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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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INTERSTATE HOTELS CORPORATION
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
MARYLAND 0-26805 75-2767215
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification Number)
The Company (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, and
(2) has been subject to such filing requirements for the past 90 days.
The total number of shares of the Company's Common Stock, par value $0.01
per share, outstanding at August 4, 2000 was 6,394,996.
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INDEX
INTERSTATE HOTELS CORPORATION
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................ 2
Consolidated Balance Sheets - December 31, 1999 and June 30,
2000........................................................ 2
Consolidated Statements of Operations - Three Months and Six
Months Ended June 30, 1999 and June 30, 2000................ 3
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1999 and June 30, 2000............................. 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 13
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
INTERSTATE HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(A) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,440 $ 34,521
Accounts receivable, net of allowance for doubtful
accounts of $486 in 1999 and
$530 in 2000............................................ 16,779 17,041
Deferred income taxes..................................... 1,172 2,008
Net investment in direct financing leases................. 464 340
Prepaid expenses and other assets......................... 1,148 1,687
Related party receivables -- management contracts......... 423 316
-------- --------
Total current assets.................................. 42,426 55,913
Restricted cash............................................. 1,701 1,687
Marketable securities....................................... 2,134 2,565
Property and equipment, net................................. 16,049 15,649
Officer and employee notes receivable....................... 3,541 3,336
Notes receivable -- affiliates, net of reserve for
uncollectible notes receivable of
$333 in 2000.............................................. 10,838 10,860
Net investment in direct financing leases................... 928 680
Intangible and other assets................................. 64,842 57,277
-------- --------
Total assets.......................................... $142,459 $147,967
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. 3,430 2,020
Accounts payable -- health trust.......................... 3,358 4,621
Accounts payable -- related parties....................... 3,991 2,247
Accrued payroll and related benefits...................... 8,252 7,225
Accrued rent.............................................. 5,348 8,346
Other accrued liabilities................................. 12,486 16,276
Current portion of long-term debt......................... -- 89
-------- --------
Total current liabilities............................. 36,865 40,824
Deferred income taxes....................................... 2,454 1,532
Deferred compensation....................................... 2,134 2,565
Long-term debt.............................................. -- 7,440
-------- --------
Total liabilities..................................... 41,453 52,361
Minority interest........................................... 41,000 36,761
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding at June 30,
2000.................................................... -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 6,394,996 shares issued and outstanding at
June 30, 2000........................................... 64 64
Paid-in capital........................................... 66,705 66,705
Retained deficit.......................................... (5,889) (7,205)
Unearned compensation..................................... (874) (719)
-------- --------
Total stockholders' equity............................ 60,006 58,845
-------- --------
Total liabilities and stockholders' equity............ $142,459 $147,967
======== ========
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(A) The year-end balance sheet information was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The accompanying notes are an integral part of the consolidated financial
statements.
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INTERSTATE HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1999 2000 1999 2000
------- ------- -------- --------
Lodging revenues:
Rooms.......................................... $48,854 $51,913 $ 89,124 $ 94,908
Other departmental............................. 2,734 3,164 5,059 5,894
Net management fees.............................. 8,753 7,861 17,322 14,045
Other fees....................................... 3,200 2,727 6,180 5,628
------- ------- -------- --------
63,541 65,665 117,685 120,475
------- ------- -------- --------
Lodging expenses:
Rooms.......................................... 11,085 11,999 20,820 22,465
Other departmental............................. 1,769 1,915 3,275 3,509
Property costs................................. 13,905 15,449 26,722 29,554
General and administrative....................... 3,510 3,288 7,588 6,472
Payroll and related benefits..................... 5,048 5,433 9,956 10,753
Lease expense.................................... 23,612 24,221 44,509 44,377
Depreciation and amortization.................... 5,434 4,300 10,092 8,588
------- ------- -------- --------
64,363 66,605 122,962 125,718
------- ------- -------- --------
Operating loss................................... (822) (940) (5,277) (5,243)
Other income (expense):
Interest, net.................................. 96 538 155 984
Other, net..................................... 1,181 24 1,563 24
Loss on sale of investment in hotel real
estate...................................... (876) -- (876) --
------- ------- -------- --------
Loss before income tax expense (benefit)......... (421) (378) (4,435) (4,235)
Income tax expense (benefit)..................... 249 (274) (1,376) (877)
------- ------- -------- --------
Loss before minority interest.................... (670) (104) (3,059) (3,358)
Minority interest................................ (1,045) 307 (996) (2,042)
------- ------- -------- --------
Net income (loss)................................ $ 375 $ (411) $ (2,063) $ (1,316)
======= ======= ======== ========
Earnings per common share and common share
equivalent (Note 4):
Basic.......................................... -- $ (.07) -- $ (.21)
======= ======= ======== ========
Diluted........................................ -- $ (.07) -- $ (.21)
======= ======= ======== ========
Weighted average number of common share and
common share equivalents outstanding:
Basic.......................................... -- 6,159 -- 6,159
======= ======= ======== ========
Diluted........................................ -- 6,159 -- 6,159
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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INTERSTATE HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 2000
------------ ------------
Cash flows from operating activities:
Net loss.................................................. $(2,063) $(1,316)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization.......................... 10,092 8,588
Equity in earnings from unconsolidated subsidiaries.... (1,525) --
Minority interest...................................... (996) (2,042)
Deferred income taxes.................................. (52) (1,758)
Other.................................................. 836 572
Cash (used in) provided by assets and liabilities:
Accounts receivable, net............................... (174) (262)
Prepaid expenses and other assets...................... (923) (539)
Related party receivables.............................. 295 107
Accounts payable....................................... 1,632 (1,174)
Accrued liabilities.................................... 12,178 7,201
------- -------
Net cash provided by operating activities............ 19,300 9,377
------- -------
Cash flows from investing activities:
Net investment in direct financing leases................. 534 372
Change in restricted cash................................. 562 14
Purchase of property and equipment, net................... (75) (217)
Purchases of marketable securities........................ (1,324) (1,151)
Proceeds from sale of marketable securities............... 1,113 1,111
Proceeds from sale of investment in hotel real estate..... 13,654 --
Net cash received from unconsolidated subsidiaries........ 1,176 --
Change in officer and employee notes receivable........... 112 (233)
Net investment in management contracts.................... (176) (71)
Merger-related acquisition costs.......................... (8,303) --
Change in notes receivable -- affiliates, net............. (623) (355)
Other..................................................... (16) (270)
------- -------
Net cash provided by (used in) investing
activities.......................................... 6,634 (800)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 7,560
Repayment of long-term debt............................... -- (31)
Financing costs paid...................................... -- (85)
Proceeds from sale of common stock........................ 2,120 --
Net contributions from minority interest.................. 6,934 --
Related party payables.................................... (15,135) (3,940)
Net contributions from owners............................. 16,659 --
------- -------
Net cash provided by financing activities............ 10,578 3,504
------- -------
Net increase in cash and cash equivalents................... 36,512 12,081
Cash and cash equivalents at beginning of period............ 1,652 22,440
------- -------
Cash and cash equivalents at end of period.................. $38,164 $34,521
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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INTERSTATE HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Corporation (together with its subsidiaries and
predecessors, the "Company") was formed pursuant to a series of events
culminating in the spin-off of the Company's operations from Wyndham
International, Inc., formerly Patriot American Hospitality, Inc. ("Wyndham"), on
June 18, 1999. On June 2, 1998, Interstate Hotels Company (the predecessor of
the Company, and together with its subsidiaries, "Old Interstate") merged into
Wyndham (the "Merger"). Prior to the Merger, Marriott International, Inc.
("Marriott") filed a lawsuit to stop the closing of the Merger as a result of a
dispute over certain franchise agreements between Marriott and Old Interstate.
On June 18, 1999, pursuant to a settlement agreement with Marriott, Wyndham
transferred to the Company, which was then a newly formed corporation, the
third-party hotel management business of Old Interstate, equity interests in The
Charles Hotel Complex, a hotel, retail and office complex located in Cambridge,
Massachusetts, and long-term leasehold interests in 79 hotels. Wyndham then
spun-off the Company to its shareholders (the "Spin-off"). In connection with
the Spin-off, Marriott purchased 4% of the Company's common stock, Wyndham
retained 4% of the Company's common stock, and the remaining 92% of the
Company's common stock was distributed to Wyndham's shareholders.
The Company's principal subsidiaries include Interstate Hotels, LLC ("IH
LLC") and Interstate Pittsburgh Hotel Holdings, L.L.C. IH LLC has assumed the
third-party hotel management business previously conducted by Old Interstate and
holds the leasehold interests in the Company's leased hotels, as well as
provides ancillary services such as centralized purchasing, equipment leasing
and insurance services. The Company owns a 45% managing member interest and
Wyndham owns a 55% non-controlling ownership interest in IH LLC. Interstate
Pittsburgh Hotel Holdings, L.L.C. is a wholly owned subsidiary of the Company
which owns the Pittsburgh Airport Residence Inn by Marriott.
In accordance with IH LLC's limited liability company agreement, the
Company is required to distribute 55% of IH LLC's cash flows from operations to
Wyndham and allocate between IH LLC and the Company the costs and expenses
relating to services provided by one party for the benefit of the other in
accordance with generally accepted accounting principles, on the basis of which
party benefited from the expenditure. To the extent that the allocation of any
such costs and expenses, including general and administrative expenses, cannot
be fairly apportioned, IH LLC and the Company will allocate such costs and
expenses based upon their respective gross revenues, so that each party's profit
margins are substantially the same for similar services.
The Company includes the revenues and expenses and the working capital of
the leased hotels in the financial statements because the risk of operating
these hotels is borne by the Company, as lessee, under the terms of the leases.
Revenues and expenses from the operation of the managed hotels are not included
in the financial statements because the hotel management contracts are generally
cancellable, not transferable and do not shift the risks of operation to the
Company. Therefore, the Company records revenues from management fees only for
its managed hotels.
2. INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These consolidated interim financial statements should be
read in conjunction with the consolidated financial statements, notes thereto
and other information included in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1999.
The accompanying consolidated interim financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation, in all
material respects, of the financial position and results of operations for the
periods presented. The preparation of financial statements in accordance with
generally
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS)
2. INTERIM FINANCIAL STATEMENTS--CONTINUED
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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.
3. PRO FORMA INFORMATION:
The following pro forma information for the three and six-month periods
ended June 30, 1999 and 2000 is presented to include the effects of the
Spin-off, the sale of equity interests in The Charles Hotel Complex and certain
other adjustments as if all of the transactions had occurred on January 1, 1999.
Such other adjustments principally include the elimination and addition of
certain management fee and other fee revenues related to Wyndham-owned hotels,
the management of which was transferred to Wyndham, Marriott or the Company as a
result of the Spin-off. The adjustments also include the elimination of a $2,000
one-time charge in the first quarter of 1999 for additional incentive lease
expense for 1999 paid in settlement of a dispute with Equity Inns, Inc.
resulting from the Merger, and the addition of minority interest to reflect
Wyndham's 55% non-controlling interest in IH LLC prior to the Spin-off.
In management's opinion, all material pro forma adjustments necessary to
reflect the effects of these transactions have been made. The pro forma
information does not include earnings on the Company's pro forma cash and cash
equivalents or certain one-time charges to income relating to the Merger, and
does not purport to present what the actual results of operations of the Company
would have been if the previously mentioned transactions had occurred on such
date or to project the results of operations of the Company for any future
period.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1999 2000 1999 2000
------- ------- -------- --------
Total revenues................................... $61,378 $65,665 $113,435 $120,475
Operating loss................................... (3,329) (940) (8,271) (5,243)
Net loss......................................... (782) (411) (2,014) (1,316)
Pro Forma basic earnings per common share........ (.12) (.06) (.31) (.21)
Pro Forma diluted earnings per common share...... (.12) (.06) (.31) (.21)
4. EARNINGS PER SHARE:
Prior to the Spin-off, the Company was not a separate legal entity.
Therefore, the accompanying consolidated financial statements of the Company
have been carved out of the financial statements of Old Interstate and Wyndham,
and principally include those assets, liabilities, revenues and expenses
directly attributable to the third-party hotel management and leasing businesses
conducted by the Company. Accordingly, the Company believes that the historical
earnings per share calculations required in accordance with Statement of
Financial Accounting Standard No. 128 are not meaningful for periods prior to
the Spin-off and, therefore, have not been provided.
5. LONG-TERM DEBT:
In February 2000, Interstate Pittsburgh Hotel Holdings, L.L.C. entered into
a limited-recourse mortgage note with a bank. The proceeds from the note, which
has a two-year term with a one-year extension if certain minimum financial
requirements are met, totaled $7,560. Monthly payments are due based on a
25-year amortization schedule for principal, with interest based on variable
rate options using the prime rate or the LIBOR rate. The note is collateralized
by the Pittsburgh Airport Residence Inn by Marriott, which was acquired by the
Company in November 1999, and provides for a guarantee by the Company of up to
$3,000. The outstanding principal balance on the note is due and payable at
maturity.
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8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS)
6. COMMITMENTS AND CONTINGENCIES:
On July 21, 2000, the Company executed a binding Memorandum of
Understanding (the "Memorandum") with Equity Inns, Inc. ("Equity Inns") with
respect to the hotel lease agreements between the Company and Equity Inns.
Pursuant to the Memorandum, all of the lease agreements for the 75 hotels leased
from Equity Inns will be terminated effective January 1, 2001, and Equity Inns
and the Company simultaneously will enter into management agreements for 54 of
the hotels formerly leased to the Company. The management agreements will expire
on a staggered basis beginning January 1, 2002 through 2005. As a result
effective January 1, 2001, the revenues and expenses and the working capital of
these hotels will no longer be reflected in the financial statements of the
Company. Instead, the Company will record revenues from management fees only.
The Company will also continue to manage, under a new management agreement, one
additional hotel it currently manages for Equity Inns (but does not lease). The
closing of the transaction is contingent upon obtaining the consents of certain
third parties.
In addition, the Memorandum addresses a dispute between the Company and
Equity Inns regarding certain performance standards currently in place with
respect to the leased hotels, including requirements to maintain revenue per
available room and expenditures to within specified percentages of the amounts
targeted in the hotels' operating budgets. Previously, Equity Inns had asserted
that the Company had failed to spend the required percentages of the amounts
targeted in certain categories of the hotels' operating budgets for the
measuring period from July 1, 1999 through December 31, 1999 with respect to 41
leases. Equity Inns' sole remedy for a failure to satisfy the performance
standards was to terminate the subject lease or leases, without penalty. The
Company vigorously disagreed with and disputed Equity Inns' interpretation of
this requirement. The execution of the Memorandum suspends the application of
the performance standards as to all periods prior to and after the date of
execution and through the closing. In the event that the transaction does not
close, the performance standards will be reinstated retroactively, unless the
failure to close is the result of a breach by Equity Inns of its obligations
under the Memorandum, in which case the performance standards will be reinstated
on a forward-looking basis with an effective date of January 1, 2001.
In the event that the transaction does not close and the performance
standards are then reinstated, Equity Inns termination rights with respect
thereto will also be reinstated. The termination of any leases could result in
accelerated amortization of all or the applicable portion of the leased hotel's
intangible assets on the date of termination. The carrying value of the
Company's leased hotel intangible assets related to the 41 hotel leases amounted
to approximately $6,000 as of June 30, 2000.
In addition, during the period prior to the closing of the transaction, the
Company is still required to maintain a certain minimum net worth. A failure to
maintain the minimum net worth would be a default under the leases.
7. SEGMENT INFORMATION:
The Company's reportable segments are: (i) operations of luxury and upscale
hotels, and (ii) operations of mid-scale, upper economy and budget hotels. The
luxury and upscale hotels segment derives revenues from management fees and
other services which directly relate to providing management services, including
revenues from insurance, purchasing and equipment leasing. The mid-scale, upper
economy and budget segment derives revenues from managing and leasing hotels and
certain specialized support services.
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9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS)
7. SEGMENT INFORMATION--CONTINUED:
The table below presents revenue and operating loss information for each
reportable segment for the three and six-month periods ended June 30, 1999 and
2000.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1999 2000 1999 2000
------- ------- -------- --------
REVENUES:
Luxury and Upscale Hotels................... $10,909 $ 9,402 $ 21,618 $ 17,466
Mid-Scale, Upper Economy and Budget
Hotels.................................... 52,632 56,263 96,067 103,009
------- ------- -------- --------
Consolidated totals....................... $63,541 $65,665 $117,685 $120,475
======= ======= ======== ========
OPERATING INCOME (LOSS):
Luxury and Upscale Hotels................... $ 279 $ (768) $ 764 $ (2,602)
Mid-Scale, Upper Economy and Budget
Hotels*................................... (1,101) (172) (6,041) (2,641)
------- ------- -------- --------
Consolidated totals....................... $ (822) $ (940) $ (5,277) $ (5,243)
======= ======= ======== ========
- - ---------------
* The 1999 amount includes a $2,000 one-time charge in the first quarter of 1999
for additional incentive rent paid in settlement of a dispute with Equity
Inns, Inc. resulting from the Merger.
Depreciation and amortization included in segment operating loss for the
three and six-month periods ended June 30, 1999 and 2000 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1999 2000 1999 2000
------- ------- -------- --------
Luxury and Upscale Hotels................... $ 4,157 $ 3,317 $ 7,502 $ 6,634
Mid-Scale, Upper Economy and Budget
Hotels.................................... 1,277 983 2,590 1,954
------- ------- -------- --------
Consolidated totals....................... $ 5,434 $ 4,300 $ 10,092 $ 8,588
======= ======= ======== ========
The net book value of intangible and other assets by segment consisted of
the following at December 31, 1999 and June 30, 2000:
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
Luxury and Upscale Hotels........................... $42,736 $36,612
Mid-Scale, Upper Economy and Budget Hotels.......... 22,106 20,665
------- -------
Consolidated totals............................... $64,842 $57,277
======= =======
The following table reconciles the Company's measure of segment profit to
consolidated net income (loss) for the three and six-month periods ended June
30, 1999 and 2000.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 2000 1999 2000
------- ------- ------- -------
Total after-tax operating loss................ $ (493) $ (565) $(3,166) $(3,146)
Unallocated amounts, net of tax:
Interest, net............................... 58 323 93 590
Other, net.................................. 183 14 412 14
Minority interest........................... 627 (183) 598 1,226
------- ------- ------- -------
Consolidated net income (loss)................ $ 375 $ (411) $(2,063) $(1,316)
======= ======= ======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1999
Lodging revenues, which consist of rooms, food and beverage and other
departmental revenues from the leased hotels and one hotel acquired by the
Company in November 1999. Lodging revenues increased by $3.5 million, or 6.8%,
from $51.6 million in the three months ended June 30, 1999 (the "1999 Three
Months") to $55.1 million in the three months ended June 30, 2000 (the "2000
Three Months") and by $6.6 million, or 7.0%, from $94.2 million in the six
months ended June 30, 1999 (the "1999 Six Months") to $100.8 million in the six
months ended June 30, 2000 (the "2000 Six Months"). This increase was partially
due to incremental revenues of $1.1 million in the 2000 Three Months and $2.1
million in the 2000 Six Months related to the acquired hotel. In addition, the
Company entered into leases for two newly constructed hotels in June 1999 that
earned incremental revenues of approximately $4.0 million during the 2000 Three
Months and $7.2 million during the 2000 Six Months. These additional revenues
were offset by the loss of six hotel operating leases since January 1, 1999,
increased competition and general negative trends in the limited-service hotel
sector.
The average daily room rate for the leased hotels increased by 4.2%, from
$77.44 during the 1999 Three Months to $80.69 during the 2000 Three Months, and
the average occupancy rate increased to 70.8% during the 2000 Three Months from
69.8% during the 1999 Three Months. This resulted in an increase in room revenue
per available room of 5.7% to $57.14 during the 2000 Three Months. During the
six-month periods average daily room rate for the leased hotels increased by
4.7%, from $75.56 during the 1999 Six Months to $79.12 during the 2000 Six
Months, and the average occupancy rate decreased to 65.3% during the 2000 Six
Months from 65.6% during the 1999 Six Months. This resulted in an increase in
room revenue per available room of 4.2% to $51.69 during the 2000 Six Months.
The operating results of the Company's leased hotels were consistent with the
current trends within the lodging industry. The increase in the average daily
room rate primarily resulted from inflationary rate increases.
Net management fees decreased by $0.9 million, or 10.2%, from $8.8 million
in the 1999 Three Months to $7.9 million in the 2000 Three Months and by $3.3
million, or 18.9%, from $17.3 million in the 1999 Six Months to $14.0 million in
the 2000 Six Months. This decrease was due to the net loss of 18 management
contracts since January 1, 1999, which were primarily hotels whose management
was transferred to either Wyndham or Marriott in connection with the Spin-off.
Contributing to the net loss of management contracts was the uncertainty
surrounding the timing and completion of the Spin-off, which impaired the
Company's ability to add new management contracts. Other fees decreased by $0.5
million, or 14.8%, from $3.2 million in the 1999 Three Months to $2.7 million in
the 2000 Three Months and by $0.6 million, or 8.9%, from $6.2 million in the
1999 Six Months to $5.6 million in the 2000 Six Months. The decrease in other
fees related to the reduction in the total number of hotels operated by the
Company in 2000 as compared to 1999.
Lodging expenses consist of rooms, food and beverage, property costs and
other departmental expenses from the leased hotels and one hotel acquired by the
Company in November 1999. Lodging expenses increased by $2.6 million, or 9.7%,
from $26.8 million in the 1999 Three Months to $29.4 million in the 2000 Three
Months and by $4.7 million, or 9.3%, from $50.8 million in the 1999 Six Months
to $55.5 million in the 2000 Six Months. This increase was partially due to
incremental expenses of $0.7 million in the 2000 Three Months and $1.3 million
in the 2000 Six Months related to the acquired hotel. For the leased hotels,
increased competition resulting from an increased supply of limited-service
hotels in certain markets required higher operating costs to maintain and
increase revenue levels. In addition, the Company entered into leases for two
newly constructed hotels in June 1999 that incurred incremental operating
expenses of approximately $2.2 million during the 2000 Three Months and $4.2
million during the 2000 Six Months. These additional expenses were offset by the
loss of six hotel operating leases since January 1, 1999. The operating margin
of the leased and owned hotels decreased from 48.1% during the 1999 Three Months
to 46.7% during the 2000 Three Months and from 46.0% during the 1999 Six Months
to 44.9% during the 2000 Six Months due primarily to the increased operating
costs associated with the leased hotels. The Company expects the increased
competition and over-supply of limited-service hotels to continue to affect
negatively the future operating margin of the Company's leased hotels.
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11
General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. General and administrative
expenses decreased by $0.2 million, or 6.3%, from $3.5 million in the 1999 Three
Months to $3.3 million in the 2000 Three Months and by $1.1 million, or 14.7%,
from $7.6 million in the 1999 Six Months to $6.5 million in the 2000 Six Months.
During the 2000 Six Months, the Company incurred an expense for a $0.5 million
deficiency between the amount of premiums received as compared to actual and
estimated claims incurred under the Company's self-insured health and welfare
plan. The deficiency that was recorded by the Company was $1.4 million during
the 1999 Six Months. General and administrative expenses as a percentage of
revenues decreased to 5.0% during the 2000 Three Months compared to 5.5% during
the 1999 Three Months and to 5.4% during the 2000 Six Months compared to 6.4%
during the 1999 Six Months. This decrease was due to the increase in total
revenues and the decrease in general and administrative expenses.
Payroll and related benefits increased by $0.4 million, or 7.6%, from $5.0
million in the 1999 Three Months to $5.4 million in the 2000 Three Months and by
$0.8 million, or 8.0%, from $10.0 million in the 1999 Six Months to $10.8
million in the 2000 Six Months. This increase was due to the addition of the
Company's Chief Executive Officer and three marketing and development
vice-presidents who were hired after the Spin-off. Payroll and related benefits
as a percentage of revenues increased to 8.3% during the 2000 Three Months
compared to 7.9% during the 1999 Three Months and to 8.9% during the 2000 Six
Months compared to 8.5% during the 1999 Six Months.
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,
adjusted for increases in the consumer price index. Lease expense increased by
$0.6 million, or 2.6%, from $23.6 million in the 1999 Three Months to $24.2
million in the 2000 Three Months. In addition to the impact on lease expense
related to the increase in lodging revenues, the Company paid additional
incentive rent of $0.5 million to Equity Inns, Inc. in connection with the sale
of one of the Company's leased hotels by Equity Inns. In the six-month periods,
lease expense decreased slightly from $44.5 million in the 1999 Six Months to
$44.4 million in the 2000 Six Months. The impact on lease expense related to the
increase in lodging revenues was offset by a $2.0 million one-time charge that
was incurred by the Company in the first quarter of 1999 for additional
incentive rent paid in settlement of a dispute with Equity Inns, Inc. resulting
from the Merger.
Depreciation and amortization decreased by $1.1 million, or 20.9%, from
$5.4 million in the 1999 Three Months to $4.3 million in the 2000 Three Months
and by $1.5 million, or 14.9%, from $10.1 million in the 1999 Six Months to $8.6
million in the 2000 Six Months. In the fourth quarter of 1999, a $16.4 million
non-cash impairment loss was incurred related to the Company's leased hotel
intangible assets and three leased hotels were sold by Equity Inns, both of
which events reduced future amortization.
As a result of the changes noted above, an operating loss of $0.9 million
was incurred in the 2000 Three Months as compared to an operating loss of $0.8
million in the 1999 Three Months. In the six-month periods, an operating loss of
$5.2 million was incurred in 2000 as compared to an operating loss of $5.3
million in 1999.
Other income in 1999 consisted primarily of equity in earnings from The
Charles Hotel Complex, which was sold on June 18, 1999.
Loss on sale of investment in hotel real estate in 1999 resulted from the
sale of the Company's equity interests in The Charles Hotel Complex.
Income tax expense (benefit) for both 1999 and 2000 was computed based on
an effective tax rate of 40% after reduction of minority interest, except for
the $0.9 million loss on the sale of equity interests in The Charles Hotel
Complex in 1999, which was allocated 100% to Wyndham.
Minority interest in 2000 reflects Wyndham's 55% non-controlling interest
in IH LLC that it retained after the Spin-off. In addition, in the 2000 Three
Months an additional one-time $0.6 million was distributed to Wyndham. Minority
interest in 1999 reflects the $0.9 million loss on the sale of equity interests
in The Charles Hotel Complex that was allocated 100% to Wyndham, in addition to
Wyndham's 55% non-controlling interest in IH LLC.
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As a result of the changes noted above, a net loss of $0.4 million was
incurred in the 2000 Three Months as compared to net income of $0.4 million in
the 1999 Three Months. In the six-month periods, a net loss of $1.3 million was
incurred in 2000 as compared to a net loss of $2.1 million in 1999.
As discussed in Note 6 to the consolidated financial statements, the lease
agreements for the 75 hotels leased from Equity Inns will be terminated and the
Company will enter into management agreements for 54 of the hotels formerly
leased to the Company effective as of January 1, 2001. The Company expects that
the effect of this transaction will result in a re-valuation and write-down of
the Company's leased hotel intangible assets, which will reflect the new terms
of the management agreements. The Company believes that eliminating the risk of
potential operating losses in the future under the leases and replacing them
with management fee revenue will positively impact future cash flows and
profitability. The Company currently expects to account for this transaction in
the third quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent assets were $34.5 million at June
30, 2000 compared to $22.4 million at December 31, 1999 and current assets
exceeded current liabilities by $15.1 million at June 30, 2000.
The Company's principal source of liquidity during the 2000 Six Months was
cash from operations and proceeds from the issuance of long-term debt. Net cash
provided by operating activities was $9.4 million during the 2000 Six Months
compared to $19.3 million during the 1999 Six Months. The decrease resulted
primarily from a decrease in operating income (adjusted for non-cash items) of
$2.2 million from 1999 to 2000, and a decrease of $7.7 million in cash provided
by changes in assets and liabilities.
Net cash of $3.5 million was provided by financing activities during the
2000 Six Months compared to $10.6 million during the 1999 Six Months. In the
first quarter of 2000, the Company entered into a $7.6 million limited-recourse
mortgage note that is collateralized by the Pittsburgh Airport Residence Inn by
Marriott, which was acquired by the Company in November 1999. These proceeds
were offset by a $3.9 million payment to Wyndham in the second quarter of 2000
which represents Wyndham's 55% cash flow distribution from IH LLC for the period
from the Spin-off through December 31, 1999.
Net cash of $0.8 million was used by investing activities during the 2000
Six Months compared to net cash of $6.6 million provided by investing activities
during the 1999 Six Months. During the 1999 Six Months, the Company received
$13.6 million of proceeds from the sale of equity interests in The Charles Hotel
Complex, which were offset by amounts paid in connection with the Merger and
Spin-off. The Company's capital expenditure budget for the year ending December
31, 2000 relating to current operations is approximately $150,000 consisting
primarily of expenditures for office and telephone equipment.
In accordance with the terms of IH LLC's limited liability company
agreement, the Company is required to distribute 55% of IH LLC's cash flows from
operations to Wyndham. The Company's required distribution to Wyndham for the
period from the January 1, 2000 through June 30, 2000 totaled $2.2 million. In
addition, the agreement requires the Company to allocate between IH LLC and the
Company the costs and expenses relating to services provided by one party for
the benefit of the other in accordance with generally accepted accounting
principles, on the basis of which party benefited from the expenditure. To the
extent that the allocation of any such costs and expenses, including general and
administrative expenses, cannot be fairly apportioned, IH LLC and the Company
will allocate such costs and expenses based upon their respective gross
revenues, so that each party's profit margins are substantially the same for
similar services. During the third quarter of 2000, the Company reached an
agreement with Wyndham with respect to such allocation of costs and expenses
between IH, LLC and the Company. As a result, the Company recorded a one-time
$0.6 million charge to minority interest in the second quarter, which represents
a settlement of expense allocations for the period from January 1, 2000 through
April 30, 2000.
The Company intends to pursue future opportunities to manage or lease
hotels on behalf of third-party owners, as well as pursue other business
opportunities, such as selective hotel investments and the formation of
strategic alliances. Such opportunities may require capital investments by the
Company. The Company believes that its cash on hand and future cash flows from
operations may be insufficient to fund fully all such capital opportunities. As
a result, the Company will be required to obtain debt or equity financing or
modify its
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business plan. Management is currently pursuing possible alternatives to augment
its capital resources to enable it to more effectively pursue its growth
strategy. The principal focus of this effort to date has been potential capital
partners. There can be no assurance that these efforts will be successful or, if
so, as to the timing or terms thereof. If these efforts are not successful, of
if the Company does not obtain additional financing, its pursuit of its business
strategy and growth may be impaired.
NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes and clarifies the SEC's position in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B, "Second Amendment:
Revenue Recognition in Financial Statements," which extends the date that the
Company may report a change in accounting principle to no later than the fourth
quarter of 2000. Management is currently assessing the impact of this SAB on the
Company's consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and information based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used herein,
words such as "anticipate," "believe," "estimate," "expect," "intend" and
similar expressions, as they relate to the Company or the Company's management,
are intended to identify these forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause the Company's
business and results of operations to differ materially from those reflected in
the Company's forward-looking statements.
Forward-looking statements are not guarantees of future performance. The
Company's forward-looking statements are based on trends that the Company's
management anticipates in the lodging industry and the effect on those trends of
such factors as industry capacity, the seasonal nature of the lodging industry
and product demand and pricing. In addition, such forward-looking statements are
subject to the Company's reversing the current negative trend in its business
and financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The quantitative and qualitative disclosures required by this Item 3 and by
Rule 305 of SEC Regulation S-K are not applicable to the Company at this time.
Interest rate exposure on indebtedness is discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
Report is filed.
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SIGNATURES
Pursuant to the requirements of Section 13 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.
INTERSTATE HOTELS CORPORATION
Date: August 14, 2000 By: /s/ J. WILLIAM RICHARDSON
------------------------------------
J. William Richardson
Vice Chairman and Chief Financial
Officer
(Principal Financial Officer)
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