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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 September 30, 2000 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 November 10, 2000 was 35,925,008.
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MERISTAR HOTELS & RESORTS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 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 17
PART II. OTHER INFORMATION 18
ITEM 5: OTHER INFORMATION 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 18
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, 2000 December 31, 1999
------------------- ------------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 9,989 $ 1,726
Accounts receivable, net of allowance for doubtful
accounts of $3,732 and $2,090 77,243 47,976
Prepaid expenses 21,921 3,589
Deposits and other 13,338 8,388
-------- --------
Total current assets 122,491 61,679
-------- --------
Fixed assets:
Furniture, fixtures, and equipment 27,503 14,832
Accumulated depreciation (4,499) (2,522)
-------- --------
Total fixed assets, net 23,004 12,310
-------- --------
Investments in and advances to affiliates 38,001 30,018
Intangible assets, net of accumulated
amortization of $12,349 and $7,927 190,399 153,927
Deferred income taxes 904 -
Restricted cash - 210
-------- --------
$374,799 $258,144
======== ========
Liabilities, Minority Interests, and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $124,878 $ 96,603
Due to MeriStar Hospitality Corporation 20,619 11,476
Income taxes payable 150 80
Long-term debt, current portion 80 10
-------- --------
Total current liabilities 145,727 108,169
Deferred income taxes 23,257 13,247
Long-term debt 95,184 57,752
-------- --------
Total liabilities 264,168 179,168
Minority interests 14,343 13,774
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01 per share
Authorized - 10,000 shares
Common stock, par value $0.01 per share
Authorized - 100,000 shares
Issued and outstanding - 35,894 and 29,625 shares 359 296
Additional paid-in capital 74,801 57,637
Retained earnings 21,265 7,236
Accumulated other comprehensive income:
Translation adjustment (53) 33
Unrealized loss on investments (84) -
-------- --------
Total stockholders' equity 96,288 65,202
-------- --------
$374,799 $258,144
======== ========
See accompanying notes to condensed consolidated financial statements.
3
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
-------- --------- ---------- ----------
Revenue:
Rooms $231,497 $ 226,310 $ 721,045 $697,221
Food and beverage 67,618 64,852 222,197 214,053
Corporate housing 29,369 --- 38,761 ---
Other operating departments 21,593 21,551 71,187 67,212
Management and other fees 6,287 2,075 16,358 7,363
-------- --------- ---------- --------
Total revenue 356,364 314,788 1,069,548 985,849
-------- --------- ---------- --------
Operating expenses by department:
Rooms 55,956 55,146 166,824 163,754
Food and beverage 51,451 50,316 162,094 159,068
Corporate housing 18,744 -- 24,781 --
Other operating departments expenses 12,693 10,245 40,246 32,484
Undistributed operating expenses:
Administrative and general 58,270 49,257 173,894 157,971
Property operating costs 48,678 47,259 145,427 140,162
Participating lease expense 106,792 97,396 320,104 306,009
Depreciation and amortization 2,778 1,418 6,540 4,454
-------- --------- ---------- --------
Total operating expenses 355,362 311,037 1,039,910 963,902
-------- --------- ---------- --------
Net operating income 1,002 3,751 29,638 21,947
Interest expense, net 1,986 1,037 4,530 3,543
-------- --------- ---------- --------
Income before minority interests
and income taxes (984) 2,714 25,108 18,404
Minority interests (31) 250 2,108 2,694
-------- --------- ---------- --------
Income before income taxes (953) 2,464 23,000 15,710
Income taxes (52) 911 8,971 5,812
-------- --------- ---------- --------
Net income $ (901) $ 1,553 $ 14,029 $ 9,898
======== ========= ========== ========
Other comprehensive income:
Foreign currency translation adjustment (176) (1) (86) (34)
Unrealized loss on investments (12) --- (84) ---
-------- --------- ---------- --------
Comprehensive income $ (1,089) $ 1,552 $ 13,859 $ 9,864
======== ========= ========== ========
Earnings per share:
Basic $ (0.03) $ 0.05 $ 0.42 $ 0.36
======== ========= ========== ========
Diluted $ (0.03) $ 0.05 $ 0.41 $ $0.36
======== ========= ========== ========
See accompanying notes to condensed consolidated financial statements.
4
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
Nine Months Ended
September 30,
----------------------
2000 1999
--------- ----------
Operating activities:
Net income $ 14,029 $ 9,898
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,540 4,454
Minority interests 2,108 2,694
Deferred income taxes 8,276 5,813
Changes in operating assets and liabilities:
Accounts receivable, net (24,919) (3,487)
Deposits and other (3,638) (2,510)
Prepaid expenses (12,646) (7,024)
Accounts payable, accrued expenses and other liabilities 11,029 (1,769)
Income Taxes Payable (100) (35)
Due to MeriStar Hospitality Corporation 9,143 11,059
--------- ----------
Net cash provided by operating activities 9,822 19,093
--------- ----------
Investing activities:
Purchases of fixed assets (7,054) (3,641)
Investments in and advances to affiliates, net (7,983) (15,465)
Purchases of intangible assets (2,716) (2,860)
Cash paid to BridgeStreet Accommodations shareholders (12,216) ---
Change in restricted cash 210 416
--------- ----------
Net cash used in investing activities (29,759) (21,550)
--------- ----------
Financing activities:
Proceeds from issuance of long term debt 154,500 121,000
Principal payments on long term debt (117,124) (131,993)
Purchase of OP units (1,149) ---
BridgeStreet Accommodations debt repaid (12,021) ---
Proceeds from issuances of common stock, net 5,494 5,879
Deferred financing costs (1,601) ---
--------- ----------
Net cash provided by (used in) financing activities 28,099 (5,114)
--------- ----------
Effect of exchange rate changes on cash 101 (3)
Net increase (decrease) in cash and cash equivalents 8,263 (7,574)
Cash and cash equivalents, beginning of period 1,726 11,155
--------- ----------
Cash and cash equivalents, end of period $ 9,989 $ 3,581
========= ==========
See accompanying notes to condensed consolidated financial statements.
5
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
UNAUDITED (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
We lease, manage and operate a portfolio of hospitality properties and provide
related services in the hotel, corporate housing, golf, and vacation membership
markets. Our portfolio is diversified by franchise and brand affiliations. Our
subsidiary, MeriStar H&R Operating Company, L.P., conducts all of our
operations. We are the sole general partner of MeriStar H&R and control its
operations.
On August 3, 1998, American General Hospitality Corporation and CapStar Hotel
Company merged together to form MeriStar Hospitality Corporation, a real estate
investment trust. As part of that merger, CapStar formed our company to become
the lessee, manager and operator of substantially all of the hotels owned or
leased by American General and CapStar before the merger. At the time of the
merger, CapStar distributed all of the shares of our common stock to its
stockholders and we became a separate, publicly traded company.
We manage all of the hotels CapStar leased and/or managed for third-party owners
before the merger. Immediately after the merger, we acquired all of the
partnership interests in AGH Leasing, L.P., the third-party lessee that leased
most of the hotels American General owned. We also acquired substantially all
of the assets and some liabilities of American General Hospitality, Inc., the
third-party manager that managed most of the hotels American General owned.
We have an intercompany agreement with MeriStar Hospitality Corporation. This
provides each of us the right to participate in certain transactions entered
into by each company. In particular, we have the right of first refusal to
become the lessee of any real property acquired by MeriStar Hospitality
Corporation. We also provide MeriStar Hospitality Corporation with certain
services including administrative, renovation supervision, corporate,
accounting, finance, insurance, legal, tax, information technology, human
resources, acquisition identification and due diligence, and operational
services. We are compensated in an amount that MeriStar Hospitality Corporation
would be charged by an unaffiliated third party for comparable services.
On May 31, 2000, we completed the acquisition of BridgeStreet Accommodations,
Inc. BridgeStreet provides corporate housing services in the United States,
Canada, and the United Kingdom. We are continuing to operate our corporate
housing division under the BridgeStreet name. Our consolidated interim
financial statements for the nine months ended September 30, 2000 include the
operating results of BridgeStreet since May 31, 2000.
As of September 30, 2000, we leased or managed 213 hotels with 46,511 rooms in
33 states, the District of Columbia, Canada, Puerto Rico and the U.S. Virgin
Islands. In addition, we had approximately 3,600 apartments under lease in the
United States, Canada, and the United Kingdom at September 30, 2000.
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. Certain
information and footnote disclosures have been omitted, which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles. These interim financial statements should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
1999. Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
In our opinion, the accompanying unaudited condensed consolidated interim
financial statements reflect all adjustments 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
generally accepted accounting principles requires us to make estimates and
assumptions. These estimates and assumptions affect the reported amounts on our
balance sheet, income statement and the disclosure of contingent assets and
liabilities at the date of our financial statements. Our actual results
6
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 hotel participating leases have noncancelable remaining terms ranging from 9
to 13 years. The leases can be terminated earlier under certain circumstances
defined in the leases. The rent payable under each participating lease is the
greater of base rent or percentage rent, as defined in the lease agreement.
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. We made cash
lease payments in excess of the expense we were required to recognize under EITF
No. 98-9 during the interim periods ended September 30, 2000 and 1999. As of
September 30, 2000, we had a prepaid expense balance of $9,910 which is included
on our condensed consolidated balance sheet.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. In June 1999, the Financial Accounting Standard
Board issued Statement of Financial Accounting Standard No. 137 which amended
Statement of Financial Accounting Standard No. 133 to defer the effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. In
June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 138 which provides additional guidance and
amendments to Statement of Financial Accounting Standard No. 133. We are
currently in the process of evaluating the effect this new standard will have on
our financial statements. We do not believe the standard will have a material
impact on our financial statements.
3. LONG-TERM DEBT
Long-term debt consists of the following:
September 30, December 31,
2000 1999
------------- ------------
Senior secured credit facility ................................. $ 95,000 $ -
Revolving credit facility with MeriStar Hospitality
Corporation.................................................... - 57,000
Other .......................................................... 264 762
-------- --------
95,264 57,762
Less current portion ........................................... (80) (10)
-------- --------
$ 95,184 $ 57,752
======== ========
On February 29, 2000, we entered into a $100,000 senior secured credit facility
with a syndicate of banks. The interest rate on the credit facility is the 30-
day London Inter-Bank Offered Rate plus 350 basis points. The credit facility
expires in February 2002 with a one-year extension at our option. On March 1,
2000, we borrowed $65,000 to repay the borrowings outstanding under the
revolving credit agreement with MeriStar Hospitality Corporation. Upon
execution of the senior secured credit facility, we amended the facility with
MeriStar Hospitality Corporation to reduce the maximum borrowing limit from
$75,000 to $50,000.
7
The aggregate future maturities of the above obligations are as follows:
2000..................................... $ 80
2001..................................... 184
2002..................................... -
2003..................................... 95,000
--------
$ 95,264
========
4. EARNINGS PER SHARE
The following tables present the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
BASIC EARNINGS PER SHARE
COMPUTATION:
Net income $ (901) $ 1,553 $ 14,029 $ 9,898
Weighted average number of shares
of common stock outstanding 35,882 29,043 33,547 27,298
-------- -------- -------- --------
Basic earnings per share $ (0.03) $ 0.05 $ 0.42 $ 0.36
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
COMPUTATION:
Net income $ (901) $ 1,553 14,029 $ 9,898
Minority interest, net of tax --- (30) 1,286 ---
-------- -------- -------- --------
Adjusted net income $ (901) $ 1,523 $ 15,315 $ 9,898
======== ======== ======== ========
Weighted average number of shares
of common stock outstanding 35,882 29,043 33,547 27,298
Common stock equivalents-Operating
partnership units --- 678 3,503 392
Common stock equivalents-stock
options --- 186 82 160
------- ------- ------- -------
Total weighted average number of
diluted shares of common stock
outstanding 35,882 29,907 37,132 27,850
======== ======== ======== ========
Diluted earnings per share $ (0.03) $ 0.05 $ 0.41 $ 0.36
======== ======== ======== ========
8
5. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
Cash paid for interest and income taxes:
Interest $ 4,337 $3,674
Income Taxes 420 35
Non-cash investing and financing activities:
Conversion of operating partnership units to common stock 391 7,790
Operating partnership units issued and/or
assumption of liabilities in purchase of intangible assets --- 6,736
Issuance of common stock to BridgeStreet shareholders 11,239 ---
Fair value of assets acquired 17,223 ---
Fair value of liabilities acquired (16,083) ---
Fair value of debt assumed (12,021) ---
-------- ------
Fair value of net liabilities assumed (10,881) ---
======== ======
6. SEGMENTS
We are organized into four operating divisions: hotel operations, corporate
housing, golf management and vacation ownership. Each division is managed
separately because of its distinctive products and services. Hotel operations
and corporate housing are reportable operating segments. In 1999, we were
organized into three different operating segments: upscale, full-service hotels;
premium limited-service hotels and inns; and resort properties. In 2000, we
reorganized our operations into the current operating divisions. We
reclassified the segment information for 1999 accordingly. We evaluate the
performance of each division based on earnings before interest, taxes,
depreciation, and amortization.
The following are the segment disclosures for hotel operations and corporate
housing for the three months ended September 30:
Hotel Operations Corporate Housing
---------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue $325,766 $314,344 $29,369 --
======== ======== ======= ========
Earnings before interest, taxes,
depreciation, and amortization $ 713 $ 5,656 $ 3,114 --
======== ======== ======= ========
The following are the segment disclosures for hotel operations and corporate
housing as of and for the nine months ended September 30:
Hotel Operations Corporate Housing
---------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue $1,026,825 $982,733 $38,761 --
========== ======== ======= =======
Earnings before interest, taxes,
depreciation, and amortization $ 32,848 $ 26,685 $ 3,898 --
========== ======== ======= =======
Total assets $ 171,713 $136,558 $20,992 --
========== ======== ======= =======
The following is a reconciliation of the segment information to our consolidated
financial information for the three months ended September 30:
9
2000 1999
------------------------------------- -------------------------------------
Earnings before interest, Earnings before interest,
taxes, depreciation, and taxes, depreciation, and
Revenues amortization Revenues amortization
-------- ------------------------- -------- -------------------------
Hotel Operations $325,766 $ 713 $314,344 $5,656
Corporate Housing 29,369 3,114 -- --
Other 1,229 (47) 444 (487)
-------- ------ -------- ------
Per financial statements $356,364 $3,780 $314,788 $5,169
======== ====== ======== ======
The following is a reconciliation of the segment information to our consolidated
financial information as of and for the nine months ended September 30:
2000 1999
--------------------------------------------- ---------------------------------------------
Earnings before Earnings before
interest, taxes, interest, taxes,
depreciation, and depreciation, and
Revenues amortization Assets Revenues amortization Assets
-------- ------------------ ------ -------- ------------------ ---------
Hotel Operations $1,026,825 $32,848 $171,713 $982,733 $26,685 $136,558
Corporate Housing 38,761 3,898 20,992 -- -- --
Other 3,962 (568) 182,094 3,116 (284) 140,008
---------- ------- -------- -------- ------- --------
Per financial statements $1,069,548 $36,178 $374,799 $985,849 $26,401 $276,566
========== ======= ======== ======== ======= ========
The other items in the tables above represent operating segment activity and
assets for the non-reportable segments and non-operating segment activity and
assets. The non-operating segment activity and assets are primarily unallocated
corporate expenses and intangibles and other miscellaneous assets.
Revenues for foreign operations for the three months ended September 30 were as
follows:
2000 1999
---- ----
Canada $8,717 $6,163
====== ======
United Kingdom $7,040 $ ---
====== ======
Revenues for foreign operations for the nine months ended September 30 were as
follows:
2000 1999
---- ----
Canada $19,669 $16,345
======= =======
United Kingdom $ 9,220 $ ---
======= =======
10
7. ACQUISITION
On May 31, 2000, we completed the acquisition of BridgeStreet Accommodations,
Inc. for $1.50 in cash and 0.5 shares of our common stock for each share of
BridgeStreet common stock outstanding. We issued 4,072 shares of common
stock and paid $12,216 to BridgeStreet's shareholders. In addition, we repaid
$12,021 of BridgeStreet's outstanding debt as part of the acquisition.
BridgeStreet provides corporate housing services in the United States, Canada,
and the United Kingdom. The total purchase price of the acquisition was
approximately $44,907, which resulted in $34,335 of goodwill. The goodwill will
be amortized on a straight line basis over 35 years.
In accordance with generally accepted accounting principles, we accounted for
the acquisition as a purchase. Accordingly, we have included the operating
results of BridgeStreet in our condensed consolidated financial statements since
May 31, 2000, the date of acquisition.
The following unaudited pro forma consolidated results of operations are
presented as if we had acquired BridgeStreet at the beginning of the periods
presented:
Three Months Ended
September 30, Nine Months Ended September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue $356,364 $340,921 $1,110,500 $1,058,908
Net Income $ (901) $ 1,765 $ 12,112 $ 9,577
Earnings Per Share:
Basic $ (0.03) $ 0.05 $ 0.33 $ 0.31
Diluted $ (0.03) $ 0.05 $ 0.33 $ 0.31
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition debt and
certain other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We lease, manage and operate a portfolio of hospitality properties and provide
related services in the hotel, corporate housing, golf, and vacation membership
markets. Our portfolio is diversified by franchise and brand affiliations. Our
subsidiary, MeriStar H&R Operating Company, L.P., conducts all of our
operations. We are the sole general partner of MeriStar H&R and control its
operations.
On August 3, 1998, American General Hospitality Corporation and CapStar Hotel
Company merged together to form MeriStar Hospitality Corporation, a real estate
investment trust. As part of that merger, CapStar formed our company to become
the lessee, manager and operator of substantially all of the hotels owned or
leased by American General and CapStar before the merger. At the time of the
merger, CapStar distributed all of the shares of our common stock to its
stockholders and we became a separate, publicly traded company.
We manage all of the hotels CapStar leased and/or managed for third-party owners
before the merger. Immediately after the merger, we acquired all of the
partnership interests in AGH Leasing, L.P., the third-party lessee that leased
most of the hotels American General owned. We also acquired substantially all
of the assets and some liabilities of American General Hospitality, Inc., the
third-party manager that managed most of the hotels American General owned.
As of September 30, 2000, we leased or managed 213 hotels with 46,511 rooms in
33 states, the District of Columbia, Canada, Puerto Rico, and the U.S. Virgin
Islands. We also manage or are otherwise affiliated with 11 golf courses. Our
golf course management operations are not material to any period presented.
On May 31, 2000, we completed the acquisition of BridgeStreet Accommodations,
Inc. for $1.50 in cash and 0.5 shares of our common stock for each share of
BridgeStreet common stock outstanding. In addition, we repaid $12.0 million of
BridgeStreet's outstanding debt as part of the acquisition. BridgeStreet
provides corporate housing services in the United States, Canada, and the United
Kingdom. The total purchase price of the acquisition was approximately $44.9
million. As of September 30, 2000, BridgeStreet had approximately 3,600
apartments under lease in the United States, Canada, and the United Kingdom.
In December 1999, the Real Estate Investment Trust Modernization Act became law.
The Real Estate Investment Trust Modernization Act now permits real estate
investment trusts to create a taxable subsidiary on or after January 1, 2000,
which will be subject to taxation similar to a C-Corporation. In conjunction
with the REIT Modernization Act, we have agreed to convert all 106 leases with
MeriStar Hospitality to management contracts beginning January 1, 2001. We have
structured the management agreements to mirror the current economics and terms
of the existing leases. The conversion does not result in any cash
consideration to be exchanged between the parties. Under the new management
agreements, the base management fee is 2.5 percent of total hotel revenue with
incentives up to an additional 1.5 percent of total revenue if we achieve
certain operating thresholds. We are also in discussions with our other primary
lessor, Winston Hotels, Inc., regarding the conversion of our 47 leases with
Winston to management contracts. We have not yet reached an agreement with
Winston regarding conversion of these leases.
Financial Condition
Assets
- ------
Our total assets increased by $116.7 million to $374.8 million at September 30,
2000 from $258.1 million at December 31, 1999 primarily due to the following:
. Investments in and advances to affiliates increased by $8.0 million
due to our investments in MIP Lessee, L.P. and other hotel ventures;
. Accounts receivable increased $29.3 million primarily due to:
. An increase of $50.1 million in our revenues in the third quarter
of 2000 compared to the fourth quarter of 1999; and
. The addition of $5.4 million of BridgeStreet's accounts
receivable.
. Cash and cash equivalents increased $8.3 million resulting from net
operating activity and additional net borrowings on our credit
facility;
12
. Prepaid expenses increased $18.3 million due to:
. The addition of $6.9 million of BridgeStreet prepaid expenses; and
. The establishment of a $9.9 million prepaid lease expense under
Emerging Issues Task Force Issue No. 98-9. This prepaid balance
only exists at interim periods.
. Furniture, fixtures, and equipment increased $12.7 million during the
nine months ended September 30, 2000 primarily due to the acquisition
of BridgeStreet and the acquisition of computer equipment and
software. As of September 30, 2000 BridgeStreet has $7.2 million of
furniture, fixtures, and equipment; and
. Intangible assets increased $36.5 million primarily due to the
acquisition of BridgeStreet.
Our assets include a substantial amount of intangible assets, primarily related
to our acquisitions of hotel management companies and BridgeStreet. We evaluate
the carrying values of our long-lived intangible assets periodically in relation
to their operating performance and expected future undiscounted cash flows of
the underlying assets. Through September 30, 2000, our evaluations have not
indicated a need to adjust the carrying value of our intangible assets. Over the
past two years, however, the lodging industry has experienced the negative
effects of the supply of new rooms in some hotel product types and geographic
regions exceeding demand. As a result, we will continue to regularly evaluate
the recoverability of our intangible assets.
Liabilities
- -----------
Our total liabilities increased by $85.0 million to $264.2 million at
September 30, 2000 from $179.2 million at December 31, 1999 primarily due to
the following:
. Accounts payable, accrued expenses and other liabilities increased
$28.3 million due to:
. Higher operating expenses before participating lease expense for
the third quarter 2000 as compared to the fourth quarter 1999; and
. The addition of $10.5 million of BridgeStreet's accounts payable,
accrued expenses and other liabilities.
. Due to MeriStar Hospitality Corporation increased $9.1 million
primarily due to the participating rent payable balance at
September 30, 2000 being higher than at December 31, 1999; and
. Long-term debt increased $37.4 million due to borrowings under our
credit facility to fund short term operating requirements and the
acquisition of BridgeStreet.
Stockholders' Equity
- --------------------
Stockholders' equity increased $31.1 million primarily due to:
. The issuance of 4,072,099 shares of our common stock to
BridgeStreet's shareholders;
. The sale of 1,818,182 shares of our common stock to our joint venture
partner in MIP Lessee, L.P.; and
. Net income of $14.0 million through September 2000.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Revenues
- ---------
Total revenue increased $41.6 million or 13.2% to $356.4 million in the three
months ended September 30, 2000 compared to $314.8 million in the three months
ended September 30, 1999. The increase in revenue is primarily the result of
the acquisition of BridgeStreet, an increase in third-party management fees, and
a 5.2% improvement in revenue per available room from our leased hotels. The
improvement in revenue per available room was primarily the result of a 6.7%
increase in the average daily rate. The following table provides our operating
statistics for our leased hotels on a pro forma basis for the quarter:
2000 1999 Change
---- ---- ------
Revenue per available room $72.69 $69.09 5.2 %
Average daily rate $99.09 $92.85 6.7 %
Occupancy 73.4% 74.4% (1.3)%
13
Operating Expenses
- ------------------
Operating expenses increased $44.4 million or 14.3% to $355.4 million in the
three months ended September 30, 2000 compared to $311.0 million in the three
months ended September 30, 1999. This increase reflects:
. The acquisition of BridgeStreet;
. Increased participating lease expense resulting from the increase in
revenue at our leased hotels; and
. Increased administrative and general expenses due mainly to higher
insurance costs and labor costs.
Earnings Before Interest, Taxes, Depreciation and Amortization
- --------------------------------------------------------------
Earnings before interest, taxes, depreciation and amortization decreased to $3.8
million in the three months ended September 30, 2000 compared to $5.2 million in
the three months ended September 30, 1999. The decrease in earnings before
interest, taxes, depreciation and amortization is primarily due to:
. A $4.9 million decrease in hotel operations' earnings before interest,
taxes, depreciation and amortization resulting from increased cost
pressures. These include higher lease expenses, energy costs,
insurance costs, frequent traveler program costs, and labor costs; and
. The acquisition of BridgeStreet resulted in $3.1 million of earnings
before interest, taxes, depreciation and amortization.
Minority interest decreased by $0.3 million primarily due to lower operating
income as compared to 1999. Taxes decreased by $1.0 million due to lower
operating income as compared to 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues
- ---------
Total revenue increased $83.7 million or 8.5% to $1,069.5 million in the nine
months ended September 30, 2000 compared to $985.8 million in the nine months
ended September 30, 1999. The increase in revenue is primarily the result of an
increase in the number of third party managed hotels, the acquisition of
BridgeStreet, and a 4.9% improvement in revenue per available room from our
leased hotels. The improvement in revenue per available room was primarily the
result of a 5.6% increase in the average daily rate. The following table
provides our operating statistics for our leased hotels on a pro forma basis:
2000 1999 Change
---- ---- ------
Revenue per available room $ 75.66 $72.14 4.9 %
Average daily rate $102.99 $97.49 5.6 %
Occupancy 73.5% 74.0% (0.7)%
Operating Expenses
- ------------------
Operating expenses increased $76.0 million or 7.9% to $1,039.9 million in the
nine months ended September 30, 2000 compared to $963.9 million in the nine
months ended September 30, 1999. The increase reflects:
. The acquisition of BridgeStreet;
. The increased departmental operating costs and participating lease
expense of our leased hotels associated with the increase in revenue;
and
. Increased administrative and general expenses due to higher insurance
costs and labor costs.
Earnings Before Interest, Taxes, Depreciation and Amortization
- --------------------------------------------------------------
Earnings before interest, taxes, depreciation and amortization increased to
$36.2 million in the nine months ended September 30, 2000 compared to $26.4
million in the nine months ended September 30, 1999. The increase in earnings
before interest, taxes, depreciation and amortization is primarily due to:
. A $6.2 million increase in hotel operations; and
. $3.9 million from BridgeStreet's operations.
Minority interest decrease by $0.6 million primarily due to the conversion of
operating partnership units. Taxes increased by $3.2 million due to higher
operating income as compared to 1999.
14
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 in excess of the expense we were required to recognize under EITF
No. 98-9 during the interim periods ended September 30, 2000 and 1999. As of
September 30, 2000 and 1999, this resulted in prepaid expense balances of $9,910
and $6,345, respectively, which are included on our condensed consolidated
balance sheets. The effect on our financial statements is as follows (in
thousands, except for per share amounts):
Three Months Ended September 30, 2000
-------------------------------------
Prior to Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
---------------- -------------- --------------
Net operating income $ 1,218 (216) $ 1,002
Interest expense, net (1,986) -- (1,986)
Minority interest 57 (26) 31
Income taxes 291 (239) 52
------- ----- -------
Net income $ (420) $(481) $ (901)
======= ===== =======
Diluted earnings per share $ (0.01) $(0.03)
======= =======
Three Months Ended September 30, 1999
-------------------------------------
Prior to Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
---------------- -------------- --------------
Net operating income $ 306 $ 3,445 $ 3,751
Interest expense, net (1,037) --- (1,037)
Minority interest 205 (455) (250)
Income taxes 195 (1,106) (911)
------- ------- -------
Net income $ (331) $ 1,884 $ 1,553
======= ======= =======
Diluted earnings per share $ (0.01) $ 0.05
======= =======
Nine Months Ended September 30, 2000
------------------------------------
Prior to Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
---------------- -------------- --------------
Net operating income $19,728 $ 9,910 $29,638
Interest expense, net (4,530) -- (4,530)
Minority interest (1,266) (842) (2,108)
Income taxes (5,236) (3,735) (8,971)
------- ------- -------
Net income $ 8,696 $ 5,333 $14,029
======= ======= =======
Diluted earnings per share $ 0.26 $ 0.41
======= =======
15
Nine Months Ended September 30, 1999
------------------------------------
Prior to Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
---------------- -------------- --------------
Net operating income $15,602 $ 6,345 $21,947
Interest expense, net (3,543) --- (3,543)
Minority interest (1,864) (830) (2,694)
Income taxes (3,772) (2,040) (5,812)
------- ------- -------
Net income $ 6,423 $ 3,475 $ 9,898
======= ======= =======
Diluted earnings per share $ 0.23 $0.36
======= =======
Liquidity and Capital Resources
Sources of Cash
Our continuing operations are funded through cash generated from hotel
management and leasing operations, and corporate housing operations. We finance
business acquisitions and investments in affiliates through a combination of
internally generated cash, external borrowings and the issuance of partnership
interests and/or common stock. We generated $9.8 million of cash from
operations during the first nine months of 2000.
We generated $28.1 million of cash from financing activities during the first
nine months of 2000 primarily from the following:
. We had net borrowings of $37.4 million on our credit facilities;
. We repaid $12.0 million of the BridgeStreet debt as part of our
acquisition of BridgeStreet; and
. We received $5.5 million from the issuances of our common stock.
Under the terms of the participating lease agreements with our lessors, our
lessors will generally be required to fund significant capital expenditures at
the hotels we lease.
Uses of Cash
We used $29.8 million of cash in investing activities during the first nine
months of 2000 primarily for the following:
. We purchased $7.1 million of fixed assets;
. We invested $8.0 million in hotel partnerships; and
. We paid $12.2 million in cash to BridgeStreet shareholders during the
acquisition.
Revolving Credit Facilities
On February 29, 2000, we entered into a $100.0 million senior secured revolving
credit facility with a syndicate of banks. This facility has an interest rate of
the 30-day London Inter-Bank Offered Rate plus 350 basis points and expires in
February 2002 with an optional one-year extension. We borrowed $65 million to
repay the borrowings outstanding under the revolving credit agreement with
MeriStar Hospitality Corporation. At September 30, 2000, we had $5.0 million of
unused capacity under the senior secured revolving credit facility.
We amended the facility with MeriStar Hospitality Corporation to reduce the
maximum borrowing limit from $75 million to $50 million when we entered into
this new facility.
Summary
We believe cash generated by our operations, together with anticipated borrowing
capacity under our credit facilities, will be sufficient to fund our
requirements for working capital, capital expenditures, and debt service. We
expect to continue to seek acquisitions of hotel, resort and golf management
businesses and management contracts. In addition, we expect to expand our
corporate housing business by entering new markets. We also expect to expand
our business into vacation ownership management. We expect to finance future
acquisitions through a combination of additional borrowings under
16
our credit facilities and the issuance of operating partnership units and/or our
common stock. We believe these sources of capital will be sufficient to provide
for our long-term capital needs.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns. For
non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season.
For resort properties, demand is generally higher in winter and early spring.
Since the majority of our hotels are non-resort properties, our operations
generally reflect non-resort seasonality patterns. Excluding the effect of
Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in
Interim Financial Periods", we have lower revenue, operating income and cash
flow in the first and fourth quarters and higher revenue, operating income and
cash flow in the second and third quarters.
Corporate housing activity 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since the Company filed the Form 10-Q on
August 10, 2000.
17
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
Certain statements in this Form 10-Q and in the future filings by the Company
with the SEC, in the Company's press releases, and in oral statements made by or
with the approval of an authorized executive officer constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievement expressed or implied by such forward-looking
statements. Such factors include: the ability of the Company to successfully
implement its operating strategy; the Company's ability to manage expansion;
lease rental rates; changes in economic cycles; competition from other
hospitality companies; the ability of the REIT to acquire properties which will
be leased to the Company; the availability of financing to the Company and to
the REIT; and changes in the laws and governmental regulations applicable to the
relationship between the REIT and the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of Employment Agreement between the Company and Paul W. Whetsell
10.14 Form of Employment Agreement between the Company and John Emery
27 -- Financial Data Schedule
Current Report on Form 8-K dated and filed on March 24, 2000, regarding the
merger of MeriStar Hotels & Resorts, Inc. with BridgeStreet Accommodations, Inc.
18
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: November 13, 2000 /s/ James A. Calder
-----------------------
James A. Calder
Chief Financial Officer
19