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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 1-14331
MERISTAR HOTELS & RESORTS, INC.
(Exact name of issuer as specified in its charter)
Delaware 52-2101815
(State or other jurisdiction) (I.R.S. Employer)
of incorporation or organization) Identification Number)
1010 Wisconsin Avenue, N.W.
Washington, D.C.
(Address of principal executive offices)
20007
(Zip code)
Registrant's telephone number, including area code: (202) 965-4455
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
------------------------
Title of each class which registered
------------------- ----------------
Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the average sale price at March 5, 2002, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$20,046,234.
The number of shares of the Registrant's common stock outstanding as of
March 5, 2002 was 37,188,574.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III--Those portions of the Registrant's definitive proxy statement
relating to Registrant's 2002 Annual Meeting of Stockholders which are
incorporated into Items 10, 11, 12, and 13.
PART I
ITEM 1. BUSINESS
THE COMPANY
We manage, lease and operate a portfolio of hospitality properties, and
provide related services in the hotel, corporate housing, resort, conference
center and golf markets. Our portfolio is diversified by franchise and brand
affiliations. As of December 31, 2001, we managed 229 hotels with 51,880 rooms
in 43 states, the District of Columbia, and Canada, and leased 48
limited-service hotels with 6,581 rooms in 12 states. In addition, we had 3,054
apartments under lease in the United States, Canada, France and the United
Kingdom at December 31, 2001.
We are the lessee, manager and operator of various hospitality-related
assets, including all of the hotels owned by MeriStar Hospitality Corporation.
We are the largest independent hotel management company in the United States,
based on rooms under management. As of December 31, 2001, we managed 229 hotels;
112 of these hotels are owned by MeriStar Hospitality. We also lease 48 hotels
from Winston Hotels, Inc.; we manage 40 of these hotels. The hotels we manage
are located throughout the United States and Canada, including most major
metropolitan areas and rapidly growing secondary cities. Our managed hotels
include hotels operated under nationally recognized brand names such as
Hilton(R), Sheraton(R), Westin(R), Radisson(R), Marriott(R), Doubletree(R),
Embassy Suites(R), and Holiday Inn(R). Our business strategy is to manage the
renovation, repositioning and operations of each property according to a
business plan specifically tailored to the characteristics of the property and
its market.
We manage properties primarily within the upscale, full-service and premium
limited-service sector, and provide related management services for owners of
properties in both sectors as well. We believe the upscale, full-service segment
of the lodging industry offers strong potential operating results and investment
opportunities. The real estate market has recently experienced a significant
slowdown in the construction of upscale, full-service hotels. Also, upscale,
full-service hotels have particular appeal to both business executives and
upscale leisure travelers. We believe the combination of these factors offers
good potential opportunities for us in this sector of the lodging industry.
We are the lessor of high quality, fully furnished one-, two- and
three-bedroom and larger accommodations through our BrideStreet brand. We lease
substantially all of our Corporate Housing accommodations through flexible,
short-term leasing arrangements in order to match our supply of accommodations
with current and anticipated client demand. We believe our flexible leasing
strategy allows us to react to changes in market demand for particular
geographic locations and types of accommodations. Our management strives to
develop strong relationships with property managers to ensure that we have a
reliable supply of high quality, conveniently located accommodations.
We were formed on August 3, 1998 when we were spun off by CapStar Hotel
Company and became the lessee and manager of all of CapStar's hotels. After the
spin-off, American General Hospitality Corporation, (a Maryland corporation
operating as a real estate investment trust or "REIT") and CapStar Hotel Company
merged to form MeriStar Hospitality Corporation. We then acquired the third
party lessee of most of the hotels owned by American General Hospitality, and
substantially all of the assets and certain liabilities of the third-party
manager of most of the hotels owned by American General Hospitality.
We continue to capitalize on our hospitality management experience and
expertise. We secured a net of nine additional management contracts in 2001. We
also worked closely with the owners of the hotels we manage to obtain revenues
and reduce costs in the face of an extremely difficult economic and operating
environment.
Our senior management team has successfully managed hotels in all segments
of the lodging industry. We attribute our management success to our ability to
analyze each hotel as a unique property and to identify particular cash flow
growth opportunities present at each hotel. Our principal operating objectives
are to continue to analyze each hotel as a unique property in order to generate
higher revenue per available room and increase net operating
2
income, while providing our hotel guests with high-quality service and value.
Given the challenging operating environment that has resulted from a slowing
economy coupled with the disruptions caused by the events of September 11, we
believe our experience and strategies are now even more valuable to the owners
of the hotels we manage.
We have invested $10 million in MeriStar Investment Partners, a joint
venture with Oak Hill Capital Partners, L.P. This joint venture was established
to acquire upscale, full-service hotels. As of December 31, 2001, the joint
venture had acquired 10 full-service hotels throughout the United States. We
manage all of these hotels. We are continually looking for additional hotel
investment opportunities that we can bring to new joint venture partners.
Business Strategy
We plan to focus on the internal growth of our two core operating segments
- - Hotel Management and Corporate Housing.
In our Hotel Management business segment, we plan to generate earnings
through base fees, incentive fees and other services from our existing
management contracts as well as additional management contracts we may acquire.
We are also currently negotiating the conversion of our Winston leases of
limited-service hotels to management contracts. We believe this will better
align our interests with Winston, the owners of the properties we lease.
In our Corporate Housing business segment, we plan to generate net income
by improving our inventory management and cost control in our existing markets.
We may also add additional markets in North America if the conditions are
favorable. In our European markets we plan to manage shifting demand in London
and expand the Paris operations acquired in 2001.
We expect to finance future acquisitions through a combination of
additional borrowings under our credit facilities and the issuance of
partnership interests and/or our common stock. We believe these sources of
capital will be sufficient to provide for our short-term capital needs. In order
to provide sufficient long-term capital for our operations, we will attempt to
refinance our existing senior secured credit facility during 2002.
Relationship with MeriStar Hospitality
We have historically had a close business relationship with MeriStar
Hospitality Corporation, a REIT, and we have five common board members and five
common senior executives.
REIT Modernization Act
Until January 1, 2001, in order for MeriStar Hospitality to maintain its
tax status as a real estate investment trust, MeriStar Hospitality was not
permitted to engage in the operations of its hotel properties. To comply with
this requirement, MeriStar Hospitality leased most of its real property to us
and one other third-party lessee/manager. In late 1999, the Federal government
enacted changes to the Internal Revenue Code that now permit MeriStar
Hospitality to create taxable subsidiaries, which are subject to taxation
similar to a subchapter C corporation and are permitted to lease MeriStar
Hospitality's real property.
Although a taxable subsidiary of a REIT may lease real property, it is not
permitted to manage the properties itself; it must enter into an "arms-length"
management agreement with an independent third-party manager that is actively
involved in the trade or business of hotel management and manages properties on
behalf of other owners. We are such a qualified independent third party manager.
In connection with MeriStar Hospitality's creation of its taxable
subsidiaries, we assigned our leases of hotels owned by MeriStar Hospitality to
taxable subsidiaries of MeriStar Hospitality effective January 1, 2001 and
entered into management contracts with those taxable subsidiaries to manage
those hotels. Under the management agreements, we receive a management fee
based on total hotel revenue that is subject to increase based on the
achievement of specified operating thresholds. We have structured the management
agreements to substantially
3
mirror the economics of the prior leases. We believe the elimination of the
lease structure reduces our exposure to fluctuations in the economy, and the
management agreements provide us with a more stable source of revenue.
The Intercompany Agreement
We are party to an intercompany agreement with MeriStar Hospitality. For so
long as the agreement remains in effect, we are prohibited from making real
property investments that a real estate investment trust could make unless:
. MeriStar Hospitality is first given the opportunity but elects not to
pursue the investments;
. The investment is on land already owned or leased by us or subject to
a lease or purchase option in favor of us;
. We will operate the property under a trade name owned by us; or
. The investment is a minority investment made as part of a lease or
management agreement arrangement by us.
The intercompany agreement will generally grant us the right of first
refusal to become the manager of any real property acquired by MeriStar
Hospitality. MeriStar Hospitality will make such an opportunity available to us
only if MeriStar Hospitality determines that:
. Consistent with its status as a real estate investment trust, MeriStar
Hospitality must enter into a management agreement with an
unaffiliated third party with respect to the property;
. We are qualified to be the manager of that property; and
. MeriStar Hospitality decides not to have the property operated by the
owner of a hospitality trade name under that trade name.
Because of the provisions of the intercompany agreement, we are restricted
in the nature of our business and the opportunities we may pursue.
Services
- --------
Under our intercompany agreeement with MeriStar Hospitality we provide each
other with certain services. These may include administrative, renovation
supervision, corporate, accounting, financial, risk management, legal, tax,
information technology, human resources, acquisition identification and due
diligence, and operational services. We believe we compensate each other in an
amount that would be charged by an unaffiliated third party for comparable
services. The arrangements relating to the provision of these services were not
subject to arms-length negotiation.
Equity Offerings
- ----------------
If we or MeriStar Hospitality wish to issue securities, the issuing party
will give notice to the other party as promptly as practicable of the proposed
securities issuance. The notice will include the proposed material terms of the
issuance, to the extent determined by the issuing party, including whether such
issuance is proposed to be in a public or private offering, the amount of
securities proposed to be issued and the manner of determining the offering
price, and other terms of the securities. The non-issuing party will cooperate
with the issuing party by assisting in the preparation of any registration
statement or other document required in connection with the issuance and by
providing the issuing party with such information as may be required to be
included in the registration statement or offering document.
4
Term
- ----
The Intercompany Agreement will terminate upon the earlier of August 3,
2008 and a change in our ownership or control.
The Management Agreements with MeriStar Hospitality
Management Agreements
- ---------------------
We currently have management agreements with respect to all 112 hotels
owned by MeriStar Hospitality.
Management Fees and Performance Standards
- -----------------------------------------
Under the management agreements with MeriStar Hospitality, we receive a
management fee for each hotel equal to a specified percentage of aggregate hotel
operating revenues, increased or reduced, as the case may be, by 20% of the
positive or negative difference between:
. The actual excess of total operating revenues over total operating
expenses; and
. A projected excess of total operating revenues over total operating
expenses.
The total management fee for a hotel in any fiscal year will not be less
than the base fee of 2.5%, or greater than 4.0% (with incentive fees) of
aggregate hotel operating revenues.
Term and Termination
- --------------------
The management agreements with MeriStar Hospitality generally have initial
terms of 10 years with three renewal periods of five years each, except for four
management agreements that have initial terms of one year with additional
one-year renewal periods. A renewal will not go into effect if a change in the
federal tax laws permits MeriStar Hospitality or one of its subsidiaries to
operate the hotel directly without adversely affecting MeriStar Hospitality's
ability to qualify as a real estate investment trust or if we elect not to renew
the agreement. MeriStar Hospitality may elect not to renew the management
agreements only as discussed below.
MeriStar Hospitality's taxable subsidiaries have the right to terminate a
management agreement for a hotel upon the sale of the hotel to a third party or
if the hotel is destroyed and not rebuilt after a casualty. Upon that
termination, MeriStar Hospitality's taxable subsidiary will be required to pay
us the fair market value of the management agreement. That fair market value
will be equal to the present value of the remaining payments (discounted using a
10% rate) under the then-existing term of the agreement, based on the operating
results for the 12 months preceding the termination. MeriStar Hospitality's
taxable subsidiaries will be able to credit against any termination payments the
present value of projected fees (discounted using a 10% rate) under any
management agreements or leases entered into between MeriStar Hospitality and us
(or our subsidiaries) after August 3, 1998.
If a hotel's gross operating profit is less than 85% of the amount
projected in the hotel's budget in any fiscal year and gross operating profit
from that hotel is less than 90% of the projected amount in the next fiscal
year, MeriStar Hospitality's taxable subsidiaries will have the right to
terminate the management agreement for the hotel, unless:
. MeriStar Hospitality did not materially comply with the capital
expenditures contemplated by the budget for either or both of the
applicable fiscal years; or
. We cure the shortfall by agreeing to reduce our management fee for the
next fiscal year by the amount of the shortfall between the actual
operating profit for the second fiscal year and 90% of the projected
gross operating profit for that year.
5
We can only use the cure right once during the term of each management
agreement.
Assignment
- ----------
We do not have the right to assign a management agreement without the prior
written consent of the relevant taxable subsidiary of MeriStar Hospitality. A
change in control of our company will require MeriStar Hospitality's consent,
and they may grant or withhold their consent at their sole discretion.
Borrowings From MeriStar Hospitality
We have a revolving credit agreement with MeriStar Hospitality under which
MeriStar Hospitality may lend us up to $50 million for general corporate
purposes. On January 25, 2002, we amended this revolving credit agreement to
provide revised, relaxed financial covenants. These covenant revisions are
similar to those made to our senior secured credit facility. The covenant
revisions are effective through the maturity of the revolving credit facility,
which is 91 days after the maturity date of our senior credit facility. As of
December 31, 2001, we had $36.0 million of borrowings outstanding under the
revolving credit facility at an interest rate of 10.8%.
In connection with the execution of the amendment to the revolving credit
agreement, we executed a Term Note with MeriStar Hospitality in the amount of
$13.1 million. This term note refinances our account payable to MeriStar
Hospitality. The Term Note bears interest at the 30-day London Interbank Offered
Rate plus 650 basis points and the maturity date is the same as that of the
revolving credit agreement.
Other Recent Developments
On January 28, 2002, we amended our $100.0 million senior secured credit
facility provided by a syndicate of banks. The amendment provided financial
covenant relief through the maturity of the senior credit facility, and the
interest rate of the senior secured credit facility was increased by 100 basis
points to the 30-day London Interbank Offered Rate plus 450 basis points. The
amendment also reduced the borrowing capacity of the facility to $82.5 million.
The term of the senior secured credit facility was extended to February 28,
2003. As of December 31, 2001, we had $82.5 million of borrowings under the
senior secured credit facility at a weighted average effective interest rate of
7.9%.
BUSINESS
Business Segments
We operate primarily in two segments, Hotel Management and Corporate
Housing. We operate our Corporate Housing division under the trade name
BridgeStreet Corporate Housing Worldwide. Each segment is managed separately
because of its distinctive products and services and is a reportable operating
segment. We evaluate the performance of each segment based on earnings before
interest, taxes, depreciation and amortization.
The following table summarizes certain segment financial data as of and for
the year ended December 31 (amounts in thousands):
2001 2000 1999
-------- ---------- ----------
Hotel Management
Revenues................................................... $201,843 $1,345,144 $1,292,221
Earnings (loss) before Interest, Taxes, Depreciation and
Amortization.............................................. 17,890 16,718 23,500
Total Assets............................................... 22,692 156,972 111,216
Corporate Housing
Revenues................................................... $103,733 $ 64,910 --
Earnings before Interest, Taxes, Depreciation and
Amortization.............................................. 1,139 4,650 --
Total Assets............................................... 19,108 22,878 --
6
Revenues for foreign operations for the year ended December 31 were as
follows (amounts in thousands):
2001 2000 1999
------- ------- -------
Canada................. $11,200 $27,724 $21,477
United Kingdom......... $30,460 $16,152 --
France................. $ 196 -- --
Hotel Management
Operating Strategy
Our Hotel Management division's principal operating objectives are to
generate higher revenue per available room and increase net operating income of
the hotels we manage, while providing our guests with high-quality service and
value. We believe that skilled management is the most critical element in
maximizing revenue and cash flow in properties, especially in upscale,
full-service properties.
Personnel at our Corporate Office carry out financing and investment
activities and provide services to support and monitor our on-site hotel
operating executives. Each of our executive departments, including Hotel
Operations, Sales and Marketing, Human Resources, Food and Beverage, Technical
Services, Information Technology, Development, Legal, and Corporate Finance, is
headed by an executive with significant experience in that area. These
departments support the hotel operating executives by providing accounting and
budgeting services, property management tools and other resources that can be
created, maintained and provided more efficiently and effectively, centrally at
our Corporate Office.
Key elements of our management programs include the following:
Comprehensive Budgeting and Monitoring
- --------------------------------------
Our operating strategy begins with an integrated budget planning process.
The budget is implemented by individual on-site managers and monitored by our
corporate staff. Our Corporate Office personnel work with the property-based
managers to set targets for cost and revenue categories at each of the
properties. These targets are based on historical operating performance, planned
renovations, operational efficiencies and local market conditions. Through
effective and timely use of our comprehensive financial information and
reporting systems, we are able to monitor actual performance efficiently. As a
result, we can rapidly adjust prices, staffing levels and sales efforts to take
advantage of changes in the market and to improve revenue yield.
Targeted Sales and Marketing
- ----------------------------
We employ a systematic approach toward identifying and targeting demand
segments for each property in order to maximize market penetration. Executives
at our Corporate Office and property-based managers divide these segments into
smaller subsegments (typically ten or more for each property) and develop
tailored marketing plans to suit each such segment. We support each property's
local sales efforts with Corporate Office sales executives who develop and
implement new marketing programs, and monitor and respond to specific market
needs and preferences. We employ revenue yield management systems to manage each
property's use of the various distribution channels in the lodging industry.
Those channels include franchisor reservation systems and toll-free numbers,
travel agent and airline global distribution systems, corporate travel offices
and office managers, and convention and visitor bureaus. Our access to these
channels enables us to maximize revenue yields on a day-to-day basis. We
recruit sales teams locally and those teams receive incentive-based compensation
bonuses. All of our sales managers complete our sales training program.
Strategic Capital Improvements
- ------------------------------
We and the owners of our properties plan renovations primarily to enhance a
property's appeal to targeted
7
market segments. This is designed to attract new customers and generate
increased revenue and cash flow. For example, in many of our properties, the
banquet and meeting spaces have been renovated and guest rooms have been
upgraded with high speed internet access and comfortable work spaces to better
accommodate the needs of business travelers and to increase average daily rates.
We base recommendations on capital spending decisions on both strategic needs
and potential rate of return on a given capital investment. While we provide
recommendations and supervision of many capital expenditure projects, the owners
of the properties are responsible for funding capital expenditures.
Selective Use of Multiple Brand Names
- -------------------------------------
We believe the selection of an appropriate franchise brand is essential in
positioning a hotel property optimally within its local market. We select brands
based on local market factors such as local presence of the franchisor, brand
recognition, target demographics and efficiencies offered by franchisors. We
believe our relationships with many major hotel franchisors place us in a
favorable position when dealing with those franchisors and allow us to negotiate
favorable franchise agreements with franchisors. We believe our growth in
acquiring management contracts will further strengthen our relationship with
franchisors.
The following chart summarizes information on the national franchise
affiliations of our properties as of December 31, 2001:
8
Leased Properties Managed Properties
----------------- ------------------
Guest % of Guest % of
----- ---- ------ ----
Franchise Rooms Hotels Rooms Rooms Hotels Rooms
- ------------------------------ ----- ------ ----- ------ ------ -----
Hilton(R). -- -- -- 7,920 29 15.3%
Sheraton(R)................... -- -- -- 6,299 21 12.1%
Independent................. -- -- -- 6,266 28 12.1%
Radisson(R)................... -- -- -- 4,664 16 9.0%
Holiday Inn(R)................ 414 2 6.3% 4,439 22 8.6%
Hampton Inn(R)................ 1,964 16 29.8% 2,128 17 4.1%
Doubletree(R)................. -- -- -- 2,049 7 3.9%
Marriott(R)................... -- -- -- 1,841 5 3.5%
Westin(R). ................... -- -- -- 1,715 6 3.3%
Residence Inn(R).............. 168 1 2.5% 1,641 12 3.1%
Embassy Suites(R)............. -- -- -- 1,488 6 2.9%
Crowne Plaza(R)............... -- -- -- 1,395 6 2.7%
Courtyard by Marriott(R)...... 607 4 9.2% 1,299 7 2.5%
Holiday Inn Select(R)......... -- -- -- 1,244 4 2.4%
Wyndham(R).................... -- -- -- 1,070 4 2.1%
Ramada(R)..................... -- -- -- 1,011 6 1.9%
Hilton Garden Inn(R).......... 652 4 9.9% 821 4 1.6%
Comfort Inn(R)................ 1,144 8 17.4% 670 4 1.3%
Holiday Inn Express(R)........ 208 2 3.2% 637 5 1.2%
Doral(R)...................... -- -- -- 575 2 1.1%
Four Points(R)................ -- -- -- 338 2 0.7%
Best Western(R)............... -- -- -- 329 3 0.6%
Doubletree Guest Suites(R).... -- -- -- 292 2 0.6%
Renaissance(R)................ -- -- -- 289 1 0.6%
Comfort Suites(R)............. 215 1 3.3% 238 2 0.5%
Omni(R)....................... -- -- -- 215 1 0.4%
Fairfield Inn(R).............. 110 1 1.7% 200 1 0.4%
Quality Suites(R)............. 168 1 2.5% 177 1 0.3%
Hilton Suites(R).............. -- -- -- 174 1 0.3%
Quality Inn(R)................ -- -- -- 165 1 0.3%
Staybridge Suites(R).......... -- -- -- 108 1 0.2%
Howard Johnson(R)............. -- -- -- 100 1 0.2%
Homewood Suites(R)............ 795 7 12.1% 83 1 0.2%
Hampton Inn & Suites(R)....... 136 1 2.1% -- -- --
----- ----- ----- ------ ----- -----
Total........................ 6,581 48 100.0% 51,880 229 100.0%
===== ===== ===== ====== ===== =====
Emphasis on Food and Beverage
- -----------------------------
We believe popular food and beverage ideas are a critical component in the
overall success of a full-service hospitality property. We utilize food and
beverage operations to create local awareness of our hotel facilities, to
improve the profitability of our hotel operations, and to enhance customer
satisfaction. We are committed to competing for patrons with restaurants and
catering establishments by offering high-quality restaurants that garner
positive reviews and strong local and/or national reputations. We have engaged
food and beverage experts to develop several proprietary restaurant concepts. We
have also successfully placed nationally recognized food outlets such as Pizza
Hut(R), Starbuck's Coffee(R), "TCBY"(R) Yogurt and TJ Cinnamon(R) in several of
our hotels. We believe popular food concepts will strengthen our ability to
attract business travelers and group meetings and improve the name recognition
of our properties.
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Commitment to Service and Value
- -------------------------------
We are dedicated to providing consistent, exceptional service and value to
our customers. We conduct extensive employee training programs to ensure
high-quality, personalized service. We have created and implemented programs to
ensure the effectiveness and uniformity of our employee training. Our practice
of tracking customer comments through guest comment cards, and the direct
solicitation of guest opinions regarding specific items, allows us to target
investment in services and amenities. Our focus on these areas has enabled us to
attract lucrative group business.
Purchasing
- ---------
We have spent extensive resources to create efficient purchasing programs
that offer the owner of each hotel we manage quality products at very
competitive pricing. These programs are available to all of the properties we
manage. While participation in our purchasing programs is voluntary, we believe
they provide each of our managed hotels with a distinct competitive and economic
edge. In developing these programs, we seek to obtain the best pricing available
for the quality of item or service being sourced, in order to minimize the
operating expenses of the property.
Internet-based Reporting Systems
- --------------------------------
We employ internet-based reporting systems at each of our properties and at
our Corporate Office to monitor the daily financial and operating performance of
the properties. We have integrated information technology services through
networks at many of the properties. Corporate Office executives utilize
information systems that track each property's daily occupancy, average daily
rates, and revenue from rooms, food and beverage. By having the latest property
operating information available at all times, we are better able to respond to
changes in the market of each property.
Expansion Strategy
We anticipate we will continue to expand our portfolio by securing
additional management contracts. We attempt to identify properties that are
promising management candidates located in markets with economic, demographic
and supply dynamics favorable to hotel operators. Through our extensive due
diligence process, we select those expansion targets where we believe selected
capital improvements and focused management will increase the property's ability
to attract key demand segments, demonstrate better financial performance, and
increase long-term value. In order to evaluate the relative merits of each
investment opportunity, senior management and individual operations teams create
detailed plans covering all areas of renovation and operation. These plans serve
as the basis for our expansion decisions and guide subsequent renovation and
operating plans.
We seek to manage properties that meet the following criteria:
Market Criteria
- ---------------
Economic Growth. We focus on metropolitan areas that are approaching, or
have already entered, periods of economic growth. Such areas generally show
above average growth in the business community as measured by job formation
rates, population growth rates, tourism and convention activity, airport traffic
volume, local commercial real estate occupancy, and retail sales volume. Markets
that exhibit these characteristics typically have strong demand for hotel
facilities and services.
Supply Constraints. We seek lodging markets with favorable supply dynamics
for property owners and operators. These dynamics include an absence of current
new hotel development and barriers to future development such as zoning
constraints, the need to undergo lengthy local development approval processes,
and a limited number of suitable sites. Other factors limiting the supply of new
hotels are the current lack of financing available for new development and the
inability to generate adequate returns on investment to justify new development.
Geographic Diversification. Our properties are located in 33 states across
the United States, the District of Columbia and Canada. See "Properties" for
additional information regarding our properties. We seek to maintain a
geographically diverse portfolio of managed properties to offset the effects of
regional economic cycles.
Hotel Criteria
- --------------
Location and Market Appeal. We seek to operate hotels situated near both
business and leisure centers that generate a broad base of demand for hotel
accommodations and facilities. These demand generators include airports,
convention centers, business parks, shopping centers and other retail areas,
sports arenas and stadiums, major
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highways, tourist destinations, major universities and cultural and
entertainment centers with nightlife and restaurants. The confluence of nearby
business and leisure centers enables us to attract both weekday business
travelers and weekend leisure guests. Attracting a balanced mix of business,
group and leisure guests to the hotels helps to maintain stable occupancy rates
and high average daily rates.
Size and Facilities. We seek to operate hotels with 200 to 500 guest rooms
and include accommodations and facilities that are, or are capable of being
made, attractive to key demand segments such as business, group and leisure
travelers. These facilities typically include large, upscale guest rooms; food
and beverage facilities; extensive meeting and banquet space; and amenities such
as health clubs, swimming pools and adequate parking.
Potential Performance Improvements. We target underperforming hotels where
intensive management and selective capital improvements can increase revenue and
cash flow. These hotels represent opportunities where a systematic management
approach and targeted renovations should result in improvements in revenue and
cash flow.
We expect our relationships throughout the industry will continue to
provide us with a competitive advantage in identifying, evaluating and managing
hotels that meet our criteria. We have a record of successfully managing the
renovation and repositioning of hotels in situations with varying levels of
service, room rates and market types. We plan to continue to manage such
renovation programs as we acquire new management contracts.
Corporate Housing
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. BridgeStreet is a leading provider of corporate housing
services in metropolitan markets located in the United States, Canada and the
United Kingdom. On August 17, 2001, we expanded BridgeStreet into France through
the acquisition of a Paris-based corporate housing company. As of December 31,
2001, our Corporate Housing division had approximately 3,054 apartments under
lease.
Accommodations and Services
Accommodations
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Through our BridgeStreet brand, we offer high quality, fully furnished
one-, two- and three-bedroom and larger accommodations. These accommodations,
together with the specialized services we offer, are intended to provide guests
with a "home away from home." We select our BridgeStreet accommodations based on
location, general condition and basic amenities, with the goal of providing
accommodations that meet each guest's particular needs. As a flexible
accommodation services provider, we can satisfy client requests for
accommodations in a variety of locations and neighborhoods, including requests
for proximity to an office, school or area attraction, as well as requests for
accommodations of specific types and sizes. The substantial majority of
BridgeStreet's accommodations are located within high-quality property complexes
that typically feature in-unit washers and dryers, dedicated parking, and access
to fitness facilities, including, in many cases, pools, saunas and tennis
courts. We also are able to customize accommodations at a guest's request with
items such as office furniture, fax machines and computers.
We lease substantially all of our Corporate Housing accommodations through
flexible, short-term leasing arrangements in order to match our supply of
accommodations with client demand. We believe our flexible leasing strategy
allows us to react to changes in market demand for particular geographic
locations and types of accommodations. Our Corporate Housing management strives
to develop strong relationships with property managers to ensure that we have a
reliable supply of high quality, conveniently located accommodations.
Our Corporate Housing accommodations generally are priced competitively
with all-suite or upscale extended-stay hotel rooms, even though we believe our
accommodations are substantially larger than those hotel rooms. We believe we
generally are able to price our accommodations competitively due to:
. Our high quality accommodations;
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. Our relatively low operating cost structure; and
. Our ability to lease accommodations in accordance with demand and
leave unfavorable markets quickly.
The length of a guest's stay can range from a few nights to a few years,
with the typical stay ranging from 30 to 45 days.
Corporate Client Services
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Our goal is to provide valuable, cost-effective services to our corporate
clients. Many of these clients' human resource directors, relocation managers or
training directors have significant, national employee lodging requirements. In
particular, BridgeStreet aims to relieve our clients of the administrative
burden often associated with relocating employees and/or providing them with
temporary housing.
We believe existing and potential clients will increasingly turn to outside
providers such as BridgeStreet to satisfy their employee lodging requirements as
their awareness of BridgeStreet and the flexible accommodation services industry
increases.
Guest Services
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We strive to provide the highest quality of customer service by overseeing
all aspects of a guest's lodging experience, from preparations prior to the
guest's arrival to the moving out process. BridgeStreet maintains a
representative in each city in which it operates to be responsive to guests'
needs. BridgeStreet's guest services department offers guests comprehensive
information services before and during their stays to help guests acclimate
themselves to their new surroundings.
Sales and Marketing
Our Corporate Housing division focuses primarily on business-to-business
selling. At the local level, each of BridgeStreet's operating subsidiaries has
corporate account specialists that call on local companies, including local
branches of regional or national companies, to solicit business. Each account
specialist focuses their efforts on the key decision makers at each company
responsible for establishing and administering travel and accommodation
policies. These decision makers are typically human resource directors,
relocation managers or training directors. By aggressively pursuing
relationships with potential clients and expanding services to existing clients,
BridgeStreet seeks to become each client's primary or sole provider of flexible
accommodation services nationwide. We operate a global BridgeStreet sales office
to market our worldwide capabilities to our international corporate clients. In
addition, we have expanded BridgeStreet's internet presence to supplement
traditional marketing strategies and to better serve our customers.
We tailor our marketing strategy to the needs of particular clients. For
example, we may market ourselves to a corporation with relocating employees by
focusing on our ability to situate large families in apartments with three or
more bedrooms, our access to accommodations in both metropolitan and suburban
settings, and our access to accommodations that allow pets. In contrast, when
marketing to potential corporate clients in need of short-term housing, we might
emphasize our flexible lease terms and our ability to customize an accommodation
with amenities such as office equipment, including computers, additional
telephone lines and other work-related items.
We intend to continue an advertising program designed to enhance the
BridgeStreet name both inside and outside the flexible accommodation services
industry and broaden our client base. In addition, we promote our BridgeStreet
brand name by advertising in trade publications, Chamber of Commerce listings,
local visitor magazines and telephone directories and the Internet, and through
periodic direct mail campaigns.
Expansion Strategies
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Local Market Share
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We have offices in many markets that offer significant opportunity for
expansion. Since our May 2000 acquisition of BridgeStreet, we have trained all
of our BridgeStreet sales employees in our sales and marketing techniques. We
believe this training will allow us to expand our sales in these markets. With a
better-trained sales force and our management experience, we believe we will be
in a better position to penetrate local markets and increase our market share.
National Accounts
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We believe national accounts have substantial growth potential for
BridgeStreet. BridgeStreet's current customers include a significant number of
large national companies who utilize BridgeStreet's services in a limited, but
loyal, manner. We plan to maximize sales to those existing corporate clients and
to obtain new clients. We intend to use a national sales and marketing program
that promotes the BridgeStreet brand and highlights BridgeStreet's expanding
national and international network, as well as BridgeStreet's ability to serve
as a central point of contact on all issues. Many of BridgeStreet's clients are
Fortune 2000 companies with significant national and international employee
lodging requirements.
Network Partner Relationships
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We have developed a network partner relationship with flexible
accommodation service providers in the United States and in 39 countries
worldwide. Through network partner agreements, BridgeStreet has expanded the
number of locations where it can serve our clients' needs. In some additional
markets, BridgeStreet intends to enter into network partner agreements with one
or more leading local or regional flexible accommodation service providers
having the size and quality of operations suitable for serving BridgeStreet's
client base.
Other Business Information
Employees
As of December 31, 2001, we employed approximately 20,300 persons, of whom
approximately 17,100 were compensated on an hourly basis. Some of the employees
at 21 of our hotels are represented by labor unions. We believe that labor
relations with our employees are generally good.
Franchises
We employ a flexible branding strategy based on each particular property's
market environment and other unique characteristics. Accordingly, we use various
national trade names pursuant to licensing arrangements with national
franchisors.
Governmental Regulation
A number of states regulate the licensing of hospitality properties and
restaurants, including liquor licensing, by requiring registration, disclosure
statements and compliance with specific standards of conduct. We believe that we
are substantially in compliance with these requirements. Managers of hospitality
properties are also subject to laws governing their relationship with employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. Compliance with, or changes in, these laws could reduce the
revenue and profitability of our properties and could otherwise adversely affect
our operations.
Americans with Disabilities Act.
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Under the Americans with Disabilities Act, all public accommodations are
required to meet certain requirements related to access and use by disabled
persons. These requirements became effective in 1992. Although significant
amounts have been and continue to be invested in federally required upgrades to
our properties and units leased by
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BridgeStreet, a determination that we are not in compliance with the Americans
with Disabilities Act could result in a judicial order requiring compliance,
imposition of fines or an award of damages to private litigants. We are likely
to incur additional costs of complying with the Americans with Disabilities Act.
Those costs, however, are not expected to have a material adverse effect on our
results of operations or financial condition.
Environmental Laws.
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Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to use the property, sell the property or borrow by
using such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is or ever was owned or operated by such person.
The operation and removal of underground storage tanks are also regulated by
federal and state laws. In connection with the operation of our properties, we
could be liable for the costs of remedial action with respect to such regulated
substances and storage tanks and claims related thereto. Environmental laws and
common law principles could also be used to impose liability for releases of
hazardous materials, including asbestos-containing materials, into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released
asbestos-containing materials or other hazardous materials.
Phase I environmental site assessments have been conducted at all of the
hotels owned by MeriStar Hospitality, and Phase II environmental site
assessments have been conducted at some of these hotels by qualified independent
environmental engineers. The purpose of the environmental site assessments is to
identify potential sources of contamination for which we may be responsible and
to assess the status of environmental regulatory compliance. These assessments
have not revealed any environmental liability or compliance concerns that we
believe would have a material adverse effect on our business, assets, results of
operations or liquidity, nor are we aware of any material environmental
liability or concerns. Nevertheless, it is possible that these environmental
site assessments did not reveal all environmental liabilities or compliance
concerns or that material environmental liabilities or compliance concerns exist
of which we are currently unaware.
In reliance upon the Phase I and Phase II environmental site assessments,
we believe the hotels owned by MeriStar Hospitality are in material compliance
with all federal, state and local ordinances and regulations regarding hazardous
or toxic substances and other environmental matters. We have not been notified
by any governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
any of the properties we lease or manage.
Other regulation.
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As a lessee of its accommodations, our Corporate Housing division believes
that it and its employees are either outside the purview of, exempted from or in
compliance with laws in the jurisdictions in which BridgeStreet operates
requiring real estate brokers to hold licenses. However, there can be no
assurance that BridgeStreet's position in any jurisdiction where it believes
itself to be excepted or exempted would be upheld if challenged or that any such
jurisdiction will not amend its laws to require BridgeStreet and/or one or more
of its employees to be licensed brokers. Moreover, there can be no assurance
that BridgeStreet will not operate in the future in additional jurisdictions
requiring such licensing.
In some of the jurisdictions in which BridgeStreet operates, we believe
that we are not required to charge guests the sales and "bed" taxes that are
applicable to establishments furnishing rooms to transient guests. We cannot
provide assurance, however, that the tax laws in particular jurisdictions will
not change or that a tax collection agency will not successfully challenge
BridgeStreet's position regarding the applicability of tax laws. We believe we
properly charge and remit such taxes in all jurisdictions where we are required
to do so.
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Competition
We compete primarily in the following segments of the lodging industry: the
upscale and mid-priced sectors of the full-service segment; the limited-service
segment; and resorts. We also compete with other providers of flexible
accommodation services. Other full- and limited-service hotels and resorts
compete with our properties in each geographic market in which our properties
are located. Competition in the United States lodging industry is based on a
number of factors, most notably convenience of location, brand affiliation,
price, range of services and guest amenities or accommodations offered, and
quality of customer service and overall product.
In addition, we compete for hotel management contracts against numerous
competitors, many of which have more financial resources than us. These
competitors include the management arms of some of the major hotel brands as
well as independent, non-brand affiliated hotel managers.
The Operating Partnership
The following summary information is qualified in its entirety by the
provisions of the MeriStar H&R Operating Company, L.P. limited partnership
agreement. We have filed a copy of the agreement as an exhibit to this Form
10-K.
MeriStar H&R Operating Company, L.P., our subsidiary operating partnership,
indirectly holds substantially all of our assets. We are the sole general
partner of that partnership. We, one of our directors and approximately 85
independent third-parties are limited partners of that partnership. The
partnership agreement gives the general partner full control over the business
and affairs of the partnership. The agreement also gives us, as general partner,
the right, in connection with the contribution of property to the partnership or
otherwise, to issue additional partnership interests in the partnership in one
or more classes or series. These interests may have such designations,
preferences and participating or other special rights and powers, including
rights and powers senior to those of the existing partners, as we may determine.
The partnership agreement currently has three classes of limited
partnership interests: Class A units, Class B units and Preferred units. As of
March 5, 2002, the ownership of the limited partnership units was as follows:
. We and our wholly-owned subsidiaries own a number of Class A units
equal to the number of outstanding shares of our common stock; and
. Other limited partners own 543,539 Class A units, 1,275,607 Class B
units and 392,157 Preferred units.
We did not make any distributions during 2001, 2000 or 1999 to the holders
of the Class A units and Class B units. Holders of preferred units receive a
6.5% cumulative annual preferred return based on a capital amount of $3.34 per
unit compounded quarterly to the extent not paid currently. All net income and
capital proceeds received by the partnership, after payment of the annual
preferred return and, if applicable, the liquidation preference, will be shared
by the holders of the Class A units and Class B units in proportion to the
number of units owned by each holder.
The holders of each Class A or Class B unit not held by us or one of our
subsidiaries is redeemable for cash equal to the value of one share of our
common stock or, at our option, one share of our common stock. Until April 1,
2004, the partnership may redeem the Preferred units for cash at a price of
$3.34 per unit or with the holder's consent for our common stock having
equivalent aggregate value. After April 1, 2004, each holder of the Preferred
units may require the partnership to redeem these units for cash at a price of
$3.34 per unit or, at the holder's option, shares of our common stock having
equivalent aggregate value. If we or the holders of the Preferred units chose to
redeem the Preferred units for our common stock instead of cash, and if our
common stock was valued at that time at less than $3.34 per share, we would have
to issue more shares of our common stock than the number of Preferred units
being redeemed. For example, at December 31, 2001, our stock price was $0.69 per
share. If the Preferred units were redeemed for common stock at that date, we
would have issued 1,898,267 shares of our common stock, which would have
represented approximately 4.9% of our then outstanding common stock, with
respect to 392,157
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Preferred units then outstanding.
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RISK FACTORS
Financing Risks
Restrictions imposed by our debt agreements may limit our ability to execute our
business strategy and increase the risk of default under our debt obligations.
Our senior secured credit facility and other indebtedness contain a number
of covenants, including requirements to maintain financial ratios, which may
significantly limit our ability to, among other things:
. borrow additional money;
. make capital expenditures and other investments;
. pay dividends;
. merge, consolidate or dispose of assets; and
. incur additional liens.
While we believe our current business plan and outlook provide sufficient
liquidity to fund our operations, a significant decline in our operations could
reduce our cash from operations and cause us to be not in compliance with other
covenants in our debt agreements, leaving us unable to use our senior credit
facility to supply needed liquidity.
Our credit facilities mature during 2003. If we are unable to refinance or
extend the maturities of these credit facilities, our continuing operations
could suffer.
Our senior secured credit facility, as amended in January 2002, matures in
February 2003. As of February 15, 2002, we had approximately $82.5 million of
outstanding indebtedness under that facility. Our revolving credit facility with
MeriStar Hospitality matures 91 days after our senior secured credit facility
matures. As of February 15, 2002, we had approximately $44.0 million of
outstanding indebtedness under the MeriStar Hospitality facility. In addition,
we have a $13.1 million note payable to MeriStar Hospitality, which matures on
the same date as the MeriStar Hospitality facility
We plan to refinance or negotiate an extension of the maturity of our
senior secured credit facility. However, our ability to complete such a
transaction is subject to a number of conditions, many of which are beyond our
control. For example, if there were a further disruption in the financial
markets because of a terrorist attack or other event, we may be unable to access
the financial markets. Failure to complete a refinancing or extension of the
senior secured credit facility would have a material adverse effect on our
company.
We have limited additional availability under our credit facilities.
Our principal sources of liquidity have been our credit facilities and cash
flow from operations. As of February 15, 2002, we had no availability for
further borrowings under our senior credit facility and approximately $6.0
million of availability under the MeriStar Hospitality Facility. On February 28,
2002 we made a required payment of $2.5 million on our senior credit facility.
In addition, the availability under the senior credit facility will decrease by
$2.5 million on June 30, 2002, September 30, 2002 and December 31, 2002. Our
cash flow from operations is subject to a number of risks, including those set
forth below under "Operating Risks." If our cash flow and capital resources are
insufficient to fund our cash needs, which include debt service, we may be
forced to reduce or delay capital expenditures, sell material assets or
operations, obtain additional capital or restructure our indebtedness. In the
event we are required to dispose of material assets or operations, we may not be
able to do so on terms that are acceptable to us. Failure to meet our cash needs
would have a material adverse effect on our company.
Our failure to meet the NYSE's continued listing standards could negatively
impact our ability to raise future capital and could make it more difficult for
investors to obtain quotations or trade our stock.
We have received notification from the NYSE that we are not in compliance
with the continued listing standards of the NYSE because our average closing
share price was less than $1.00 over a consecutive 30-day trading period. The
NYSE's continued listing standards require that we bring our 30-day average
closing price and our share price above $1.00 by June 20, 2002, subject to
certain conditions. Although management is actively seeking to remedy the
problem, we may not be able to resolve the problem in a timely fashion or at
all. If we fail to comply with the listing requirements, our common stock might
be delisted by the NYSE. Delisting from the NYSE would adversely affect the
liquidity of our common stock and our ability to raise additional capital
through a sale of our common stock.
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Operating Risks
If our performance was negatively affected by one or more of a variety of risks
related to the lodging industry, our results of operations could suffer.
Various factors could adversely affect our ability to generate revenues on
which our management fee will be based. Our business is subject to all of the
operating risks inherent in the lodging industry. These risks include the
following:
. changes in general and local economic conditions;
. cyclical overbuilding in the lodging industry;
. varying levels of demand for rooms and related services;
. competition from other hotels, motels and recreational properties,
some of which may have greater marketing and financial resources than
us or the owners of the properties we manage;
. dependence on business and commercial travelers and tourism, which may
fluctuate and be seasonal;
. decreases in air travel;
. fluctuations in operating costs;
. the recurring costs of necessary renovations, refurbishment and
improvements of hotel properties;
. changes in governmental regulations that influence or determine wages,
prices and construction and maintenance costs; and
. changes in interest rates and the availability of credit.
Demographic, geographic or other changes in one or more of our markets
could impact the convenience or desirability of the sites of some hotels or
guest accommodation apartments, which would in turn affect the operations of
those hotels or flexible accommodations. In addition, due to the level of fixed
costs required to operate full-service hotels, significant expenditures
necessary for the operation of hotels generally cannot be reduced when
circumstances cause a reduction in revenue.
The recent economic slowdown has adversely affected the performance of our
hotels and, if it worsens or continues, these effects could be material.
The economic slowdown and the resulting declines in revenue per available
room at the hotels we manage began in March 2001. These trends are currently
continuing. The decline in occupancy during the second, third and fourth
quarters of 2001 has led to declines in room rates as hotels compete more
aggressively for guests. If the current economic slowdown worsens significantly
or continues for a protracted period of time, the declines in occupancy could
also lead to further declines in average daily room rates and could have a
material adverse effect on our EBITDA and operating results.
Acts of terrorism, the threat of terrorism and the ongoing war against terrorism
have impacted and will continue to impact our industry and our results of
operations.
The terrorist attacks of September 11, 2001 have had a negative impact on
our hotel operations in the third and fourth quarters causing lower than
expected performance in an already slowing economy. The events of September 11
have caused a significant decrease in our hotels' occupancy and average daily
rate due to disruptions in business and leisure travel patterns, and concerns
about travel safety. Major metropolitan area and airport hotels have been
adversely affected due to concerns about air travel safety and a significant
overall decrease in the amount of air
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travel.
The September 11 terrorist attacks were unprecedented in scope, and in
their immediate, dramatic impact on travel patterns. We have not previously
experienced such events, and it is currently not possible to accurately predict
if and when travel patterns will be restored to pre-September 11 levels. While
we have had improvements in our operating levels from the period immediately
following the attacks, we believe the uncertainty associated with subsequent
incidents, threats and the possibility of future attacks will continue to hamper
business and leisure travel patterns for the next several quarters.
The lodging business is seasonal.
Generally, hotel revenues are greater in the second and third calendar
quarters than in the first and fourth calendar quarters. This may not be true,
however, for hotels in major tourist destinations. Revenues for hotels in
tourist areas generally are substantially greater during tourist season than
other times of the year. Because of the September 11 events, our operating
results for the third and fourth quarters of 2001 were lower than expected.
Seasonal variations in revenue at the hotels we lease or manage will cause
quarterly fluctuations in our revenues. Events beyond our control, such as
extreme weather conditions, economic factors and other considerations affecting
travel may also adversely affect our earnings.
We may be adversely affected by the limitations in our franchising and licensing
agreements.
The franchise agreements under which we operate and manage hotels generally
contain specific standards for, and restrictions and limitations on, the
operation and maintenance of a hotel in order to maintain uniformity within the
franchisor system. Those limitations may conflict with our philosophy, which is
shared with MeriStar Hospitality, of creating specific business plans tailored
to each hotel and to each market. Standards are often subject to change over
time, in some cases at the discretion of the franchisor, and may restrict a
franchisee's ability to make improvements or modifications to a hotel without
the consent of the franchisor. In addition, compliance with standards could
require a hotel owner to incur significant expenses or capital expenditures.
Action or inaction on our part or by the owner of one of our hotels could result
in a breach of standards or other terms and conditions of the franchise
agreements, and could result in the loss or cancellation of a franchise license.
Loss of franchise licenses without replacement would likely have an adverse
effect on our revenues. In connection with terminating or changing the franchise
affiliation of a hotel, the owner of the hotel may be required to incur
significant expenses or capital expenditures. Moreover, the loss of a franchise
license could have a material adverse effect upon the operation or the
underlying value of the hotel covered by the franchise due to the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. Franchise agreements covering the hotels
managed or leased by us expire or terminate, without specified renewal rights,
at various times and have differing remaining terms. As a condition to renewal,
these franchise agreements frequently contemplate a renewal application process.
This process may require an owner to make substantial capital improvements to a
hotel. Although our management agreements generally require owners to make
capital improvements to maintain the quality of a property, we do not directly
control the timing or amount of those expenditures.
The lodging industry and flexible accommodation service market are highly
competitive.
We have no single competitor or small number of competitors that are
dominant in our business. We operate in areas that contain numerous competitors,
some of which may have substantially greater resources than us or the owners of
our properties. Competition in the lodging industry is based generally on
location, availability, room rates or accommodations prices, range and quality
of services and guest amenities offered. New or existing competitors could
significantly lower rates; offer greater conveniences, services or amenities; or
significantly expand, improve or introduce new facilities in markets in which we
compete. All of these factors could adversely affect our operations and the
number of suitable business opportunities. In addition, we compete for hotel
management contracts against numerous competitors, many of which have more
financial resources than us. These competitors include the management arms of
some of the major hotel brands as well as independent, non-brand affiliated
hotel managers.
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Our leasing arrangements may not match demand for services in our markets.
Our Corporate Housing division, which provides flexible accommodation
services, intends to continue to lease substantially all of its accommodations
through flexible, short-term leasing arrangements with property managers. Our
goal is to match our supply of accommodations with client demand. Because our
only access to apartment communities will be through leasing arrangements, the
Corporate Housing division will be dependent upon relationships with property
managers in order to conduct our operations effectively. We will strive to
develop strong relationships with property managers to ensure we have a reliable
supply of high-quality, conveniently-located accommodations. In the event these
relationships were to deteriorate or fail to develop, the Corporate Housing
division might not be able to satisfactorily meet client demand requirements. In
addition, as we obtain our supply of accommodations through leases with typical
terms of between one and 12 months, we may not be able to react immediately to
sudden changes in consumer demand, such as that which occurred after the
September 11 attacks, by decreasing or increasing our inventory of
accommodations. Failure to maintain good relationships with property managers
and increased volatility in consumer demand could negatively impact our results
of operations.
Costs of compliance with environmental laws could adversely affect our operating
results.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances.
These laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to properly remediate contaminated property, may adversely affect
the owner's ability to sell or rent the property or to borrow using the property
as collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not that
facility is or ever was owned or operated by that person. The operation and
removal of underground storage tanks are also regulated by federal and state
laws. In connection with the ownership and operation of hotels, we or the owners
of our properties could be held liable for the costs of remedial action for
regulated substances and storage tanks and related claims. Activities have been
undertaken to close or remove storage tanks located on the property of several
of the hotels that we lease or manage.
Substantially all of the hotels we lease or manage have undergone Phase I
environmental site assessments, which generally provide a nonintrusive physical
inspection and database search, but not soil or groundwater analyses, by a
qualified independent environmental engineer. The purpose of a Phase I is to
identify potential sources of contamination for which the hotels may be
responsible and to assess the status of environmental regulatory compliance. The
Phase I assessments have not revealed any environmental liability or compliance
concerns that we believe would have a material adverse effect on our results of
operations or financial condition, nor are we aware of any material
environmental liability or concerns. Nevertheless, it is possible that these
environmental site assessments did not reveal all environmental liabilities or
compliance concerns or that material environmental liabilities or compliance
concerns exist of which we are currently unaware.
In addition, substantially all of the hotels we lease or manage have been
inspected to determine the presence of asbestos. Federal, state and local
environmental laws, ordinances and regulations also require abatement or removal
of asbestos-containing materials and govern emissions of and exposure to
asbestos fibers in the air. Asbestos-containing materials are present in various
building materials such as sprayed-on ceiling treatments, roofing materials or
floor tiles at some of the hotels. Operations and maintenance programs for
maintaining asbestos-containing materials have been or are in the process of
being designed and implemented, or the asbestos-containing materials have been
scheduled to be or have been abated, at these hotels. Any liability resulting
from non-compliance or other claims relating to environmental matters could have
a material adverse effect on our results of operations or financial condition.
Aspects of our operations are subject to government regulation, and changes in
regulations may have significant effects on our business.
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A number of states regulate the licensing of hotels and restaurants,
including liquor licensing, by requiring registration, disclosure statements and
compliance with specific standards of conduct. We believe we are substantially
in compliance with these requirements or, in the case of liquor licenses, that
we have or will promptly obtain the appropriate licenses. Managers of hotels and
providers of flexible accommodation services are also subject to employment
laws, including minimum wage requirements, overtime, working conditions and work
permit requirements. Compliance with, or changes in, these laws could reduce the
revenue and profitability of our hotels and corporate housing units and could
otherwise adversely affect our results of operations or financial condition.
Under the Americans with Disabilities Act, or ADA, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
owners of hotels we manage have invested significant amounts in ADA-required
upgrades, a determination that the hotels we lease or manage or the units leased
by our Corporate Housing division are not in compliance with the ADA could
result in a judicial order requiring compliance, imposition of fines or an award
of damages to private litigants.
A high concentration of the hotels we manage or lease are in the upscale,
full-service segment, and our Corporate Housing division primarily services
business travelers, so we may be more susceptible to an economic downturn.
Approximately 85% of the rooms our Hotel Management division currently
manages or leases are in hotels that are in the upper-upscale, full-service
segment. This hotel segment generally permits higher room rates. However, in an
economic downturn, hotels in this segment may be more susceptible to a decrease
in revenues, as compared to hotels in other segments that have lower room rates.
This characteristic may result from hotels in this segment generally targeting
business and high-end leisure travelers. In periods of economic difficulties,
business and leisure travelers may seek to reduce travel costs by limiting trips
or seeking to reduce costs on their trips. Our Corporate Housing division, which
primarily services business travelers, is sensitive to economic conditions for
the same reasons. Adverse changes in economic conditions could have a material
adverse effect on our revenues and results of operations.
Other Risks
If we are unable to pursue new growth opportunities through our relationship
with MeriStar Hospitality, our hotel management business could be negatively
affected.
Because of the terms of our intercompany agreement with MeriStar
Hospitality, we will be highly dependent on MeriStar Hospitality. If MeriStar
Hospitality in the future fails to qualify as a real estate investment trust,
that could have a substantial adverse effect on those aspects of our business
operations and business opportunities that depend on MeriStar Hospitality. For
example, if MeriStar Hospitality ceases to qualify as a real estate investment
trust, the requirement in the intercompany agreement that MeriStar Hospitality
enter into management agreements with us would cease. In that case, MeriStar
Hospitality would have the right to operate a newly acquired property itself.
We, however, would remain subject to all of the limitations on our operations
contained in the existing management agreements. In addition, although we
anticipate that the management agreements involving us generally will be
assigned to any person or entity acquiring the fee or leasehold interest in a
hotel property from MeriStar Hospitality or its affiliates, we could lose our
rights under any such management agreement upon the expiration of the agreement.
The likelihood of a sale of the hotel properties could possibly increase if
MeriStar Hospitality fails to qualify as a real estate investment trust. In
addition, if there is a change in the Internal Revenue Code that would permit
MeriStar Hospitality or one of its affiliates to operate hotels without
adversely affecting MeriStar Hospitality's status as a real estate investment
trust, MeriStar Hospitality would not be required to enter into future renewals
of its management agreements. Furthermore, a change in control of MeriStar
Hospitality could have the same effect as a sale of all of the MeriStar
Hospitality hotel properties, and our working relationship with the new owner of
those hotels may not be as close as our working relationship with MeriStar
Hospitality.
Also, if we and MeriStar Hospitality do not negotiate a mutually
satisfactory management arrangement within approximately 30 days after MeriStar
Hospitality provides the hotel management subsidiary with written notice of the
management opportunity, MeriStar Hospitality may offer the opportunity to others
for a period of one year before it must again offer the opportunity to us.
21
Our relationship with MeriStar Hospitality Corporation may lead to general
conflicts of interests that adversely affect our shareholders' interests.
We have historically had a close business relationship with MeriStar
Hospitality. We and MeriStar Hospitality have five common board members and five
common senior executives. Our relationship with MeriStar Hospitality is governed
by an intercompany agreement. That agreement restricts each party from taking
advantage of some business opportunities without first presenting those
opportunities to the other party.
In its relationship with us, MeriStar Hospitality may have conflicting
views on the manner in which we operate and manage their hotels, as well as
lease arrangements, acquisitions and dispositions. As a result, our directors
and senior executives, who may serve in similar capacities at MeriStar
Hospitality, may well be presented with several decisions which provide them the
opportunity to benefit MeriStar Hospitality to our detriment or benefit us to
the detriment of MeriStar Hospitality. Inherent potential conflicts of interest
will be present in all of the numerous transactions among us and MeriStar
Hospitality.
We have restrictions on our business and on our future opportunities that could
affect our operations.
So long as the intercompany agreement with MeriStar Hospitality is in
effect, we are prohibited from making real property investments that a REIT
could make unless:
. MeriStar Hospitality is first given the opportunity, but elects not to
pursue the investments;
. The investment is on land already owned or leased by us or subject to
a lease or purchase option in favor of us;
. We will operate the property under a trade name owned by us; or
. The investment is a minority investment made as part of a lease or
management agreement arrangement by us.
The intercompany agreement will generally grant us the right of first
refusal to become the manager of any real property acquired by MeriStar
Hospitality. MeriStar Hospitality will make such an opportunity available to us
only if MeriStar Hospitality determines that:
. Consistent with its status as a REIT, MeriStar Hospitality must enter
into a management agreement with an unaffiliated third party with
respect to the property;
. We are qualified to be the manager of that property; and
. MeriStar Hospitality decides not to have the property operated by the
owner of a hospitality trade name under that trade name.
Because of the provisions of the intercompany agreement, we are restricted
in the nature of our business and the opportunities we may pursue.
The terms of the intercompany agreement were not negotiated on an
arm's-length basis. Because the two companies share some of the same executive
officers and directors, there is a potential conflict of interest with respect
to the enforcement and termination of the intercompany agreement to our benefit
and to the detriment of MeriStar Hospitality, or to the benefit of MeriStar
Hospitality and to our detriment. Furthermore, because of the independent
trading of the two companies, stockholders in each company may develop divergent
interests that could lead to conflicts of interest. The divergence of interests
could also reduce the anticipated benefits of our close relationship with
MeriStar Hospitality.
We may have conflicts relating to sale of hotels subject to management
agreements
22
MeriStar Hospitality will generally be required to pay a termination fee to
us if it elects to sell or transfer a hotel to a person or entity that is not an
affiliate of MeriStar Hospitality or if it elects to permanently close a hotel
after a casualty and does not replace it with another hotel with a management
fee equal to that payable under the management agreement to be terminated. Where
applicable, the termination fee will equal the present value of the management
fees payable during the remainder of the existing term of the management
agreement (discounted using a 10% discount rate), based on fees payable during
the previous twelve months. MeriStar Hospitality's decision to sell a hotel may,
therefore, have significantly different consequences for us and MeriStar
Hospitality.
We rely on the knowledge and experience of some key personnel, and the loss of
these personnel may have a material adverse effect on our operations.
We place substantial reliance on the lodging industry knowledge and
experience and the continued services of our senior management, led by Paul W.
Whetsell and John Emery. While we believe that, if necessary, we could find
replacements for these key personnel, the loss of their services could have a
material adverse effect on our operations. In addition, Messrs. Whetsell and
Emery are currently engaged, and in the future will continue to engage, in the
management of MeriStar Hospitality. Messrs. Whetsell and Emery may experience
conflicts of interest in allocating management time, services and functions
between MeriStar Hospitality and us.
Our shareholder rights plan and the anti-takeover defense provisions of our
charter documents may deter potential acquirors and depress our stock price.
Under our shareholder rights plan, holders of our common stock are entitled
to one preferred share purchase right for each outstanding share of common stock
they hold, exercisable under certain defined circumstances involving a potential
change of control. The preferred share purchase rights have the anti-takeover
effect of causing substantial dilution to a person or group that attempts to
acquire us on terms not approved by our board of directors. Those provisions
could have a material adverse effect on the premium that potential acquirors
might be willing to pay in an acquisition or that investors might be willing to
pay in the future for shares of our common stock. For a more complete
description of our shareholder rights plan, please refer to the description of
the plan contained in our registration statement on Form S-4, filed with the SEC
on April 28, 2000, file No. 333-35890, under the caption "Certain Antitakeover
Provisions of MeriStar."
Provisions of Delaware law and of our charter and by-laws may have the
effect of discouraging a third party from making an acquisition proposal for our
company. These provisions could delay, defer or prevent a transaction or a
change in control of our company under circumstances that could otherwise give
the holders of our common stock the opportunity to realize a premium over the
then-prevailing market prices of our common stock. These provisions include the
following:
. we are able to issue preferred shares with rights senior to its common
stock;
. our bylaws prohibit action by written consent of our stockholders, and
stockholders may not call special meetings;
. our certificate of incorporation and bylaws provide for a classified
board of directors;
. removal of directors only for cause and upon the vote of two-thirds of
the outstanding shares of our common stock; and
. our bylaws require advance notice for nomination of directors and for
shareholder proposals.
23
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference in this
annual report on Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
and as such may involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe our future plans, strategies and
expectations are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negative of them or other variations of them or comparable terminology.
Factors which could have a material adverse effect on our operations and future
prospects include, but are not limited to:
. the current slowdown of the national economy;
. economic conditions generally and the real estate market
specifically;
. the impact of the September 11, 2001 terrorist attacks or actual
or threatened future terrorist incidents;
. legislative/regulatory changes (including changes to laws
governing the taxation of REITs);
. availability of debt and equity capital;
. interest rates;
. competition; and
. supply and demand for lodging facilities in our current and
proposed market areas.
These risks and uncertainties should be considered in evaluating any
forward-looking statements contained or incorporated by reference in this annual
report on Form 10-K.
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events, or otherwise,
other than as required by law.
ITEM 2. PROPERTIES
We maintain our Corporate headquarters in Washington, D.C. We also have
other corporate offices in North Carolina and Texas. We lease our offices. In
addition our Corporate Housing division leases administrative offices in the
majority of the markets in which they operate in the United States, Canada, the
United Kingdom and Paris, France. We lease and/or manage hotel properties and
golf courses throughout the United States and Canada. No one leased or managed
hotel property is material to our operations.
The full-service hotels we manage generally feature comfortable, modern
guest rooms, extensive meeting and convention facilities and full-service
restaurant and catering facilities. These facilities are designed to attract
meeting and convention functions from groups and associations, upscale business
and vacation travelers, and banquets and receptions from the local community.
The following tables set forth operating information with respect to the
properties we leased as of December 31:
Number of Guest
--------- ------
Year Properties Rooms ADR Occupancy RevPAR
- ---- ---------- ------ ------- --------- ------
2001..... 48 6,581 $80.22 63.6% $51.03
2000..... 157 35,141 $102.38 71.4% $73.11
1999..... 161 35,655 $96.24 71.4% $68.74
The following table summarizes operating information for the properties we
managed as of December 31:
24
Number of Guest
--------- -----
Year Properties Rooms
- ---- ---------- -----
2001..... 229 51,880
2000..... 59 12,172
1999..... 54 9,693
The following table sets forth operating information with respect to our
Corporate Housing division for the year ended December 31:
Average
-------
Number
------
Number of of
--------- --
Year Markets Units ADR Occupancy
- ---- ------- ----- --- ---------
2001..... 21 3,589 $84.47 85.3%
2000..... 22 3,231 $83.80 88.4%
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business activities, various lawsuits, claims and
proceedings have been or may be instituted or asserted against us. Based on
currently available facts, we believe that the disposition of matters pending or
asserted will not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2001.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the NYSE under the symbol "MMH." As of March
5, 2002, 37,188,574 shares of our common stock were issued and outstanding, held
by approximately 1,049 record holders.
The following table lists, for the fiscal quarters indicated, the range of
high and low intra-day sale prices per share of our common stock in U.S.
dollars, as reported on the NYSE Composite Transaction Tape.
High Low
Fiscal 2000
First Quarter........................................ $3.44 $2.63
Second Quarter....................................... 3.13 2.69
Third Quarter........................................ 3.13 2.44
Fourth Quarter....................................... 2.69 2.06
Fiscal 2001
First Quarter........................................ $2.71 $1.60
Second Quarter....................................... 2.14 1.49
Third Quarter........................................ 1.85 0.87
Fourth Quarter....................................... 0.98 0.54
Fiscal 2002
First Quarter (through March 5, 2002)................ $0.84 $0.65
The last reported sale price of our common stock on the NYSE on March 5,
2002 was $0.70.
In December 2001, we received notification from the NYSE that we were not
in compliance with the continued listing standards of the NYSE because our
average closing share price was less than $1.00 over a consecutive 30-day
trading period. The NYSE's continued listing standards require that we bring our
30-day average closing price and our share price above $1.00 by June 20, 2002,
subject to certain conditions. We are currently evaluating our alternatives with
regard to complying with this standard.
We have not paid any cash dividends on our common stock and we do not
anticipate that we will do so in the foreseeable future. We intend to retain
earnings to provide funds for the continued growth and development of our
business. The agreements governing our outstanding indebtedness restrict our
ability to pay dividends. Any determination to pay cash dividends in the future
will be at the discretion of the Board of Directors and will be dependent upon
our results of operations, financial condition, contractual restrictions and
other factors deemed relevant by the Board of Directors.
Recent Sales of Unregistered Securities
On April 15, 1999, we privately issued 1,818,182 shares of our common stock
at a price of $2.75 per share to our joint venture partner in MIP Lessee, L.P.
On January 6, 2000, we privately issued an additional 1,818,182 shares of our
common stock at a price of $2.75 per share to our joint venture partner in MIP
Lessee, L.P.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial
information. We have extracted the selected operating results and balance sheet
data from our consolidated financial statements for each of the periods
presented. The following information should be read in conjunction with our
consolidated financial statements and notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Annual Report on Form 10-K.
26
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- ----------- ----------- --------- --------
(dollars in thousands, except per share amounts)
Operating Results:
Revenues:
Rooms ................................................. $ 138,600 $ 929,585 $ 894,983 $ 395,633 $ 9,880
Food, beverage and other .............................. 17,435 397,205 387,091 152,276 1,871
Corporate housing ..................................... 103,638 64,872 -- -- --
Management and other fees ............................. 46,201 19,206 10,040 14,528 12,088
--------- ----------- ----------- --------- --------
Total revenues ................................... 305,874 1,410,868 1,292,114 562,437 23,839
--------- ----------- ----------- --------- --------
Operating expenses:
Departmental expenses:
Rooms ................................................. 31,449 219,197 213,239 95,627 2,533
Food, beverage and other .............................. 12,119 272,923 260,537 107,860 1,170
Corporate housing expense ............................. 76,019 42,827 -- -- --
Undistributed operating expenses:
Administrative and general ............................ 75,683 233,553 208,576 84,881 10,473
Participating lease expense ........................... 59,375 431,014 404,086 186,601 4,135
Property operating costs .............................. 33,250 188,235 182,412 76,300 1,917
Depreciation and amortization ......................... 12,958 9,470 6,014 3,372 636
Merger and lease conversion costs ..................... 4,239 2,989 -- -- --
Charges to investments in and advances to
affiliates, account and notes receivable and other ... 16,098 -- -- -- --
Loss on asset impairment .............................. -- 21,657 -- -- --
Restructuring expenses ................................ 3,479 -- -- -- --
--------- ----------- ----------- --------- --------
Total operating expenses ......................... 324,669 1,421,865 1,274,864 554,641 20,864
--------- ----------- ----------- --------- --------
Net operating income (loss) ................................ (18,795) (10,997) 17,250 7,796 2,975
Interest expense, net ...................................... 11,303 6,401 4,692 2,017 56
Equity in (earnings) loss of affiliates .................... (732) (751) 31 1,337 (46)
Minority interests ......................................... (1,130) (1,094) 1,916 155 103
Income tax expense (benefit) /(A)/ ......................... (9,287) (6,173) 3,926 337 --
--------- ----------- ----------- --------- --------
Net income (loss) ................................ $ (18,949) $ (9,380) $ 6,685 $ 3,950 $ 2,862
========= =========== =========== ========= ========
Basic earnings (loss) per share /(B)/ ...................... $ (0.51) $ (0.27) $ 0.24 $ 0.02 --
Diluted earnings (loss) per share /(B)/ .................... $ (0.51) $ (0.27) $ 0.24 $ 0.02 --
Number of shares of common stock issued and
outstanding /(C)/ ....................................... 37,189 35,976 29,625 25,437 --
Other Financial Data:
EBITDA /(D)/ ............................................... $ (5,105) $ (776) $ 23,233 $ 9,831 $ 3,657
Net cash provided by (used in) operating activities ........ (10,156) 5,028 27,528 10,125 11,167
Net cash used in investing activities ...................... (11,339) (32,486) (32,837) (102,109) (6,501)
Net cash provided by (used in) financing
activities .............................................. 18,497 33,308 (4,100) 76,113 4,208
Balance Sheet Data:
Total assets ............................................ $ 242,937 $ 338,214 $ 258,144 $ 247,529 $ 84,419
Long-term debt .......................................... 118,500 100,187 57,762 67,812 981
/(A) We did not include a provision for federal and state income taxes prior to
August 3, 1998 because our predecessor entities were partnerships, and all
income tax liabilities were passed through to the individual partners./
/(B) Our calculations of basic and diluted earnings per share for the year ended
December 31, 1998 are based on earnings for the period from the date of our
spin-off from CapStar Hotel Company, August 3, 1998 through December 31,
1998./
/(C) As of December 31 for the periods presented./
/(D) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. We believe that EBITDA is a useful measure
of operating performance because it is industry practice to evaluate hotel
27
properties based on operating income before interest, depreciation and
amortization and minority interests of common and preferred operating
partnership unit holders, which is generally equivalent to EBITDA, and
EBITDA is unaffected by the debt and equity structure of the entity. EBITDA
does not represent cash flow from operations as defined by generally
accepted accounting principles, is not necessarily indicative of cash
available to fund all cash flow needs, should not be considered as an
alternative to net income under generally accepted accounting principles
for purposes of evaluating our results of operations, and may not be
comparable to other similarly titled measures used by other companies./
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
We manage, lease, and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, and golf markets. Our portfolio is diversified by franchise and brand
affiliations. We were created in connection with the August 3, 1998 merger of
American General Hospitality Corporation and CapStar Hotel Company. At the time
of the merger, CapStar distributed all of the shares of our common stock to its
shareholders and we became a separate, publicly traded company. The merger
created MeriStar Hospitality Corporation, a real estate investment trust. We are
the manager and operator of all of the hotels owned by MeriStar Hospitality.
On May 31, 2000, we completed the acquisition of BridgeStreet
Accommodations, Inc. BridgeStreet provides corporate housing services in the
United States, Canada, the United Kingdom and France. Our consolidated financial
statements include the operating results of BridgeStreet since May 31, 2000. We
operate our corporate housing division under the name BridgeStreet Corporate
Housing Worldwide or BridgeStreet.
Until January 1, 2001, we leased from MeriStar Hospitality their hotels
that we operated. As of January 1, 2001, we assigned these participating leases
to wholly-owned taxable subsidiaries of MeriStar Hospitality. In connection with
the assignment, MeriStar Hospitality's taxable subsidiaries executed new
management agreements with us to manage these hotels. Under these management
agreements, MeriStar Hospitality's taxable subsidiaries pay us a management fee
for each property. The management agreements were structured to substantially
mirror the economics of the former leases. We and MeriStar Hospitality did not
exchange any cash consideration except for the transfer of hotel operating
assets and liabilities to the taxable subsidiaries. Under the new management
agreements, the base management fee is 2.5% of total hotel revenue plus
incentives payments, based on meeting performance thresholds that could total up
to 1.5% of total hotel revenue. The agreements have an initial term of 10 years
with three renewal periods of five years each at our option, subject to some
exceptions. Because these leases have been assigned to MeriStar Hospitality's
taxable subsidiaries, those taxable subsidiaries now bear the operating risk
associated with these hotels.
On January 1, 2001, we invested $100,000 in Flagstone Hospitality
Management LLC, a joint venture established to manage 54 hotels owned by RFS
Hotel Investors, Inc. We owned 51% of, and controlled, the joint venture during
2001. We have included the results of Flagstone in our consolidated financial
statements since January 1, 2001. Effective January 1, 2002, Flagstone became a
single member LLC, of which we own 100%.
On August 17, 2001, our corporate housing division acquired Paris-based
Apalachee Bay Properties. Apalachee Bay is an apartment finder service, third-
party manager and a property sales brokerage business, representing 300 units.
Apalachee Bay has been renamed BridgeStreet Paris. Our consolidated financial
statements include the operating results of BridgeStreet Paris since August 17,
2001.
The following table summarizes our historical portfolio of managed and
leased hotel properties as of December 31:
Leased Managed Total
------------------- ------------------- -------------------
Properties Rooms Properties Rooms Properties Rooms
---------- ------ ---------- ------ ---------- ------
2001 ......... 48 6,581 229 51,880 277 58,461
2000 ......... 157 35,141 59 12,172 216 47,313
1999 ......... 161 35,655 54 9,693 215 45,348
As discussed above, effective January 1, 2001, we converted 106 leases with
MeriStar Hospitality to long-term management contracts. In addition, during
2001, we terminated three leases with another hotel owner and converted those
leases to long-term management contracts. Our remaining 48 leases are with
Winston Hotels, Inc. We have had, and continue to have, discussions with Winston
to convert these leases to long-term management contracts. We
29
believe management contracts provide a better alignment of interests between a
hotel's owner and operator.
Business Summary
The terrorist attacks of September 11, 2001 have had a negative impact on
our hotel operations in the third and fourth quarters, causing lower than
expected performance in an already slowing economy. The events of September 11th
have caused a significant decrease in our hotels' occupancy and average daily
rate due to disruptions in business and leisure travel patterns and concerns
about travel safety. Major metropolitan area and airport hotels have been
adversely affected due to concerns about air travel safety and a significant
overall decrease in the amount of air travel. Although the conversion of our
leases with MeriStar Hospitality to management contracts on January 1, 2001 has
significantly reduced the earnings volatility from hotel operations, we still
experience the effects of market downturns because our management fees are tied
directly to hotel revenues, and we continue to lease 48 hotel properties not
owned by MeriStar Hospitality.
In response to the decline in operating activity following the terrorist
attacks, we have worked with our hotel owners to aggressively review and reduce
the cost structure of the hotels we operate. We have implemented numerous
cost-cutting strategies, including the following items:
. reducing overall staffing and reducing hours for remaining hourly
staff,
. instituting hiring and wage freezes for all properties,
. revising operating procedures to gain greater efficiencies and/or
reduce costs,
. closing under-utilized or duplicative facilities and outlets,
. creating revised minimum staffing guides for each department in our
hotels, and
. reducing capital expenditures to focus primarily on life-safety
requirements, and deferring or terminating discretionary capital
outlays.
The September 11, 2001 terrorist attacks were unprecedented in scope and in
their immediate dramatic impact on travel patterns. We have not previously
experienced such events, and it is currently not possible to accurately predict
if and when travel patterns will be restored to pre-September 11 levels. While
we have had improvements in our operating levels from the period immediately
following the attacks, we believe the uncertainty associated with subsequent
incidents and the possibility of future attacks will continue to hamper business
and leisure travel patterns for the next several quarters.
Our senior secured credit facility requires us to meet or exceed certain
financial performance ratios at the end of each quarter. Travel disruptions and
safety concerns following the terrorist attacks on September 11, 2001 and the
slowdown of the national economy resulted in a significant negative impact to
the lodging industry and our operations. This decline in operations would have
caused us to be out of compliance with certain financial covenants specified in
our senior credit facility. However, on October 24, 2001, we finalized a waiver
on all affected financial covenants with our senior bank group. This waiver to
the senior credit facility waived these covenants through February 28, 2002.
On January 28, 2002, we amended our senior credit facility to provide more
flexibility under certain financial covenants and allow us to extend the
maturity from February 2002 until February 2003. The interest rate on the
revolver increases 100 basis points to 30-day London Interbank Offered Rate plus
450 basis points. We currently have no additional borrowing capacity under this
credit facility. The amendment also sets restrictions on investments and capital
expenditures. The availability under our senior secured credit facility must
also be reduced by $2.5 million on each of the following dates: February 28,
2002, June 30, 2002, September 30, 2002 and December 31, 2002. In addition, on
January 31, 2003, the availability under our senior credit facility will be
further reduced in the amount of our earnings before interest, taxes,
depreciation and amortization greater than $20 million, for 2002.
On January 25, 2002, we amended our credit facility with MeriStar
Hospitality to provide financial covenant relief similar to that in our senior
credit facility. The maturity date remains 91 days after the maturity of the
senior credit facility. The interest rate also remains the same, at the 30-day
London Interbank Offered Rate plus 650 basis points.
30
In January 2002, in connection with the execution of the amendment to the
revolving credit facility with MeriStar Hospitality, we executed a Term Note
payable to MeriStar Hospitality in the amount of $13.1 million to refinance our
outstanding account payable due to MeriStar Hospitality. The Term Note bears
interest at the 30-day London Interbank Offered Rate plus 650 basis points and
matures on the same date as our revolving credit facility with MeriStar
Hospitality.
In December 2001, we received notification from the NYSE that we were not
in compliance with the continued listing standards of the NYSE because our
average closing share price was less than $1.00 over a consecutive 30-day
trading period. The NYSE's continued listing standards require that we bring our
30-day average closing price and our share price above $1.00 by June 20, 2002,
subject to certain conditions. We are currently evaluating our alternatives with
regard to complying with this standard.
Critical Accounting Policies
Accounting estimates are an integral part of the preparation of our
consolidated financial statements and our financial reporting process and are
based on our current judgments. Certain accounting estimates are particularly
sensitive because of their significance to our consolidated financial statements
and because of the possibility that future events affecting them may differ
markedly from our current judgments.
The most significant accounting policies affecting the Company's
consolidated financial statements relate to:
. the evaluation of impairment of certain long-lived assets;
. estimation of valuation allowances, specifically those related to
income taxes and allowance for doubtful accounts;
. estimates of restructuring and other accruals; and
. the evaluation of the fair value of our derivative instruments.
Impairment of long-lived assets
Whenever events or changes in circumstances indicate that the carrying
value of a long-lived asset (including all intangibles) may be impaired, we
perform an analysis to determine the recoverability of the asset's carrying
value. We make estimates of the undiscounted cash flows from the expected future
operations of the asset. If the analysis indicates that the carrying value is
not recoverable from future cash flows, the asset is written down to estimated
fair value and an impairment loss is recognized. Any impairment losses are
recorded as operating expenses. In 2000, we recognized $21.7 million of
impairment losses. We did not recognize any impairment losses in 2001 or 1999.
We review long-lived assets for impairment when one or more of the
following events has occurred:
a. Current or immediate short-term (future twelve months) projected cash
flows are significantly less than the most recent historical cash
flows.
b. The unplanned departure of an executive officer or other key personnel
that could adversely affect our ability to maintain our competitive
position and manage future growth.
c. A significant adverse change in legal factors or an adverse action or
assessment by a regulator that could affect the value of the goodwill
or other long-lived assets.
d. Events that could cause significant adverse changes and uncertainty in
business and leisure travel patterns.
We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In
31
projecting the expected future operations of the asset, we base our estimates on
future budgeted earnings before interest expense, income taxes, depreciation and
amortization, or EBITDA, amounts and use growth assumptions to project these
amounts out over the expected life of the underlying asset. Our growth
assumptions are based on assumed future improvements in the national economy and
improvements in the demand for lodging; if actual conditions differ from those
in our assumptions, the actual results of each asset's actual future operations
could be significantly different from the estimated results we used in our
analysis. Our operating results also are subject to risks set forth under "Risk
Factors - Operating Risks."
Valuation Allowances
We use our judgment in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance recorded
against our deferred tax assets. We have recorded a $7.9 million valuation
allowance as of December 31, 2001 to reduce our deferred tax assets to the
amount that we believe is more likely than not to be realized. This is an
allowance against some, but not all, of our recorded deferred tax assets. We
have considered estimated future taxable income and prudent and feasible ongoing
tax planning strategies in assessing the need for a valuation allowance. Our
estimates of taxable income require us to make assumptions about various factors
that affect our operating results, such as economic conditions, consumer demand,
competition and the other factors that are listed in Item 1, "Risk
Factors--Operating Risks" and "Forward-Looking Information." Our actual results
may differ from these estimates. Based on actual result