of the REIT,
stockholders of each company may develop divergent interests which could lead to
conflicts of interest. This divergence of interests could also reduce the
anticipated benefits of the relationship between the two companies.
3
Provision of Services
The Company provides the REIT with certain services as the REIT may
reasonably request from time to time, including administrative, renovation
supervision, corporate, accounting, financial, insurance, legal, tax,
information technology, human resources, acquisition identification and due
diligence, and operational services. The REIT compensates the Company for
services provided in an amount determined in good faith by the Company as the
amount an unaffiliated third party would charge the REIT for comparable
services.
Equity Offerings
If either the Company or the REIT desires to engage in a securities
issuance, such issuing party will give notice to such other party as promptly as
practicable of its desire to engage in a securities issuance. Any such notice
will include the proposed material terms of such issuance, to the extent
determined by the issuing party, including whether such issuance is proposed to
be pursuant to a public or private offering, the amount of securities proposed
to be issued and the manner of determining the offering price and other terms
thereof. The non-issuing party will cooperate with the issuing party in every
way to effect any securities issuance of the issuing party by assisting in the
preparation of any registration statement or other document required in
connection with such issuance and, in connection therewith, providing the
issuing party with such information as may be required to be included in such
registration statement or other document.
Term
The Intercompany Agreement will terminate upon the earlier of (a) August 3,
2008, or (b) a change in ownership or control of the Company.
Intercompany Loan
Under a revolving credit agreement, the REIT may lend the Company up to $75
million for general corporate purposes. Amounts outstanding under the facility
bear interest at the 30-day London Inter-Bank Offered Rate plus 350 basis
points. At December 31, 1999, the interest rate was 9.98 % and the Company had
drawn $57 million on the facility. On February 29, 2000, the REIT facility was
amended to reduce the maximum borrowing limit from $75 million to $25 million
(see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources).
4
BUSINESS
The Company seeks to increase shareholder value by (i) implementing its
operating strategy to improve hotel operations and increase cash flow; (ii)
expanding its leasing and management business in its three existing operating
segments -- upscale, full-service hotels, premium limited-service hotels and
inns, and resort properties; and (iii) utilizing its property management
expertise to expand into time share, corporate (extended stay) housing, golf
course and conference center management.
Segments
During 1999 and 1998, the Company operated primarily within three
significant segments of the hospitality industry: (a) upscale, full-service
hotels ("Hotels"), (b) premium limited-service hotels and inns ("Inns") and (c)
resort properties ("Resorts"). The Company uses its primary strategy of creating
and executing management plans that are specifically tailored for each
individual property to create and realize each property's full potential.
Prior to the Spin-Off, the Company conducted its business primarily in only
one operating segment. Therefore, the segment disclosures presented below are
for the year ended December 31, 1999 and for the period August 3, 1998 through
December 31, 1998. The Company has determined that it is not practicable to
present the segment information for the year ended December 31, 1997.
The following table summarizes certain segment financial data as of and for
the year ended December 31, 1999 (amounts in thousands):
December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------------
Hotels Inns Resorts Total Segments
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $830,828 $172,295 $273,113 $1,276,236
Participating Lease Expense $261,671 $ 71,142 $ 71,273 $ 404,086
Earnings before Income Taxes, Depreciation and $ 17,047 $ 6,164 $ 6,886 $ 30,097
Amortization
Total Assets $ 71,191 $ 14,161 $ 12,791 $ 98,143
- --------------------------------------------------------------------------------------------------------------------------------
The following table summarizes certain segment financial data as of
December 31, 1998 and for the period August 3, 1998 through December 31, 1998
(amounts in thousands):
December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------------
Hotels Inns Resorts Total Segments
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $322,720 $72,267 $73,878 $468,865
Participating Lease Expense $101,423 $29,430 $24,187 $155,040
Earnings before Income Taxes, Depreciation and $ 4,710 $ 172 $ (882) $ 4,000
Amortization
Total Assets $ 48,264 $42,091 $16,276 $106,631
- --------------------------------------------------------------------------------------------------------------------------------
The Company leased and managed 4 properties in Canada as of December 31,
1999 and 1998. Revenues for the Canadian operations totaled $21,477 and $8,865
for the year ended December 31, 1999 and the period August 3, 1998 through
December 31, 1998, respectively.
Expansion Strategy
The Company anticipates that it will continue to expand its portfolio of
hotels under management and/or lease by securing additional management contracts
and/or leases. The Company attempts to identify properties that are promising
management candidates located in markets with economic, demographic and supply
dynamics favorable to hotel lessees and operators. Through its extensive due
diligence process, the Company selects those expansion targets where it believes
selective capital improvements and intensive management will increase the
hotel's ability to attract key demand segments, enhance hotel operations and
increase long-term value. In order to evaluate the relative merits of each
investment opportunity, senior management and individual operations
5
teams create detailed plans covering all areas of renovation and operation.
These plans serve as the basis for the Company's expansion decisions and guide
subsequent renovation and operating plans.
The Company seeks to lease and/or manage hotels that meet the following
criteria:
Market Criteria
Economic Growth. The Company focuses on metropolitan areas that are
approaching, or have already entered, periods of economic growth. Such areas
generally show above average growth in the business community as measured by (i)
job formation rates, (ii) population growth rates, (iii) tourism and convention
activity, (iv) airport traffic volume, (v) local commercial real estate
occupancy, and (vi) retail sales volume. Markets that exhibit these
characteristics typically have strong demand for hotel facilities and services.
Supply Constraints. The Company seeks lodging markets with favorable supply
dynamics for hotel owners and operators, including an absence of current new
hotel development and barriers to future development such as zoning constraints,
the need to undergo lengthy local development approval processes and a limited
number of suitable sites. Other factors limiting the supply of new hotels are
the current lack of financing available for new development and the inability to
generate adequate returns on investment to justify new development.
Geographic Diversification. The MeriStar Hotels are located in 34 states
across the nation, the District of Columbia, the U.S. Virgin Islands and Canada.
See "Properties" for additional information regarding the MeriStar Hotels. The
Company seeks to maintain a geographically diverse portfolio of managed hotels
to offset the effects of regional economic cycles.
Hotel Criteria
Location and Market Appeal. The Company seeks to operate hotels that are
situated near both business and leisure centers that generate a broad base of
demand for hotel accommodations and facilities. These demand generators include
(i) airports, (ii) convention centers, (iii) business parks, (iv) shopping
centers and other retail areas, (v) sports arenas and stadiums, (vi) major
highways, (vii) tourist destinations, (viii) major universities, and (ix)
cultural and entertainment centers with nightlife and restaurants. The
confluence of nearby business and leisure centers enables the Company to attract
both weekday business travelers and weekend leisure guests. Attracting a
balanced mix of business, group and leisure guests to the Hotels helps to
maintain stable occupancy rates and high ADRs.
Size and Facilities. The Company seeks to operate hotels that contain 200
to 500 guest rooms and include accommodations and facilities that are, or are
capable of being made, attractive to key demand segments such as business, group
and leisure travelers. These facilities typically include large, upscale guest
rooms, food and beverage facilities, extensive meeting and banquet space, and
amenities such as health clubs, swimming pools and adequate parking.
Potential Performance Improvements. The Company seeks to operate
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. These hotels represent
opportunities where a systematic management approach and targeted renovations
should result in improvements in revenue and cash flow.
The Company expects that its relationships throughout the industry will
continue to provide it with a competitive advantage in identifying, evaluating
and managing hotels that meet its criteria. The Company has a record of
successfully managing the renovation and repositioning of hotels, in situations
with varying levels of service, room rates and market types, and the Company
plans to continue to manage such renovation programs as its acquires new leases
and management contracts.
Other Opportunities
The Company expects to capitalize on its hospitality management experience
as it continues to expand into related sectors of the hospitality industry, such
as leasing and/or managing golf courses, time-share properties, resorts and
conferences centers, and corporate (extended-stay) housing. The Company believes
these parts of the hospitality industry are currently characterized by
fragmented, relatively smaller management companies without the broad range of
management, operational, and financial resources the Company possesses. By
bringing its expertise in other property management activities, the Company
believes it can realize significant economic benefit for the owners/lessors of
such properties through increased profitability of the properties' operations.
During 1999, the Company secured five golf course management contracts, and, as
of December 31, 1999, the Company leased, managed or was otherwise affiliated
with 10 golf courses. Also during 1999, the Company established a time-share
management division to develop, sell and manage time-share properties. Resort
hotels and conference centers also offer additional growth opportunities. As of
December 31, 1999, the Company leased or managed 31 resort hotels and 1
conference center. In addition, the
6
Company expects to expand its own brand, Doral Hotels and Resorts, through a
combination of licensing and management agreements for hotels, resorts,
conference centers, and golf courses.
During 1999, the Company invested $5.6 million as an equity investment in
MeriStar Investment Partners ("MIP Lessee, L.P."), a joint venture with Oak Hill
Capital Partners, L.P. ("Oak Hill") established to acquire upscale, full-service
hotels. The Company's ultimate investment in this joint venture may increase up
to $10 million. The Company will manage all hotels acquired by the joint
venture. As part of the joint venture transaction, the Company sold 1,818,182
shares of the Company's common stock to Oak Hill for $5 million ($2.75 per
share) on April 15, 1999. On January 6, 2000, pursuant to the terms of the joint
venture, the Company sold another 1,818,182 shares of the Company's common stock
to Oak Hill for $5 million ($2.75 per share). There are no further agreements
pursuant to the terms of the joint venture for Oak Hill to purchase additional
shares of the Company's common stock.
Operating Strategy
The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with high-
quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual MeriStar Hotel rather than by implementing an operating strategy that
is designed to maintain a uniform corporate image or brand. Management believes
that custom-tailored business plans are the most effective means of addressing
the needs of a given hotel or market. The Company believes that skilled
management of hotel operations is the most critical element in maximizing
revenue and cash flow in hotels, especially in upscale, full-service hotels.
The Company's corporate headquarters carries out financing and investment
activities and provide services to support as well as monitor the Company's on-
site hotel operating executives. Each of the Company's executive departments,
including Hotel Operations, Sales and Marketing, Human Resources, Food and
Beverage, Technical Services, Information Technology, Development and Corporate
Finance, is headed by an executive with significant experience in that area.
These departments support decentralized decision-making by the hotel operating
executives by providing accounting and budgeting services, property management
software and other resources which cannot be economically maintained at the
individual MeriStar Hotels.
Key elements of the Company's management programs include the following:
Comprehensive Budgeting and Monitoring. The Company's operating strategy
begins with an integrated budget planning process that is implemented by
individual on-site managers and monitored by the Company's corporate staff.
Management sets targets for cost and revenue categories at each of the MeriStar
Hotels based on historical operating performance, planned renovations,
operational efficiencies and local market conditions. On-site managers
coordinate with the corporate staff to ensure that such targets are realistic.
Through effective and timely use of its comprehensive financial information and
reporting systems, the Company is able to monitor actual performance and rapidly
adjust prices, staffing levels and sales efforts to take advantage of changes in
the market and to improve yield.
Targeted Sales and Marketing. The Company employs a systematic approach
toward identifying and targeting segments of demand for each MeriStar Hotel in
order to maximize market penetration. Executives at the Company's corporate
headquarters and property-based managers divide such segments into smaller
subsegments, typically ten or more for each MeriStar Hotel, and develop narrowly
tailored marketing plans to suit each such segment. The Company supports each
MeriStar Hotel's local sales efforts with corporate sales executives who develop
new marketing concepts and monitor and respond to specific market needs and
preferences. These executives are active in implementing on-site marketing
programs developed in the central management office. The Company employs
computerized revenue yield management systems to manage each MeriStar Hotel's
use of the various distribution channels in the lodging industry. Management
control over those channels, which include franchisor reservation systems and
toll-free numbers, travel agent and airline global distribution systems,
corporate travel offices and office managers, and convention and visitor
bureaus, enables the Company to maximize revenue yields on a day-to-day basis.
Sales teams are recruited locally and receive incentive-based compensation
bonuses. All of the Company's sales managers complete a highly developed sales
training program.
Strategic Capital Improvements. The Company and the REIT (through the
Intercompany Agreement) and other third-party owners plan renovations primarily
to enhance a MeriStar Hotel's appeal to targeted market segments, thereby
attracting new customers and generating increased revenue and cash flow. For
example, in many of the MeriStar Hotels, the banquet and meeting spaces have
been or are intended to be renovated and guest rooms have been upgraded with
computer ports and comfortable work spaces to better accommodate the needs of
business travelers and to increase ADRs. Capital spending decisions will be
based on both strategic needs and potential rate of return on a given capital
investment. The owners of the MeriStar Hotels are primarily responsible for
funding capital expenditures.
Selective Use of Multiple Brand Names. Management believes that the
selection of an appropriate franchise brand is essential in positioning a hotel
optimally within its local market. The Company selects brands based on local
market factors such as local
7
presence of the franchisor, brand recognition, target demographics and
efficiencies offered by franchisors. Management believes that its relationships
with many major hotel franchisors places the Company in a favorable position
when dealing with those franchisors and allows it to negotiate favorable
franchise agreements with franchisors. Management believes that its growth in
acquiring management contracts will further strengthen its relationship with
franchisors.
The following chart summarizes certain information with respect to the
national franchise affiliations of the MeriStar Hotels as of December 31, 1999:
Leased Hotels
(includes
REIT Owned Hotels) Managed Hotels
------------------------------------- ---------------------------------------
Guest % Guest %
Franchise Rooms Hotels of Rooms Rooms Hotels of Rooms
- --------- ---------- ---------- ----------- ----------- ----------- -----------
Hilton(R).................... 6,309 23 17.7% 1,123 4 11.6%
Sheraton(R).................. 3,502 10 9.8% 562 2 5.8%
Radisson(R).................. 3,460 12 9.7% 1,147 4 11.8%
Holiday Inn(R)............... 2,754 13 7.7% 1,183 7 12.2%
Hampton Inn(R)............... 2,257 18 6.3% 126 1 1.3%
Independent.................. 2,048 12 5.7% 1,476 12 15.2%
Doubletree(R)................ 1,729 5 4.9% 488 2 5.0%
Courtyard by Marriott(R)..... 1,642 9 4.6% 162 1 1.7%
Comfort Inn(R)............... 1,293 9 3.6% - - -
Westin(R) ................... 1,289 4 3.6% 226 1 2.3%
Holiday Inn Select(R)........ 1,244 4 3.5% 284 1 2.9%
Marriott(R).................. 1,211 3 3.4% 323 1 3.3%
Wyndham(R) .................. 849 3 2.4% - - -
Homewood Suites(R) .......... 795 7 2.2% - - -
Embassy Suites(R)............ 728 3 2.0% 248 1 2.6%
Crowne Plaza(R).............. 715 3 2.0% 318 1 3.3%
Doral(R)..................... 575 2 1.6% - - -
Hilton Garden Inn(R)......... 474 3 1.3% - - -
Ramada(R).................... 407 2 1.1% 309 2 3.2%
Holiday Inn Express(R)....... 367 3 1.0% 83 1 0.9%
Doubletree Guest Suites(R)... 292 2 0.8% - - -
Renaissance(R)............... 289 1 0.8% - - -
Comfort Suites(R)............ 277 2 0.8% 238 2 2.5%
Best Western(R).............. 254 2 0.7% 75 1 0.8%
Four Points(R)............... 213 1 0.6% - - -
Residence Inn(R)............. 168 1 0.5% 342 3 3.5%
Quality Suites(R)............ 168 1 0.5% 281 2 2.9%
Hampton Inn & Suites(R)...... 136 1 0.4% - - -
Fairfield Inn(R)............. 110 1 0.3% 200 1 2.1%
Howard Johnson(R)............ 100 1 0.3% - - -
Quality Inn(R)............... - - - 265 2 2.7%
Hilton Suites(R)............. - - - 174 1 1.8%
Econolodge(R)................ - - - 60 1 0.6%
---------- ---------- ----------- ----------- ----------- -----------
Total 35,655 161 100.0% 9,693 54 100.0%
========== ========== =========== =========== =========== ===========
Emphasis on Food and Beverage. Management believes popular food and
beverage ideas are a critical component in the overall success of a hotel. The
Company utilizes its food and beverage operations to create local awareness of
its hotel facilities, to improve the profitability of its hotel operations and
to enhance customer satisfaction. The Company is committed to competing for
patrons with restaurants and catering establishments by offering high-quality
restaurants that garner positive reviews and strong local and/or national
reputations. The Company has engaged food and beverage experts to develop
several proprietary restaurant concepts. The Company has also successfully
placed national food franchises such as Starbuck's Coffee(R) and "TCBY"(R)
Yogurt in casual,
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delicatessen-style restaurants in several of the REIT Owned Hotels. Popular food
concepts will strengthen the Company's ability to attract business travelers and
group meetings and improve the name recognition of the MeriStar Hotels.
Commitment to Service and Value. The Company is dedicated to providing
exceptional service and value to its customers on a consistent basis. The
Company conducts extensive employee training programs to ensure personalized
service at the highest levels. Programs such as "Be A Star" have been created
and implemented by the Company to ensure the effectiveness and uniformity of its
employee training. The Company's practice of tracking customer comments, through
the recording of guest comment cards and the direct solicitation (during check-
in and check-out) of guest opinions regarding specific items, allows investment
in services and amenities where they are most effective. The Company's focus on
these areas has enabled it to attract lucrative group business.
Distinct Management Culture. The Company has a distinct management culture
that stresses creativity, loyalty and entrepreneurship. Management believes in
realistic solutions to problems, and innovation is always encouraged. Incentive
programs and awards have been established to encourage individual property
managers to seek new ways of increasing revenues and operating cash flow. This
creative, entrepreneurial spirit is prevalent from the corporate staff and the
general managers down to the operations staff. Individual general managers work
closely with the corporate staff, and they and their employees are rewarded for
achieving target operating and financial goals.
Computerized Reporting Systems. The Company employs computerized reporting
systems at each of the MeriStar Hotels and at its corporate offices to monitor
the financial and operating performance of the hotels. Management information
services have been fully integrated through the installation of Novell and Unix
networks at many of the REIT Owned Hotels. Management also utilizes daily
reporting and electronic mail programs to facilitate daily communication between
the MeriStar Hotels and the Company's corporate headquarters. Such programs
enable the Company to create and implement detailed reporting systems at each of
the MeriStar Hotels and its corporate headquarters. Corporate executives utilize
information systems that track each MeriStar Hotel's daily occupancy, ADR, and
revenue from rooms, food and beverage. By having the latest hotel operating
information available at all times, management is better able to respond to
changes in the market of each hotel.
REIT Modernization Act
In order for the REIT to maintain its tax status as a REIT, the REIT has
not been permitted to engage in the operations of its hotel properties. To
comply with this requirement, the REIT has leased most of its real property to
the Company as a third-party lessee/manager. In December 1999, the REIT
Modernization Act (the "RMA") became law. The RMA now permits the REIT to create
a taxable REIT subsidiary (the "TRS"), which will be subject to taxation similar
to a C-Corporation. The TRS will be allowed to lease the real property owned by
the REIT.
The RMA does not permit a REIT to establish a TRS until January 1, 2001.
Also, although a TRS can lease real property from a REIT, it will be restricted
from being involved in certain activities prohibited by the RMA. First, a TRS
will not be permitted to manage the properties itself; it will need to enter
into an "arms length" management agreement with an independent third-party
manager that is actively involved in the trade or business of hotel management
and manages properties on behalf of other owners. Second, the TRS will not be
permitted to lease a property that contains gambling operations. Third, the TRS
will be restricted from owning a brand or franchise.
The REIT believes that establishing a TRS to lease its properties will
provide a more efficient alignment of and ability to capture the economic
interests of property ownership. The REIT has established a subcommittee of
independent members of the Board of Directors to negotiate the transfer of its
existing leases with the Company to the REIT's TRS. Since this process is a
significant change from the business structure the REIT has maintained as REIT,
it is not currently possible to predict the outcome of these negotiations. The
amount of consideration, if any, to be exchanged between the Company and the
REIT is subject to completion of these negotiations. The Company is aiming to
conclude these negotiations during 2000 and transfer its leases to the REIT's
TRS effective January 1, 2001. Concurrent with the transfer of the leases to the
TRS, the Company expects to enter into management agreements with the REIT to
manage its properties in accordance with the RMA rules described above.
Competition
The Company competes primarily in the following segments of the lodging
industry: (a) the upscale and mid-priced sectors of the full-service segment,
(b) the limited-service segment and (c) resorts. In each geographic market in
which the MeriStar Hotels are located, there are other full- and limited-service
hotels and resorts that compete with the MeriStar Hotels. Competition in the
U.S. lodging industry is based generally on convenience of location, brand
affiliation, price, range of services and guest amenities offered, and quality
of customer service and overall product.
Employees
As of December 31, 1999, the Company employed approximately 30,000 persons,
of whom approximately 27,000 were compensated on an hourly basis. Some of the
employees at 17 of the Hotels are represented by labor unions. Management
believes that labor relations with its employees are generally good.
Franchises
The Company employs a flexible branding strategy based on a particular
hotel's market environment and the hotel's unique characteristics. Accordingly,
the Company uses various national trade names pursuant to licensing arrangements
with national franchisors.
Governmental Regulation
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. The Company
believes that it is substantially in compliance with these requirements.
Managers of hotels are also subject to laws governing their relationship with
hotel employees, including minimum wage requirements, overtime, working
conditions and work permit requirements. Compliance with, or changes in, these
laws could reduce the revenue and profitability of the Hotels and could
otherwise adversely affect the Company's operations.
Americans with Disability Act - Under the Americans with Disabilities Act
(the "ADA"), all public accommodations are required to meet certain requirements
related to access and use by disabled persons. These requirements became
effective in 1992. Although significant amounts have been and continue to be
invested in ADA required upgrades to the Hotels, a determination that the
Company is not in compliance with the ADA could result in a judicial order
requiring compliance, imposition of fines or an award of damages to private
litigants. The Company is likely to incur additional costs of complying with the
ADA; however, such costs are not expected to
9
have a material adverse effect on the Company's results of operations or
financial condition.
Environmental Laws - Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of hazardous
or toxic substances on, under or in such property. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. In addition, the presence
of hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the owner's ability to use the property, sell the
property or borrow by using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person. The operation and removal of certain
underground storage tanks are also regulated by federal and state laws. In
connection with the operation of the MeriStar Hotels, the Company could be
liable for the costs of remedial action with respect to such regulated
substances and storage tanks and claims related thereto. Certain environmental
laws and common law principles could also be used to impose liability for
releases of hazardous materials, including asbestos-containing materials
("ACMs"), into the environment, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs or other hazardous materials.
Phase I environmental site assessments ("ESA") have been conducted at all
of the REIT owned Hotels, and Phase II ESAs have been conducted at some of the
REIT owned Hotels by qualified independent environmental engineers. The purpose
of the ESA is to identify potential sources of contamination for which the
Company may be responsible and to assess the status of environmental regulatory
compliance. The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any material environmental liability or concerns. Nevertheless,
it is possible that these ESAs did not reveal all environmental liabilities or
compliance concerns or that material environmental liabilities or compliance
concerns exist of which the Company is currently unaware.
In reliance upon the Phase I and Phase II ESAs, the Company believes the
REIT owned Hotels are in material compliance with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters. The Company has not been notified by any governmental
authority of any material noncompliance, liability or claim relating to
hazardous or toxic substances or other environmental substances in any of the
REIT owned Hotels.
10
THE OPERATING PARTNERSHIP
The following summary information is qualified in its entirety by the
provisions of the amended and restated agreement of Limited Partnership, as
amended, of MeriStar H&R Operating Company, L.P., a copy of which has been filed
as an exhibit to this Form 10-K.
Substantially all of the Company's assets are held indirectly by MeriStar
H&R Operating Company, L.P. (the "Operating Partnership"), the Company's
subsidiary operating partnership. The Company is the sole general partner of the
Operating Partnership, and the Company, two officers and directors of the
Company and approximately 85 independent third-parties are limited partners of
the Operating Partnership. The partnership agreement of the Operating
Partnership gives the general partner full control over the business and affairs
of the Operating Partnership. The general partner is also given the right, in
connection with the contribution of property to the Operating Partnership or
otherwise, to issue additional partnership interests in the Operating
Partnership in one or more classes or series, with such designations,
preferences and participating or other special rights and powers (including
rights and powers senior to those of the existing partners) as the general
partner may determine.
The Operating Partnership's partnership agreement currently has three
classes of partnership interests ("OP Units"): Class A OP Units, Class B OP
Units and Preferred OP Units. As of March 13, 2000, the partners of the
Operating Partnership own the following aggregate numbers of OP Units: (i) the
Company and its wholly-owned subsidiaries own a number of Common OP Units equal
to the number of issued and outstanding shares of the Company's common stock,
par value $0.01, (the "Common Stock"), (ii) the officers and directors of the
Company own 1,409,753 Class B OP Units and (iii) independent third parties own
2,306,763 OP Units (consisting of 981,082 Class A OP Units, 933,524 Class B OP
Units and 392,157 Preferred OP Units). No dividend was paid during 1999 or 1998
and no dividend is expected to be paid during 2000 to the Class A OP Units and
Class B OP Units. Preferred OP Units receive a 6.5% cumulative annual preferred
return based on an assumed price per Common Share of $3.34, compounded quarterly
to the extent not paid on a current basis, and are entitled to a liquidation
preference of $3.34 per Preferred OP Unit. All net income and capital proceeds
earned by the Operating Partnership, after payment of the annual preferred
return and, if applicable, the liquidation preference, will be shared by the
holders of the Class A OP Units and Class B OP Units in proportion to the number
of OP Units owned by each such holder.
Each OP Unit held by the two officers and the independent third-parties is
redeemable by the holder for one share of Common Stock (or, at the Company's
option, for cash in an amount equal to the market value of a share of Common
Stock). In addition, the Preferred OP Units may be redeemed by the Operating
Partnership at a price of $3.34 per Preferred OP Unit (or, at the Company's
option, for a number of shares of Common Stock having a value equal to such
redemption price) at any time after April 1, 2000 or by the holders of the
Preferred OP Units at a price of $3.34 per Preferred OP Unit (in cash or, at the
holder's option, for a number of shares of Common Stock having a value equal to
the redemption price) at any time after April 1, 2004.
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference in this
annual report on Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, and as such may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Forward-
looking statements, which are based on certain assumptions and describe our
future plans, strategies and expectations are generally identifiable by use of
the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative thereof or other variations
thereon or comparable terminology. Factors which could have a material adverse
effect on the operations and future prospects of our Company include, but are
not limited to, changes in: economic conditions generally and the real estate
market specifically, legislative/regulatory changes (including changes to laws
governing the taxation of real estate investment trusts), availability of
capital, interest rates, competition, supply and demand for hotel rooms in our
current and proposed market areas and general accounting principles, policies
and guidelines applicable to real estate investment trusts. These risks and
uncertainties should be considered in evaluating any forward-looking statements
contained or incorporated by reference herein.
11
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Washington, D.C. with
other corporate offices in Florida, North Carolina and Texas. The Company
leases its offices. The Company leases and/or manages hotel properties and golf
courses throughout the United States and Canada. No one leased or managed hotel
property is material to the operation of the Company. A typical full-service
MeriStar Hotel has meeting and banquet facilities, food and beverage facilities
and guest rooms and suites. Additionally, the Company's golf management
operations are currently not material to the operation of the Company.
The REIT Owned Hotels generally feature, or after contemplated renovation
programs have been completed will feature, comfortable, modern guest rooms,
extensive meeting and (for hotels and resorts) convention facilities and full-
service restaurant and catering facilities that attract meeting and convention
functions from groups and associations, upscale business and vacation travelers
as well as banquets and receptions from the local community. The following
tables sets forth the 1999 and 1998 operating information with respect to the
REIT Owned Hotels and Leased Hotels:
As of December 31, 1999 Year ended December 31, 1999
----------------------- ----------------------------
Guest
Type Number of Hotels Rooms ADR Occupancy RevPAR
---- ---------------- ----- --- --------- ------
Inns 56 7,674 $ 75.94 71.2% $ 54.06
Hotels 82 22,219 96.45 70.9% 68.39
Resorts 23 5,762 119.86 73.7% 88.38
------------------------ -------------------- ---------- -------------- ----------
Total/weighted average 161 35,655 $ 96.24 71.4% $ 68.74
======================== ==================== ============ ============== ==========
As of December 31, 1998 Year ended December 31, 1998
----------------------- ----------------------------
Guest
Type Number of Hotels Rooms ADR Occupancy RevPAR
---- ---------------- ----- --- --------- ------
Inns 57 8,299 $ 72.93 74.2% $ 54.12
Hotels 83 22,365 94.28 71.3% 67.22
Resorts 22 5,002 97.44 70.7% 68.89
------------------------ -------------------- ---------- -------------- ----------
Total/weighted average 162 35,666 $ 90.12 71.8% $ 64.71
======================== ==================== ============ ============== ==========
The following tables set forth the operating information with respect to
the hotels managed by the Company as of December 31:
1999 1998
---------------------------------- --------------------------------
Guest Number of Guest
Type Number of Hotels Rooms Hotels Rooms
---- ---------------- --------------- --------------- ---------------
Inns 27 3,547 27 3,857
Hotels 18 4,519 11 2,620
Resorts 9 1,627 3 323
------------------------------------ --------------------------------
Total 54 9,693 41 6,800
==================================== ================================
12
The Participating Leases
Subsidiaries of the Company are the lessees (each, a "Lessee") of 108 of
the REIT's 116 hotels. Each lease (a "Participating Lease") provides for an
initial term of 12 years. Each Participating Lease provides the Lessee with
three renewal options of five years each (except in the case of properties with
ground leases having a remaining term of less than 40 years), provided that (a)
the Lessee will not have the right to a renewal if a change in the tax law has
occurred that would permit the REIT to operate the hotel directly; (b) if the
Lessee elects not to renew a Participating Lease for any applicable hotel, then
the REIT has the right to reject the exercise of a renewal right on a
Participating Lease of a comparable hotel; and (c) the rent for each renewal
term is adjusted to reflect the then fair market rental value of the hotel. If
the Lessee and the REIT are unable to agree upon the then fair market rental
value of a hotel, the Participating Lease terminates upon the expiration of the
then current term and the Lessee then has a right of first refusal to lease the
hotel from the REIT on such terms as the REIT may have agreed upon with a third-
party lessee.
Base Rent; Participating Rent; Additional Charges
Each Participating Lease requires the Lessee to pay (i) fixed monthly base
rent (the "Base Rent"), (ii) participating rent ("Participating Rent") which is
payable monthly and based on certain percentages of room revenue, food and
beverage revenue and telephone and other revenue at each hotel in excess of Base
Rent, and (iii) certain other amounts, including interest accrued on any late
payments or charges ("Additional Charges"). Base Rent and Participating Rent
departmental thresholds (departmental revenue on which the rent percentage is
based) are increased annually by a percentage equal to the percentage increase
in the Consumer Price Index (CPI percentage increase plus 0.75% in the case of
the Participating Rent departmental revenue threshold) compared to the prior
year. Base Rent is payable monthly in arrears. Participating Rent is payable in
arrears based on a monthly schedule adjusted to reflect the seasonal variations
in the hotel's revenue.
Other than real estate and personal property taxes and assessments, rent
payable under ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments
(determined in accordance with generally accepted accounting principles), that
are obligations of the REIT, the Participating Leases require the Lessee to pay
rent, liability insurance, all costs and expenses and all utility and other
charges incurred in the operation of the hotels. The Participating Leases also
provide for rent reductions and abatements in the event of damage or destruction
or a partial taking of any hotel.
The Participating Leases also provide for a rental adjustment under certain
circumstances in the event of (a) a major renovation of the hotel or (b) a
change in the franchisor of the hotel.
Capitalization Requirements of the Company
The Participating Leases require the Company, as guarantor of the
Participating Leases, to maintain a book net worth of not less than $40 million.
Further, commencing January 1, 1999, for so long as the tangible net worth of
the Company is less than 17.5% of the aggregate rents payable under the
Participating Leases for the prior calendar year, the Company is prohibited from
paying dividends or making distributions other than dividends or distributions
made for the purpose of permitting the partners of the Operating Partnership to
pay taxes on the taxable income of the Operating Partnership attributable to its
partners plus any required preferred distributions existing to partners.
Termination
The REIT has the right to terminate the applicable Participating Lease upon
the sale of a hotel to a third party or, upon the REIT's determination not to
rebuild after a casualty, upon payment to the Lessee of the fair market value of
the leasehold estate (except for properties identified by the Company and the
REIT at the Merger as properties slated to be sold). The fair market value of
the leasehold estate is determined by discounting to present value at a discount
rate of 10% per annum the cash flow for each remaining year of the then current
lease term, which cash flow will be deemed to be the cash flow realized by the
Lessee under the applicable Participating Lease for the 12-month period
preceding the termination date. The REIT will receive as a credit against any
such termination payments an amount equal to any outstanding "New Lease
Credits," which means the projected cash flow (determined on the same basis as
the termination payment) of any new Participating Leases entered into between
the Company and the REIT after the Effective Date for the initial term of such
new Participating Lease amortized on a straight-line basis over the initial term
of the new Participating Lease.
Performance Standards
The REIT has the right to terminate the applicable Participating Lease if,
in any calendar year, the gross revenues from a hotel are less than 95% of the
projected gross revenues for such year as set forth in the applicable budget
unless (a) the Lessee can
13
reasonably demonstrate that the gross revenue shortfall was caused by general
market conditions beyond the Lessee's control or (b) the Lessee "cures" the
shortfall by paying to the Company the difference between the rent that would
have been paid to the REIT had the property achieved gross revenues of 95% of
the budgeted amounts and the rent paid based on actual gross revenues. The
Lessee does not have such a cure right for more than two consecutive years.
The Participating Leases also require that the Lessee spend in each
calendar year at least 95% of the amounts budgeted for marketing expenses and
for repair and maintenance expenses.
Assignment and Subleasing
The Lessees do not have the right to assign a Participating Lease or sublet
a hotel without the prior written consent of the REIT. For purposes of the
Participating Lease, a change in control of the Company or the Lessees will be
deemed an assignment of the Participating Lease and will require the REIT's
consent, which may be granted or withheld in its sole discretion.
REIT Modernization Act
In order for the REIT to maintain its tax status as a REIT, the REIT has
not been permitted to engage in the operations of its hotel properties. To
comply with this requirement, the REIT has leased most of its real property to
the Company as a third-party lessee/manager. In December 1999, the REIT
Modernization Act (the "RMA") became law. The RMA now permits the REIT to create
a taxable REIT subsidiary (the "TRS"), which will be subject to taxation similar
to a C-Corporation. The TRS will be allowed to lease the real property owned by
the REIT.
The RMA does not permit a REIT to establish a TRS until January 1, 2001.
Also, although a TRS can lease real property from a REIT, it will be restricted
from being involved in certain activities prohibited by the RMA. First, a TRS
will not be permitted to manage the properties itself; it will need to enter
into an "arms length" management agreement with an independent third-party
manager that is actively involved in the trade or business of hotel management
and manages properties on behalf of other owners. Second, the TRS will not be
permitted to lease a property that contains gambling operations. Third, the TRS
will be restricted from owning a brand or franchise.
The REIT believes that establishing a TRS to lease its properties will
provide a more efficient alignment of and ability to capture the economic
interests of property ownership. The REIT has established a subcommittee of
independent members of the Board of Directors to negotiate the transfer of its
existing leases with the Company to the REIT's TRS. Since this process is a
significant change from the business structure the REIT has maintained as REIT,
it is not currently possible to predict the outcome of these negotiations. The
amount of consideration, if any, to be exchanged between the Company and the
REIT is subject to completion of these negotiations. The Company is aiming to
conclude these negotiations during 2000 and transfer its leases to the REIT's
TRS effective January 1, 2001. Concurrent with the transfer of the leases to the
TRS, the Company expects to enter into management agreements with the REIT to
manage its properties in accordance with the RMA rules described above.
ITEM 3. LEGAL PROCEEDINGS
In the course of the Company's normal business activities, various
lawsuits, claims and proceedings have been or may be instituted or asserted
against the Company. Based on currently available facts, management believes
that the disposition of matters that are pending or asserted will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during the
fourth quarter of 1999.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock, par value $0.01 per share, ("Common Stock") is listed on
the New York Stock Exchange ("NYSE") under the symbol "MMH." The following table
sets forth for the periods indicated the high and low closing sale prices for
the Common Stock on the NYSE.
Price
-----
High Low
---- ---
2000:
First Quarter (through March 13, 2000) $ 3 7/16 $ 2 5/8
1999:
Fourth Quarter (ended December 31, 1999) 3 9/16 2 3/16
Third Quarter (ended September 30, 1999) 3 3/4 2 7/8
Second Quarter (ended June 30, 1999) 4 7/16 2 11/16
First Quarter (ended March 31, 1999) 3 3/16 2 3/8
1998:
Fourth Quarter (ended December 31, 1998) 2 11/16 1 15/16
Third Quarter (from Spin-Off on August 3, 1998 through September 30, 1998) 3 3/4 2
The last reported sale price of the Common Stock on the NYSE on March 13,
2000 was $2 7/8. As of March 13, 2000, there were approximately 242 holders of
record of the Common Stock.
The Company has not paid any cash dividends on the Common Stock and does
not anticipate that it will do so in the foreseeable future. The Company intends
to retain earnings to provide funds for the continued growth and development of
the Company's business. The Company's Participating Lease agreements with the
REIT restrict the Company's ability to pay dividends on the Common Stock. Any
determination to pay cash dividends in the future will be at the discretion of
the Board of Directors and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
On August 3, 1998, the Company privately issued 3,414,872 Class B OP Units
as part of the purchase of 100% of the partnership interests in AGH Leasing and
substantially all of the assets and certain liabilities of AGHI.
On October 1, 1998, the Company privately issued 916,230 Class A OP Units
as part of the purchase of a portfolio of assets from South Seas Properties
Company Limited Partnership and its affiliates.
On April 15, 1999, the Company privately issued 1,818,182 shares of the
Company's Common Stock at a price of $2.75 per share to the Company's joint
venture partner in MIP Lessee, L.P. On January 6, 2000, the Company privately
issued an additional 1,818,182 shares of the Company's Common Stock at a price
of $2.75 per share to the Company's joint venture partner in MIP Lessee, L.P.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information
for the Company. The selected operating results and balance sheet data have been
extracted from the consolidated financial statements for each of the periods
presented. The following information should be read in conjunction with the
consolidated financial statements and notes thereto for the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- --------- --------- --------
(dollars in thousands, except per share amounts)
Operating Results:
Revenues:
Rooms......................................................... $ 894,983 $ 395,633 $ 9,880 $ - $ -
Food, beverage and other...................................... 387,091 152,276 1,871 - -
Management and other fees..................................... 10,040 14,528 12,088 7,050 5,354
---------- ----------- --------- --------- --------
Total revenues.............................................. 1,292,114 562,437 23,839 7,050 5,354
---------- ----------- --------- --------- --------
Operating expenses:
Departmental expenses:
Rooms......................................................... 213,107 95,627 2,533 - -
Food, beverage and other...................................... 273,345 107,860 1,170 - -
Undistributed operating expenses:
Administrative and general.................................... 183,279 84,881 10,473 6,140 4,745
Participating lease expense................................... 404,086 186,601 4,135 - -
Property operating costs...................................... 195,033 76,300 1,917 - -
Depreciation and amortization................................. 6,014 3,372 636 349 84
---------- ----------- --------- --------- --------
Total operating expenses.................................... 1,274,864 554,641 20,864 6,489 4,829
---------- ----------- --------- --------- --------
Net operating income........................................... 17,250 7,796 2,975 561 525
Interest expense, net.......................................... 4,692 2,017 56 123 44
Equity in earnings of affiliates............................... (31) (1,337) 46 - -
Minority interests............................................. 1,916 155 103 - -
Income taxes (A)............................................... 3,926 337 - - -
---------- ----------- --------- --------- --------
Net income.................................................. $ 6,685 $ 3,950 $ 2,862 $ 438 $ 481
========== =========== ========= ========= =======
Basic earnings per share (B)................................... $0.24 $0.02 - - -
Diluted earnings per share (B)................................. $0.24 $0.02 - - -
Number of shares of common stock issued and outstanding (C).... 29,625 25,437 - - -
Other Financial Data:
EBITDA (D)..................................................... $ 23,264 $ 11,168 $ 3,611 $ 910 $ 609
Net cash provided by operating activities...................... 27,528 10,125 11,167 19,069 208
Net cash used in investing activities.......................... (32,857) (102,105) (6,501) (1,826) (61)
Net cash (used in) provided by financing activities............ (4,100) 76,113 4,208 699 59
Balance Sheet Data:
Total assets................................................... $ 258,144 $ 247,529 $84,419 $24,366 $2,881
Debt........................................................... 57,762 67,812 981 885 950
(A) No provision for federal income taxes was included prior to August 3, 1998
because the Company's predecessor entities were partnerships and all
federal income tax liabilities were passed through to the individual
partners.
(B) Basic and diluted earnings per share for the year ended December 31, 1998
is based on earnings for the period from the date of the spin-off, August
3, 1998 through December 31, 1998.
(C) As of December 31 for the periods presented.
(D) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. 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
16
not represent cash flow from operations as defined by generally accepted
accounting principles ("GAAP"), is not necessarily indicative of cash available
to fund all cash flow needs, should not be considered as an alternative to net
income under GAAP for purposes of evaluating the Company's results of operations
and may not be comparable to other similarly titled measures used by other
companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We are the lessee, manager and operator of a portfolio of primarily
upscale, full-service hotels in the United States and Canada. Our portfolio is
diversified by franchise and brand affiliations. Our subsidiary, MeriStar H&R
Operating Company, L.P., conducts all of our operations. We are the sole
general partner of MeriStar H&R and control its operations.
On August 3, 1998, American General Hospitality Corporation and CapStar
Hotel Company merged together to form MeriStar Hospitality Corporation, a real
estate investment trust. As part of that merger, CapStar formed our company to
become the lessee, manager and operator of substantially all of the hotels owned
or leased by American General and CapStar before the merger. At the time of the
merger, CapStar distributed all of the shares of our common stock to its
stockholders and we became a separate, publicly traded company.
We manage all of the hotels CapStar leased and/or managed for third-party
owners before the merger. Immediately after the merger, we acquired all of the
partnership interests in AGH Leasing, L.P., the third-party lessee that leased
most of the hotels American General owned. We also acquired substantially all
of the assets and some liabilities of American General Hospitality, Inc., the
third-party manager that managed most of the hotels American General owned.
Our financial statements include the historical results of the management
and leasing operations of CapStar for all periods and include the operating
results of AGH Leasing and American General Hospitality, Inc. since August 3,
1998. In addition, before August 3, 1998, we managed substantially all of the
hotels owned by CapStar and received management fee revenues from those hotels.
Since August 3, 1998, we have leased these hotels from MeriStar Hospitality
Corporation. We have not recorded management fees from these hotels. We have
recorded room, food and beverage and other operating department revenues and
expenses from these leases. Therefore, our results of operations for the
periods ended December 31, 1999, 1998 and 1997 reflect significantly differing
numbers of managed and leased hotels throughout the periods. The following
table outlines our historical portfolio of managed and leased hotels as of
December 31:
MERISTAR
HOSPITALITY
CORPORATION CAPSTAR THIRD PARTY OTHER
LEASED OWNED MANAGED LEASED TOTAL
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
1999 108 28,055 -- -- 54 9,693 53 7,600 215 45,348
1998 109 28,058 -- -- 41 6,800 53 7,608 203 42,466
1997 -- -- 47 12,019 27 4,631 40 5,687 114 22,337
We also manage five golf courses for third party owners. Our golf course
management operations are not material to any period presented.
Financial Condition
Assets
- ------
Our total assets increased by $10.6 million to $258.1 million at December
31, 1999 from $247.5 million at December 31, 1998 primarily due to the
following:
. Investments in and advances to affiliates increased by $22.3
million due to our investment in MIP Lessee, L.P. and our
purchase of the investment in Radisson Hallmark from MeriStar
Hospitality Corporation during 1999;
. Accounts receivable decreased $14.0 million due to more effective
collection efforts and to a decrease
17
in our guest ledger receivables;
. Cash and cash equivalents decreased $9.4 million resulting from
the paydown of our debt; and
. Net fixed assets increased $6.1 million resulting from
enhancements made to our information technology systems.
Our assets include a substantial amount of intangible assets, primarily
related to our acquisitions of hotel management companies in 1997 and 1998. We
evaluate the carrying values of our long-lived intangible assets periodically in
relation to their operating performance and expected future undiscounted cash
flows of the underlying assets. Through December 31, 1999, our evaluations have
not indicated a need to adjust the carrying value of our intangible assets. Over
the past two years, however, the lodging industry has experienced the negative
effects of the supply of new rooms in some segments and geographic regions
exceeding demand. As a result, we will continue to regularly evaluate the
recoverability of our intangible assets.
Minority Interests and Paid in Capital
- --------------------------------------
Minority interests decreased $5.9 million primarily due to the conversion
of partnership interests (see "The Operating Partnership" on page 11 for more
information) to our common stock during the year. The conversion of these
partnership interests and the sale of 1,818,182 shares of our common stock to
our joint venture partner in MIP Lessee, L.P. on April 15, 1999 caused paid in
capital to increase.
Results of Operations
1999 Compared to 1998
Revenues
- --------
Total revenue increased $729.7 or 129.7% to $1,292.1 million in 1999 compared
to $562.4 million in 1998. The increase in revenue is primarily the result of an
increase in the number of hotels leased as described previously. During the
period January 1, 1998 through August 3, 1998, the revenue is from CapStar's
management and leasing operations. From August 3, 1998 through December 31, 1998
and for all of 1999, the revenue also includes the management and leasing
operations of AGH Leasing and American General Hospitality, Inc. As a result,
the 1998 revenue was derived from a smaller number of hotels being leased and
managed throughout the year. In addition, the significant increase in revenues
from our resort properties is due to the acquisition of the South Seas Resorts.
We acquired this portfolio of resort properties during the fourth quarter of
1998. Therefore, there are only three months of revenue included in 1998 and a
full 12 months of revenue included in 1999 from these properties.
The increase as it relates to our three operating segments is as follows:
Revenues Hotels Inns Resorts
Year ended December 31, 1999 $830,828 $172,295 $273,113
For the period August 3, 1998 through December 31, 1998 $322,720 $ 72,267 $ 73,878
The segment information for 1998 only includes five months of operations, from
August 3, 1998 (the date of the spin-off) through December 31, 1998. Since there
is a full year of operations for 1999, the 1998 segment information is not
comparable.
Operating Expenses
- ------------------
Operating expenses increased $720.3 million or 129.9% to $1,274.9 million in
1999 compared to $554.6 million in 1998. The increase reflects the increase in
the number of leased and managed hotels. This 129.9% increase is consistent
with the increase in revenues.
Earnings Before Interest, Taxes, Depreciation and Amortization
- --------------------------------------------------------------
Earnings before interest, taxes, depreciation and amortization increased
108.0% to $23.3 million in 1999 compared to $11.2 million in 1998. The increase
in earnings before interest, taxes, depreciation and amortization is due to the
change in the number of hotels operated and managed by us in 1999 compared to
1998.
18
Earnings before interest, taxes, depreciation and amortization for our three
operating segments is as follows:
Earnings before interest, taxes,
depreciation and amortization Hotels Inns Resorts
Year ended December 31, 1999 $17,047 $6,164 $6,886
For the period August 3, 1998 through December 31, 1999 $ 4,710 $ 172 $ (882)
The segment information for earnings before interest, taxes, depreciation and
amortization for 1999 includes a full year of operations. The 1998 information
only includes five months of operations, from August 3, 1998 (date of the spin-
off) through December 31, 1998. Therefore, the 1998 segment information for
earnings before interest, taxes, depreciation and amortization is not
comparable.
Minority interest and taxes increased by $1.8 million and $3.6 million,
respectively, due to higher operating income as compared to 1998.
1998 Compared to 1997
Revenues
- --------
Total revenue increased to $562.4 million in 1998 compared to $23.8 million
in 1997. The increase in revenues is primarily a result of the increase in the
number of hotels leased and managed as described above.
Operating Expenses
- ------------------
Operating expenses increased $533.7 million to $554.6 million in 1998 compared
to $20.9 million in 1997. The increase reflects the increase in the number of
leased and managed hotels. This increase resulted in additional personnel and
other administrative costs in 1998.
Earnings Before Interest, Taxes, Depreciation and Amortization
- --------------------------------------------------------------
Earnings before interest, taxes, depreciation and amortization increased $7.6
million to $11.2 million in 1998 compared to $3.6 million in 1997. The increase
in earnings before interest, taxes, depreciation and amortization is due to the
change in the number of hotels leased and managed in 1998 compared to 1997.
Liquidity and Capital Resources
Sources of Cash
Our continuing operations are funded through cash generated from hotel
management and leasing operations. We finance business acquisitions and
investments in affiliates through a combination of internally generated cash,
external borrowings and the issuance of partnership interests and/or common
stock. We generated $27.5 million from operations in 1999.
Under the terms of the participating lease agreements with our lessors, our
lessors will generally be required to fund significant capital expenditures at
the hotels we lease.
Uses of Cash
We used $32.9 million of cash in investing activities during 1999 primarily
for the following:
. Our additional $22.3 million of investments in hotel
partnerships.
We used $4.1 million of cash in financing activities during 1999 primarily
for the following:
. $10.0 million of net principal payments on our credit facility
with MeriStar Hospitality Corporation; and
. We received $6.0 million from the issuances of our common stock.
Revolving Credit Facilities
On August 3, 1998, we entered into a three-year, $75.0 million revolving
credit facility with MeriStar Hospitality Corporation. This loan contains
covenants regarding financial ratios, reporting requirements and other customary
restrictions. The interest rate on this loan is based on the 30-day London
Interbank Offered Rate plus 350 basis points. As of December 31, 1999, we
borrowed $57.0 million. At December 31, 1999, the interest rate was 9.98%.
On February 29, 2000, we entered into a $100.0 million senior secured
credit facility among a syndicate of banks. The credit facility bears interest
at the 30-day London InterBank Offered Rate plus 350 basis points and expires in
February 2002
19
with an optional one-year extension. We drew down $65 million at an interest
rate of 9.4% to repay the borrowings outstanding under our revolving credit
agreement with MeriStar Hospitality Corporation.
Upon execution of this new credit facility, the facility with Meristar
Hospitality Corporation was amended to reduce the maximum borrowing limit from
$75 million to $25 million.
Summary
We believe cash generated by our operations, together with anticipated
borrowing capacity under our credit facilities, will be sufficient to fund our
requirements for working capital, capital expenditures, and debt service. We
expect to continue to seek acquisitions of hotel, resort and golf management
businesses and management contracts. In addition, we expect to expand our
business into timeshare development and management and corporate (extended-stay)
housing. We expect to finance future acquisitions through a combination of
additional borrowings under our credit facilities and the issuance of
partnership interests and/or our common stock. We believe these sources of
capital will be sufficient to provide for our long-term capital needs.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns.
For non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season. For
resort properties, demand is generally higher in winter and early spring. Since
the majority of our hotels are non-resort properties, our operations generally
reflect non-resort seasonality patterns. Excluding the effect of Emerging Issues
Task Force ("EITF") Issue No. 98-9, "Accounting for Contingent Rent in Interim
Financial Periods", we have lower revenue, operating income and cash flow in the
first and fourth quarters and higher revenue, operating income and cash flow in
the second and third quarters.
Year 2000 Conversion
We have reviewed our computer systems to identify the systems that could be
affected by the "Year 2000" problem and implemented a plan to address the
problem. The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected, this could result in
a major systems failure or miscalculations.
Our hotel properties contain various information technology and embedded
technology systems. Both types of systems contain microprocessors and
microcontrollers that must be assessed for Year 2000 compliance. We identified
the following six phases in our Year 2000 remediation programs: (1) increase
awareness of issue; (2) assign responsibility for coordinating response to
issue; (3) information collection; (4) analysis; (5) modification, repair or
replacement and (6) testing. We completed all six phases and believe these
systems are Year 2000 compliant.
As an additional part of our implementation plan to address the Year 2000
problem, we initiated communications with third parties with which we have
material relationships to determine the extent of their potential Year 2000
problems. The most critical of these services involve such items as
reservations systems for our hotels. Without such systems, we could suffer a
material decline in business at many of our properties. We completed our
communications and assessment of these outside parties' services in September
1999. As of March 13, 2000, we have not encountered any significant Year 2000
problems related to third parties' services provided to us.
We incurred costs for outside consultants and capital expenditures in 1999
and 1998 related to Year 2000 which totaled approximately $148,056. These
costs, which were expensed as incurred, were funded through operations. The
costs through December 31, 1999 did not have a material affect on our financial
position or results of operations. Future consulting and capital acquisition
costs are expected to be insignificant. We are responsible for costs incurred
at our corporate offices related to Year 2000. The owners of the hotels we
operate are responsible for costs incurred at their hotel properties. As of
March 13, 2000, we have not encountered any significant Year 2000 related
problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our credit
facility with MeriStar Hospitality Corporation that impacts the fair value of
this obligation. 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. We have not entered into any derivative or interest
rate transactions.
20
Our long-term debt of $57.8 million at December 31, 1999 matures in August
2001. Interest on the debt is variable, based on the 30-day London Interbank
Offered Rate plus 350 basis points. The interest rate was 9.98% at December 31,
1999. We have determined that the fair value of the debt approximates its
carrying value.
Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows as of December 31, 1999. Additionally, foreign currency transaction gains
and losses were not material to our results of operations for the year ended
December 31, 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.
21
ITEM 8. FINANCIAL STATEMENTS
The following Consolidated Financial Statements are filed as part of this
Annual Report on Form 10-K:
MeriStar Hotels & Resorts, Inc.
Independent Auditors' Report............................................................................................ 23
Consolidated Balance Sheets as of December 31, 1999 and 1998............................................................ 24
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.............................. 25
Consolidated Statements of Stockholders' Equity and Owners' Equity for the Years Ended December 31, 1999, 1998 and 1997. 26
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.............................. 27
Notes to the Consolidated Financial Statements.......................................................................... 28
All Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MeriStar Hotels & Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of MeriStar
Hotels & Resorts, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and owners'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MeriStar
Hotels & Resorts, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Washington, D.C.
January 28, 2000, except for Note 5
which is as of February 29, 2000
KPMG LLP
23
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(in thousands, except per share amounts)
1999 1998
--------- --------
Assets
Current Assets:
Cash and cash equivalents $ 1,726 $ 11,155
Accounts receivable, net of allowance for
doubtful accounts of $2,090 and $2,285 47,976 61,987
Prepaid expenses 3,589 4,193
Deposits and other 8,388 8,885
-------- --------
Total current assets 61,679 86,220
-------- --------
Fixed assets:
Furniture, fixtures, and equipment 14,832 7,325
Accumulated depreciation (2,522) (1,099)
-------- --------
Total fixed assets, net 12,310 6,226
-------- --------
Investments in and advances to affiliates 30,018 7,695
Intangible assets, net of accumulated
amortization of $7,927 and $3,338 153,927 146,782
Restricted cash 210 606
-------- --------
$258,144 $247,529
======== ========
Liabilities, Minority Interests, and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $ 96,603 $ 96,290
Due to affiliates, net 11,476 9,564
Income taxes payable 80 69
Long-term debt, current portion 10 27
-------- --------
Total current liabilities 108,169 105,950
Deferred income taxes 13,247 9,367
Long-term debt 57,752 67,785
-------- --------
Total liabilities 179,168 183,102
-------- --------
Minority interests 13,774 19,693
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share:
Authorized - 100,000 shares
Issued and outstanding - 29,625 and 25,437 shares 296 254
Additional paid-in capital 57,637 43,894
Retained earnings 7,236 551
Accumulated other comprehensive income 33 35
-------- --------
65,202 44,734
-------- --------
$258,144 $247,529
======== ========
See accompanying notes to consolidated financial statements.
24
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INCLUDING PREDECESSOR ENTITY
(in thousands, except per share amounts)
1999 1998 1997
----------- --------- -------
Revenue:
Rooms $ 894,983 $395,633 $ 9,880
Food and beverage 295,551 119,295 1,397
Other operating departments 91,540 32,981 474
Management and other fees 10,040 14,528 12,088
---------- -------- -------
Total revenue 1,292,114 562,437 23,839
---------- -------- -------
Operating expenses by department:
Rooms 213,107 95,627 2,533
Food and beverage 224,726 90,662 909
Other operating expenses 48,619 17,198 261
Undistributed operating expenses:
Administrative and general 183,279 84,881 10,473
Participating lease expense 404,086 186,601 4,135
Property operating costs 195,033 76,300 1,917
Depreciation and amortization 6,014 3,372 636
---------- -------- -------
Total operating expenses 1,274,864 554,641 20,864
---------- -------- -------
Net operating income 17,250 7,796 2,975
Interest expense, net 4,692 2,017 56
Equity in earnings of affiliates (31) (1,337) 46
---------- -------- -------
Income before minority interests
and income taxes 12,527 4,442 2,965
Minority interests 1,916 155 103
Income taxes 3,926 337 -
---------- -------- -------
Net income $ 6,685 $ 3,950 $ 2,862
========== ======== =======
Earnings per share:
Basic $0.24 $0.02 -
Diluted $0.24 $0.02 -
========== ======== =======
See accompanying notes to consolidated financial statements.
25
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INCLUDING PREDECESSOR ENTITY
(in thousands)
Common Stock Accumulated
----------------------- Additional Other
Paid-in Retained Comprehensive Owners'
Shares Amount Capital Earnings Income Equity Total
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Balance, January 1, 1997 - $ - $ - $ - $ - $ 3,007 $ 3,007
Capital contributions - - - - - 35,040 35,040
Net income for the year - - - - - 2,862 2,862
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Balance, December 31, 1997 - - - - - 40,909 40,909
Spin-Off and issuances of
common stock 24,952 249 42,914 - - (44,308) (1,145)
Net income for period
January 1, 1998 through
August 2, 1998 - - - - - 3,399 3,399
Net income for period
August 3, 1998 through
December 31, 1998 - - - 551 - - 551
Foreign currency
translation adjustment - - - - 35 - 35
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Comprehensive Income 3,985
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Issuances of common stock
under Stock Purchase Plan 5 - 11 - - - 11
Rights offering 480 5 952 - - - 957
Proceeds from exercise of
stock options, net - - 17 - - - 17
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Balance, December 31, 1998 25,437 254 43,894 551 35 - 44,734
Net income for the year - - - 6,685 - - 6,685
Foreign currency
translation adjustment - - - - (2) - (2)
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Comprehensive Income 6,683
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Issuances of common stock 1,820 18 4,793 - - - 4,811
Redemption of OP units 1,908 19 7,816 - - - 7,835
Issuances of common stock
under Stock Purchase Plan 381 4 935 - - - 939
Proceeds from exercise of
stock options, net 79 1 199 - - - 200
---------- ----------- ------------ --------------- ---------------- ------------- --------------
Balance, December 31, 1999 29,625 $296 $57,637 $7,236 $ 33 $ - $65,202
========== =========== ============ =============== ================ ============= ==============
See accompanying notes to the consolidated financial statements.
26
MERISTAR HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INCLUDING PREDECESSOR ENTITY
(in thousands)
1999 1998 1997
--------------- --------------- ---------------
Operating activities:
Net income $ 6,685 $ 3,950 $ 2,862
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,014 3,372 636
Equity in earnings of affiliates 31 1,337 (46)
Minority interests 1,916 155 103
Deferred income taxes 3,880 267 -
Changes in operating assets and liabilities:
Accounts receivable, net 14,011 (54,825) (5,459)
Prepaid expenses 604 (3,096) (320)
Deposits and other 497 (8,229) (645)
Accounts payable, accrued expenses and other liabilities (8,033) 81,975 10,398
Due to affiliates, net 1,912 (14,850) 3,638
Income taxes payable 11 69 -
--------------- --------------- ---------------
Net cash provided by operating activities 27,528 10,125 11,167
--------------- --------------- ---------------
Investing activities:
Purchases of fixed assets (7,527) (4,624) (2,046)
Purchases of intangible assets (3,388) (99,438) (924)
Investments in and advances to affiliates (22,338) 2,563 (2,078)
Distribution from investments in affiliates - - 147
Additions to notes receivable - - (1,600)
Change in escrows and restricted funds 396 (606) -
--------------- --------------- ---------------
Net cash used in investing activities (32,857) (102,105) (6,501)
--------------- --------------- ---------------
Financing activities:
Proceeds from long-term debt 177,000 67,000 96
Principal payments on long-term debt (187,050) (169) 4,112
Proceeds from issuances of common stock, net 5,950 974 -
Contributions from CapStar - 8,383 -
Distributions to minority investors - (75) -
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (4,100) 76,113 4,208
--------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (9,429) (15,867) 8,874
Cash and cash equivalents, beginning of year 11,155 27,022 18,148
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 1,726 $ 11,155 $27,022
=============== =============== ===============
See accompanying notes to consolidated financial statements.
27
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
INCLUDING PREDECESSOR ENTITY
(dollars in thousands, except per share amounts)
1. Organization
MeriStar Hotels & Resorts, Inc. (the "Company") was spun off by CapStar
Hotel Company ("CapStar") on August 3, 1998 (the "Spin-Off") to become the
lessee, manager and operator of various hotel assets, including those which were
previously owned, leased and managed by CapStar and certain of its affiliates.
CapStar distributed to its stockholders, on a share-for-share basis, all of the
outstanding shares of the Company's common stock, par value $0.01 per share
("Common Stock"). On August 3, 1998, CapStar merged (the "Merger") with and
into American General Hospitality Corporation ("AGH"), a Maryland corporation
operating as a real estate investment trust, to form MeriStar Hospitality
Corporation (the "REIT").
Immediately following the Spin-Off and the Merger, the Company acquired
100% of the partnership interests in AGH Leasing L.P. ("AGH Leasing"), the
third-party lessee of most of the hotels owned by AGH, and acquired
substantially all of the assets and certain liabilities of American General
Hospitality, Inc. ("AGHI"), the third-party manager of most of the hotels owned
by AGH and certain other hotels. The Company thereby became the lessee, manager
and operator of most of the hotels owned by AGH. The purchase price of $95,000
was funded with a combination of cash and units of limited partnership interest
("OP Units") in the Company's subsidiary operating partnership. In accordance
with generally accepted accounting principles ("GAAP"), the acquisitions have
been accounted for as purchases and, therefore, the operating results of AGHI
and AGH Leasing are included in the Company's consolidated financial statements
from the date of acquisition.
The Company's financial statements include the historical results of the
Company's predecessor entity, the management and leasing operations of CapStar,
for all periods and include the operating results of AGH Leasing and AGHI since
August 3, 1998. In addition, prior to August 3, 1998, the Company managed
substantially all of the hotels owned by CapStar and received management fee
revenues from such hotels. Since August 3, 1998, the Company has leased these
hotels from the REIT and therefore records no management fees from such hotels
but instead records room, food and beverage and other operating department
revenues and expenses from such leased properties. Therefore, the Company's
results of operations for each of the years in the three-year period ended
December 31, 1999 reflect significantly differing numbers of managed and leased
hotels throughout the periods. The following table outlines the Company's
historical portfolio of managed and leased hotels:
REIT CAPSTAR THIRD PARTY OTHER
LEASED OWNED MANAGED LEASED TOTAL
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
12/31/99 108 28,055 -- -- 54 9,693 53 7,600 215 45,348
12/31/98 109 28,058 -- -- 41 6,800 53 7,608 203 42,466
12/31/97 -- -- 47 12,019 27 4,631 40 5,687 114 22,337
We also manage 5 golf courses for third party owners. Our golf course
management operations are not material to any period presented.
28
2. Summary of Significant Accounting Policies
Principles of Consolidation- The consolidated financial statements include the
accounts of the Company and all of its majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated joint ventures and affiliated companies in which
the Company holds a voting interest of 50% or less and exercises significant
influence are accounted for using the equity method. The Company uses the cost
method to account for its investment in entities in which it does not have the
ability to exercise significant influence.
Cash Equivalents and Restricted Cash- The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Restricted cash represents amounts required to be maintained in
escrow.
Fixed Assets- Fixed assets are recorded at cost and are depreciated using the
straight-line method over lives ranging from five to seven years.
Intangible Assets- Intangible assets consist of the value of goodwill and
hotel contracts purchased, franchise costs, and costs incurred to obtain
management contracts. Goodwill represents the excess of cost over the fair
value of the net identifiable assets of the acquired businesses. Intangible
assets are amortized on a straight-line basis over the estimated useful lives of
the underlying assets ranging from five to 40 years.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of- The
carrying values of long-lived intangible assets are evaluated periodically in
relation to the operating performance and expected future undiscounted cash
flows of the underlying assets. Adjustments are made if the sum of expected
future undiscounted net cash flows are less than net book value. The impairment
loss to be recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. No impairment losses were
recorded during 1999, 1998 or 1997.
Income Taxes- Prior to the Spin-Off, no provision for income taxes was made
since the Company's predecessor entities were partnerships and limited liability
companies, and, therefore, all income, losses, and credits for tax purposes were
passed through to the individual partners. Concurrent with the Spin-Off, the
Company implemented Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts.
Foreign Currency Translation- Results of operations for the Company's Canadian
leased hotels and management fees for the Company's Canadian managed hotels are
maintained in Canadian dollars and translated using the average exchange rates
during the period. Assets and liabilities are translated to U.S. dollars using
the exchange rate in effect at the balance sheet date. Resulting translation
adjustments are reflected in stockholders' equity as a cumulative foreign
currency translation adjustment.
Stock-Based Compensation- The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, the Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock-based plans. All grants have been made at fair value
and therefore no compensation cost has been recognized for these plans.
Revenue Recognition- Revenue is earned through the operations and management
of the hospitality properties and is recognized when earned.
Participating Lease Agreements-The Company's participating leases have non-
cancelable remaining terms ranging from 9 to 14 years, subject to earlier
termination on the occurrence of certain contingencies, as defined. The rent
payable under each participating lease is the greater of base rent or percentage
rent, as defined. Percentage rent applicable to room and food and beverage
revenue varies by lease and is calculated by multiplying fixed percentages by
the total amounts of such revenues over specified threshold amounts. Both the
minimum rent and the revenue thresholds used in computing percentage rents are
subject to annual adjustments based on increases in the United States Consumer
Price Index. Percentage rent applicable to other revenues is calculated by
multiplying fixed percentages by the total amounts of such revenues. During
interim reporting periods, the Company recognizes contingent rental expense
prior to the achievement of the specified target that triggers the contingent
rental expense if the achievement of the specified target by the end of the
fiscal year is considered probable.
Comprehensive Income-SFAS No. 130, "Reporting Comprehensive Income," requires
an enterprise to display comprehensive income and its components in a financial
statement to be included in an enterprise's full set of annual financial
statements or in the notes to financial statements. Comprehensive income
represents a measure of all changes in equity of an enterprise that result from
recognized transactions and other economic events for the period other than
transactions with owners in their capacity as owners. Comprehensive
29
income of the Company includes net income and other comprehensive income from
foreign currency items. For the year ended December 31, 1999, net income was
$6,685, other comprehensive income, net of tax, was $(2) and comprehensive
income was $6,683. For the year ended December 31, 1998, net income was $3,950,
other comprehensive income, net of tax, was $35 and comprehensive income was
$3,985.
New Accounting Pronouncements- In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity recognize all
derivatives as either assets or liabilities in statements of financial position
and measure those instruments at fair value. In June 1999, the FASB issued SFAS
No. 137 which amended SFAS No. 133 to defer the effective date to all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is
currently in the process of evaluating the effect this new standard will have on
its financial statements.
Use of Estimates- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications- Certain 1998 and 1997 amounts have been reclassified to
conform to 1999 presentation.
3. Investments in and Advances to Affiliates
The Company's net investment in and advances to these corporate joint
ventures and affiliated companies is summarized as follows:
December 31,
------------
1999 1998
------------------ --------------------
CapStar Hallmark Company, L.L.C. $11,255 $ -
MIP Lessee, L.P. 5,429 -
CapStar San Diego HGI Associates 3,940 -
CapStar Wyandotte I, LLC and CapStar
Wyandotte II, LLC 2,620 1,937
Sapphire Beach Resort & Marina 2,137 1,750
Ballston Parking Associates 1,629 1,629
BoyStar Ventures, L.P. 1,458 1,367
Other 1,550 1,012
------------------ --------------------
$30,018 $7,695
================== ====================
Combined summarized financial information of the Company's unconsolidated
corporate joint ventures and affiliated companies is as follows:
December 31,
--------------------------------
Balance sheet data: 1999 1998
-------------- --------------
Current assets $ 11,460 $ 902
Non-current assets 267,345 18,332
Current liabilities 10,560 1,082
Non-current liabilities 132,298 157
OPERATING DATA:
Revenue $ 61,284 $11,159
Net loss (2,394) (933)
30
4. Intangible Assets
Intangible assets consist of the following:
December 31,
--------------------------------------
1999 1998
--------------- -----------------
Goodwill $117,060 $109,213
Hotel contracts 39,993 36,208
Other 4,801 4,699
--------------- -----------------
161,854 150,120
Less accumulated amortization (7,927) (3,338)
--------------- -----------------
$153,927 $146,782
=============== =================
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------------------------------
1999 1998
------------------ -----------------
Credit Facility................................. $57,000 $67,000
Other........................................... 762 812
------------------ -----------------
57,762 67,812
Less current portion............................ (10) (27)
------------------ -----------------
$57,752 $67,785
================== =================
Credit Facility- On August 3, 1998, the Company entered into a three-year
$75,000 unsecured revolving credit facility (the "Credit Facility") with the
REIT. The Credit Facility contains certain covenants, including maintenance of
financial ratios, reporting requirements and other customary restrictions.
Interest on the facility is variable, based on the 30-day London Interbank
Offered Rate plus 350 basis points. As of December 31, 1999 and 1998, the
Company had $57,000 and $67,000 in outstanding borrowings under the Credit
Facility, at an interest rate of 9.98% and 8.56% respectively. The Company has
determined that the fair value of this note payable approximates its carrying
value. The Company incurred interest expense of $4,907 and $1,967 on this
facility during 1999 and 1998 respectively.
On February 29, 2000, the Company entered into a $100.0 million senior
secured credit facility among a syndicate of banks ("New Credit Facility"). The
New Credit Facility bears interest at the 30-day London Inter-Bank Offered Rate
plus 350 basis points and expires in February 2002 with an optional one-year
extension. The Company drew down $65 million at an interest rate of 9.4% to
repay the borrowings outstanding under the revolving credit agreement with the
REIT.
Upon execution of the New Credit Facility, the REIT facility was amended to
reduce the maximum borrowing limit from $75 million to $25 million.
Future Maturities- Aggregate future maturities of the above obligations are
as follows: 2000-$10; 2001-$57,752
6. Income Taxes
Prior to the Spin-Off, the Company's predecessor entity conducted its
operations in partnerships and limited liability companies; these operations,
therefore, were not subject to income taxes. The Company is taxable as a C
Corporation. Accordingly, the Company's income taxes are based on pre-tax income
since the Spin-off. Pre-tax income for the period August 3, 1998 through
December 31, 1998 was $887.
31
The Company's effective income tax rate for the year ended December 31, 1999
and for the period August 3, 1998 through December 31, 1998 differs from the
federal statutory income tax rate as follows:
1999 1998
------------------------------------
Statutory tax rate 35.0% 35.0%
State and local taxes 4.0 4.2
Difference in rates on foreign subsidiaries - 2.3
Business meals and entertainment 0.7 5.2
Compensation expense (0.5) (77.8)
Valuation allowance (5.8) 69.0
Other 3.6 -
------------------------------------
37.0% 37.9%
====================================
The components of income tax expense are as follows:
Current: 1999 1998
-----------------------------
Federal $ - $ -
State 46 27
Foreign - 42
-----------------------------
46 69
-----------------------------
Deferred:
Federal 3,276 234
State 604 33
-----------------------------
3,880 267
-----------------------------
$ 3,926 $ 336
=============================
The tax effects of the temporary differences and carryforwards that give rise to
the Company's net deferred tax liability at December 31, 1999 and 1998 are as
follows:
1999 1998
------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 144 $ 236
Accrued vacation 491 545
Minority interests temporary difference 862 -
Net operating loss 1,159 613
-----------------------------------
Total gross deferred tax assets 2,656 1,394
Less valuation allowance - (613)
-----------------------------------
Net deferred tax assets 2,656 781
-----------------------------------
Deferred tax liabilities:
Accrued expenses $ (876) $ (7)
OP Units (9,100) (9,100)
Amortization expense (2,443) (580)
Prepaid expenses (306) (461)
Intangible assets basis differences (3,100) -
Other (78) -
-----------------------------------
Total gross deferred tax liabilities (15,903) (10,148)
-----------------------------------
Net deferred tax liability $(13,247) $ (9,367)
===================================
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $3,132 that begin to expire in 2018. The valuation allowance for
deferred tax assets as of January 1, 1999 was $613. The net change in the total
valuation allowance for the year ended December 31, 1999 was a decrease of $613.
As part of the Spin-Off, the Company received certain assets that CapStar
had acquired, in part, through the issuance of OP Units. These assets were
acquired by CapStar prior to August 3, 1998. At August 3, 1998 the tax basis of
these assets differed from the financial reporting amounts that the Company
recorded as part of the Spin-Off. The Company has recorded a deferred income tax
32
liability of $9,100 for the estimated future tax effect of this basis
difference. The amount of the basis difference and corresponding deferred income
tax liability have been estimated. The deferred income tax liability may be
adjusted upon the final determination of the basis difference. Any such
adjustment, however, would be recorded as an increase or decrease to the
deferred income tax liability balance, and a corresponding decrease or increase
in the capital CapStar contributed to the Company as part of the Spin-Off.
7. Stockholders' Equity and Minority Interests
Common Stock- In conjunction with the Spin-Off, CapStar distributed to its
stockholders, on a share-for-share basis, all of the 24,948,754 outstanding
shares of the Company's Common Stock.
In connection with the Spin-Off, the Company distributed to holders of the
REIT's common stock and the REIT's OP Units, one right for every six shares or
units owned. Each right entitled its holder to purchase a share of Common Stock
at a subscription price of $2.84 per share, during a subscription period from
August 13, 1998 through August 31, 1998. The Rights Offering resulted in the
sale of approximately 480,000 shares of Common Stock with net proceeds to the
Company of $957.
In November 1998, the Company implemented a stock purchase plan that allows
eligible employees to purchase the Company's common stock at a discount to
market value. The Company has reserved 1,500,000 shares of Common Stock for
issuance under this plan. The Company sold 5,384 shares under this plan in
1998 and 381,066 shares under this plan in 1999.
On April 15, 1999, the Company privately issued 1,818,182 shares of the
Company's Common Stock at a price of $2.75 per share to the Company's joint
venture partner in MIP Lessee, L.P.
On January 6, 1999, the Company privately issued 1,818,182 shares of the
Company's Common Stock at a price of $2.75 per share to the Company's joint
venture partner in MIP Lessee, L.P.
OP Units- Substantially all of the Company's assets are held indirectly by
MeriStar H&R Operating Company, L.P. (the "Operating Partnership"), the
Company's subsidiary operating partnership.
The Operating Partnership's partnership agreement currently has three
classes of OP Units: Class A OP Units, Class B OP Units and Preferred OP Units.
No dividends were paid during 1998 or 1999 and no dividends are expected to be
paid in 2000 to the Class A OP Unit holders and Class B OP Unit holders.
Preferred OP Unit holders receive a 6.5% cumulative annual preferred return
based on an assumed price per Common Share of $3.34, compounded quarterly to the
extent not paid on a current basis, and are entitled to a liquidation preference
of $3.34 per Preferred OP Unit. All net income and capital proceeds earned by
the Operating Partnership, after payment of the annual preferred return and, if
applicable, the liquidation preference, will be shared by the holders of the
Class A OP Units and Class B OP Units in proportion to the number OP Units owned
by each such holder.
Each Class A and Class B OP Unit is redeemable by the holder for one share
of Common Stock (or, at the Company's option, for cash in an amount equal to the
market value of a share of Common Stock). In addition, the Preferred OP Units
may be redeemed by the Operating Partnership at a price of $3.34 per Preferred
OP Unit (or, at the Company's option, for a number of shares of Common Stock
having a value equal to such redemption price) at any time after April 1, 2000
or by the holders of the Preferred OP Units at a price of $3.34 per Preferred OP
Unit (in cash or, at the holder's option, for a number of shares of Common Stock
having a value equal to the redemption price) at any time after April 1, 2004.
In conjunction with the Spin-Off and Merger, the Company issued to holders of
CapStar OP Units, 1,083,759 Class A and B OP Units and 392,157 Preferred OP
Units.
Immediately following the Spin-Off and the Merger, the Company acquired 100%
of the partnership interests in AGH Leasing and acquired substantially all of
the assets and certain liabilities of AGHI. The purchase price of $95,000 was
funded with a combination of cash and the issuance of 3,414,872 Class B OP
Units.
In October 1998, in conjunction with the purchase of certain assets of
South Seas Properties Company, L.P., the Company issued 916,230 Class A OP
Units.
33
8. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for net income for the
year ended December 31, 1999 and for the period August 3, 1998 through December
31, 1998:
Basic EPS Computation: 1999 1998
--------------------------------
Net income $ 6,685 $ 551
Weighted average number of shares
of Common Stock outstanding 27,868 25,335
--------------------------------
Basic EPS $ 0.24 $ 0.02
================================
Diluted EPS Computation:
Net income $ 6,685 $ 551
Minority interest, net of tax - (90)
--------------------------------
Adjusted net income $ 6,685 $ 461
--------------------------------
Weighted average number of shares
of Common Stock outstanding 27,868 25,335
Common Stock equivalents:
Stock options 146 18
OP Units 392 1,308
--------------------------------
Total weighted average number of diluted
shares of Common Stock outstanding 28,406 26,661
--------------------------------
Diluted EPS $ 0.24 $ 0.02
================================
Certain OP Units were not included in the computation of diluted EPS as
their effect was anti-dilutive.
EPS for 1998 has been calculated using net income amounts for the period
from the Spin-Off on August 3, 1998 through December 31, 1999. EPS is not
presented for periods prior to the Spin-Off because the Company's predecessor
entities were partnerships.
9. Related-Party Transactions
Pursuant to an intercompany agreement, the Company and the REIT provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, the Company has a right
of first refusal to become the lessee of any real property acquired by the REIT.
The Company also provides the REIT with certain services including
administrative, renovation supervision, corporate, accounting, finance,
insurance, legal, tax, information technology, human resources, acquisition
identification and due diligence, and operational services, for which the
Company is compensated in an amount that the REIT would be charged by an
unaffiliated third party for comparable services. During the years ended
December 31, 1999 and 1998, the Company paid $1,600 and $781 for such services
to the REIT, respectively.
10. Stock-Based Compensation
On August 3, 1998, the Company adopted an equity incentive plan that
authorized the Company to issue and award up to 4,000,000 shares of common
stock. This plan was amended to increase the maximum number of shares of Common
Stock that may be issued under the Plan to fifteen percent of the number of
outstanding shares of Common Stock. Awards under the plan may be granted to
directors, officers, or other key employees.
On August 8, 1998, the Company adopted an equity incentive plan for non-
employee directors that authorized the Company to issue and award options for up
to 125,000 shares of common stock. These options vest in three annual
installments beginning on the date of grant and on subsequent anniversaries
thereof, provided the eligible director continues to serve as a director of the
Company on each such anniversary. Options granted under the Plan are
exercisable for ten years from the grant date.
In November 1998, the Company implemented a stock purchase plan that allows
eligible employees to purchase the Company's common stock at a discount to
market value. The Company has reserved 1,500,000 shares of Common Stock for
issuance under this plan.
34
Stock option activity is as follows:
Equity Incentive Plan Directors' Plan
------------------------------------- --------------------------------------
Number of Average Option Number of Average Option
Shares Price Shares Price
------------- ------------------ --------------- ------------------
Balance, August 3, 1998 - - - $ -
Granted 2,805,955 $3.37 45,000 $3.28
Exercised (2,235) - - -
Forfeited - - - -
------------- ------------------ --------------- ------------------
Balance, December 31, 1998 2,803,720 $3.37 45,000 $3.28
Granted 449,425 3.22 40,000 4.19
Exercised (106,579) 2.48 - -
Forfeited (151,822) 3.62 - -
------------- ------------------ --------------- ------------------
Balance, December 31, 1999 2,994,744 $3.36 85,000 $3.71
============= ================== =============== ==================
Shares exercisable at December 31, 1999 1,776,946 $3.40 15,000 $3.28
============= ================== =============== ==================
Shares exercisable at December 31, 1998 1,415,044 $3.43 - $ -
============= ================== =============== ==================
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------------------- ---------------------------------
Weighted
Weighted Average Average
Range of exercise Number Remaining Weighted Average Number Exercise
prices outstanding Contractual Life Exercise Price exercisable Price
- ----------------- ------------- ------------------- ----------------- ------------- -------------
$2.19 to $2.63 834,599 7.23 $2.40 672,279 $2.37
$2.69 to $3.19 172,650 9.02 2.93 15,734 3.11
$3.25 to $3.28 941,720 8.59 3.28 313,370 3.28
$3.31 to $4.76 1,130,775 8.20 4.19 790,563 4.33
------------- ------------------- ----------------- ------------- -------------
$2.19 to $4.76 3,079,744 8.10 $3.36 1,791,946 $3.40
============= =================== ================= ============= =============
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies
Accounting Principles Board Opinion No. 25 in accounting for the Equity
Incentive Plan and therefore no compensation cost has been recognized for the
Equity Incentive Plan.
Pro forma information regarding net income and EPS is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method. The weighted average fair value of
the options granted was $1.46 and $1.58 at December 31, 1999 and 1998,
respectively. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1999 and 1998:
1999 1998
---------------------------------
Risk-free interest rate 6.70% 5.51%
Dividend rate - -
Volatility factor 0.56 0.50
Weighted average expected life 2.63 years 6.15 years
The Company's pro forma net income and basic EPS as if the fair value method
had been applied were $6,185 and $0.22 and $(2,324) and $(0.09) for 1999 and
1998, respectively. The effects of applying SFAS No. 123 for disclosing
compensation costs may not be representative of the effects on reported net
income and EPS for future years.
35
11. Commitments and Contingencies
The Company leases certain hotels under non-cancelable participating leases
with remaining initial terms ranging from 9 to 14 years, expiring through 2013.
The total amount payable on these participating leases was $9,503 and $11,100 at
December 31, 1999, and 1998 respectively. The Company also leases corporate
office space. Future minimum lease payments required under these operating
leases as of December 31, 1999 were as follows:
2000 $ 260,378
2001 260,548
2002 260,397
2003 259,585
2004 258,754
Thereafter 1,582,985
----------
$2,882,647
==========
In the course of the Company's normal business activities, various
lawsuits, claims and proceedings have been or may be instituted or asserted
against the Company. Based on currently available facts, management believes
that the disposition of matters that are pending or asserted will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
The Participating Leases require the Company, as guarantor of the
Participating Leases, to maintain a book net worth of not less than $40 million.
Further, commencing January 1, 1999, for so long as the tangible net worth of
the Company is less than 17.5% of the aggregate rents payable under the
Participating Leases for the prior calendar year, the Company is prohibited from
paying dividends or making distributions other than dividends or distributions
made for the purpose of permitting the partners of the Operating Partnership to
pay taxes on the taxable income of the Operating Partnership attributable to its
partners plus any required preferred distributions existing to partners.
12. Segments
The Company is organized into three primary operating divisions. Each
division is managed separately because of its distinctive products and services
offered by the hotel properties within the operating division. These operating
divisions are the Company's three reportable operating segments: upscale, full-
service hotels ("Hotels"); premium limited-service hotels and inns ("Inns"); and
resort properties ("Resorts"). The Company's management evaluates performance
of each segment based on earnings before interest taxes, depreciation, and
amortization ("EBITDA"). The accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
Prior to the Spin-Off, the Company conducted its business primarily in
only one operating segment. Therefore, the segment disclosures presented below
are for the year ended December 31, 1999 and the period August 3, 1998 through
December 31, 1998. The Company has determined that it is not practicable to
present the segment information for the year ended December 31, 1997.
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 Hotels Inns Resorts Total Segments
- -------------------------------------------------------------------- ----------- ------------ ----------------
Revenues $830,828 $172,295 $273,113 $1,276,236
Participating Lease Expense $261,671 $ 71,142 $ 71,273 $ 404,086
EBITDA $ 17,047 $ 6,164 $ 6,886 $ 30,097
Total Assets $ 71,191 $ 14,161 $ 12,791 $ 98,143
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Period August 3, 1998 through December 31, 1998 Hotels Inns Resorts Total Segments
- -------------------------------------------------------------------- ----------- ------------ ---------------
Revenues $322,720 $72,267 $73,878 $468,865
Participating Lease Expense $101,423 $29,430 $24,187 $155,040
EBITDA $ 4,710 $ 172 $ (882) $ 4,000
Total Assets $ 48,264 $42,091 $16,276 $106,631
- --------------------------------------------------------------------------------------------------------------------------------
36
The following is a reconciliation of the segment information to the
Company's consolidated data for the year ended December 31, 1999:
Participating
Lease
Revenues Expense EBITDA Assets
---------------------------------------------------------------
Total Segments $1,276,236 $404,086 $30,097 $ 98,143
Other Items 15,878 - (6,833) 160,788
---------------------------------------------------------------
Per Financial Statements $1,292,114 $404,086 $23,264 $258,931
===============================================================
The following is a reconciliation of the segment information to the
Company's consolidated data for the year ended December 31, 1998:
Participating
Lease
Revenues Expense EBITDA Assets
-----------------------------------------------------------
Total Segments $468,865 $155,040 $ 4,000 $106,631
Other Items 7,526 - 1,164 140,898
-----------------------------------------------------------
Total August 3, 1998 through
December 31, 1998 $476,391 $155,040 $ 5,164 $247,529
===========================================================
Total Pre-Spin-Off (January
1, 1998 through August 2, 1998) 86,046 31,561 6,004 -
-----------------------------------------------------------
Per Financial Statements $562,437 $186,601 $11,168 $247,529
===========================================================
The other items in the table above represent non-operating segment activity
and assets. These are primarily unallocated corporate expenses and non-segment
activities, and intangible and other miscellaneous assets.
Revenues for Canadian operations totaled $21,477 and $8,865 for the year
ended December 31, 1999 and period August 3, 1998 through December 31, 1998,
respectively.
13. Acquisitions
Pursuant to the Spin-Off and Merger, the Company acquired 100% of the
partnership interests in AGH Leasing, the third-party lessee of most of the
hotels owned by AGH, and substantially all of the assets and liabilities of
AGHI, the third-party manager of most of the AGH hotels. As a result, the
Company became the lessee and manager of most of the hotels owned by the
REIT. The purchase price of $95,000 was paid with a combination of cash and
OP Units in the Company's subsidiary operating partnerships.
The following unaudited pro forma summary presents information as if AGH
Leasing and AGHI had been acquired, and the Spin-Off had occurred, at the
beginning of the periods presented. The pro forma information is provided
for informational purposes only. It is based on historical information and
does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the Company.
PRO FORMA INFORMATION (UNAUDITED)
1998 1997
---------------- ---------------
Total revenue....................... $1,083,348 $938,613
Net income.......................... $ 3,295 $ 3,097
Diluted EPS......................... $ 0.13 $ 0.12
37
14. Quarterly Financial Information (Unaudited)
The following is a summary of the Company's quarterly results of
operations:
1999 1998
---- ----
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- -------- -------- --------- ------- ------- -------- ---------
Total revenue $325,838 $345,223 $314,788 $306,265 $30,130 $41,101 $195,498 $295,708
Total operating expenses 325,547 327,318 311,037 310,962 28,798 38,462 187,890 299,491
Net operating income (loss) 291 17,905 3,751 (4,697) 1,332 2,639 7,608 (3,783)
Net income (loss) (465) 8,810 1,553 (3,213) 758 2,223 3,605 (2,636)
Diluted earnings (loss) per share $ (0.02) $ 0.31 $ 0.05 $ (0.11) - - $ 0.12 $ (0.10)
The effect of the Emerging Issues Task Force ("EITF") No. 98-9 "Accounting
for Contingent Rent in Interim Financial Periods", on the Company's financial
statements for the three months ended December 31, 1999 is as follows:
Three Months Ended December 31, 1999
------------------------------------
Prior to Effect After
Effect of of Effect of
EITF No.98-9 EITF No. 98-9 EITF No. 98-9
------------- -------------- --------------
Net operating income $ 1,648 $(6,345) $(4,697)
Interest expense, net (1,149) - (1,149)
Equity in earnings of affiliate (31) - (31)
Minority interest (52) 830 778
Income taxes (154) 2,040 1,886
------- ------- -------
Net income $ 262 $(3,475) $(3,213)
======= ======= =======
Diluted EPS $0.01 $(0.11)
======= =======
15. Supplemental Cash Flow Information
1999 1998 1997
---------- --------- --------
Cash paid for interest and income taxes:
Interest $4,907 $ 2,017 $ 56
Income taxes 36 - -
Non-cash investing and financing activities:
Conversion of OP Units to common stock 7,835 - -
OP Units issued and/or assumptions of liabilities
in purchase of intangible assets 8,346 14,022 -
Assets contributed by CapStar - 2,605 38,844
Liabilities contributed by CapStar - (7,549) (4,219)
Debt contributed by CapStar - (1,116) -
---------- ------- --------
Net assets (liabilities) contributed by CapStar - $(6,060) $34,625
========== ======= ========
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 405 of Regulation S-K with respect to
Directors and Executive Officers of the Company is incorporated herein by
reference to the sections entitled "Management" and "Principal Stockholders" in
the Company's definitive proxy for its 2000 Annual Meeting of Stockholders (the
"2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the sections entitled "Executive Compensation," "Compensation of Directors"
and "Stock Option Grants" in the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the section entitled "Principal Stockholders" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" in the
2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Index to Financial Statements and Financial Statement Schedules
1. Financial Statements
The Financial Statements included in the Annual Report on Form 10-K are
listed in Item 8.
2. Financial Statement Schedules
The Financial Statement Schedules included in the Annual Report on Form 10-
K are listed in Item 8.
3. Exhibits
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other documents
previously filed with the Commission.
Exhibit No. Description of Document
----------- -----------------------
2.1* Acquisition Agreement, dated as of March 15, 1998, among MeriStar H&R
Operating Company, L.P., American General Hospitality Corporation,
American General Hospitality, Inc., AGHL GP, Inc., the general partner
of AGH Leasing, L.P., and the limited partners of AGH Leasing, Inc.
2.2** Form of Contribution, Assumption and Indemnity Agreement between
CapStar Hotel Company and MeriStar H&R Operating Company, L.P.
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-laws of the Company
4.1* Specimen Common Stock certificate
4.4* Form of Rights Agreement
4.5****Form of Stock Purchase Agreement dated as of March 31, 1999
4.6****Amendment to Stock Purchase Agreement dated April 15, 1999
4.7****Form of Registration Rights Agreement dated as of March 31, 1999
10.1* Form of Employment Agreement between the Company and Paul W. Whetsell
10.2* Form of Employment Agreement between the Company and Steven D. Jorns
39
10.3* Form of Employment Agreement between the Company and David E.
McCaslin
10.4* Form of Employment Agreement between the Company and James A.
Calder
10.5* Form of Employment Agreement between the Company and John E.
Plunket
10.6* Form of Equity Incentive Plan of the Company
10.7* Form of Non-Employee Directors' Incentive Plan of the Company
10.8*** Form of Intercompany Agreement among MeriStar Hotels & Resorts,
Inc., MeriStar H&R Operating Company, L.P., MeriStar Hospitality
Corporation and MeriStar Hospitality Operating Partnership, L.P.
(Incorporated by reference to Exhibit 99.4 to CapStar Hotel
Company's Report on Form 8-K dated March 17, 1998, No. 1-11903)
10.9*** Form of Revolving Credit Agreement, dated as of August 3, 1998,
between MeriStar H&R Operating Company, L.P. and MeriStar
Hospitality Operating Partnership, L.P.
10.10*** Form of Employee Stock Purchase Plan
10.11 Form of Senior Secured Credit Facility, dated as of
February 29, 2000 between MeriStar H&R Operating Company, L.P.
and Societe Generale, Southwest Agency, as Arranger and
Administrative Agent
10.12**** Form of Agreement of Limited Partnership of MIP Lessee, LP dated
as of March 31, 1999.
10.13 Amendment to Revolving Credit Agreement, dated as of February 29,
2000, between MeriStar H&R Operating Company, L.P. and MeriStar
Hospitality Operating Partnership, L.P.
21 Subsidiaries of the Company
23 Consent of KPMG LLP
27 Financial Data Schedule
29 Power of Attorney (see signature page)
---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-49881), filed with the Securities and Exchange
Commission on August 12, 1998.
** Incorporated by reference to Exhibit 99.4 to CapStar Hotel Company's
Report on Form 8-K dated March 17, 1998, No. 1-11903.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 001-14331), filed with the Securities and Exchange Commission on
March 22, 1999.
**** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 001-14331), filed with the Securities and Exchange Commission on
May 7, 1999.
B. Reports on Form 8-K:
A current report on Form 8-K was filed with the Securities and Exchange
Commission on August 16, 1998, as amended, reporting events required to be
reported pursuant to Items 5 and 7 of the current report on Form 8-K.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MeriStar Hotels & Resorts, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERISTAR HOTELS & RESORTS, INC.
By:
/s/ Paul W. Whetsell
_____________________________
Paul W. Whetsell
Chief Executive Officer and
Chairman of the Board
Dated: March 14, 2000
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul W. Whetsell and David E. McCaslin, such
person's true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this report filed pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same
with all exhibits thereto, and the other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and things requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and the foregoing Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer and Chairman March 14, 2000
of the Board of Directors (Principal
/s/ Paul W. Whetsell
____________________
Paul W. Whetsell Executive Officer)
Vice Chairman of the Board of Directors March 14, 2000
/s/ Steven D. Jorns
___________________
Steven D. Jorns
President and Director March 14, 2000
/s/ David E. McCaslin
____________________
David E. McCaslin
Chief Financial Officer (Principal March 14, 2000
/s/ James A. Calder
____________________
James A. Calder Financial and Accounting Officer)
Director March 14, 2000
/s/ Daniel L. Doctoroff
____________________
Daniel L. Doctoroff
41
Director March 14, 2000
/s/ Kent R. Hance
____________________
Kent R. Hance
Director March 14, 2000
/s/ S. Kirk Kinsell
____________________
S. Kirk Kinsell
Director March 14, 2000
/s/ James McCurry
___________________
James McCurry
Director March 14, 2000
/s/ James R. Worms
____________________
James R. Worms
42