<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.txt
<DESCRIPTION>10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2002 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
COMMISSION FILE NUMBER 1-11903
MERISTAR HOSPITALITY CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 75-2648842
(State of Incorporation) (IRS Employer Identification No.)
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20017
(Address of Principal Executive Offices)(Zip Code)
202-295-1000
(Registrant's Telephone Number, Including Area Code)
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 for which 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
The number of shares of Common Stock, par value $0.01 per share, outstanding at
May 13, 2002 was 44,861,259.
<PAGE>
MERISTAR HOSPITALITY CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss) - Three months ended
March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
PART II. OTHER INFORMATION 22
ITEM 5: OTHER INFORMATION 22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Investments in hotel properties $3,195,949 $3,183,677
Accumulated depreciation (425,765) (397,380)
---------- ----------
2,770,184 2,786,297
Cash and cash equivalents 25,974 23,448
Accounts receivable, net of allowance for doubtful
accounts of $964 and $973 59,432 47,178
Prepaid expenses and other 16,672 18,306
Notes receivable from MeriStar Hotels 58,069 36,000
Due from MeriStar Hotels - 8,877
Investments in affiliates 41,714 41,714
Restricted cash 18,352 21,304
Intangible assets, net of accumulated amortization
of $12,140 and $11,224 26,126 26,736
---------- ----------
$3,016,523 $3,009,860
========== ==========
Liabilities, Minority Interests and Stockholders' Equity
Accounts payable, accrued expenses and other liabilities $ 129,459 $ 129,786
Accrued interest 41,309 45,009
Due to MeriStar Hotels 3,968 -
Income taxes payable 93 350
Dividends and distributions payable 447 1,090
Deferred income taxes 8,714 9,031
Interest rate swaps 8,703 12,100
Long-term debt 1,713,778 1,700,134
---------- ----------
Total liabilities 1,906,471 1,897,500
---------- ----------
Minority interests 89,028 89,797
Stockholders' equity:
Preferred stock, par value $0.01 per share
Authorized - 100,000 shares - -
Common stock, par value $0.01 per share
Authorized - 250,000 shares
Issued - 48,962 and 48,761 shares 489 487
Additional paid-in capital 1,186,616 1,183,463
Retained earnings (deficit) (78,664) (68,241)
Accumulated other comprehensive loss (7,245) (12,503)
Unearned stock-based compensation (4,407) (5,287)
Less common stock held in treasury - 4,307 and 4,237
shares (75,765) (75,356)
---------- ----------
Total stockholders' equity 1,021,024 1,022,563
---------- ----------
$3,016,523 $3,009,860
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME (LOSS)
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
2002 2001
---- ----
<S> <C> <C>
Revenue:
Hotel operations:
Rooms $170,548 $200,380
Food and beverage 62,065 71,291
Other operating departments 19,108 22,471
Participating lease revenue - 3,784
Office rental and other revenues 4,943 4,758
-------- --------
Total revenue 256,664 302,684
-------- --------
Hotel operating expenses by department:
Rooms 38,935 45,722
Food and beverage 44,405 51,404
Other operating departments 10,694 11,570
Office rental, parking and other operating
expenses 814 937
Undistributed operating expenses:
Administrative and general 43,471 44,917
Property operating costs 37,382 42,699
Property taxes, insurance and other 20,061 18,387
Depreciation and amortization 30,901 29,697
Write-off of deferred financing costs 1,529 -
Loss on fair value of non-hedging derivatives 4,735 -
Write down of investment in STS Hotel Net - 2,112
Swap termination costs - 9,297
-------- --------
Total operating expenses 232,927 256,742
-------- --------
Net operating income 23,737 45,942
Interest expense, net 34,588 30,229
-------- --------
Income (loss) before minority interests, income tax
expense (benefit), loss on sale of assets and extraordinary loss (10,851) 15,713
Minority interests (627) 1,104
-------- --------
Income (loss) before income tax expense (benefit), loss on sale of
assets and extraordinary loss (10,224) 14,609
Income tax expense (benefit) (281) 511
-------- --------
Income (loss) before loss on sale of assets and extraordinary loss (9,943) 14,098
Loss on sale of assets, net of tax effect of ($22) - (1,059)
Extraordinary loss on early extinguishments of debt, net of tax
effect of ($19) - (1,224)
-------- --------
Net income (loss) $ (9,943) $ 11,815
======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31,
--------
2002 2001
---- ----
<S> <C> <C>
Other comprehensive income (loss):
Net income (loss) $ (9,943) $ 11,815
Foreign currency translation adjustment 12 (974)
Derivative instruments transition adjustment - (2,842)
Change in valuation of derivative instruments 511 (4,793)
-------- --------
Comprehensive income (loss) $ (9,420) $ 3,206
======== ========
Earnings per share:
Basic:
Income (loss) before extraordinary loss $ (0.22) $ 0.29
Extraordinary loss - (0.03)
-------- --------
Net income (loss) $ (0.22) $ 0.26
======== ========
Diluted:
Income (loss) before extraordinary loss $ (0.22) $ 0.28
Extraordinary loss - (0.03)
-------- --------
Net income (loss) $ (0.22) $ 0.25
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------
2002 2001
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ (9,943) $ 11,815
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 30,901 29,697
Loss on fair value of non-hedging derivatives 4,735 -
Write-off of deferred financing costs 1,529
Loss on sale of assets, before tax effect - 1,081
Write down of investment in STS Hotel Net - 2,112
Extraordinary loss on early extinguishment of debt,
before tax effect - 1,243
Minority interests (627) 1,104
Amortization of unearned stock based compensation 880 797
Interest rate swaps marked to fair value (2,887) -
Deferred income taxes (317) 164
Changes in operating assets and liabilities:
Accounts receivable, net (12,254) (7,173)
Prepaid expenses and other 1,634 (2,580)
Due to/from MeriStar Hotels (224) 11,512
Accounts payable, accrued expenses and other liabilities (328) (4,788)
Accrued interest (3,700) 2,592
Income taxes payable (257) 208
--------- --------
Net cash provided by operating activities 9,142 47,784
--------- --------
Investing activities:
Investment in hotel properties (12,292) (8,743)
Proceeds from disposition of assets - 7,274
Hotel operating cash received in lease conversions - 3,778
Notes receivable from MeriStar Hotels (9,000) (36,000)
Change in restricted cash 2,952 1,697
--------- --------
Net cash used in investing activities (18,340) (31,994)
--------- --------
Financing activities:
Deferred financing costs (3,131) (9,322)
Proceeds from issuance of long-term debt 234,545 578,379
Principal payments on long-term debt (220,901) (541,752)
Proceeds from issuance of common stock, net 3,155 280
Purchase of treasury stock (409) -
Dividends paid to stockholders (475) (22,669)
Distributions to minority investors (789) (2,190)
--------- --------
Net cash provided by financing activities 11,995 2,726
--------- --------
Effect of exchange rate changes on cash and cash equivalents (271) 216
--------- --------
Net increase in cash and cash equivalents 2,526 18,732
Cash and cash equivalents, beginning of period 23,448 250
--------- --------
Cash and cash equivalents, end of period $ 25,974 $ 18,982
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
UNAUDITED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As of
March 31, 2002, we owned 112 hotels, with 28,653 rooms, all of which are leased
by our taxable subsidiaries and managed by MeriStar Hotels & Resorts, Inc.
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, and its
associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American General, we
created MeriStar Hotels, a separate publicly traded company, to be the lessee
and manager of nearly all of our hotels.
On January 1, 2001, changes to the federal tax laws governing real estate
investment trusts became effective, Those changes are commonly known as the REIT
Modernization Act, or RMA. The RMA permits real estate investment trusts to
create taxable subsidiaries that are subject to taxation similar to subchapter
C-Corporations. Because of the RMA, we have created a number of these taxable
subsidiaries to lease our real property. The RMA prohibits our taxable
subsidiaries from engaging in the following activities:
. Managing the properties they lease (our taxable subsidiaries must
enter into an "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),
. Leasing a property that contains gambling operations; and
. Owning a brand or franchise.
We believe establishing taxable subsidiaries to lease the properties we own
provides a more efficient alignment of and ability to capture the economic
interests of property ownership. Under the prior lease structure with MeriStar
Hotels, we received lease payments based on the revenues generated by the
properties; MeriStar Hotels, however, operated the properties in order to
maximize net operating income from the properties. This inconsistency could
potentially result in the properties being operated in a way that did not
maximize revenues. With the assignment of the leases from MeriStar Hotels to our
taxable subsidiaries and the execution of the new management agreements (as
described below), we gained the economic risks and rewards usually associated
with ownership of real estate, and property revenues became the basis for
MeriStar Hotels' management fees.
Subsidiaries of MeriStar Hotels assigned the participating leases to our
wholly-owned taxable subsidiaries as of January 1, 2001. In connection with the
assignment, the taxable subsidiaries executed new management agreements with a
subsidiary of MeriStar Hotels to manage our hotels. Under these management
agreements, the taxable subsidiaries pay a management fee to MeriStar Hotels for
each property. The taxable subsidiaries in turn make rental payments to us under
the participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases. The assignment of the
leases from MeriStar Hotels to our taxable subsidiaries did not result in any
cash consideration exchanged among the parties except for the transfer of hotel
operating assets and liabilities to the taxable subsidiaries. Under the new
management agreements, the base management fee is 2.5% of total hotel revenue
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 the option of MeriStar
Hotels, subject to some exceptions. Because these leases have been assigned to
our taxable subsidiaries, we now bear the operating risk associated with our
hotels.
During 2001, we acquired the eight leases from Prime Hospitality for our hotels
that were previously leased and managed by Prime. These hotels are now managed
by MeriStar Hotels under management agreements identical to our other management
agreements with MeriStar Hotels, except that the term on four of the agreements
is one year with additional one- year renewal periods.
7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared these unaudited interim financial statements according to the
rules and regulations of the Securities and Exchange Commission. We have omitted
certain information and footnote disclosures that are normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America. These interim financial statements
should be read in conjunction with the financial statements, accompanying notes
and other information included in our Annual Report on Form 10-K, as amended,
for the year ended December 31, 2001. Certain 2001 amounts have been
reclassified to conform to the 2002 presentation.
In our opinion, the accompanying unaudited condensed consolidated interim
financial statements reflect all adjustments, which are of a normal and
recurring nature, necessary for a fair presentation of the financial condition
and results of operations and cash flows for the periods presented. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities, as well as the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Our actual results could
differ from those estimates. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" requires a public entity to report
selected information about operating segments in financial reports issued to
shareholders. Based on the guidance provided in the standard, we have determined
that our business is conducted in one reportable segment. The standard also
establishes requirements for related disclosures about products and services,
geographic areas and major customers. Revenues for Canadian operations totaled
$4,525 and $5,522 for the three months ended March 31, 2002 and 2001,
respectively.
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. FAS No. 137 and No. 138 amended certain
provisions of FAS No. 133. We adopted these accounting pronouncements on January
1, 2001.
Our interest rate risk management objective is to limit the impact of interest
rate changes on earnings and cash flows. We assess interest rate cash flow risk
by continually identifying and monitoring changes in interest rate exposures
that may adversely impact expected future cash flows, and by evaluating hedging
opportunities. We do not enter into derivative instruments for any purpose other
than cash flow hedging purposes.
Our interest rate swap agreements were initially designated as hedges against
changes in future cash flows associated with specific variable rate debt
obligations. As of March 31, 2002, we had three swap agreements with notional
amounts totaling $300 million. All of these swap agreements have been converted
to non-hedging derivatives due to our repayment of the floating-rate borrowings
they originally hedged and they are currently being marked to market through our
statement of operations. We have interest rate exposure going forward as the
change in fair value of our non-hedging derivatives will have an impact on our
statement of operations. The interest rate swap agreements are reflected at fair
value in our consolidated balance sheet as of March 31, 2002. For more
information regarding our interest rate hedging activities, see "Quantitative
and Qualitative Disclosures about Market Risk."
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
supersedes SFAS No. 121. We did not have any asset sales or impairments in the
first three months of 2002; therefore, SFAS No. 144 has no effect on our
financial statement for that period.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets,"
and SFAS No. 143 "Accounting for Asset Retirement Obligations." These new
standards have no effect on our financial statements for the three months ended
March 31, 2002.
3. NOTE RECEIVABLE FROM LESSEE
We may lend MeriStar Hotels up to $50,000 for general corporate purposes under a
revolving credit agreement. The
8
<PAGE>
interest rate on this credit agreement is 650 basis points over the 30-day
London Interbank Offered Rate. As of March 31, 2002, $45,000 was outstanding
under this revolving credit agreement.
MeriStar Hotels also issued us a term note effective January 1, 2002. This
$13,069 term note refinances outstanding accounts payable MeriStar Hotels owed
to us. The term note bears interest at 650 basis points over the 30-day LIBOR.
The maturity date is the same as that of the revolving credit agreement.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Senior unsecured notes.............. $ 950,000 $ 750,000
Revolving credit facility........... 43,000 224,000
Secured facility.................... 330,000 330,000
Subordinated notes.................. 205,000 205,000
Convertible notes................... 154,300 154,300
Mortgage debt and other............. 51,687 52,335
Unamortized issue discount.......... (20,209) (15,501)
---------- ----------
$1,713,778 $1,700,134
========== ==========
As of March 31, 2002 aggregate future maturities of the above obligations are as
follows:
2002............. $ 14,057
2003............. 51,589
2004............. 171,168
2005............. 9,265
2006............. 10,006
Thereafter....... 1,457,693
---------
$1,713,778
==========
In February 2002, we issued an additional $200,000 ($196,250, net of discount)
aggregate principal amount of 9.13% senior unsecured notes due 2011. We used the
proceeds from the issuance of these notes to repay approximately $195,000 of the
outstanding balance under our revolving credit agreement. As a result of this
financing, we redesignated some swap agreements as non-hedging derivatives. We
recognized a $4,735 loss when this amount was transferred out of accumulated
other comprehensive income because the debt being hedged was repaid.
In February 2002, we amended our revolving credit agreement. The amendment
allows us to reduce the revolving commitments to below $300,000. In March 2002,
we reduced the borrowing capacity on our revolving credit agreement from
$310,000 to $150,000. We recognized a $1,529 loss due to the write-off of
deferred financing costs related to reducing the borrowing capacity of our
revolving credit agreement.
On January 26, 2001, we issued $300,000 aggregate principal amount of 9.0%
senior notes due 2008 and $200,000 of 9.13% senior notes due 2011. The notes are
unsecured obligations of certain subsidiaries of ours and we guarantee payment
of principal and interest on the notes. The net proceeds from the sale of
$492,000 were used to repay amounts outstanding under the credit facility and to
make payments to terminate certain swap agreements that hedged variable interest
rates of the loans that were repaid. The repayments of term loans under the
credit facility resulted in an extraordinary loss of $1,243 ($1,224, net of tax)
from the write-off of deferred financing costs. Also, in conjunction with the
sales of the senior unsecured notes, we terminated three swap agreements with
notional amounts totaling $300,000. These swap agreements were designated to the
credit facility term loans that were repaid with the proceeds from the sale of
these notes. We made payments totaling $9,297 to terminate these swap
agreements.
5. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On March 20, 2002, we declared a dividend for the three months ended March 31,
2002 of $0.01 per share of common stock and per unit of limited partnership
interest in our subsidiary operating partnership. We paid the dividend on April
30, 2002.
9
<PAGE>
6. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
---------
2002 2001
---- ----
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE COMPUTAION:
Income (loss) before extraordinary
loss $ (9,943) $ 13,039
Dividends paid on unvested restricted
stock (2) (183)
-------- --------
Income (loss) available to common
stockholders (9,945) 12,856
Weighted average number of shares
of common stock outstanding 44,553 44,494
-------- --------
Basic earnings (loss) per share before
extraordinary loss $ (0.22) $ 0.29
======== ========
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION:
Income (loss) available to common
Stockholders $ (9,945) $ 12,856
Minority interest, net of tax - 933
-------- --------
Adjusted net income (loss) $ (9,945) $ 13,789
======== ========
Weighted average number of shares of
Common stock outstanding 44,553 44,494
Common stock equivalents:
Operating partnership units - 3,928
Stock options - 322
-------- --------
Total weighted average number of
diluted shares of Common Stock
outstanding 44,553 48,744
======== ========
Diluted earnings (loss) per share before
extraordinary loss $ (0.22) $ 0.28
======== ========
</TABLE>
Stock options and operating partnership units are not included in the
computation of diluted earnings (loss) per share when their effect is
antidilutive.
10
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2002 2001
---- ----
<S> <C> <C>
Cash paid for interest and income taxes:
Interest, net of capitalized interest of
$919 and $2,005 respectively ............... $ 38,288 $ 27,637
Income taxes ............................... 93 142
Non-cash investing and financing activities:
Conversion of OP Units to Common Stock - 2,640
Operating assets received and liabilities assumed from lease conversion:
Accounts receivable - 47,305
Prepaid expenses and other - 12,874
Furniture and fixtures, net - 152
Investment in affiliates, net - 1,629
--------- ---------
Total operating assets received - 61,960
========= =========
Accounts payable and accrued expenses - 65,706
Long-term debt - 32
--------- ---------
Total liabilities acquired - 65,738
========= =========
</TABLE>
8. STOCK-BASED COMPENSATION
As of March 31, 2002, we have granted 479,000 shares of restricted stock to
employees. This restricted stock vests ratably over three-year or five-year
periods. The issuance of restricted stock has resulted in $4,407 of unearned
stock-based compensation recorded as a reduction to stockholders' equity on our
condensed consolidated balance sheet as of March 31, 2002.
As of March 31, 2002, we have granted 737,500 Profits-Only OP Units, or POPs, to
some of our employees pursuant to our POPs Plan. These POPs are fixed awards and
vest ratably over three years.
9. RESTRUCTURING EXPENSES
During 2001, we incurred a restructuring charge of $1,080 in connection with
operational changes at our corporate headquarters. The restructuring included
eliminating seven corporate staff positions and office space no longer needed
under the new structure. During 2002, we applied $52 of lease termination costs
against the restructuring reserve. Approximately $340 of the restructuring
accrual remains at March 31, 2002.
10. DISPOSITIONS
On March 21, 2001, we sold one hotel and received proceeds of $7,274. The sale
resulted in a loss of $1,081 ($1,059, net of tax).
11. CONSOLIDATING FINANCIAL INFORMATION
We and certain subsidiaries of MeriStar Hospitality Operating Partnership, L.P.
(MHOP), our subsidiary operating partnership, are guarantors of senior unsecured
notes issued by MHOP. MHOP and certain of its subsidiaries are guarantors of our
unsecured subordinated notes. We own a one percent general partner interest in
MHOP and MeriStar LP, Inc., our wholly-owned subsidiary, owns approximately a 90
percent limited partner interest in MHOP. All guarantees
11
<PAGE>
are full and unconditional, and joint and several. Exhibit 99 to this Quarterly
Report on Form 10-Q presents supplementary consolidating information for MHOP,
including each of the guarantor subsidiaries. This schedule presents MHOP
consolidating balance sheets as of March 31, 2002 and 2001, and consolidating
statements of operations and cash flows for each of the three months ended March
31, 2002 and 2001.
12. SUBSEQUENT EVENT
On May 2, 2002, MeriStar Hotels, the manager of our hotels, announced an
agreement to merge with Interstate Hotels Corporation, or Interstate. The
transaction will be a stock-for-stock merger of Interstate into MeriStar Hotels
in which Interstate stockholders will receive 4.6 shares of common stock for
each share of Interstate stock outstanding. Holders of MeriStar Hotels common
stock and operating partnership units will continue to hold their stock and
units following the merger. The combined company will operate approximately
86,000 rooms in 412 hotels. MeriStar Hotels expects the transaction to close in
the third quarter of 2002.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As of
March 31, 2002, we owned 112 hotels, with 28,653 rooms, all of which were leased
by our taxable subsidiaries and managed by MeriStar Hotels & Resorts, Inc.
We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, and its
associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American General, we
created MeriStar Hotels, a separate publicly traded company, to be the lessee
and manager of nearly all of our hotels.
On January 1, 2001, changes to the federal tax laws governing REITs became
effective. Those changes are commonly known as the REIT Modernization Act, or
RMA. The RMA permits real estate investment trusts to create taxable
subsidiaries that are subject to taxation similar to subchapter C-Corporations.
We have created a number of these taxable subsidiaries to lease our real
property. The RMA prohibits our taxable subsidiaries from engaging in the
following activities:
. Managing the properties they lease (our taxable subsidiaries must enter
into an "arms length" management agreement with an independent
third-party manager actively involved in the trade or business of hotel
management and manages properties on behalf of other owners);
. Leasing a property that contains gambling operations; and
. Owning a brand or franchise.
We believe establishing taxable subsidiaries to lease the properties we own
provides a more efficient alignment of and ability to capture the economic
interests of property ownership. Under the prior lease structure with MeriStar
Hotels, we received lease payments based on the revenues generated by the
properties; MeriStar Hotels, however, operated the properties in order to
maximize net operating income from the properties. This inconsistency could
potentially result in the properties being operated in a way that did not
maximize revenues. With the assignment of the leases from MeriStar Hotels to our
taxable subsidiaries and the execution of the new management agreements (as
describe below), we gained the economic risks and rewards usually associated
with ownership of real estate, and property revenues became the basis for
MeriStar Hotels' management fees.
Subsidiaries of MeriStar Hotels assigned the participating leases to our
wholly-owned taxable subsidiaries as of January 1, 2001. In connection with the
assignment, the taxable subsidiaries executed new management agreements with a
subsidiary of MeriStar Hotels to manage our hotels. Under these management
agreements, the taxable subsidiaries pay a management fee to MeriStar Hotels for
each property. The taxable subsidiaries in turn make rental payments to us under
the participating leases. The management agreements have been structured to
substantially mirror the economics of the former leases. The assignment of the
leases from MeriStar Hotels to our taxable subsidiaries did not result in any
cash consideration exchanged among the parties except for the transfer of hotel
operating assets and liabilities to the taxable subsidiaries. Under the new
management agreements, the base management fee is 2.5% of total hotel revenue.
MeriStar Hotels can also earn incentive management fees, based on meeting
performance thresholds, of up to 1.5% of total hotel revenue. The agreements
have an initial term of 10 years with three renewal periods of five years each
at the option of MeriStar Hotels, subject to some exceptions. Because these
leases have been assigned to our taxable subsidiaries, we now bear the operating
risk associated with our hotels.
During 2001, we acquired the eight leases from Prime Hospitality for our hotels
that were previously leased and managed by Prime. These hotels are now managed
by MeriStar Hotels under management agreements identical to our other management
agreements with MeriStar Hotels, except that the term on four of the agreements
is one year with additional one- year renewal periods.
Business Summary
Our results continue to reflect a cautious economy which has caused declines in
business and leisure travel demand
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nationwide. Our group business at our hotels improved during the first quarter,
but our transient business continues to be significantly lower than prior to the
terrorist attacks on September 11, 2001, and also lower than our internal
projections for 2002. Overall, our occupancies were ahead of our internal plan
for the quarter, but our average daily rate was lower than we projected. We have
continued to work with MeriStar Hotels, the manager of our hotels to focus on
cost reduction and control measures at our hotels. We expect year-over-year
performance measures to improve in the second half of 2002 when the economy is
expected to gain momentum.
The September 11, 2001 terrorist attacks have had a dramatic effect on the
insurance and reinsurance industries. Many companies are being subject to
nonrenewal or cancellations of insurance polices, or renewals of existing
coverage with extreme price increases. Our total annual property and casualty
insurance premiums are approximately $25.0 million under our current policies.
Also our secured facility requires our property insurance carrier to be rated AA
or better by Standard & Poors. Our manager, MeriStar Hotels, is responsible for
securing property insurance and is in the process of renewing this coverage. As
part of that process, they intend to attempt to obtain coverage from a carrier
or carriers that are appropriately rated by S&P. If we are unable to obtain
insurance that meets our debt covenant requirements and if we are unable to
amend or waive those covenants, it could have a material adverse effect on our
business. At our insurance policy renewals in mid-2002, we may be subject to
restrictions as compared to our current coverages, price increases, or a
combination of both restrictions and increases.
Critical Accounting Policies
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our estimates and judgments,
including those related to the impairment of long-lived assets and the recording
of certain accrued liabilities. Some of our estimates are material to the
financial statements. These estimates are therefore particularly sensitive as
future events could cause the actual results to be significantly different from
our estimates.
Our critical accounting policies are as follows:
. Impairment of long-lived assets;
. Estimating certain accrued liabilities; and
. Determining the impact of future interest rate changes on our statement
of operations.
Impairment of long-lived assets
Whenever events or changes in circumstances indicate that the carrying values of
long-lived assets (including property and equipment and all intangibles) may be
impaired, we perform an analysis to determine the recoverability of the asset's
carrying value. The carrying value of the asset includes the original purchase
price (net of depreciation) plus the value of all capital improvements (net of
depreciation). 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, we write down the
asset to estimated fair value and recognize an impairment loss. Any impairment
losses we recognize are recorded as operating expenses. We did not recognize any
impairment losses for the three months ended 2002 or 2001.
Estimating certain accrued liabilities
Estimates for certain accruals such as real and personal property taxes could
have a material effect on our financial statements. Currently, we estimate real
and personal property taxes based on a combination of preliminary estimates from
state and local jurisdictions, and historical information. The assessed values
of these properties could change significantly from the values or rates we use
in our estimates. Property tax assessments are subject to periodic and often
lengthy appeals. For example, in instances where a jurisdiction increases our
assessed value, we frequently appeal that assessment. Similarly, when hotel
operations are declining, we may appeal an assessment as too high if it is based
on past operating results. These appeals of assessed values are subject to a
potentially wide range of outcomes. As a result of the economic slowdown and
events of September 11, 2001, we have filed a number of appeals for lower
assessments. As of March 31, 2002, we had ongoing appeals in several
jurisdictions with respect to more than 20 properties. We accrue for these
liabilities based on what we believe is a reasonable judgment of the most likely
outcome of the appeals. Based on our current estimate of the outcome, however,
we do not expect to incur any additional expense even if all of our appeals
proved unsuccessful. We cannot predict with certainty the outcome of these
appeals, or their effect on our accruals for such items. Also, actual property
tax expense could vary greatly from our estimates used for the current property
tax accrual based on a change in the assessed value, a change in the tax rate,
and/or a different outcome of the appeals process than we currently expect.
Determining impact of future interest rate changes on our statement of
operations
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires a company to recognize all derivatives as either assets or liabilities
in the balance sheet and record those instruments at fair value. SFAS No. 137
and No. 138 amended certain provisions of SFAS No. 133. We adopted these
accounting pronouncements effective January
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1, 2001.
Our interest rate risk management objective is to limit the impact of interest
rate changes on earnings and cash flows. We assess interest rate cash flow risk
by continually identifying and monitoring changes in interest rate exposures
that may adversely impact expected future cash flows and by evaluating hedging
opportunities. We do not enter into derivative instruments for any purpose other
than cash flow hedging purposes.
Our interest rate swap agreements were initially designated as hedges against
changes in future cash flows associated with specific variable rate debt
obligations. As of March 31, 2002, we had three swap agreements with notional
amounts totaling $300 million. These swap agreements have been converted to
non-hedging derivatives due to our repayment of the floating-rate borrowings
they originally hedged and they are currently being marked to market through our
statement of operations. We have interest rate exposure going forward as the
change in fair value of our non-hedging derivatives will have an impact on our
statement of operations. The fair value of swap agreements is $8,703 at March
31, 2002. For more information regarding our interest rate hedging activities,
see "Quantitative and Qualitative Disclosures about Market Risk."
FINANCIAL CONDITION
MARCH 31, 2002 COMPARED WITH DECEMBER 31, 2001
Our total assets increased by $6.6 million to $3,016.5 million at March 31, 2002
from $3,009.9 million at December 31, 2001 primarily due to:
. the $22.1 million increase in notes receivable from MeriStar Hotels is
due primarily to the new $13.1 million term note and additional
borrowing of $9.0 million by MeriStar Hotels;
. capital expenditures of $12.3 million at the hotels; and
. the $12.3 million increase in accounts receivable due to the improved
occupancy since December 31, 2001; partially offset by
. the decrease of $8.9 million in due from MeriStar Hotels primarily due
to the $13.1 million term note; and
. depreciation on hotel assets of $28.4 million.
Total liabilities increased by $9.0 million to $1,906.5 million at March 31,
2002 from $1,897.5 million at December 31, 2001 due mainly to:
. net borrowings of long-term debt of $13.7 million; and
. a $4.0 million increase in due to MeriStar Hotels; partially offset by
. a $3.7 million decrease in accrued interest due to the payment of
interest on several senior secured notes; and
. a $3.4 million decrease in market value of our derivative instruments.
Long-term debt increased by $13.7 million to $1,713.8 million at March 31, 2002
from $1,700.1 million at December 31, 2001 due primarily to:
. $200 million ($196.2 million, net of discount) in senior unsecured
notes issued in February, partially offset by
. $181.0 million of net repayments on our revolving credit facility using
proceeds of the issuance of senior unsecured notes in February and cash
generated by operations.
Stockholders' equity decreased $1.6 million to $1,021.0 million at December 31,
2001 from $1,022.6 million at December 31, 2001 due primarily to:
. the $9.9 million of net loss for the first quarter of 2002; partially
offset by
. a $5.3 million decrease in accumulated other comprehensive loss due
mainly to the conversion of our swap agreements to non-hedging
derivatives; and
. $3.1 million of exercised stock options.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2001
Until January 1, 2001, MeriStar Hotels leased substantially all of our hotels
from us. Effective January 1, 2001, MeriStar Hotels assigned the hotel leases to
our newly created, wholly-owned, taxable REIT
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subsidiaries in turn, entered into management agreements with MeriStar Hotels to
manage the hotels. As a result of this change in structure, our wholly-owned
taxable REIT subsidiaries have assumed the operating risks and rewards of the
hotels and now pay MeriStar Hotels a management fee to manage the hotels for us.
For consolidated financial statement purposes, effective January 1, 2001, we now
record all of the revenues and expenses of the hotels in our statements of
operations, including the management fee paid to MeriStar Hotels.
The following table provides our hotels' operating statistics on a same store
basis for the three months ended March 31, 2002 and 2001.
2002 2001 Change
---------- ---------- --------
Revenue per available room $ 66.44 $ 81.05 (18.0)%
Average daily rate $104.93 $115.56 (9.2)%
Occupancy 63.3% 70.1% (9.7)%
Overall, the slowing United States economy had a major negative effect on our
hotels during the first quarter of 2002 compared to the first quarter of 2001.
This effect is evidenced by a sharp reduction in business travel, as well as
leisure travel. This is reflected in the 9.2% reduction in average daily rate
and the 9.7% reduction in occupancy in the first quarter 2002 compared to 2001.
Total revenue decreased $46.0 million to $256.7 million in 2002 from $302.7
million in 2001 primarily due to:
. a $29.8 million decrease in room revenue due to a decrease in
occupancy and average daily rate;
. a $9.2 million decrease in food and beverage revenue due to a decrease
in occupancy; and
. a $3.8 million decrease in lease revenue due to us no longer leasing
hotels in 2002.
Total operating expenses decreased $23.8 million to $232.9 for the three months
ended March 31, 2002 compared to $256.7 million for the same period in 2001 due
primarily to:
. a $6.8 million decrease in room expenses due to lower occupancy;
. a $7.0 million decrease in food and beverage expenses due to lower
occupancy;
. a $5.3 million decrease in property operating costs due primarily to a
$1.9 million decrease in energy costs and a $1.4 million decrease in
management fees;
. $9.3 million in swap termination fees during 2001; and
. a $2.1 million write down of investment in STS Hotel Net during 2001;
partially offset by
. a $4.7 million loss on fair value of non-hedging derivatives in 2002
due to the repayment of debt that was originally hedged; and
. a $1.5 million write-off of deferred costs due to the reduction in our
borrowing capacity on our revolving credit agreement in 2002.
Interest expense increased $4.4 million to $34.6 million for the three months
ended March 31, 2002 compared to $30.2 million for the same period in 2001 due
primarily to the issuance of $250 million of senior secured notes in December
2001 and $200 million of senior secured notes in February 2002 at fixed rates
greater than the variable rate of the debt they repaid.
In 2001, we paid down $300 million of our revolving credit facility. This
resulted in an extraordinary loss of $1.2 million, net of tax.
In the first quarter of 2001, we sold one hotel and received $7.3 million. This
resulted in a loss on the sale of the asset of $1.1 million, net of tax.
The National Association of Real Estate Investment Trusts or NAREIT defines
Funds from Operations, or FFO as net income (loss), computed in accordance with
generally accepted accounting principles, also called GAAP, excluding gains (or
losses) from sales of properties, plus real estate related depreciation and
amortization and after comparable adjustments for our portion of these items
related to unconsolidated partnerships and joint ventures. Extraordinary items
under GAAP are excluded from the calculation of FFO. We believe FFO is helpful
to investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of our ability to incur and
service debt, to make capital expenditures and
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to fund other cash needs. FFO does not represent cash generated from operating
activities determined by GAAP and should not be considered as an alternative to
net income determined in accordance with GAAP as an indication of our financial
performance or to cash flow from operating activities determined in accordance
with GAAP as a measure of our liquidity, nor is it indicative of funds available
to fund our cash needs, including our ability to make cash distributions. FFO
may include funds that may not be available for management's discretionary use
due to functional requirements to conserve funds for capital expenditures and
property acquisitions, and other commitments and uncertainties.
We use recurring FFO as a measure of our performance. Recurring FFO represents
FFO, as defined above, adjusted for significant non-recurring items. The
following is a reconciliation between income (loss) before loss on the sale of
assets and extraordinary items and recurring FFO on a diluted basis for the
three months ended March 31, 2002 and 2001 (in thousands):
2002 2001
---------- ----------
Income (loss) before loss on sale of assets and
extraordinary items $(9,943) $14,098
Minority interest to common OP Unit Holders (768) 963
Interest on convertible debt 1,832 1,832
Hotel depreciation and amortization 28,651 28,619
Non-recurring items (net of minority interests and
income taxes):
Write down of deferred financing costs 1,490 -
Loss on fair value of non-hedging derivatives 4,615 -
Swap termination costs - 8,998
Write down of investment in STS Hotel Net - 2,046
---------- ----------
Recurring FFO $25,877 $56,556
========== ==========
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LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
We generated $9.1 million of cash from operations during the first three months
of 2002. Our principal sources of liquidity are cash on hand, cash generated
from operations, and funds from external borrowings and debt offerings. We
expect to fund our continuing operations through cash generated by our hotels.
In addition, as of May 13, 2002, we had $112.0 million available under our
revolving credit facility. We also expect to finance hotel acquisitions, hotel
renovations and joint venture investments through a combination of internally
generated cash, external borrowings, and the issuance of OP Units and/or common
stock.
Factors that may influence our liquidity include:
. Factors that affect our results of operations, including general
economic conditions, demand for business and leisure travel, public
concerns about travel safety and other operating risks described under
the caption, "Risk Factors--Operating Risks" in our 2001 Annual Report
on Form 10-K;
. Factors that affect our access to bank financing and the capital
markets, including interest rate fluctuations, operational risks and
other risks described under the caption "Risk Factors--Financing
Risks" in our 2001 Annual Report on Form 10-K; and
. The other factors described under the caption, "Special Note Regarding
Forward-Looking Statements."
We must distribute to stockholders at least 90% of our taxable income, excluding
net capital gains to preserve the favorable tax treatment accorded to real
estate investment trusts under the Internal Revenue Code. We expect to fund such
distributions through cash generated from operations and borrowings on our
credit agreement. Due to the sluggish economy, we expect our taxable income to
decrease in 2002 compared to 2001. Any future distributions will be at the
discretion of our Board of Directors and will be determined by factors including
our operating results, capital expenditure requirements, the economic outlook,
the Internal Revenue Service dividend payout requirements for REITs and such
other factors as our Board of Directors deems relevant. We cannot provide
assurance that any such distributions will be made in the future.
We generated $12.0 million of cash from financing activities during the first
three months of 2002 primarily from:
. $13.6 million of net borrowings under our credit agreement;
. $3.2 million of proceeds from issuances of common stock; partially
offset by
. $3.1 million from additional deferred financing costs related to
issuing the $200 million of senior unsecured notes.
Uses of Cash
We used $18.3 million of cash in investing activities during the first three
months of 2002 primarily for:
. $ 9.0 million of notes receivable with MeriStar Hotels; and
. $12.3 million of capital expenditures at hotels.
Long-Term Debt
In February 2002, we issued $200 million ($196.2 million, net of discount)
aggregate principal amount of 9.13% senior unsecured notes due 2011. We used the
proceeds from the issuance of these notes to repay approximately $195.0 million
of the outstanding balance under our revolving credit agreement. As a result of
this financing, we redesignated some swap agreements as non-hedging derivatives.
We recognized a $4.7 million loss when this amount was transferred out of
accumulated other comprehensive income because the debt being hedged was repaid.
In February 2002, we amended our revolving credit agreement. The amendment
allows us to reduce the revolving commitments to below $300 million. In March
2002, we reduced the borrowing capacity on our revolving credit agreement from
$310 million to $150 million. We recognized a $1,529 loss due to the write-off
of deferred financing costs related to reducing the borrowing capacity of our
revolving credit agreement. The weighted average interest rate on borrowings
outstanding under the revolving credit agreement as of March 31, 2002 was 5.94%.
As of May 13, 2002, we had $112.0 million of indebtedness outstanding under our
revolving credit agreement.
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Minimum payments due under our debt obligations as of March 31, 2002 are (in
thousands):
2002 ....................................... $ 14,057
2003 ....................................... 51,589
2004 ....................................... 171,168
2005 ....................................... 9,265
2006 ....................................... 10,006
Thereafter ................................. 1,457,693
---------------
$1,713,778
===============
Capital Resources
We must make ongoing capital expenditures in order to keep our hotels
competitive in their markets. We expect a combination of internally generated
cash and external borrowings to provide capital for renovation work. Initial
renovation programs for most of our hotels are complete or nearing completion.
Once initial renovation programs for a hotel are completed, we expect to spend
approximately 4% annually of hotel revenues for ongoing capital expenditure
programs. These ongoing programs will include room and facilities
refurbishments, renovations, and furniture and equipment replacements. For the
three months ended March 31, 2002, we spent $11 million on renovation and
ongoing property capital expenditure programs. We intend to spend approximately
$37 million during the remaining three quarters of 2002 for our ongoing capital
expenditure programs.
We believe cash generated by operations, together with anticipated borrowing
capacity under our senior credit agreements, will be sufficient to fund our
existing working capital requirements, ongoing capital expenditures, and debt
service requirements. We believe, however, that our future capital decisions
will also be made in response to specific acquisition and/or investment
opportunities, depending on conditions in the capital and/or other financial
markets.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns. For
non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season. For
resort properties, demand is generally higher in winter and early spring. Since
the majority of our hotels are non-resort properties, our operations generally
reflect non-resort seasonality patterns. We have lower revenue, operating income
and cash flow in the first and fourth quarters and higher revenue, operating
income and cash flow in the second and third quarters.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on long-term debt
obligations that impact the fair value of these obligations. Our policy is to
manage interest rates through the use of a combination of fixed and variable
rate debt. Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve our objectives, we borrow at a combination of fixed
and variable rates, and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks in order to mitigate our interest
rate risk on a related financial instrument. We do not enter into derivative or
interest rate transactions for speculative purposes. We have no cash flow
exposure due to general interest rate changes for our fixed long-term debt
obligations.
The table below presents, as of March 31, 2002, the principal amounts (in
thousands of dollars) for our fixed and variable rate debt instruments,
weighted-average interest rates, and fair values by year of expected maturity to
evaluate the expected cash flows and sensitivity to interest rate changes.
<TABLE>
<CAPTION>
Long-term Debt
--------------------------------------------------------------------------
Average Average
Interest Variable Interest
Expected Maturity Fixed Rate Rate Rate Rate
--------------------------- -------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
2002 $ 14,057 8.6% $ - N/A
2003 8,589 8.2% 43,000 6.0%
2004 171,168 5.1% - N/A
2005 9,265 8.4% - N/A
2006 10,006 8.1% - N/A
Thereafter 1,457,693 9.0% - N/A
-------------- ----------------- -------------- -------------
Total $ 1,670,778 8.5% $ 43,000 8.2%
============== ================= ============== =============
Fair Value at 3/31/02 $ 1,668,010 $ 43,000
============== ==============
</TABLE>
Upon the issuance in February 2002 of $200 million aggregate principal amount of
9.13% senior unsecured notes due 2011, we reduced the borrowings under our
senior secured credit agreement by $195.0 million. At that time, we converted
some swap agreements to non-hedging derivatives. As a result of this financing,
we redesignated some swap agreements as non-hedging derivatives. These swap
agreements had notional principal amounts of approximately $200 million and were
originally designated to hedge variable rate borrowings under our senior secured
credit facility that were repaid. We recognized a $4.7 million loss when this
amount was transferred out of accumulated other comprehensive income because the
debt being hedged was repaid.
As of March 31, 2002, we had three swap agreements with notional principal
amounts totaling $300 million. All of these swap agreements have been converted
to non-hedging derivatives. The swap agreements effectively fix the 30-day LIBOR
between 4.77% and 6.4%. The swap agreements expire between December 2002 and
July 2003. For the three months ended March 31, 2002 and 2001, we have made net
payments of approximately $2.9 million and $0.1 million, respectively.
In anticipation of the August 1999 completion of our mortgage-backed secured
facility, we entered into two separate hedge transactions during July 1999. Upon
completion of the secured facility, we terminated the underlying treasury lock
agreements, resulting in a net payment to us of $5.1 million. This amount was
deferred and is being recognized as a reduction to interest expense over the
life of the underlying debt. As a result, the effective interest rate on the
secured facility is 7.76%.
Additionally, in anticipation of the August 1997 offering of $150 million
aggregate principal amount of our 8.75% senior subordinated notes due 2007, we
entered into separate hedge transactions during June and July 1997. Upon
completion of the subordinated notes offering, we terminated the underlying swap
agreements, resulting in a net payment to us of $836,000. This amount was
deferred and is being recognized as a reduction to interest expense over the
life of the underlying debt. As a result, the effective interest rate on the
subordinated notes is 8.69%.
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As of March 31, 2002, 97.5% of our debt was fixed and our overall weighted
average interest rate was 8.52%.
Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows during the three months ended March 31, 2002 and 2001. Additionally,
foreign currency transaction gains and losses were not material to our results
of operations for the years ended March 31, 2002 and 2001. Accordingly, we were
not subject to material foreign currency exchange rate risk from the effects
that exchange rate movements of foreign currencies would have on our future
costs or on future cash flows we would receive from our foreign subsidiaries. To
date, we have not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange rates.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
Information both included and incorporated by reference in this annual report on
Form 10-K may contain forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, and as such may
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements. Forward-looking statements, which are based on
certain assumptions and describe our future plans, 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
that could have a material adverse effect on our operations and future prospects
include, but are not limited to:
. the current slowdown of the national economy;
. economic conditions generally and the real estate market specifically;
. the impact of the September 11, 2001 terrorist attacks or actual or
threatened future terrorist incidents;
. legislative/regulatory changes, including changes to laws governing the
taxation of REITs;
. availability of capital;
. interest rates;
. competition;
. supply and demand for hotel rooms in our current and proposed market
areas; and
. changes in general accounting principles, policies and guidelines
applicable to REITs.
These risks and uncertainties, along with the risk factors set forth in our
Annual Report on Form 10-K for the year ended December 31, 2001 under "Risk
Factors", should be considered in evaluating any forward-looking statements
contained in this Form 10-Q.
We undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future events, or otherwise, other than
required by law.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.6 Form of Employment Agreement between MeriStar Hospitality Corporation and
Paul W. Whetsell.
13 Unaudited Financial Statements of MeriStar Hospitality Operating
Partnership, L.P. as of March 31, 2002 and December 31, 2001 and for the
three months ended March 31, 2002 and 2001.
99 Consolidating Financial Information of MeriStar Hospitality Operating
Partnership, L.P.
(b) Reports on Form 8-k
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MeriStar Hospitality Corporation
Dated: May 15, 2002 /s/ James A. Calder
_____________________
James A. Calder
Chief Accounting Officer
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</TEXT>
</DOCUMENT>