EX-13 4 dex13.txt EXHIBIT 13 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, 2002 December 31, 2001 -------------- ----------------- (unaudited) 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 25,966 23,441 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 $6,439 and $5,289 21,167 21,469 ----------- ----------- $ 3,011,556 $ 3,004,586 =========== =========== Liabilities, Minority Interests and Stockholders' Equity Accounts payable, accrued expenses and other liabilities $ 124,143 $ 123,972 Accrued interest 41,309 45,009 Due to MeriStar Hotels 3,968 -- Income taxes payable 82 310 Distributions payable 447 1,090 Deferred income taxes 6,849 7,130 Interest rate swaps 8,703 12,100 Notes payable to MeriStar Hospitality 357,214 357,117 Long-term debt 1,356,564 1,343,017 ----------- ----------- Total liabilities 1,899,279 1,889,745 ----------- ----------- Minority interests 2,650 2,639 Redeemable OP units at redemption value 82,117 67,012 Partners' capital - common OP units 44,654,578 and 44,524,147 issued and outstanding 1,027,510 1,045,190 ----------- ----------- $ 3,011,556 $ 3,004,586 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, --------- 2002 2001 ---- ---- 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 37,381 42,699 Property taxes, insurance and other 20,082 18,387 Depreciation and amortization 30,592 29,387 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 232,638 256,432 --------- --------- Net operating income 24,026 46,252 Interest expense, net 34,588 30,229 --------- --------- Income (loss) before minority interests, income tax expense (benefit), loss on sale of assets and extraordinary loss (10,562) 16,023 Minority interests 11 11 --------- --------- Income (loss) before income tax expense (benefit), loss on sale of assets and extraordinary loss (10,573) 16,012 Income tax expense (benefit) (249) 453 --------- --------- Income (loss) before loss on sale of assets and extraordinary loss (10,324) 15,559 Loss on sale of assets, net of tax effect of ($19) -- (1,062) Extraordinary loss on early extinguishments of debt, net of tax effect of ($17) -- (1,226) --------- --------- Net income (loss) $ (10,324) $ 13,271 Preferred distributions (141) (141) --------- --------- Net income (loss) applicable to common unitholders $ (10,465) $ 13,130 ========= =========
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Three months ended March 31, --------- 2002 2001 ---- ---- Net income (loss) applicable to common unitholders $ (10,465) $ 13,130 ========= ========= Net income (loss) applicable to general partner common unitholder $ (9,585) $ 11,970 ========= ========= Net income (loss) applicable to third party limited partner common unitholders $ (880) $ 1,160 ========= ========= Earnings per unit: Basic: Income (loss) before extraordinary loss $ (0.22) $ 0.29 Extraordinary loss -- (0.02) --------- --------- Net income (loss) $ (0.22) $ 0.27 ========= ========= Diluted: Income (loss) before extraordinary loss $ (0.22) $ 0.29 Extraordinary loss -- (0.02) --------- --------- Net income (loss) $ (0.22) $ 0.27 ========= =========
See accompanying notes to condensed consolidated financial statements. 5 MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL IN THOUSANDS UNAUDITED
Three months ended March 31, 2002 2001 ---- ---- Balance at beginning of year $ 1,045,190 $ 1,142,772 Net income (loss) (10,324) 13,271 Foreign currency translation adjustment 12 (974) Transition adjustment -- (2,842) Change in fair value of cash flow hedges 511 (4,793) ----------- ----------- Comprehensive income (loss) (9,801) 4,662 Reclassification of non-hedging derivatives 4,735 -- Contributions 3,155 280 Contribution from general partner related to amortization of unearned stock-based compensation 880 797 Repurchase of units (409) -- Allocations from (to) redeemable OP units (15,793) 2,674 Distributions (447) (24,283) ----------- ----------- Balance at end of period $ 1,027,510 $ 1,126,902 =========== ===========
6 MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS)
Three months ended March 31, --------- 2002 2001 ---- ---- Operating activities: Net income (loss) $ (10,324) $ 13,271 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 30,592 29,387 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 11 11 Amortization of unearned stock based compensation 880 797 Interest rate swaps marked to fair value (2,887) -- Deferred income taxes (281) 144 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 (342) (4,888) Accrued interest (3,700) 2,592 Income taxes payable (228) 283 --------- --------- Net cash provided by operating activities 9,141 47,792 --------- --------- 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 mortgages and notes payable 234,545 578,347 Principal payments on mortgages and notes payable (220,901) (541,720) Contributions from partners 3,155 280 Repurchase of units (409) -- Distributions paid to partners (1,264) (24,859) --------- --------- 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 2,525 18,740 Cash and cash equivalents, beginning of period 23,441 242 --------- --------- Cash and cash equivalents, end of period $ 25,966 $ 18,982 ========= =========
See accompanying notes to condensed consolidated financial statements. 7 MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 UNAUDITED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. ORGANIZATION We are a subsidiary operating partnership of MeriStar Hospitality Corporation. 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, as a result of the merger between CapStar Hotel Company and American General Hospitality Corporation, and the subsequent formation of MeriStar Hospitality, the merged entity. MeriStar Hospitality, a real estate investment trust, or REIT, is our general partner and owns a one percent interest in us as of March 31, 2002. The limited partners are as follows: . MeriStar LP, Inc., a wholly-owned subsidiary of MeriStar Hospitality, which owns approximately a 90 percent interest as of March 31, 2002; and . various third parties, which owned an aggregate interest of nine percent at March 31, 2002. Partners' capital includes the partnership interests of MeriStar Hospitality and MeriStar LP, Inc. MeriStar Hospitality held 482,838 common OP units as of March 31, 2002. MeriStar LP, Inc. held 44,171,740 common OP units as of March 31, 2002. Due to the redemption rights of the limited partnership units held by third parties, these units have been excluded from partner's capital and classified as Redeemable OP units and are recorded at redemption value. At March 31, 2002, there were 4,121,355 redeemable units outstanding. 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 8 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. 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. 9 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 first three months of 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 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 Mortgage debt and other ............. 51,687 52,335 ----------- ----------- 1,374,687 1,356,335 Notes payable to MeriStar Hospitality 359,300 359,300 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 ($1,226, 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. 10 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. DISTRIBUTIONS PAYABLE On March 20, 2002, we declared a dividend for the three months ended March 31, 2002 of $0.01 per unit of limited partnership interest. We paid the distributions on April 30, 2002. 6. EARNINGS PER UNIT The following table presents the computation of basic and diluted earnings per unit: Three months ended ------------------ March 31, --------- 2002 2001 ---- ---- BASIC EARNINGS (LOSS) PER UNIT COMPUTAION: Income (loss) before extraordinary loss $(10,324) $ 14,497 Dividends paid on unvested restricted stock (2) (183) Preferred distributions (141) (141) -------- -------- Income (loss) available to common unitholders (10,467) 14,173 Weighted average number of OP units outstanding 48,670 48,421 -------- -------- Basic earnings (loss) per unit before extraordinary loss $ (0.22) $ 0.29 ======== ======== DILUTED EARNINGS (LOSS) PER UNIT COMPUTATION: Income (loss) available to common unitholders $(10,467) $ 14,173 ======== ======== Weighted average number of OP units outstanding 48,670 48,421 Stock options of MeriStar -- 322 -------- -------- Total weighted average number of diluted OP units outstanding 48,670 48,743 ======== ======== Diluted earnings (loss) per unit before extraordinary loss $ (0.22) $ 0.29 ======== ======== Stock options and operating partnership units are not included in the computation of diluted earnings (loss) per share when their effect is antidilutive. 7. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended March 31, ---------------------------- 2002 2001 ---- ---- Cash paid for interest and income taxes: Interest, net of capitalized interest of $919 and $2,005 respectively $ 38,288 $ 27,637 Income taxes 82 994
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Non-cash investing and financing activities: Redemption of redeemable OP units -- 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) ======== ========
8. STOCK-BASED COMPENSATION As of March 31, 2002, MeriStar Hospitality has granted 479,000 shares of restricted stock to employees. This restricted stock vests ratably over three-year or five-year periods. As of March 31, 2002, we have granted 737,500 Profits-Only OP Units, or POPs, to some of 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 ($1,062, net of tax). 11. CONSOLIDATING FINANCIAL INFORMATION Certain of our subsidiaries and MeriStar Hospitality are guarantors of our senior unsecured notes. Our guarantor subsidiaries also guarantee the unsecured subordinated notes of MeriStar Hospitality. All guarantees are full and unconditional, and joint and several. Exhibit 99 to this Quarterly Report on Form 10-Q presents supplementary consolidating information for us, our non-guarantor subsidiaries, and each of our guarantor subsidiaries. The supplementary consolidating information in Exhibit 99 presents our consolidating balance sheets as of March 31, 2002 and December 31, 2001, and consolidating statements of operations and cash flows for 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 Hotel's common stock and operating partnership units will continue to hold their stock and units following the 12 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. 13