-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MhmvaqUlBD2w8rprjqajUxR0DVJI0ut5Ng+b9rL1/ja0r4poQER9XZ9GOMZAr3Yd 9yvDx+WBmORe/jAw6XNiWQ== 0000928385-02-002000.txt : 20020515 0000928385-02-002000.hdr.sgml : 20020515 ACCESSION NUMBER: 0000928385-02-002000 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERISTAR HOTELS & RESORTS INC CENTRAL INDEX KEY: 0001059341 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 510379982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14331 FILM NUMBER: 02648243 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE N W CITY: WASHINGTON STATE: DC ZIP: 20007 10-Q 1 d10q.txt FORM 10-Q UNITED STATES 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 1-14331 MERISTAR HOTELS & RESORTS, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 51-0379982 (State of Incorporation) (IRS Employer Identification No.) 1010 WISCONSIN AVENUE, N.W. WASHINGTON, D.C. 20007 (Address of Principal Executive Offices)(Zip Code) 202-965-4455 (Registrant's Telephone Number, Including Area Code) NONE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 37,188,574. MERISTAR HOTELS & RESORTS, INC. 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...................................... 5 Notes to Condensed Consolidated Financial Statements............................ 6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 12 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................................... 20 PART II. OTHER INFORMATION ITEM 5: OTHER INFORMATION............................................................... 21 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K................................................ 21
2 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, 2002 December 31, 2001 -------------- ----------------- (unaudited) Assets Current Assets: Cash and cash equivalents................................................... $ 8,342 $ 4,584 Accounts receivable, net of allowance for doubtful accounts of $3,493 and $3,422................................................................ 10,221 10,155 Due from MeriStar Hospitality Corporation................................... 3,968 - Prepaid expenses............................................................ 6,869 5,668 Deposits and other.......................................................... 2,924 3,527 -------- --------- Total current assets............................................................... 32,324 23,934 -------- --------- Fixed assets: Furniture, fixtures, and equipment............................................ 32,576 32,595 Accumulated depreciation...................................................... (16,099) (14,712) -------- --------- Total fixed assets, net............................................................ 16,477 17,883 -------- --------- Investments in and advances to affiliates.......................................... 30,019 30,003 Goodwill and intangible assets, net of accumulated amortization of $9,137 and $18,498.................................................................. 163,303 163,352 Deferred income taxes.............................................................. 8,954 7,765 -------- --------- $251,077 $ 242,937 ======== ========= Liabilities, Minority Interests, and Stockholders' Equity Current Liabilities: Accounts payable, accrued expenses and other liabilities...................... $ 50,431 $ 50,149 Due to MeriStar Hospitality Corporation....................................... - 8,877 Income taxes payable.......................................................... 600 1,300 Long-term debt, current portion............................................... 80,000 10,000 -------- --------- Total current liabilities.......................................................... 131,031 70,326 Derivative financial instruments................................................... 105 687 Long-term debt..................................................................... 58,069 108,500 -------- --------- Total liabilities.................................................................. 189,205 179,513 -------- --------- Minority interests................................................................. 6,031 6,293 Stockholders' equity: Common stock, par value $0.01 per share: Authorized - 100,000 shares Issued and outstanding - 37,189 shares.................................... 372 372 Additional paid-in capital.................................................... 78,841 78,841 Deficit....................................................................... (22,876) (21,093) Accumulated other comprehensive income (loss): Translation adjustment.................................................... (423) (313) Unrealized loss on derivative financial instruments....................... (105) (687) Unrealized gain on investments............................................ 32 11 -------- --------- Total stockholders' equity......................................................... 55,841 57,131 -------- --------- $251,077 $ 242,937 ======== =========
See accompanying notes to condensed consolidated financial statements. 3 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, --------- 2002 2001 ---- ---- Revenue: Rooms..................................................... $ 28,591 $ 37,540 Food and beverage......................................... 1,769 3,134 Other operating departments............................... 1,248 1,944 Corporate housing......................................... 24,246 24,449 Management and other fees................................. 10,656 12,683 --------- --------- 66,510 79,750 Other revenue from managed properties.................... 112,399 120,840 --------- --------- Total revenue................................................ 178,909 200,590 --------- --------- Operating expenses by department Rooms..................................................... 6,506 8,505 Food and beverage......................................... 1,318 2,340 Other operating departments' expenses..................... 789 1,042 Corporate housing......................................... 18,821 17,341 Undistributed operating expenses: Administrative and general................................ 17,197 19,162 Property operating costs.................................. 6,775 8,964 Participating lease expense............................... 12,652 16,136 Depreciation and amortization............................. 2,229 3,135 Merger costs.............................................. 260 3,771 Charges to investments in and advances to affiliates, accounts and notes receivables, and other............. - 15,298 --------- --------- 66,547 95,694 Other expenses from managed properties....................... 112,399 120,840 --------- --------- Total operating expenses..................................... 178,946 216,534 --------- --------- Net operating loss........................................... (37) (15,944) Interest expense, net........................................ 2,836 2,885 Equity in (income) loss of affiliates........................ 234 (113) --------- --------- Loss before minority interests and income taxes.............. (3,107) (18,716) Minority interests........................................... (135) (672) --------- --------- Loss before income taxes..................................... (2,972) (18,044) Income tax benefit........................................... (1,189) (7,218) --------- --------- Net loss..................................................... (1,783) (10,826) Other comprehensive loss: Foreign currency translation adjustment.................. (110) (848) Unrealized gain (loss) on derivative financial instruments 582 (358) Unrealized gain on investments........................... 21 23 --------- --------- Comprehensive loss........................................... $ (1,290) $ (12,009) ========== ========== Loss per share: Basic.................................................. $ (0.05) $ (0.30) ========== ========== Diluted................................................ $ (0.05) $ (0.30) ========== =========
See accompanying notes to condensed consolidated financial statements. 4 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS)
Three months ended March 31, --------- 2002 2001 ---- ---- Operating activities: Net loss............................................................................. $ (1,783) $ (10,826) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................................... 2,229 3,135 Minority interests.............................................................. (135) (672) Equity in (income) loss of affiliates........................................... 234 (113) Deferred income taxes........................................................... (1,189) (7,415) Charges to investments in and advances to affiliates, accounts and notes receivables, and other...................................... - 15,298 Changes in operating assets and liabilities, excluding effects of assignment of leases to MeriStar Hospitality Corporation and acquisitions: Accounts receivable, net.................................................... (66) 6,403 Prepaid expenses............................................................ (1,201) (38) Deposits and other.......................................................... 603 686 Accounts payable, accrued expenses and other liabilities.................... 282 (4,515) Income taxes payable........................................................ (700) (5) Due to MeriStar Hospitality Corporation..................................... 224 (11,513) -------- --------- Net cash used in operating activities................................................ (1,502) (9,575) -------- --------- Investing activities: Purchases of fixed assets....................................................... (146) (446) Purchases of intangible assets.................................................. (114) (20) Investments in and advances to affiliates, net.................................. (192) (1,056) Hotel operating cash transferred in connection with lease conversions........... - (3,778) -------- --------- Net cash used in investing activities................................................ (452) (5,300) -------- --------- Financing activities: Proceeds from issuance of long-term debt........................................ 9,000 36,000 Principal payments on long-term debt............................................ (2,500) (18,055) Proceeds from issuances of common stock, net.................................... - 175 Contributions by minority investors............................................. - 25 Distributions to minority investors............................................. (127) - Deferred financing costs........................................................ (612) - -------- --------- Net cash provided by financing activities............................................ 5,761 18,145 -------- --------- Effect of exchange rate changes on cash.............................................. (49) (365) -------- --------- Net increase in cash and cash equivalents............................................ 3,758 2,905 Cash and cash equivalents, beginning of period....................................... 4,584 7,645 -------- --------- Cash and cash equivalents, end of period............................................. $ 8,342 $ 10,550 ======== =========
See accompanying notes to condensed consolidated financial statements. 5 MERISTAR HOTELS & RESORTS, INC. MARCH 31, 2002 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. ORGANIZATION 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. 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 63 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. We have an intercompany agreement with MeriStar Hospitality. That agreement provides each of us the right to participate in certain transactions entered into by the other company. The intercompany agreement provides MeriStar Hospitality with a right of first refusal with respect to some of our hotel real estate opportunities and it also provides us with a right of first refusal with respect to some of MeriStar Hospitality's hotel management opportunities (excluding hotels that MeriStar Hospitality elects to have managed by a hotel brand). We also provide each other with certain services including administrative, renovation supervision, corporate, accounting, finance, risk management, legal, tax, information technology, human resources, acquisition identification and due diligence and operational services. 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. We operate our corporate housing division under the name BridgeStreet Corporate Housing Worldwide. Until January 1, 2001, we leased MeriStar Hospitality's hotels and operated them. 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 as a result of these transactions except for the transfer of hotel operating assets and liabilities to the taxable subsidiaries. Under the 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 (except for four agreements which have annual terms) 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 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 and represents 300 units. Apalachee Bay has been renamed BridgeStreet Paris. Our consolidated financial statements include the operating results of BridgeStreet Paris since August 17, 2001. As of March 31, 2002, we leased or managed 277 hotels with 58,311 rooms in 43 states, the District of Columbia and Canada. In addition, at March 31, 2002, we had 3,286 apartments under lease in the United States, Canada, the United Kingdom and France. 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 6 statements should be read in conjunction with the financial statements, accompanying notes and other information included in our Annual Report on Form 10-K 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. Our management agreements with the taxable subsidiaries of MeriStar Hospitality (except for four agreements which have annual terms) have initial terms of 10 years, with three five-year extensions at our option. The annual base management fee is 2.5% of total hotel revenue with incentives of up to an additional 1.5% of total hotel revenue based in part on our achievement of specified operating thresholds. Our hotel participating leases have noncancelable remaining terms ranging from 9 to 12 years, subject to earlier termination upon the occurrence of certain contingencies as defined in the leases. The rent payable under each participating lease is the greater of base rent or percentage rent, as defined. Percentage rent applicable to room and food and beverage hotel revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index. Percentage rent applicable to other revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods", requires a lessee to recognize contingent rental expense for interim periods prior to the achievement of the specified target that triggers the contingent rental expense, if the achievement of that target by the end of the fiscal year is considered probable. This accounting pronouncement relates only to our recognition of lease expense in interim periods for financial reporting purposes; it has no effect on the timing of rent payments under our leases or our annual lease expense calculations In June 2001, the FASB issued SFAS No. 141, "Business Combinations". This standard requires that all business combinations be accounted for using the purchase method of accounting. The adoption of this statement, on January 1, 2002, did not have an impact on our financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". This standard requires among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that we identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of our existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of our intangible assets within the first quarter after adoption. We completed our initial impairment evaluation as of January 1, 2002, the date of adoption. In this transitional analysis and at least annually hereafter, we will perform an analysis to determine the impairment of goodwill and intangible assets' (with indefinite lives) carrying values. To test intangible assets with indefinite lives for impairment, we perform an analysis to compare the fair value of the intangible asset to its carrying value. We make estimates of the fair value of the intangible asset using discounted cash flows from the expected future operations of the assets. If the analysis indicates that the fair value is less than the carrying value, the asset is written down to the estimated fair value and an impairment loss is recognized. To test goodwill for impairment, we perform an analysis to compare the fair value of the reporting unit to which the goodwill is assigned to the carrying value of the reporting unit. We make estimates of the discounted cash flows from the expected future operations of the reporting unit. If the analysis indicates that the fair value of the reporting unit is less than its carrying value, we do an analysis to compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The excess of the fair value of reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized in an amount equal to that excess. Any impairment losses are recorded as operating expenses. We did not recognize any impairment losses in 2002 related to the initial impairment evaluation. 7 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets. The implementation of the provisions of SFAS No. 143 is required effective January 1, 2003. We do not expect the implementation of this statement to have a significant impact on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment and disposal of long-lived assets. The adoption of this statement, on January 1, 2002, did not have an impact on our financial position or results of operations. In 2001, the FASB issued Topic No. D-103, "Income Statement Characterization of Reimbursements for Out-of-Pocket Expenses Incurred". In January, 2002, the Emerging Issues Task Force recharacterized Topic No. D-103 to EITF No. 01-14. This pronouncement establishes standards for accounting for reimbursements received for out-of-pocket expenses incurred and the characterization as revenue and expense in the income statement. Pursuant to this pronouncement, revenue and expenses from managed properties are included in our reported results beginning January 1, 2002. These amounts relate primarily to payroll costs at managed properties where we are the employer, and the reimbursement to us for those costs. The 2001 revenue and expenses have been reclassified to conform with the 2002 presentation. On May 7, 2002, we issued a press release that contained financial results for the quarters ended March 31, 2002 and 2001; those results did not include the revenues and expenses from managed properties shown in our consolidated financial statements in this Form 10-Q. Subsequent to our press release, we have concluded that the presentation in this Form 10-Q is the appropriate way in which to disclose this information pursuant to the new FASB guidance. This new presentation has no effect on our operating loss, net loss or EPS calculation. 3. LONG-TERM DEBT Long-term debt consists of the following:
March 31, December 31, 2002 2001 ---- ---- Senior secured credit facility................................... $ 80,000 $ 82,500 Revolving credit facility with MeriStar Hospitality Corporation.. 45,000 36,000 Term loan with MeriStar Hospitality Corporation.................. 13,069 - -------- -------- 138,069 118,500 Less current portion............................................. (80,000) (10,000) -------- -------- $ 58,069 $108,500 ======== ========
Senior Secured Credit Facility--On February 29, 2000, we entered into a $100,000 senior secured credit facility among a syndicate of banks. Our senior secured credit facility has only a revolving credit facility and no term facilities. The interest rate on the facility was the 30-day London Interbank Offered Rate plus 350 basis points. The senior secured credit facility originally was to expire in February 2002, with a one-year extension at our option. The senior credit facility contains certain covenants, including maintenance of financial ratios at the end of each quarter, reporting requirements and other customary restrictions. On January 28, 2002, we amended our senior secured credit facility to provide more flexibility with certain financial covenants and allow us to extend the maturity from February 2002 until February 2003. The interest rate on the facility was increased to the 30-day London Interbank Offered Rate plus 450 basis points. In addition, the amendment reduced our availability to $82,500. The amendment also sets restrictions on investments and capital expenditures as well as requiring that availability under the facility be reduced by $2,500 on each of February 28, 2002, June 30, 2002, September 30, 2002 and December 31, 2002. In addition, on January 31, 2003, the amount available under the senior credit facility will be further reduced by the amount that our EBITDA for 2002 exceeds $20,000. We met our obligation to reduce the facility by $2,500 in February 2002. The entire balance of $80,000 due on this facility is classified as short term on the Condensed Consolidated Balance Sheet at March 31, 2002. The interest rate on borrowings under our senior credit facility as of March 31, 2002 was 6.4%. We incurred interest expense of $1,243 and $2,210 on this facility during the first quarters of 2002 and 2001, respectively. Revolving Credit Facility with MeriStar Hospitality--In 1998, we entered into a three-year, $75,000 unsecured revolving credit facility with MeriStar Hospitality. This facility was subsequently amended on February 29, 2000 to reduce the maximum borrowing limit to $50,000 and to change the maturity date to 91 days after the maturity of our senior secured credit facility. The credit facility contains certain covenants, including maintenance of financial ratios, reporting requirements and other customary restrictions. On January 25, 2002, we amended our credit facility with MeriStar Hospitality Corporation to provide financial covenant relief similar to that in our senior credit facility. The maturity date and interest rate remained the same. Interest on the facility is variable, based on the 30-day London Interbank Offered Rate plus 650 basis points. The interest rate as of March 31, 2002 was 8.4%. We incurred interest expense of $908 and $1,075 on this facility during the first quarters of 2002 and 2001, respectively. Term Note with MeriStar Hospitality-- 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 $13,069, which refinances our account payable due to MeriStar Hospitality. The Term Note bears interest at the 30-day London Interbank Offered 8 Rate plus 650 basis points and matures on the same date as the revolving credit facility with MeriStar Hospitality. The interest rate as of March 31, 2002 was 8.4%. We incurred interest expense of $273 on this facility during the first quarter of 2002. We have determined that the fair value of our outstanding borrowings on our senior credit facility, and notes payable to MeriStar Hospitality approximates their carrying values at March 31, 2002. 4. LOSS PER SHARE The following tables present the computation of basic and diluted loss per share:
Three Months Ended March 31, --------- 2002 2001 ---- ---- Net loss.................................................. $ (1,783) $(10,826) Weighted average number of shares of common stock outstanding (in thousands)............................ 37,189 36,401 --------- -------- Basic and diluted loss per share.......................... $ (0.05) $ (0.30) ========== ========
Stock options and operating partnership units are not included in the computation of diluted loss per share when their effect is antidilutive. 5. GOODWILL AND INTANGIBLE ASSETS Amortized intangible assets consists of the following:
March 31, 2002 December 31, 2001 -------------- ----------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ Management Contract Costs $34,677 $(6,245) $34,563 $(5,779) Franchise Fees 637 (223) 637 (212) Lease Contract Costs 6,576 (953) 6,576 (898) Deferred Financing Costs 2,260 (1,716) 1,647 (1,474) ------- ------- ------- ------- Total $44,150 $(9,137) $43,423 $(8,363) ======= ======= ======= =======
We incurred aggregate amortization expense of $774 and $600 on these assets during the first quarters of 2002 and 2001, respectively. Estimated Amortization Expense for the next five years is expected to be as follows: Year ended December 31, 2002 $2,862 Year ended December 31, 2003 $2,182 Year ended December 31, 2004 $2,127 Year ended December 31, 2005 $1,787 Year ended December 31, 2006 $1,750 Our unamortized intangible asset consists of costs incurred for the Doral tradename. At March 31, 2002 and December 31, 2001 this asset had a carrying value of $3,358. As of January 1, 2002, we no longer record amortization related to this asset. The carrying amount of goodwill by reportable segment as of March 31, 2002 is as follows: Hospitality Management $ 90,740 Corporate Housing 34,192 -------- Total $124,932 -------- We had no changes in the carrying amount of goodwill during the three months ended March 31, 2002. SFAS 142 requires that we cease amortization of goodwill and intangible assets with an indefinite useful life. We initially applied this statement on January 1, 2002. Net loss and loss per share are presented for the three months ended March 31, 2001 as if the statement 9 had been adopted on January 1, 2001.
For the Three months Ended March 31, ------------------------------------ 2002 2001 ---- ---- Reported Net Loss $ (1,783) $ (10,826) Add back: Goodwill amortization - 527 Add back: Doral tradename amortization - 13 -------- --------- Adjusted Net Loss $ (1,783) $(10,286) ========= =========
For the Three months Ended March 31, ------------------------------------ 2002 2001 ---- ---- Basic and Diluted Loss per Share $ (0.05) $ (0.30) Add back: Goodwill amortization - 0.02 Add back: Doral tradename amortization - - -------- --------- Adjusted Basic and Diluted Loss Per Share $ (0.05) $ (0.28) ========= =========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended March 31, --------- 2002 2001 ---- ----- Cash paid for interest and income taxes: Interest................................................................ $ 2,370 $ 2,380 Income taxes............................................................ 772 362 Non-cash investing and financing activities: Conversion of operating partnership units to common stock........... - 3,597 Operating assets and liabilities transferred in lease conversion: Accounts receivable............................................... - 52,072 Prepaid expenses.................................................. - 1,478 Deposits and other................................................ - 6,462 Furniture, fixtures and other, net................................ - 152 Investments in and advances to affiliates......................... - 1,796 -------- -------- Total operating assets transferred........................ $ - $ 61,960 ======== ======== Accounts payable and accrued expenses............................. $ - $ 65,706 Long-term debt.................................................... - 32 -------- -------- Total liabilities transferred............................. $ - $ 65,738 ======== ========
7. SEGMENTS We are organized into two operating divisions: hotel management and corporate housing, both of which are reportable operating segments. Each division is managed separately because of its distinctive products and services. In 2001, we reorganized our golf operations and included them in our hotel management segment. We also eliminated our vacation ownership segment in 2001. We evaluate the performance of each division based on earnings before interest, taxes, depreciation, and amortization.
Hotel Corporate Financial Management Housing Other Statements ---------- ------- ----- ---------- Three months ended March 31, 2002 Revenues................................................... $ 42,250 $ 24,246 $ 14 $ 66,510 Earnings before interest, taxes, depreciation, and amortization........................................ $ 3,640 $ (1,131) $ (551) $ 1,958 Total assets............................................... $187,540 $ 54,055 $ 9,482 $ 251,077 Three months ended March 31, 2001 Revenues................................................... $ 55,188 $ 24,486 $ 76 $ 79,750 Earnings before interest, taxes, depreciation, and amortization........................................ $ 6,362 $ (157) $(18,901) $ (12,696) Total assets............................................... $197,088 $ 53,177 $ 4,715 $ 254,980
10 The other items in the tables above represent operating segment activity and assets for the non-reportable segments. The non-operating segment activity includes merger costs, charges to investments and advances to affiliates, accounts and notes receivable, equity in earnings (losses), and other costs. The non-operating segment assets include deferred tax assets and deferred financing costs. Revenues for foreign operations for the three months ended March 31 were as follows: 2002 2001 ----- ---- Canada $2,151 $3,074 United Kingdom $6,605 $7,033 France $ 85 $ - 8. RESTRUCTURING EXPENSES At December 31, 2001, we had restructuring accruals of $205 remaining relating to lease termination costs incurred in connection with closing offices in four BridgeStreet markets and realigning and eliminating certain administrative functions within the corporate housing division. During the first quarter of 2002, we applied $29 in lease termination costs against the restructuring accrual, of which $176 remains at March 31, 2002. Also at December 31, 2001, we had restructuring accruals of $315 relating to severance costs incurred as a result of the elimination of approximately 15 corporate positions. These actions were taken as a result of declines in our business due to the slowdown of the national economy. During the first quarter of 2002, we applied $315 against the restructuring accrual. No accrual remains at March 31, 2002. During the second quarter of 2002, we expect to record restructuring charges of approximately $700 in our corporate housing division, primarily due to closing of an underperforming market within the corporate housing division. 9. SUBSEQUENT EVENT On May 2, 2002, we announced an agreement to merge with Interstate Hotels Corporation, or Interstate. The transaction will be a stock-for-stock merger of Interstate into MeriStar in which Interstate stockholders will receive 4.6 shares of common stock for each share of Interstate stock outstanding. Holders of MeriStar common stock and operating partnership units will continue to hold their stock and units following the merger. In connection with the merger, Interstate's convertible debt and preferred equity shares will be converted into shares of common stock of the surviving company. A new $113 million senior credit facility will replace the senior secured credit facilities of MeriStar and Interstate. We expect the new facility to have a three-year term loan and three-year revolver with a one-year option to extend. We expect the interest rate on the facility to range from London Interbank Offered Rate plus 300 basis points to London Interbank Offered Rate plus 450, based on certain financial covenant levels. The combined company will operate approximately 86,000 rooms in 412 hotels. We have incurred $260 in costs related to this merger in the first quarter of 2002. We expect the transaction to close in the third quarter of 2002. 11 ITEM 2. 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. We operate our corporate housing division under the name BridgeStreet Corporate Housing Worldwide or BridgeStreet. Until January 1, 2001, we leased MeriStar Hospitality's hotels and operated them. 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 and represents 300 units. Apalachee Bay has been renamed BridgeStreet Paris. Our consolidated financial statements include the operating results of BridgeStreet Paris since August 17, 2001. In April 2002, we launched a national licensing program within our Corporate Housing segment. This licensing program, called Global Partner Licensing Program, creates a national distribution system of professional corporate housing providers nationwide. Our licensees will have access to this distribution system as well as other marketing, training and communication tools. The following table outlines our portfolio of managed and leased hotel properties as of the dates indicated:
Managed Leased Total ------- ------ ----- Properties Rooms Properties Rooms Properties Rooms ---------- ----- ---------- ----- ---------- ----- March 31, 2002............ 229 51,730 48 6,581 277 58,311 December 31, 2001......... 229 51,880 48 6,581 277 58,461 March 31, 2001............ 216 47,692 51 7,344 267 55,036
As discussed above, effective January 1, 2001, we converted 106 leases with MeriStar Hospitality to long-term management contracts. In addition, in the fourth quarter of 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 believe management contracts provide an inherently better alignment of interests between a hotel's owner and operator. BUSINESS SUMMARY The sluggish economy and delays and difficulties in travel due to heightened security measures at airports continue to have a major impact on our operating results. This is expected to continue throughout the remainder of 2002. In response to this current operating environment, we are continuing to work with the owners of hotel properties we manage to implement cost reduction and control measures to positively affect those properties' operating results. In our corporate housing segment, we are continuing to closely monitor our inventory of leased housing units in order to adjust that inventory appropriately in light of current slower demand levels. 12 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 increased 100 basis points to the 30-day London Interbank Offered Rate plus 450 basis points. In addition, the amendment reduced our availability to $82.5 million. The amendment also sets restrictions on investments and capital expenditures. The availability under our senior secured credit facility will 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 by the amount that our earnings before interest, taxes, depreciation and amortization for 2002 exceeds $20 million. We met our obligation to reduce availability under the facility by $2.5 million on February 28, 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. 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 these standards. On May 2, 2002, we announced an agreement to merge with Interstate. The transaction will be a stock-for-stock merger of Interstate into MeriStar in which Interstate stockholders will receive 4.6 shares of common stock for each share of Interstate stock outstanding. Holders of MeriStar common stock and operating partnership units will continue to hold their stock and units following the merger. In connection with the merger, Interstate's convertible debt and preferred equity shares will be converted into shares of common stock of the surviving company. A new $113 million senior credit facility will replace the senior secured credit facilities of MeriStar and Interstate. We expect the new facility to have a three-year term loan and three-year revolver with a one-year option to extend. We expect the interest rate on the facility to range from London Interbank Offered Rate plus 300 basis points to London Interbank Offered Rate plus 450, based on certain financial covenant levels. The combined company will operate approximately 86,000 rooms in 412 hotels. We have incurred $260 in costs related to the merger during the three months ended March 31, 2002. We expect the transaction to close in the third quarter of 2002. 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 In accordance with FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets", whenever events or changes in circumstances indicate that the carrying values of long -lived assets (intangibles with definite useful lives) 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. We did not recognize any impairment losses in 2002 or 2001. We review long-lived assets for impairment when one or more of the following events have occurred: 13 a. Current or immediate short-term (future twelve months) projected cash flows are significantly less than the most recent historical cash flows. b A significant loss of management contracts without the realistic expectation of a replacement. c. The unplanned departure of an executive officer or other key personnel, which could adversely affect our ability to maintain our competitive position and manage future growth. d A significant adverse change in legal factors or an adverse action or assessment by a regulator, which could affect the value of the goodwill or other long-lived assets. e. Events which could cause significant adverse changes and uncertainty in business and leisure travel patterns. In accordance with FASB Statement No. 142, "Goodwill and Other Intangible Assets," at least annually, we perform an analysis to determine the impairment of goodwill and intangible assets' (with indefinite lives) carrying values. To test intangible assets with indefinite lives for impairment, we perform an analysis to compare the fair value of the intangible asset to its carrying value. We make estimates of the fair value of the intangible asset using discounted cash flows from the expected future operations of the assets. If the analysis indicates that the fair value is less than the carrying value, the asset is written down to the estimated fair value and an impairment loss is recognized. To test goodwill for impairment, we perform an analysis to compare the fair value of the reporting unit to which the goodwill is assigned to the carrying value of the reporting unit. We make estimates of the discounted cash flows from the expected future operations of the reporting unit. If the analysis indicates that the fair value of the reporting unit is less than its carrying value, we do an analysis to compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The excess of the fair value of reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying value, an impairment loss shall be recognized in an amount equal to that excess. Any impairment losses are recorded as operating expenses. We did not recognize any impairment losses in 2002 or 2001. We make estimates of the undiscounted and discounted cash flows from the expected future operations of the asset. In projecting the expected future operations of the asset, we base our estimates on future budgeted earnings before income taxes, depreciation and amortization 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. 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. In the fourth quarter of 2001, we recorded a $7.9 million valuation allowance 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 other factors. Our actual results may differ from these estimates. Based on actual results or a revision in future estimates, we might determine that we would not be able to realize additional portions of our net deferred tax assets in the future. If that occurred, we would record a charge to the income tax provision in that period. We also might determine that we would be able to realize all or part of the deferred tax assets covered by the existing valuation allowance. If that occurred, we would record a credit to the income tax provision in that period. We record an allowance for doubtful accounts based on our judgment in determining the ability and willingness of our customers to make required payments. Our judgments in determining customers' ability and willingness are based on past experience with customers and our assessment of the current and future operating environments for our customers. If a customer's financial condition deteriorates or a management contract is terminated in the future, this could decrease a customer's ability or obligation to make payments. If that occurred, we might have to make additional allowances, which could reduce our earnings. Restructuring and Other Accruals During 2001, the slowing national economy negatively affected our operations. In response, we implemented restructuring plans to reduce our overhead costs. These plans included termination of some personnel positions as well as the abandonment of some leases. During the second quarter of 2002, we expect to record restructuring charges based on a plan to shut down a market in our corporate housing division. We accrue the total estimated cost of the restructuring at the time the plans are finalized and communicated to our 14 employees. These estimates require our judgment as to the outcome of net lease costs. If actual results differ from our estimates, we will be required to adjust our financial statements when we identify the differences. Derivative Instruments and Hedging Activities We enter into derivative instruments for cash flow hedging purposes to limit the impact of interest rate changes on earnings and cash flows. We have designated our interest rate swap agreements as hedges against changes in future cash flows associated with the interest payments of our variable rate debt obligations. Accordingly, we reflect the interest rate swap agreements at fair value in our consolidated balance sheet as of March 31, 2002, and we record in stockholders' equity the related unrealized gains and losses on these contracts. 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. RESULTS OF OPERATIONS Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001 Revenues - -------- We earn revenue from leased hotels, management contracts and related services, and corporate housing operations. We recognize revenue from our leased hotels from their rooms, food and beverage, and other operating departments as earned at the close of each business day. Our management and other fees consist of base and incentive management fees received from third-party owners of hotel properties, and fees for other related services we provide. We recognize base fees and fees for other services as revenue when earned in accordance with the individual management contracts. In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", we accrue incentive fees in the period when we are certain they are earned. For contracts with annual incentive fee measurements, we typically will record any incentive fees in the last month of the annual contract period. In connection with FASB issued topic D-103, "Income Statement Characterization of Reimbursements for Out-of Pocket Expenses Incurred," we have reported revenue and expenses from managed properties in our reported results beginning January 1, 2002. These amounts relate primarily to payroll costs at the managed properties where we are the employer, and the reimbursement to us for those costs. The 2001 revenue and expenses have been reclassified to conform with the 2002 presentation. The following table shows the operating statistics for our full-service managed and limited-service leased hotels on a same store basis for the three months ended March 31: 2002 2001 Change ---------- --------- ------ Revenue per available room...... $ 63.79 $ 76.77 (16.9%) Average daily rate.............. $ 101.69 $ 111.58 (8.9%) Occupancy....................... 62.7% 68.8% (8.9%) Our total revenue decreased $21.7 million to $178.9 million in the first three months of 2002 compared to $200.6 million in the first three months of 2001. Major components of this decrease were: . Our revenue from our leased hotels (from rooms, food and beverage and other operating departments) decreased $11.0 million, resulting from the conversion of three leases to management contracts as well as the lower average daily rate and occupancy in the properties that existed in both periods presented. . Our revenue from existing management contracts decreased $2.0 million due to lower revenues at our managed hotels, as shown by lower occupancy and average daily rates in 2002 compared to the same period in 2001. . Other revenue from managed properties (consisting of payroll costs reimbursed to us by the hotels we manage) decreased $8.4 million due to the reduction in the number of employees at the hotels. Operating expenses by department - -------------------------------- Our operating expenses by department (rooms, food and beverage, other operating department expenses and corporate housing) decreased $1.8 million to $27.4 million in the first three months of 2002 compared to $29.2 million in the first three months of 2001. Major components of this decrease were: . Our corporate housing expenses increased $1.5 million primarily due to increased rates on apartment leases. . Our operating expenses from our leased hotels (from rooms, food and beverage and other department expenses) decreased $3.3 million. This was a direct result of the decrease in revenue from our leased hotels described above. 15 Undistributed operating expenses - -------------------------------- Our undistributed operating expenses include the following items: . administrative and general; . property operating costs; . participating lease expense; . depreciation and amortization; . loss on asset impairment, merger and lease conversion costs; . charges to investments in and advances to affiliates, accounts and notes receivable, and other; . and restructuring expenses. Our total undistributed operating expenses decreased $27.4 million to $39.1 million in the first three months of 2002 compared to $66.5 million in the first three months of 2001. Major components of this are described in the following paragraphs. Administrative and general expenses are associated with the management of hotels and corporate housing facilities and consist primarily of expenses such as operations management, sales and marketing, finance, information technology support, human resources and other support services, as well as general corporate expenses. Administrative and general expenses decreased by $2.0 million from $19.2 million in the first three months of 2001 to $17.2 million in the first three months of 2002. Approximately $1.1 million of this decrease was due to the conversion of three leased properties to management contracts. The remaining decrease is attributable to the realization of cost savings from restructuring plans carried out in 2001. Property operating costs include energy costs, repairs and maintenance, franchise fees, insurance, taxes, management fees and other expenses. Property operating costs decreased by $2.2 million from $9.0 million in the first three months of 2001 to $6.8 million in the first three months of 2002. Approximately $1.1 million of the decrease was due to the conversion of three leased properties to management contracts. The remainder of the decrease related primarily to lower energy and franchise costs in existing properties, which is a result of lower revenue during 2002. Participating lease expense represents base rent and participating rent that is based on a percentage of rooms and food and beverage revenues from the leased hotels. Participating lease expense decreased by $3.4 million from $16.1 million in the first three months of 2001 to $12.7 million in the first three months of 2002. Approximately $1.8 million of the decrease was due to the conversion of three leased properties to management contracts. The remainder of the decrease is directly attributable to the decrease in revenue from existing leased hotels. Depreciation and amortization decreased by $0.9 million from $3.1 million in the first three months of 2001 to $2.2 million in the first three months of 2002. This decrease is a result of the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets on January 1, 2002. This pronouncement requires, among other things, that we no longer amortize goodwill, but instead test goodwill for impairment at least annually. Merger costs decreased by $3.5 million from $3.8 million in the first three months of 2001 to $0.3 million in the first three months of 2002. Merger costs of $3.8 million for the first three months of 2001 included the expenses related to our proposed merger with American Skiing Company. On March 22, 2001, we and the other parties to the merger agreement mutually agreed to terminate the agreement. There were no termination fees payable to any of the parties. Merger costs of $0.3 million in the first three months of 2002 relate to our proposed merger with Interstate Hotels Corporation, announced on May 2, 2002. Charges to investments in and advances to affiliates, accounts and notes receivable, and other includes reserves against accounts and notes receivables and charges to write-off the remaining book values of impaired and abandoned assets. We incurred expenses totaling $15.3 million in the first three months of 2001. We did not experience any of these expenses in the first three months of 2002. Other expenses from managed properties - -------------------------------------- In connection with EITF No. 01-14, "Income Statement Characterization of Reimbursements for Out-of Pocket Expenses Incurred", we have reported revenue and expenses from managed properties in our reported results beginning January 1, 2002. These amounts relate primarily to payroll costs at the managed properties where we are the employer, and the reimbursement to us for those costs. The revenue and expenses have been reclassified to conform with the 2002 presentation. These costs decreased by $8.4 million to $112.4 million in the first three months of 2002 from $120.8 million in the first three months of 2001 primarily due to the reduction in headcount at the hotels we manage. Earnings (loss) before interest, taxes, depreciation and amortization - --------------------------------------------------------------------- Earnings (loss) before interest, taxes, depreciation and amortization increased $14.7 million from $(12.7) million in the first three months of 2001 to $2.0 million in the first three months of 2002. Major components of this increase were: 16 . Our Corporate Housing segment's EBITDA decreased by $0.9 million from $(0.2) million in 2001 to $(1.1) million in 2002 due to an increase in rental rates from apartment complexes offset by realization of cost savings from restructuring plans carried out in 2001. . Our Hotel Management segment's EBITDA decreased by $2.8 million from $6.4 million in 2001 to $3.6 million in 2002 due to the decrease in revenue associated with the decrease in average daily rate and occupancy in the period. . Our remaining EBITDA increased by $18.4 million primarily due to the merger costs of $3.8 million recorded in 2001, and the charges to investments in and advances to affiliates, accounts and notes receivable, and other of $15.3 million recorded in 2001. Net loss - -------- Our net loss decreased by $9.0 million from $(10.8) million in 2001 to $(1.8) million in 2002. This decrease is due to the increase of $14.7 million in EBITDA and the decrease of $0.9 million in depreciation and amortization expense as discussed above. This is offset by the following: . Our income tax benefit decreased by $6.0 million due to the decrease of $15.1 million in our loss before income taxes. . Our losses allocated to minority interest decreased by $0.5 million due to the decrease in our operating losses. Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods", requires a lessee to recognize contingent rental expense for interim periods prior to the achievement of the specified target that triggers the contingent rental expense, if the achievement of that target by the end of the fiscal year is considered probable. This accounting pronouncement relates only to our recognition of lease expense in interim periods for financial reporting purposes; it has no effect on the timing of rent payments under our leases or our annual lease expense calculations. We made cash lease payments that were below the expense we were required to recognize under EITF No. 98-9 during the interim period ended March 31, 2002. As of March 31, 2002 this resulted in an accrued liability balance of $9, which is included on our condensed consolidated balance sheets. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalent assets increased by $3.7 million from $4.6 million at December 31, 2001 to $8.3 million at March 31, 2002. Sources of Cash We fund our continuing operations through cash generated from hotel management and corporate housing operations. We finance capital expenditures, business acquisitions and investments in affiliates through a combination of internally generated cash, external borrowings and the issuance of partnership interests and/or common stock. 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 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 Annual Report on Form 10-K; and . The other factors described under the caption, "Forward-Looking Information." Our financing activities provided $5.8 million of cash during 2002 primarily from net borrowings of $6.5 million on our credit facilities. As of April 30, 2002, we had no availability under our senior secured credit facility and approximately $4.0 million available under our credit facility with MeriStar Hospitality. Uses of Cash We used $1.5 million of cash in operations during the three months ended March 31, 2002, primarily as result of the prepayment of apartment rent and contract renewals in our Corporate Housing segment as well as payment of income taxes, offset by other operating activity. 17 We used $0.5 million of cash in investing activities during the three months ended March 31, 2002. This relates to the purchase of $0.2 million of fixed assets, $0.1 million costs incurred to obtain management contracts (referred to as purchase of intangible assets on the Consolidated Statements of Cash Flows) and $0.2 million of investments made in and advances made to affiliates. In January 2002, we acquired a 5% interest in one affiliate for $0.1 million. We also made an advance of $75,000 to an affiliate. Revolving Credit Facilities 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 increased 100 basis points to the 30-day London Interbank Offered Rate plus 450 basis points. In addition, the amendment reduced our availability to $82.5 million. The amendment also sets restrictions on investments and capital expenditures. The availability under our senior secured credit facility will 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 by the amount that our earnings before interest, taxes, depreciation and amortization for 2002 exceeds $20 million. We met our obligation to reduce the facility by $2.5 million on February 28, 2002. The entire balance of $80,000 due on this facility is classified as a current liability on the Condensed Consolidated Balance Sheet at March 31, 2002 due to the maturity date in February 2003. The interest rate on borrowings under our senior credit facility as of March 31, 2002 was 6.4%. We incurred interest expense of $1,243 and $2,210 on this facility during the first quarters of 2002 and 2001, respectively. 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. In connection with the pending Interstate merger, a new $113 million senior credit facility will replace the existing senior credit facilities of both companies. We expect the new facility to have a three-year term loan and three-year revolver with a one-year option to extend. We expect the interest rate on the facility to range from London Interbank Offered Rate plus 300 basis points to London Interbank Offered Rate plus 450, based on certain financial covenant levels. 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. Contractual Obligations and Maturities of Indebtedness We lease some hotels under non-cancelable participating leases with remaining initial terms ranging from 9 to 12 years, expiring through 2013. The participating leases have minimum base rent requirements. We also lease apartments for our Corporate Housing operations and corporate office space. Those leases have terms up to 13 years. Minimum payments due under our debt and lease obligations as of March 31, 2002 were as follows (in thousands):
Credit Facilities with MeriStar Senior Credit Hospitality Non Cancelable Facility Corporation Operating Leases Total -------- ----------- ---------------- ----- 2002 $ 7,500 $ - $ 31,829 $ 39,329 2003 72,500 58,069 41,072 171,641 2004 - - 39,893 39,893 2005 - - 39,435 39,435 2006 - - 38,350 38,350 2007 and thereafter - - 225,555 225,555 ----------------------------------------------------------------------------------- $ 80,000 $ 58,069 $ 416,134 $ 554,203 ===================================================================================
Summary We believe cash generated by our operations, together with anticipated borrowing capacity under our new credit facility resulting in connection with the merger with Interstate, will be sufficient to fund our requirements for working capital, capital expenditures, and debt service. We expect to continue to seek acquisitions of hotel management businesses and management contracts. In addition, we expect to expand our corporate housing business by entering selected new markets in the United States and Europe. We expect to finance future acquisitions through a combination of additional borrowings under our anticipated credit facility and the issuance of partnership interests and/or our common stock. We believe these sources of capital will be sufficient to provide for our long-term 18 capital needs. In the event the merger with Interstate does not close, we believe cash generated by our operations will be sufficient to fund our requirements for working capital, capital expenditures, and debt service. We would be required to refinance or extended our senior secured credit facility, which expires in 2003. This could have a significant effect on our short term cash flow requirements. If we are unable to refinance or extend our senior secured credit facility, this would have a material adverse effect on our company. 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 the peak travel season. For resort properties, demand is generally higher in the winter and early spring. Since the majority of our hotels are non-resort properties, our operations generally have reflected non-resort seasonality patterns. We expect to 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. Corporate housing activity traditionally peaks in the summer months and declines during the fourth quarter and the first part of the first quarter. We expect to have lower revenue, operating income and cash flow from corporate housing in the first and fourth quarters. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates on our credit facilities. 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. In April 2001, we entered into a $50 million, one-year interest rate swap agreement with a financial institution to hedge against the effect future interest rate fluctuations may have on our floating rate debt. The swap agreement effectively fixes the 30-day London Interbank Offered Rate at 4.4%. During the three months ended March 31, 2002, we paid $315,469 under this agreement. The fair value of the interest rate swap agreement was $105,000 at March 31, 2002. In April 2002, we entered into a $40 million, 10-month rate swap agreement with a financial institution to hedge against the effect future interest rate fluctuations may have on our floating rate debt. The swap agreement effectively fixed the 30-day London Interbank Offered Rate at 4.0%. Our senior secured credit facility matures in February 2003. At March 31, 2002, we had borrowings of $80.0 million outstanding on the facility. Interest on the debt is variable, based on the 30-day London Interbank Offered Rate plus 450 basis points. The weighted average effective interest rate was 6.9% at March 31, 2002. We have determined that the fair value of the debt approximates its carrying value. Our $45.0 million of long-term debt under the MeriStar Hospitality revolving credit facility at March 31, 2002 matures 91 days after the maturity date of our senior secured credit facility. Interest on the debt is variable, based on the 30-day London Interbank Offered Rate plus 650 basis points. The weighted average effective interest rate was 9.9% at March 31, 2002. We have determined that the fair value of the debt approximates its carrying value. A 1.0% change in the 30-day London Interbank Offered Rate would have changed our interest expense by approximately $187,389 million during the three months ended March 31, 2002. Our international operations are subject to foreign exchange rate fluctuations. We derived approximately 13% of our revenue for the three months ended March 31, 2002 from services performed in Canada, the United Kingdom and France. Our foreign currency transaction gains and losses were not material to our results of operations for the three months ended March 31, 2002. To date, since most of our foreign operations have been largely self-contained we have not been exposed to material foreign exchange risk. Therefore, we have not entered into any significant foreign currency exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. In the event that we have large transactions requiring currency conversion we would reevaluate whether we should engage in hedging activity. 20 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION FORWARD-LOOKING INFORMATION Information both included in and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and described our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," anticipate," estimate," "believe," "intent,: or "project" or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospectus include, but are not limited to, changes in: . slowdown of national economy; . economic conditions generally and the real estate market specifically; . the impact of the September 11, 2001 terrorist attacks or other terrorist attacks; . legislative/regulatory changes, including changes to laws governing the taxation of real estate investment trusts; . disruptions to or restrictions on air travel; . availability of capital; . interest rates; . competition; . supply and demand for lodging facilities in our current and proposed market areas; and . general accounting principles, policies and guidelines applicable to real estate investment trusts. . potential de-listing of MeriStar Hotels & Resorts, Inc. by the NYSE. 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. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - 10.10 Employment Agreement, dated as of November 1, 2001, between MeriStar Hotels & Resorts, Inc., MeriStar Management Company, LLC and Paul W. Whetsell. 10.12.1 Amendment to Employment Agreement, dated as of November 1, 2001, between MeriStar Hotels & Resorts, Inc., MeriStar Management Company, LLC and John Emery. (b) Reports on Form 8-K - none 21 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 Hotels & Resorts, Inc. Dated: May 15, 2002 /s/ James A. Calder ------------------- James A. Calder Chief Financial Officer 22 EX-10.10 3 dex1010.txt EMPLOYMENT AGREEMENT Exhibit 10.10 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT, effective as of November 1, 2001 by and between MERISTAR HOTELS & RESORTS, INC., a Delaware corporation (the "Company"), MERISTAR MANAGEMENT COMPANY, L.L.C., a Delaware limited liability company (the "LLC"), and PAUL W. WHETSELL (the "Executive"), an individual residing at 10901 Tara Road, Potomac, Maryland 20854. The Company and the LLC desire to employ the Executive in the capacities of Chairman of the Board and Chief Executive Officer, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the "Agreement"); Now, Therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration the parties hereto hereby agree as follows: 1. Employment; Term. The Company and the LLC each hereby employ the ---------------- Executive, and the Executive agrees to be employed by the Company and the LLC, upon the terms and subject to the conditions set forth herein, for a term of three and one-half (3-1/2) years, commencing on November 1, 2001 (the "Commencement Date"), and ending on May 1, 2005, unless terminated earlier in accordance with Section 5 of this Agreement; provided that such term shall -------- automatically be extended from time to time for additional periods of one calendar year from the date on which it would otherwise expire unless the Executive, on the one hand, or the Company and the LLC, on the other, give notice to the other party and parties prior to such date that it elects to permit the term of this Agreement to expire without extension on such date. (The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the "Term"). 2. Positions; Conduct. ------------------ (a) During the Term, the Executive will hold the titles and offices of, and serve in the positions of, Chairman of the Board and Chief Executive Officer of the Company and the LLC. The Executive shall report to the Board of Directors of the Company (the "Board") and shall perform such specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as they shall reasonably request consistent with the Executive's positions. (b) During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and the LLC and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder. The Company is aware that Executive has an Employment Agreement, dated as of November 1, 2001 ("MHC Agreement"), with MeriStar Hospitality Corporation and MeriStar Hospitality Operating Partnership, L.P. (collectively, "MHC") and may perform duties as required under such agreement so long 2 as those duties are not in violation of this Agreement. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Board, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided that such activities do not involve any material conflict of interest - -------- ---- with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement. Notwithstanding the foregoing and except as expressly provided herein, during the Term, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company or the LLC. (c) The Executive's office and place of rendering his services under this Agreement shall be in the principal executive offices of the Company which shall be in the Washington, D.C. metropolitan area. Under no circumstances shall the Executive be required to relocate from the Washington, D.C. metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel. During the Term, the Company shall provide the Executive with executive office space, and administrative and secretarial assistance and other support services consistent with his positions as Chairman of the Board and Chief Executive Officer and with his duties and responsibilities hereunder. 3. Board of Directors. While it is understood that the right to ------------------ elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, during the Term the Executive will serve as a member of the Company's Board of Directors. 4. Salary; Additional Compensation; Perquisites and Benefits. (a) During the Term, the Company and the LLC will pay the Executive a base salary at an aggregate annual rate of not less than $190,000 per annum, subject to annual review by the Compensation Committee of the Board (the "Compensation Committee"), and in the discretion of such Committee, increased from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company's standard practice, but not less frequently than semi-monthly. (b) For each fiscal year during the Term, the Executive will be eligible to receive a bonus from the Company. The award and amount of such bonus shall be based upon the achievement of predefined operating or performance goals and other criteria established by the Compensation Committee, which goals shall give the Executive the opportunity to earn a bonus in the following amounts: threshold target - 25% of base salary; target - 125% of base salary; and maximum bonus amount - 150% of base salary. (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted by the Company or the LLC for their management 3 employees or the general benefit of their employees, such as any pension, profit-sharing, bonuses, stock option or other incentive compensation plans, life and health insurance plans, or other insurance plans and benefits on the same basis and subject to the same qualifications as other senior executive officers. Notwithstanding the foregoing, the Company and the LLC may, in their sole discretion, discontinue or eliminate any such plans. (d) The Executive shall be granted 500,000 stock options in the Company on December 11, 2001 at the then current market price. The options will vest equally on the first, second and third anniversary of the date of grant. Annual stock option grants thereafter shall be at the discretion of the Board. (e) The Company and the LLC will reimburse the Executive, in accordance with their standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties under this Agreement. (f) The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company's policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year. Such vacation time shall not be carried over year to year, and shall not be paid out upon termination of employment, or upon expiration of this Agreement. (g) The Company (or MHC), at its sole cost, shall pay (i) up to $20,000 annually (to be increased annually by the prior year's consumer price index, "CPI") toward the premium of a life insurance policy with a death benefit of at least $2,000,000 payable to a beneficiary designated by the Executive and (ii) up to $20,000 annually (to be increased annually by the prior year's CPI) toward the premium of a disability policy which, upon a determination of the Executive's Disability (as hereinafter defined), pays at least $2,000,000 to the Executive. The premiums for such insurance policies are to be split equally between the Company and MHC for so long as the Executive is employed by MHC. While the Executive is employed by both the Company and MHC, the Company and MHC, in the aggregate, shall not pay in excess of $20,000 annually (as increased by CPI) toward each premium. (h) The Executive shall be granted a car allowance of up to $1,000 per month toward the lease of an automobile to be leased by the Company (or MHC) for the use of the Executive. The monthly lease payment for such car is to be split equally between the Company and MHC for so long as the Executive is employed by MHC. While the Executive is employed by both the Company and MHC, the Company and MHC, in the aggregate, shall not pay in excess of $1,000 monthly toward such car lease. (i) To the fullest extent permitted by applicable law, the Executive shall be indemnified and held harmless by the Company and the LLC against any and all judgments, penalties, fines, amounts paid in settlement, and other reasonable expenses (including, without limitation, reasonable attorneys' fees and disbursements) 4 actually incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, investigative or other) for any action or omission in his capacity as a director, officer or employee of the Company or the LLC. Indemnification under this Section 4(i) shall be in addition to, and not in substitution of, any other indemnification by the Company or the LLC of its officers and directors. Expenses incurred by the Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 4(i) shall be paid by the Company or the LLC, as the case may be, in advance of the final disposition of such action, suit or proceeding upon the Company's or the LLC's receipt of (x) a written affirmation by the Executive of his good faith belief that the standard of conduct necessary for his indemnification hereunder and under the provisions of applicable law has been met and (y) a written undertaking by or on behalf of the Executive to repay the amount advanced if it shall ultimately be determined by a court that the Executive engaged in conduct, including fraud, theft, misfeasance, or malfeasance against the Company or the LLC, which precludes indemnification under the provisions of such applicable law. Such written undertaking in clause (y) shall be accepted by the Company or the LLC, as the case may be, without security therefor and without reference to the financial ability of the Executive to make repayment thereunder. The Company and the LLC shall use commercially reasonable efforts to maintain in effect for the Term of this Agreement a directors' and officers' liability insurance policy, with a policy limit of at least $5,000,000, subject to customary exclusions, with respect to claims made against officers and directors of the Company or the LLC; provided, -------- however, the Company or the LLC, as the case may be, shall be relieved of this - ------- obligation to maintain directors' and officers' liability insurance if, in the good faith judgment of the Company or the LLC, it cannot be obtained at a reasonable cost. 5. Termination. ----------- (a) The Term will terminate immediately upon the Executive's death, Disability, or, upon thirty (30) days' prior written notice by the Company, in the case of a Determination of Disability. As used herein the term "Disability" means the Executive's inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A "Determination of Disability" shall occur when a physician, reasonably satisfactory to both the Executive and the Company and paid for by the Company or the LLC, finds that the Executive will likely be unable to perform his duties and responsibilities under this Agreement for the above-specified period due to a physical or mental incapacity or impairment. Such decision shall be final and binding on the Executive and the Company; provided that if they cannot agree as to a physician, ------------- then each shall select and pay for a physician and these two together shall select a third physician whose fee shall be borne equally by the Executive and either the Company or the LLC and whose Determination of Disability shall be binding on the Executive and the Company. Should the Executive become incapacitated, his employment shall continue and all base and other compensation due the Executive hereunder shall continue to be 5 paid through the date upon which the Executive's employment is terminated for Disability or Determination of Disability in accordance with this section. (b) The Term may be terminated by the Company upon notice to the Executive and with or without "Cause" as defined herein. (c) The Term may be terminated by the Executive upon notice to the Company and with or without "Good Reason" as defined herein. 6. Severance. --------- (a) If the Term is terminated by the Company for Cause, (i) the Company and the LLC will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination; (ii) all unvested options and restricted shares will terminate immediately; and (iii) any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (b) If the Term is terminated by the Executive other than because of death, Disability or for Good Reason, (i) the Company and the LLC will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination; (ii) all unvested options and restricted shares terminate immediately; and (iii) any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (c) If the Term is terminated upon the Executive's death or Disability, (i) the Company and the LLC will pay to the Executive's estate or the Executive, as the case may 6 be, a lump sum payment equal to the Executive's base salary through the termination date, plus a pro rata portion of the Executive's bonus for the fiscal year in which the termination occurred; (ii) the Company will make payments for one (1) year of all compensation otherwise payable to the Executive pursuant to this Agreement, including, but not limited to, base salary, bonus and welfare benefits; (iii) all of the Executive's unvested stock options will immediately vest and such options, along with those previously vested and unexercised, will become exercisable for a period of one (1) year thereafter; and (iv) all of the Executive's unvested restricted stock will immediately vest and all of the restricted stock of the Company held by the Executive shall become free from all contractual restrictions. (d) Subject to Section 6(e) hereof, if the Term is terminated by the Company without Cause or other than by reason of Executive's death or Disability, in addition to any other remedies available, or if the Executive terminates the Term for Good Reason, (i) the Company and the LLC shall pay the Executive a lump sum equal to the product of (x) the sum of (A) the Executive's then annual base salary and (B) the amount of the Executive's bonus for the preceding year, multiplied by (y) the greater of (A) two and one-half (2 1/2) and (B) a fraction, the numerator of which is the number of days remaining in the Term (without further extension) and the denominator of which is 365; (ii) all of the Executive's unvested stock options will immediately vest and such options, along with those previously vested and unexercised, will become exercisable for a period of one (1) year thereafter; (iii) all of the Executive's unvested restricted stock will immediately vest and all of the restricted stock of the Company held by the Executive shall become free from all contractual restrictions; and 7 (iv) the Company shall also continue in effect the Executive's health benefits noted in Section 4(c) hereof or their equivalent for a period equal to the greater of (X) two and one-half (2 1/2) years or the remaining Term, without further extension or (Y) the date on which the Executive obtains health insurance coverage from a subsequent employer; provided, however, that in the event the Executive remains in the employ of MHC following such termination, his health insurance benefits shall be provided by MHC pursuant to the MHC Agreement rather than pursuant to this Section (6)(d)(iv). (e) If, within twenty-four (24) months following a Change in Control, the Term is terminated by the Executive for Good Reason or by the Company without Cause, in addition to any other rights which the Executive may have under law or otherwise, the Executive shall receive the same payments and benefits provided for under Section 6(d) hereof; provided, that the amount of -------- the multiplier described in clause (d)(i)(y)(A) of Section 6 hereof shall be increased from two and one-half (2 1/2) times to three and one-half (3 1/2) times. (f) If at any time the Term is not extended pursuant to the proviso to Section 1 hereof as a result of the Company giving notice thereunder that it elects to permit the term of this Agreement to expire without extension, the Company shall be deemed to have terminated the Executive's employment without Cause. (g) As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the -------- ------- Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 6(g)(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) any willful and intentional act of the Executive involving malfeasance, fraud, theft, misappropriation of funds, embezzlement or dishonesty affecting the Company or the LLC; (iv) the Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony in the jurisdiction involved; or (v) the Executive is terminated by MHC for Cause (as defined in the MHC Agreement). Termination of the Executive for Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean 8 delivery to the Executive of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Company's Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote) of finding that in the good faith opinion of the Board, the Executive was guilty of conduct constituting Cause and specifying the particulars thereof in detail, including, with respect to any termination based upon conduct described in clause (i) above that the Executive failed to cure such conduct during the thirty-day period following the date on which the Company gave written notice of the conduct referred to in such clause (i). For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination; (h) As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment to the Executive of duties materially inconsistent with the Executive's positions as described in Section 2(a) hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) the failure of the Company to nominate the Executive to the Board or the failure of the Executive to be elected to the Board; (iii) the change in the location of the Company's principal executive offices or of the Executive's principal place of employment to a location outside the Washington, D.C. metropolitan area; (iv) any material breach of this Agreement by the Company or the LLC which is continuing; (v) a Change in Control; provided that a Change of Control shall only constitute Good Reason if (i) the Executive terminates this Agreement within the six month period following a Change of Control, (ii) the Company terminates the Executive within two years following a Change of Control or (iii) the Company changes the Executive's job title, responsibilities or decreases Executive's compensation within two years following a Change of Control and Executive within six months after such change (but not later than two years following the Change of Control) terminates the Term of this Agreement; or (vi) termination of the MHC Agreement by MHC without Cause (as such term is defined in the MHC Agreement) or termination of the MHC Agreement by Executive for Good Reason (as such term is defined in the MHC Agreement); provided that such terminations of the MHC Agreement shall only constitute Good Reason (for purposes of this Agreement) if the 9 Company does not, effective immediately upon the termination of the Executive's employment with MHC, increase the Executive's total annual compensation under this Agreement by the amount of total annual compensation (including base salary, bonus, restricted stock, profits-only operating partnership units, and other similar types of annual compensation) the Executive was receiving from MHC; provided, however, that the Executive shall not be deemed to have -------- ------- Good Reason pursuant to clauses (h)(i), (ii) or (iv) above unless the Executive gives the Company or the LLC, as the case may be, written notice that the specified conduct or event has occurred and the Company or the LLC fails to cure such conduct or event within thirty (30) days of the receipt of such notice. (i) As used herein, the term "Change in Control" shall have the following meaning: (i) the acquisition (other than from the Company) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty (30%) percent or more of the combined voting power of the Company's then outstanding voting securities; (ii) the individuals who were members of the Board (the "Incumbent Board") during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by -------- ------- the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; (iii) approval by the stockholders of the Company of (a) merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty (50%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (b) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company; or (iv) approval by the stockholders of the Company of any transaction (including without limitation a "going private transaction") involving the Company if the stockholders of the Company, immediately before such transaction, do not as a result of such transaction, own directly or indirectly, more than fifty (50%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such transaction in substantially 10 the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i)(i) above solely because thirty (30%) percent or more of the combined voting power of the Company's then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (j) The amounts required to be paid and the benefits required to be made available to the Executive under this Section 6 are absolute. Under no circumstances shall the Executive, upon the termination of his employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 6. (k) Excise Tax Payments. ------------------- (i) Gross-Up Payment. If it shall be ---------------- determined that any payment or distribution of any type to or in respect of the Executive, by the Company, the LLC, or any other person, whether paid or payable or distributed or distributable pursuant to the terms of the Agreement or otherwise (the "Total Payments"), is or will be subject to the excise tax imposed by Section 4999 of the Internal Code of 1986, as amended (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes) imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. (ii) Determination by Accountant. --------------------------- (A) All computations and determinations relevant to this Section 6(k) shall be made by a national accounting firm selected by the Company from among the five (5) largest accounting firms in the United States (the "Accounting Firm") which firm may be the Company's accountants. Such determinations shall include whether any of the Total Payments are "parachute payments" (within the meaning of Section 280G of the Code). In making the initial determination hereunder as to whether a Gross-Up Payment is required the Accounting Firm shall determine that no Gross-Up Payment is 11 required, if the Accounting Firm is able to conclude that no "Change of Control" has occurred (within the meaning of Section 280G of the Code) on the basis of "substantial authority" (within the meaning of Section 6230 of the Code) and shall provide opinions to that effect to both the Company and the Executive. If the Accounting Firm determines that a Gross-Up Payment is required, the Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations regarding the amount of any Gross-Up Payment and any other relevant matter both to the Company and the Executive by no later than ten (10) days following the Termination Date, if applicable, or such earlier time as is requested by the Company or the Executive (if the Executive reasonably believes that any of the Total Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive and the Company with a written statement that such Accounting Firm has concluded that no Excise Tax is payable (including the reasons therefor) and that the Executive has substantial authority not to report any Excise Tax on his federal income tax return. (B) If a Gross-Up Payment is determined to be payable, it shall be paid to the Executive within twenty (20) days after the later of (i) the Determination (and all accompanying calculations and other material supporting the Determination) is delivered to the Company by the Accounting Firm or (ii) the date of the event which leads to the Gross-up Payment. Any determination by the Accounting Firm shall be binding upon the Company and the Executive, absent manifest error. (C) As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made by the Company should have been made ("Underpayment"), or that Gross-Up Payments will have been made by the Company which should not have been made ("Overpayments"). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment (together with any interest and penalties payable by the Executive as a result of such Underpayment) shall be promptly paid by the Company to or for the benefit of the Executive. (D) In the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, the Company, and otherwise reasonably cooperate with the Company to correct such Overpayment, provided, however, that (i) the Executive shall not in any event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment that he has retained or has recovered as a refund from the applicable taxing authorities and (ii) this provision shall be interpreted in a 12 manner consistent with the intent of Section 6(k)(i), which is to make the Executive whole, on an after-tax basis, from the application of the Excise Taxes, it being acknowledged and understood that the correction of an Overpayment may result in the Executive repaying to the Company an amount which is less than the Overpayment. (E) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service relating to the possible application of the Excise Tax under Section 4999 of the Code to any of the payments and amounts referred to herein and shall afford the Company, at its expense, the opportunity to control the defense of such claim. 7. Confidential Information. (a) The Executive acknowledges that the Company and its subsidiaries or affiliated ventures ("Company Affiliates") own and have developed and compiled, and will in the future own, develop and compile, certain Confidential Information and that during the course of his rendering services hereunder Confidential Information will be disclosed to the Executive by the Company Affiliates. The Executive hereby agrees that, during the Term and for a period of three years thereafter, he will not use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company Affiliates. (b) As used herein, the term "Confidential Information" means any trade secrets, confidential or proprietary information, or other knowledge, know-how, information, documents or materials, owned, developed or possessed by a Company Affiliate pertaining to its businesses, including, but not limited to, trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, customer lists, client lists and client contact lists, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, (iii) is or becomes available to the Executive from sources other than the Company Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company's sole expense, in seeking a protective order or other appropriate protection of such information). 13 (c) The Executive agrees that during his employment hereunder and for a period of twenty-four months thereafter he will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of the Term was an employee of a Company Affiliate (other than a person whose employment with such Company Affiliate has been terminated by such Company Affiliate), to become employed by any person, firm or corporation. 8. Specific Performance. (a) The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company Affiliates would sustain irreparable harm in the event of a violation by the Executive of Section 7 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages. (b) If any of the restrictions on activities of the Executive contained in Section 7 hereof shall for any reason be held by a court of competent jurisdiction to be excessively broad, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights. (c) Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 6 of this Agreement and such failure shall continue for twenty (20) days after written notice thereof from the Executive, all restrictions on the activities of the Executive under Section 7 hereof shall be immediately and permanently terminated. 9. Withholding. The parties agree that all payments to be ----------- made to the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations of such company. 10. Notices. All notices required or permitted hereunder shall ------- be in writing and shall be deemed given and received when delivered personally, four (4) days after being mailed if sent by registered or certified mail, postage pre-paid, or by one (1) day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively: If to the Executive, to: 14 10901 Tara Road Potomac, Maryland 20854 If to the Company or to the LLC, to: MeriStar Hotels & Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Attention: Legal Department or to any other address of which such party may have given notice to the other parties in the manner specified above. 11. Miscellaneous. ------------- (a) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive's rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company and the LLC hereunder will be binding upon and run in favor of their respective successors and assigns. The Company will not be deemed to have breached this Agreement if any obligations of the Company to make payments to the Executive are satisfied by the LLC. (b) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to conflict of laws principles. (c) Any controversy arising out of or relating to this Agreement or any breach hereof shall be settled by arbitration in Washington, D.C. by a single neutral arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any award rendered may be entered in any court having jurisdiction thereof, except in the event of a controversy relating to any alleged violation by the Executive of Section 7 hereof, in which case the Company shall be entitled to seek injunctive relief from a court of competent jurisdiction without the requirement to seek arbitration. (d) The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. (e) The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination. (f) The Company and the LLC shall reimburse the Executive for all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including without limitation all costs of investigation and reasonable attorneys fees and expenses. 15 (g) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof (other than previously executed option agreements, restricted stock agreements executed by the Executive and the Company and/or the LLC, the "Grant Agreements"), all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements (other then the Grant Agreements), including without limitation, the Executive Employment Agreement entered into as of August 3, 1998 and the Executive Employment Agreement entered into as of April 1, 2000, between the Executive and the Company, all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements and undertakings, both written and oral, among the parties hereto (other than the Grant Agreements). [SIGNATURE PAGE FOLLOWS] 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. EXECUTIVE: /s/ Paul W. Whetsell -------------------------------- Paul W. Whetsell COMPANY: MERISTAR HOTELS & RESORTS, INC. By: /s/ Christopher L. Bennett ----------------------------- Name: Christopher L. Bennett Title: Vice President, Legal and Secretary LLC: MERISTAR MANAGEMENT COMPANY, LLC By: MeriStar Hotels & Resorts, Inc., its general partner By: /s/ Christopher L. Bennett ----------------------------- Name: Christopher L. Bennett Title: Vice President, Legal and Secretary EX-10.12.1 4 dex10121.txt EMPLOYMENT AGREEMENT Exhibit 10.12.1 March 26, 2002 John Emery C/o MeriStar Hotels & Resorts, Inc. 8262 Private Lane Annandale, VA 22003 Re: Employment Agreement dated April 1, 2000 between MeriStar Hotels & Resorts, Inc. and MeriStar Management Company, LLC Dear John: Your Employment Agreement is hereby amended, effective as of November 1, 2001, as follows: Sections 2(a) and (c) of the Employment Agreement are amended to reflect that you will serve in the position of, and maintain the title of, "President and Chief Operating Officer" of the Company and LLC. Newly added Section 2(d): "While it is understood that the right to elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, during the Term the Executive will serve as a member of the Company's Board of Directors." Section 3(a) of the Employment Agreement is amended to adjust your base salary amount to "an aggregate annual rate of not less than $230,000 per annum." Except as expressly amended hereby, all of the terms and conditions of your Employment Agreement shall remain in full force and effect. Please acknowledge your agreement to the above by signing and dating this letter in the space set forth below. Sincerely, Christopher L. Bennett Senior Vice President and General Counsel Intended to be legally bound hereby, The undersigned acknowledges and agrees to all of the foregoing as of this 26 day of March, 2002. /s/ John Emery - ------------------------------- John Emery -----END PRIVACY-ENHANCED MESSAGE-----