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, 1999 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 8, 1999 was 29,531,599.
MERISTAR HOTELS & RESORTS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II. OTHER INFORMATION 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
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, 1999 December 31, 1998
------------------ -----------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 3,581 $ 11,155
Accounts receivable, net of allowance for doubtful
accounts of $2,467 and $2,285 65,474 61,987
Prepaid expenses 11,217 4,193
Deposits and other 13,595 11,085
-------- --------
Total current assets 93,867 88,420
Fixed assets:
Furniture, fixtures, and equipment 10,721 7,325
Accumulated depreciation (2,159) (1,099)
-------- --------
Total fixed assets, net 8,562 6,226
Investments in and advances to affiliates 20,960 5,495
Intangible assets, net of accumulated
amortization of $6,729 and $3,338 152,987 146,782
Restricted cash 190 606
-------- --------
$276,566 $247,529
======== ========
Liabilities, Minority Interests, and Stockholders' Equity
Current Liabilities:
Accounts payable $ 22,394 $ 28,401
Accrued expenses and other liabilities 80,990 70,016
Due to affiliates, net 18,496 7,437
Income taxes payable 34 69
Long-term debt, current portion 5 27
-------- --------
Total current liabilities 121,919 105,950
Deferred income taxes 15,180 9,367
Long-term debt 56,814 67,785
-------- --------
Total liabilities 193,913 183,102
Minority interests 14,597 19,693
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share:
Authorized -- 100,000 shares
Issued and outstanding -29,498 and 25,437 shares 295 254
Additional paid-in capital 57,312 43,929
Retained earnings 10,449 551
-------- --------
Total stockholders' equity 68,056 44,734
-------- --------
$276,566 $247,529
======== ========
See accompanying notes to condensed consolidated financial statements.
3
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
INCLUDING PREDECESSOR ENTITY
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- --------- -------- ---------
Revenue:
Rooms $226,310 $143,581 $697,221 $198,315
Food and beverage 64,852 39,336 214,053 42,918
Other operating departments 21,551 9,787 67,212 12,551
Management and other fees 2,075 2,794 7,363 12,945
-------- -------- -------- --------
Total revenue 314,788 195,498 985,849 266,729
-------- -------- -------- --------
Operating expenses by department:
Rooms 55,146 33,266 163,963 45,195
Food and beverage 52,248 30,745 164,724 33,404
Other operating departments expenses 11,699 5,020 36,366 6,286
Undistributed operating expenses:
Administrative and general 43,054 27,970 138,840 42,385
Property operating costs 50,076 26,610 149,546 36,662
Participating lease expense 97,396 63,210 306,009 89,241
Depreciation and amortization 1,418 1,069 4,454 1,977
-------- -------- -------- --------
Total operating expenses 311,037 187,890 963,902 255,150
-------- -------- -------- --------
Net operating income 3,751 7,608 21,947 11,579
Interest expense, net 1,037 807 3,543 837
Equity in earnings of affiliates - (327) - (1,195)
-------- -------- -------- --------
Income before minority interests
and income taxes 2,714 6,474 18,404 9,547
Minority interests 250 945 2,694 1,037
-------- -------- -------- --------
Income before income taxes 2,464 5,529 15,710 8,510
Income taxes 911 1,924 5,812 1,924
-------- -------- -------- --------
Net income $ 1,553 $ 3,605 $ 9,898 $ 6,586
======== ======== ======== ========
Earnings per share:
Basic $0.05 $0.13 $0.36 $0.13
======== ======== ======== ========
Diluted $0.05 $0.12 $0.36 $0.12
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCLUDING PREDECESSOR ENTITY
UNAUDITED (IN THOUSANDS)
Nine Months Ended
September 30,
--------------------
1999 1998
-------- ---------
Operating activities:
Net income $ 9,898 $ 6,586
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,454 1,977
Minority interests 2,694 1,037
Deferred income taxes 5,813 1,619
Changes in operating assets and liabilities:
Accounts receivable, net (3,487) (56,628)
Deposits and other (2,510) (10,238)
Prepaid expenses (7,024) (7,818)
Accounts payable (6,007) 23,540
Accrued expenses and other liabilities 4,238 62,134
Due to affiliates, net 11,059 (1,954)
Income taxes payable (35) 304
-------- ---------
Net cash provided by operating activities 19,093 20,559
-------- ---------
Investing activities:
Purchases of fixed assets, net (3,644) (5,266)
Investments in and advances to affiliates (15,465) (2,250)
Purchases of intangible assets (2,860) (105,877)
Change in restricted cash 416 (2,588)
-------- ---------
Net cash used in investing activities (21,553) (115,981)
-------- ---------
Financing activities:
(Payments) proceeds from long term debt, net (10,993) 56,197
Proceeds from issuances of common stock, net 5,879 957
Contributions from CapStar -- 23,745
-------- ---------
Net cash (used in) provided by financing activities (5,114) 80,899
-------- ---------
Net decrease in cash and cash equivalents (7,574) (14,523)
Cash and cash equivalents, beginning of period 11,155 27,022
-------- ---------
Cash and cash equivalents, end of period $ 3,581 $ 12,499
======== =========
See accompanying notes to condensed consolidated financial statements.
5
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
MeriStar Hotels & Resorts, Inc. (the "Company") was spun off by Capstar Hotel
Company ("CapStar") on August 3, 1998 (the "Spin-Off") to become the lessee,
manager and operator of various hotel assets, including those which were
previously owned, leased and managed by CapStar and certain of its affiliates.
CapStar distributed to its stockholders, on a share-for-share basis, all of the
outstanding shares of the Company's common stock, par value $0.01 per share
("Common Stock"). On August 3, 1998, CapStar merged (the "Merger") with and
into American General Hospitality Corporation ("AGH"), a Maryland corporation
operating as a real estate investment trust, to form MeriStar Hospitality
Corporation (the "REIT").
Immediately following the Spin-Off and the Merger, the Company acquired 100% of
the partnership interests in AGH Leasing, L.P. ("AGH Leasing"), the third-party
lessee of most of the hotels owned by AGH, and acquired substantially all of the
assets and certain liabilities of American General Hospitality, Inc. ("AGHI"),
the third-party manager of most of the hotels owned by AGH and certain other
hotels. The Company thereby became the lessee, manager and operator of most of
the hotels owned by AGH. The purchase price of $95.0 million was funded with a
combination of cash and units of limited partnership interest ("OP Units") in
the Company's subsidiary operating partnership. In accordance with generally
accepted accounting principles ("GAAP"), the acquisitions have been accounted
for as a purchase and therefore, the operating results of AGHI and AGH Leasing
are included in the Company's consolidated financial statements from the date of
acquisition.
The Company has finalized the accounting related to the acquisitions of AGH
Leasing and AGHI. Based on the allocation of the purchase price to the net
assets acquired, the Company recorded goodwill of approximately $38.9 million.
Goodwill is being amortized on a straight-line basis over 40 years.
Pursuant to an intercompany agreement, the Company and the REIT provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, the Company has a right
of first refusal to become the lessee of any real property acquired by the REIT.
The Company also provides the REIT with certain services including
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources, acquisition identification and due diligence, and
operational services, for which the Company is compensated in an amount that the
REIT would be charged by an unaffiliated third party for comparable services.
As of September 30, 1999, the Company leased or managed 209 hotels with 44,035
rooms in 34 states, the District of Columbia, Canada and the U.S. Virgin
Islands.
The consolidated interim financial statements of the Company for the nine months
ended September 30, 1998 include the historical results of the Company's
predecessor entity, the management and leasing operations of CapStar. The
operating results of AGHI and AGH Leasing have been included in the Company's
consolidated financial statements since August 3, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been omitted
pursuant to such rules and regulations. The unaudited condensed consolidated
interim financial statements should be read in conjunction with the financial
statements, notes thereto and other information included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Certain 1998 amounts
have been reclassified to conform to 1999 presentation.
6
The accompanying unaudited condensed consolidated interim financial statements
reflect, in the opinion of management, 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 GAAP requires
management 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. 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.
The Company's participating leases have noncancelable remaining terms ranging
from 9 to 14 years, subject to earlier termination on the occurrence of certain
contingencies, as defined. 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.
In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods".
EITF No. 98-9 affects the recognition of contingent rental expense in interim
periods. This pronouncement 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 the Company's recognition of lease expense in
interim periods for financial reporting purposes; it has no effect on the timing
of rent payments under the Company's leases or the Company's annual lease
expense calculations. The Company adopted EITF No. 98-9 effective July 1, 1998.
The Company has made cash lease payments in excess of the expense the Company is
required to recognize under EITF No. 98-9 for the interim period ended September
30, 1999. This has resulted in a prepaid expense of $6.3 million, which is
included on the Company's condensed consolidated balance sheet as of September
30, 1999. The effect of EITF No. 98-9 on the Company's financial statements is
as follows:
Three Months Ended September 30, 1999
-------------------------------------
Prior to Effect After
Effect of of Effect 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 EPS $ (0.01) $ 0.05
======= =======
7
Nine Months Ended September 30, 1999
------------------------------------
Prior to Effect After
Effect of of Effect 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 EPS $ 0.23 $ 0.36
======= =======
3. EARNINGS PER SHARE
Earnings per share ("EPS") has been calculated using net income for the three
and nine months ended September 30, 1999. EPS has been calculated on income
from the date of the Spin-Off, August 3, 1998, through September 30, 1998 for
both the three and nine months ended September 30, 1998. The following tables
present the computation of basic and diluted EPS:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------- ----------------- ---------------- ------------------
BASIC EARNINGS PER SHARE
COMPUTATION:
Net income $1,553 $3,185 $9,898 $3,185
Weighted average number of shares
of Common Stock outstanding 29,043 25,189 27,298 25,189
------------------------------------------------------------------------
Basic earnings per share $0.05 $0.13 $0.36 $0.13
========================================================================
8
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------- ----------------- ---------------- ------------------
DILUTED EARNINGS PER SHARE
COMPUTATION:
Net income $1,553 $3,185 $9,898 $3,185
Minority interest, net of tax (30) 562 - 562
-------------------------------------------------------------------------
Adjusted net income $1,523 $3,747 $9,898 $3,747
=========================================================================
Weighted average number of shares
of Common Stock outstanding 29,043 25,189 27,298 25,189
Common stock equivalents-OP Units 678 4,891 392 4,891
Common stock equivalents-stock options 186 41 160 41
-------------------------------------------------------------------------
Total weighted average number of
diluted shares of common stock
outstanding 29,907 30,121 27,850 30,121
=========================================================================
Diluted earnings per share $0.05 $0.12 $0.36 $0.12
=========================================================================
4. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
Cash paid for interest and income taxes:
Interest $3,674 $ 398
Income taxes 35 -
Non-cash investing and financing activities:
Conversion of OP Units to common stock 7,790 -
OP Units issued and/or assumption of liabilities
in purchase of intangible assets 6,736 11,201
Assets contributed by CapStar - 41,449
Liabilities contributed by CapStar - (11,768)
Debt contributed by CapStar - (1,116)
------- --------
Net Assets contributed by CapStar - 28,565
5. SEGMENTS
The Company is organized into three primary operating divisions. Each division
is managed separately because of its distinctive products and services offered
by the hotel properties within the operating division. These operating
divisions are the Company's three reportable operating segments: upscale, full-
service hotels ("Hotels"); premium limited-service hotels and inns ("Inns"); and
resort properties ("Resorts"). The Company's management evaluates performance
of each segment based on earnings before interest, taxes, depreciation, and
amortization ("EBITDA"). The accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
The Company's financial condition and results of operations as of September 30,
1999 and December 31, 1998 and for the three and nine months ended September 30,
1999 and 1998 reflect significantly differing numbers of managed and leased
hotels throughout the periods. Consequently, the Company has determined that it
is not practicable to present the segment
9
information of the management and leasing operations of CapStar, its predecessor
entity, for the three and nine months ended September 30, 1998. Also, prior to
the Spin-Off, the management and leasing operations of CapStar conducted its
business primarily in only one operating segment. Therefore, the segment
disclosures presented below are for the three and nine months ended September
30, 1999.
Three Months Ended September 30, 1999
--------------------------------------------------------------
Total
Hotels Inns Resorts Segments
--------------------------------------------------------------
Revenues $205,133 $48,936 $56,926 $310,995
--------------------------------------------------------------
Participating Lease Expense $63,742 $19,601 $14,053 $97,396
--------------------------------------------------------------
EBITDA $5,530 $2,418 $(3,343) $4,605
--------------------------------------------------------------
Nine Months Ended September 30, 1999
--------------------------------------------------------------
Total
Hotels Inns Resorts Segments
--------------------------------------------------------------
Revenues $615,361 $142,694 $216,480 $974,535
--------------------------------------------------------------
Participating Lease Expense $193,263 $57,701 $55,045 $306,009
--------------------------------------------------------------
EBITDA $15,757 $5,692 $11,627 $33,076
--------------------------------------------------------------
Total Assets $74,932 $17,226 $9,537 $101,695
--------------------------------------------------------------
The following is a reconciliation of the segment information to the Company's
consolidated data for the three months ended September 30, 1999:
Participating
Revenues Lease Expense EBITDA
------------------------------------------
Total Segments $310,995 $97,396 $4,605
Other Items 3,793 - 564
------------------------------------------
Per Financial Statements $314,788 $97,396 $5,169
==========================================
The following is a reconciliation of the segment information to the Company's
consolidated data for the nine months ended September 30, 1999:
Participating
Revenues Lease Expense EBITDA Assets
------------------------------------------------------
Total Segments $974,535 $306,009 $33,076 $101,695
Other Items 11,314 - (6,675) 174,871
------------------------------------------------------
Per Financial Statements $985,849 $306,009 $26,401 $276,566
=======================================================
The other items in the tables above represent non-operating segment activity and
assets. These are primarily unallocated corporate expenses and non-segment
activities, and intangible and other miscellaneous assets.
Revenues for Canadian operations totaled $6,163 and $16,345 for the three and
nine months ended September 30, 1999, respectively.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On August 3, 1998, CapStar Hotel Company ("CapStar") spun-off (the "Spin-Off")
its management and leasing operations in a taxable transaction in which CapStar
distributed on a share-for-share basis all shares of common stock, par value
$0.01 per share, ("Common Stock") of MeriStar Hotels & Resorts, Inc. (the
"Company"). The Company thereby became the lessee, manager and operator of
various hotel assets, including those which were previously owned, leased and
managed by CapStar and certain of its affiliates. On August 3, 1998, CapStar
merged (the "Merger") with and into American General Hospitality Corporation
("AGH"), a Maryland corporation operating as a real estate investment trust, to
form MeriStar Hospitality Corporation (the "REIT").
Immediately following the Spin-Off and the Merger, the Company acquired 100% of
the partnership interests in AGH Leasing, L.P. ("AGH Leasing"), the third-party
lessee of most of the hotels owned by AGH, and substantially all of the assets
and liabilities of American General Hospitality, Inc. ("AGHI"), the third-party
manager of most of the AGH hotels. As a result, the Company became the lessee
and manager of most of the hotels owned by the REIT. The purchase price of $95.0
million was paid with a combination of cash and units of limited partnership
interest ("OP Units") in the Company's subsidiary operating partnerships. In
accordance with generally accepted accounting principles, the acquisitions have
been accounted for as a purchase and therefore, the operating results of AGHI
and AGH Leasing have been included in the Company's consolidated financial
statements since the date of acquisition.
The Company's financial statements include the historical results of the
Company's predecessor entity, the management and leasing operations of CapStar,
for all periods in the year ended December 31, 1998 and include the operating
results of AGH Leasing and AGHI for the period August 3, 1998 through December
31, 1998. In addition, prior to August 3, 1998, the Company managed
substantially all of the hotels owned by CapStar and received management fee
revenues from such hotels. Since August 3, 1998, the Company has leased these
hotels from the REIT and therefore records no management fees from such hotels
but instead records room, food and beverage and other operating department
revenues and expenses from such leases. Therefore, the Company's results of
operations for the periods ended September 30, 1999 and 1998 reflect
significantly differing numbers of managed and leased hotels throughout the
periods. The following table outlines the Company's historical portfolio of
managed and leased hotels:
REIT CAPSTAR THIRD PARTY OTHER
LEASED MANAGED MANAGED LEASED TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
- ---------------------------------------------------------------------------------------------------------------------------
9/30/99 109 28,175 - - 47 8,260 53 7,600 209 44,035
12/31/98 109 28,058 - - 41 6,800 53 7,608 203 42,466
9/30/98 102 26,751 - - 47 7,729 52 7,440 201 41,920
12/31/97 - - 47 12,019 27 4,631 40 5,687 114 22,337
FINANCIAL CONDITION
SEPTEMBER 30, 1999 COMPARED WITH DECEMBER 31, 1998
Total assets increased by $29.1 million to $276.6 million at September 30, 1999
from $247.5 million at December 31, 1998. Total liabilities increased by $10.8
million to $193.9 million from $183.1 million. The increase in assets primarily
results from increases in prepaid expenses ($7.0 million), investments in and
advances to affiliates ($15.5 million), and intangible assets ($6.2 million).
The increase in prepaid expenses is due to the Company making cash lease
payments in excess of the expense the Company is required to recognize under
EITF No.98-9; this results in a prepaid expense of $6.3 million. The increase in
investments in and advances to affiliates is a result of the Company's
investments in several hotel ownership joint ventures in 1999. The increase in
intangibles is a result of the final purchase price adjustment relating to
11
the acquisitions of AGH Leasing and AGHI. The increase in liabilities primarily
results from an $11.0 million increase in accrued expenses and other liabilities
due to increased sales volume and an $11.1 million increase in due to
affiliates, primarily representing a higher amount of participating lease
payable at September 30, 1999 compared to December 31, 1998. These increases
were partially offset by an $11.0 million decrease in long-term debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenue increased by $119.3 million to $314.8 million in the three months
ended September 30, 1999 compared to $195.5 million in the three months ended
September 30, 1998. This increase results from the increase in the number of
hotels leased as described above.
Operating expenses increased $123.1 million to $311.0 million in the three
months ended September 30,1999 compared to $187.9 million in the three months
ended September 30, 1998. The increase reflects the greater number of leased and
managed hotels, and includes the costs of additional personnel and other
administrative costs incurred in conjunction with the Company's growth.
Net operating income decreased $3.8 million, to approximately $3.8 million in
the three months ended September 30, 1999 compared to $7.6 million in the three
months ended September 30, 1998. The decrease in net operating income is due to
the change in the types of revenues and expenses recorded in the Company's
financial statements in periods before and after the Merger.
EBITDA for the Company's three operating segments for the three months ended
September 30, 1999 is as follows:
Total
Hotels Inns Resorts Segments
------------------------------------------
EBITDA.....................$5,530 $2,418 $(3,343) $4,605
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenue increased by $719.1 million to $985.8 million in the nine months
ended September 30, 1999 compared to $266.7 million in the nine months ended
September 30, 1998. This increase results from the increase in the number of
hotels leased as described above.
Operating expenses increased $708.7 million to $963.9 million in the nine months
ended September 30,1999 compared to $255.2 million in the nine months ended
September 30, 1998. The increase reflects the greater number of leased and
managed hotels, and includes the costs of additional personnel and other
administrative costs incurred in conjunction with the Company's growth.
Net operating income increased $10.3 million, to approximately $21.9 million in
the nine months ended September 30, 1999 compared to approximately $11.6 million
in the nine months ended September 30, 1998. The increase in net operating
income is due to the change in the types of revenues and expenses recorded in
the Company's financial statements in periods before and after the Merger.
EBITDA for the Company's three operating segments for the nine months ended
September 30, 1999 is as follows:
Total
Hotels Inns Resorts Segments
------------------------------------------
EBITDA.................. ..$15,757 $5,692 $11,627 $33,076
12
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations are funded through cash generated from hotel
management and leasing operations. Business acquisitions and investments in
affiliates are financed through a combination of internally generated cash,
external borrowings and the issuance of OP Units and/or Common Stock.
Operating activities provided $19.1 million of net cash in the nine months ended
September 30, 1999, mainly due to higher levels of earnings, depreciation and
amortization, and net operating liabilities. The Company used $21.6 million of
cash in investing activities for the first nine months of 1999, primarily for
the investments in hotel partnerships. Net cash used in financing activities of
$5.1 million resulted from principal payments on long-term debt, net of proceeds
from issuances of Common Stock.
On March 3, 1999, the Company amended its unsecured revolving credit facility
(the "Credit Facility") with the REIT to increase the total borrowings available
under the Credit Facility to $100.0 million. At September 30, 1999, the Company
had available $44.0 million under the Credit Facility. As of November 8, 1999,
the Company had available $49 million under the Credit Facility.
On April 15, 1999, the Company issued $5 million of Common Stock in a private
placement with the Company's joint venture partner in MeriStar Investment
Partners. The stock was issued at a price of $2.75 per share. The proceeds
from this sale of stock were used to pay down debt on the Credit Facility.
Under the terms of the participating leases and management agreements between
the Company and lessors or third-party owners, the lessors and third-party
owners will generally be required to fund significant capital expenditures at
the hotels operated by the Company.
The Company believes cash generated by operations, together with anticipated
borrowing capacity under the Credit Facility, will be sufficient to fund its
existing working capital, ongoing capital expenditures, and debt service
requirements. In addition, the Company expects to continue to seek acquisitions
of hotel management businesses and management contracts. The Company expects to
finance these future acquisitions through a combination of anticipated borrowing
capacity under its Credit Facility and the issuance of OP Units and/or Common
Stock. The Company believes these sources of capital will be sufficient to
provide for the Company's long-term capital needs.
SEASONALITY
Demand in the lodging industry is affected by recurring seasonal patterns.
Excluding resort hotel properties, demand is lower in the winter months due to
decreased travel and higher in the spring and summer months during peak travel
season. The majority of the properties operated by the Company are non-resort
properties. Therefore, the Company's operations are seasonal in nature.
Assuming other factors remain constant and excluding resort hotel properties and
the effect of EITF 98-9 on reporting in interim periods, the Company has 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.
YEAR 2000 CONVERSION
The Company has reviewed its computer systems to identify the systems that could
be affected by the "Year 2000" problem and has initiated an implementation plan
to address the problem. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. If not corrected,
this could result in a major systems failure or miscalculations.
The Company's leased and managed hotel properties contain various information
technology and embedded technology systems. Both types of systems contain
microprocessors and microcontrollers that must be assessed for Year 2000
compliance. The Company has developed a comprehensive implementation plan to
address the potential Year 2000 problems caused by such systems. This plan
involves six stages: increase awareness of issue; assign responsibility for
coordinating response to issue; information collection; analysis; modification,
repair or replacement; and testing. The
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Company is currently in its modification, repair or replacement and testing
stages, and expects to complete these stages in December 1999.
As an additional part of its implementation plan to address the Year 2000
problem, the Company has also initiated communications with third parties with
which it has material relationships to determine the extent of potential Year
2000 problems with these parties' services provided to the Company. The most
critical of these services involve such items as reservations systems for the
Company's hotels. Without such systems, the Company could suffer a material
decline in business at many of its properties. The Company completed its
communications and assessment of third parties' services in September 1999.
Also, the Company is reviewing and updating its contingency plans to allow for
manual or other alternative operation of certain computerized systems, in the
event that modification, repair, and replacement efforts are not completed
timely.
The Company anticipates completing its Year 2000 implementation plan in December
1999 prior to any anticipated impact on its operating systems. As of September
30, 1999, historical costs incurred to address the Year 2000 problem approximate
$0.5 million. The Company anticipates that it will incur $0.3 million of
additional costs to address the Year 2000 problem. The Company expects that
essentially all of the future expenditures required to modify, repair or replace
computerized systems at its leased and managed hotel properties will be the
financial responsibility of the owners of those properties, rather than the
Company. The Company's current estimate of these remediation costs for all of
its leased and managed properties (including those properties leased from the
REIT) to fix Year 2000 issues is $8-10 million. This cost estimate is based on
the Company's current assessment to complete the stages of its implementation
plan to address the potential Year 2000 problems.
Based on its preliminary assessment, the Company believes that its risks of Year
2000 non-compliance (that is, its "most reasonably likely worst case scenario"),
with modifications to existing software and converting to new software, will not
pose significant operational problems for the Company's computer systems as so
modified and converted. If, however, such modifications and conversions are not
completed timely, the Year 2000 problem could have a material impact on the
Company's financial position and operations. The Company's operations are
highly dependent upon efficient operating systems at its properties. To the
extent that the Year 2000 problems materially affect the conduct of operations
at those properties, it is likely that the Company's ability to efficiently
manage operations would be materially affected. Also, as discussed above, the
vast majority of expenditures related to Year 2000 problems at the Company's
leased and managed properties will be the financial responsibility of the owners
of those properties. To the extent that those owners are unable or unwilling to
modify, repair, and replace systems with potential Year 2000 problems, the
Company could suffer material adverse financial consequences.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since the Company filed the Form 10-K on
March 22, 1999.
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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; changes in the laws and governmental regulations applicable to the
relationship between the REIT and the Company; and special risks associated with
the Merger (including the integration of CapStar with AGH and changes in the
laws and governmental regulations applicable to the structure of the Merger and
the related transactions).
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 -- Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MeriStar Hotels & Resorts, Inc.
Dated: November 9, 1999 /s/ James A. Calder
--------------------------------
James A. Calder
Chief Financial Officer
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