1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
------------------------
INTERSTATE HOTELS COMPANY
FOSTER PLAZA 10
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
PENNSYLVANIA 1-11731 25-1788101
(State of incorporation) (SEC File No.) (IRS Employer
Identification No.)
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 period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
The number of shares of the Registrant's Common Stock, par value $0.01 per
share, outstanding at November 13, 1996 was 28,681,401.
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2
INDEX
INTERSTATE HOTELS COMPANY
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................................... 2
Consolidated Balance Sheets--December 31, 1995 and September 30,
1996................................................................ 2
Consolidated Statements of Operations--Pro Forma Three Months and
Nine Months Ended September 30, 1995 and September 30, 1996......... 3
Consolidated Statements of Operations--Historical Three Months and
Nine Months Ended September 30, 1995 and September 30, 1996......... 4
Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1995 and September 30, 1996........................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 9
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 COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(A) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 14,035 $ 24,300
Accounts receivable............................................. 10,654 23,582
Net investment in direct financing leases....................... 399 657
Deferred income taxes........................................... -- 5,076
Prepaid expenses and other current assets....................... 313 4,117
-------- ---------
Total current assets....................................... 25,401 57,732
Restricted cash................................................. 2,096 10,532
Property and equipment, net..................................... 1,894 496,723
Investments in contracts, net of accumulated amortization of
$16,933 at December 31, 1995 and $19,321 at September 30,
1996......................................................... 5,861 3,154
Investments in hotel real estate................................ 12,884 5,222
Officers and employees notes receivable......................... 1,219 4,508
Affiliates notes receivable..................................... 8,718 --
Net investment in direct financing leases....................... 836 1,572
Other assets.................................................... 2,492 12,374
-------- ---------
Total assets............................................... $ 61,401 $ 591,817
======== =========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable--trade......................................... 926 6,184
Accounts payable--health trust.................................. 5,505 3,116
Accrued payroll and related benefits............................ 3,026 9,444
Income taxes payable............................................ -- 2,373
Other accrued liabilities....................................... 5,546 19,116
Current portion of long-term debt............................... 363 6,421
-------- ---------
Total current liabilities.................................. 15,366 46,654
Long-term debt.................................................. 35,907 287,870
Deferred income taxes........................................... -- 2,271
Other liabilities............................................... -- 1,213
-------- ---------
Total liabilities.......................................... 51,273 338,008
-------- ---------
Minority interests................................................ 872 5,756
-------- ---------
Equity:
Common stock, $.01 par value; authorized 75,000 shares; issued
and outstanding 28,671 shares as of September 30, 1996....... 3 287
Paid-in capital................................................. 26,883 253,058
Unearned compensation........................................... (3,263) --
Accumulated deficit............................................. (12,737) (5,292)
Receivable from stockholders.................................... (1,630) --
-------- ---------
Total equity............................................... 9,256 248,053
-------- ---------
Total liabilities and equity............................... $ 61,401 $ 591,817
======== =========
- ---------
(A) The year-end balance sheet data 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.
2
4
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA (NOTE 4)
---------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1995 1996 1995 1996
------- ------- -------- --------
Lodging revenues:
Rooms.......................................... $34,677 $39,545 $102,334 $114,309
Food and beverage.............................. 16,743 16,847 53,216 56,478
Other departmental............................. 3,020 3,950 9,848 11,261
Management and related fees...................... 9,871 10,699 29,387 32,378
------- ------- -------- --------
64,311 71,041 194,785 214,426
------- ------- -------- --------
Lodging expenses:
Rooms.......................................... 8,178 8,836 24,421 25,679
Food and beverage.............................. 12,921 12,811 40,088 41,412
Other departmental............................. 1,772 2,030 5,169 5,218
Property costs................................. 17,612 17,520 52,127 54,193
General and administrative....................... 2,263 2,725 7,361 7,889
Payroll and related benefits..................... 3,687 4,167 11,123 12,564
Depreciation and amortization.................... 5,522 5,343 16,661 16,748
------- ------- -------- --------
51,955 53,432 156,950 163,703
------- ------- -------- --------
Operating income.......................... 12,356 17,609 37,835 50,723
Other income (expense):
Interest, net.................................. (6,234) (5,200) (17,900) (16,916)
Other, net..................................... 255 (403) (416) (1,378)
------- ------- -------- --------
Income before income tax expense.......... 6,377 12,006 19,519 32,429
Income tax expense............................... 2,423 4,562 7,417 12,323
------- ------- -------- --------
Net income................................ $ 3,954 $ 7,444 $ 12,102 $ 20,106
======= ======= ======== ========
Pro forma earnings per common share and common
share equivalent............................... $ .14 $ .26 $ .42 $ .70
======= ======= ======== ========
Weighted average number of common shares and
common share equivalents outstanding........... 28,794 28,794 28,773 28,773
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
5
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
-------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1995 1996 1995 1996
------- ------- ------- -------
Lodging revenues:
Rooms............................................ -- $35,318 -- $37,351
Food and beverage................................ -- 15,771 -- 16,792
Other departmental............................... -- 3,619 -- 3,840
Net management fees................................ $ 6,786 6,894 $19,356 21,872
Other management-related fees...................... 4,450 3,928 13,532 13,916
------- ------- ------- -------
11,236 65,530 32,888 93,771
------- ------- ------- -------
Lodging expenses:
Rooms............................................ -- 7,680 -- 8,064
Food and beverage................................ -- 11,770 -- 12,513
Other departmental............................... -- 1,588 -- 1,680
Property costs................................... -- 15,738 -- 16,618
General and administrative......................... 2,147 2,664 6,464 7,240
Payroll and related benefits....................... 3,719 4,167 11,123 12,564
Non-cash compensation.............................. -- -- -- 11,896
Depreciation and amortization...................... 961 5,321 2,963 7,762
------- ------- ------- -------
6,827 48,928 20,550 78,337
------- ------- ------- -------
Operating income............................ 4,409 16,602 12,338 15,434
Other income (expense):
Interest, net.................................... 63 (4,300) 191 (5,315)
Other, net....................................... -- (422) -- 329
------- ------- ------- -------
Income before income tax expense............ 4,472 11,880 12,529 10,448
Income tax expense................................. -- 4,514 -- 11,145
------- ------- ------- -------
Income (loss) before extraordinary items.... 4,472 7,366 12,529 (697)
Extraordinary loss from early extinguishment of
debt, net of deferred tax benefit of $3,937...... -- -- -- (7,643)
------- ------- ------- -------
Net income (loss)........................... $ 4,472 $ 7,366 $12,529 $(8,340)
======= ======= ======= =======
Earnings per common share and common share
equivalent....................................... $ .26
=======
Weighted average number of common shares and common
share equivalents outstanding.................... 28,665
=======
The accompanying notes are an integral part of the consolidated financial
statements.
4
6
INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1996
-------- ---------
Cash flows from operating activities:
Net income (loss)........................................................... $ 12,529 $ (8,340)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,963 7,762
Minority interests' share of equity loss from investment in hotel real
estate................................................................... -- (106)
Write-off of deferred financing fees...................................... -- 6,231
Non-cash compensation..................................................... -- 11,896
Deferred income taxes..................................................... -- 1,835
Other..................................................................... (68) (340)
Cash (used) provided by assets and liabilities:
Accounts receivable.................................................. (3,713) (3,348)
Prepaid expenses and other assets.................................... (564) (3,486)
Accounts payable..................................................... 3,170 (2,566)
Income taxes payable................................................. -- 2,373
Accrued liabilities.................................................. 2,335 2,799
-------- ---------
Net cash provided by operating activities............................... 16,652 14,710
-------- ---------
Cash flows from investing activities:
Investments in contracts.................................................. (246) (81)
Investments in hotel real estate.......................................... -- (5,146)
Change in notes receivable, net........................................... (1,915) (3,289)
Acquisition of hotels, net of cash received............................... -- (236,673)
Purchase of property and equipment, net................................... (365) (1,148)
Purchase of assets to be leased........................................... (565) (1,447)
Payments received under capital leases.................................... 260 563
Change in restricted cash................................................. (995) (1,987)
Other..................................................................... 32 3,137
-------- ---------
Net cash used in investing activities................................... (3,794) (246,071)
-------- ---------
Cash flows from financing activities:
Proceeds form long-term debt.............................................. -- 265,750
Repayment of long-term debt............................................... (622) (241,689)
Financing costs paid...................................................... -- (9,349)
Proceeds from issuance of Common Stock, net............................... -- 263,752
Minority interests........................................................ -- (1,736)
Capital contributions..................................................... 600 --
Funds advanced to stockholders............................................ (7,950) (6,423)
Repayment of funds advanced to stockholders............................... 2,493 8,053
Repayment of notes payable to stockholders................................ -- (30,000)
Dividends and capital distributions paid.................................. (5,725) (6,732)
-------- ---------
Net cash (used in) provided by financing activities..................... (11,204) 241,626
-------- ---------
Net increase in cash and cash equivalents..................................... 1,654 10,265
Cash and cash equivalents at beginning of period.............................. 6,702 14,035
-------- ---------
Cash and cash equivalents at end of period.................................... $ 8,356 $ 24,300
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................... $ 244 $ 5,957
======== =========
Supplemental disclosure of non-cash investing and financing activities:
Notes payable issued to stockholders........................................ -- $ 30,000
======== =========
Issuance of Common Stock to purchase hotel.................................. -- $ 9,607
======== =========
Unearned compensation related to stock options.............................. -- $ (3,263)
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
5
7
INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Interstate Hotels Company (the "Company") provides management and other
related services to hotels through its wholly owned subsidiaries. As of
September 30, 1996, the Company also owned 14 hotels and had a majority interest
in seven other hotels (collectively, the "Owned Hotels"). The Company was formed
on April 19, 1996. As a result of the transactions discussed in Notes 2 and 3,
the consolidated interim financial statements of the Company as of September 30,
1996 consist of the historical results of Interstate Hotels Corporation and
Affiliates ("IHC"), the Company's predecessor, and the operations of the Owned
Hotels from the respective dates of their acquisitions. Prior thereto, the
consolidated interim financial statements reflect only the historical activity
of IHC. All significant intercompany transactions and balances have been
eliminated in consolidation.
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 (the "SEC"). 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. The consolidated interim financial
statements should be read in conjunction with the financial statements, notes
thereto and other information included in the Company's Registration Statement
on Form S-1 (No. 333-15507), filed with the SEC on November 5, 1996 (the
"Registration Statement").
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature, and which are necessary for a fair presentation of the
financial position and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted
accounting principles 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.
2. INITIAL PUBLIC OFFERING
In June 1996, the Company completed an initial public offering of
11,000,000 shares of its common stock, par value $0.01 per share (the "Common
Stock"), at a price of $21 per share (the "IPO"). In July 1996, the underwriters
of the Company's IPO exercised their over-allotment options and purchased an
additional 1,448,350 shares of Common Stock at $21 per share from the Company.
After underwriting discounts, commissions and other IPO expenses, net proceeds
to the Company were $211,851 from the IPO and $28,601 from the exercise of the
over-allotment options. In connection with the IPO, Blackstone Real Estate
Advisors L.P. and certain of its affiliates (collectively, "Blackstone")
exercised an option to receive 2,133,333 shares of Common Stock of the Company
for an exercise price of $23,300. The Company used the proceeds of the IPO to
repay certain debt obligations, to fund hotel acquisitions and for general
corporate purposes.
Also in connection with the IPO, the Company acquired all of Blackstone's
equity interests in 13 of the Owned Hotels for a cash purchase price of
$124,400, and Blackstone contributed to the Company their equity interest in one
Owned Hotel in consideration for $8,300 of Common Stock of the Company.
Additionally, in connection with the IPO, the principal shareholders of IHC
contributed to the Company their equity interests in these 14 Owned Hotels in
exchange for Common Stock of the Company. The acquisition of Blackstone's equity
interests in these 14 Owned Hotels has been accounted for using the purchase
method of accounting except that carryover basis was used for 9.3% of the
acquired interests. The contributions of interests in these Owned Hotels in
exchange for Common Stock of the Company have been accounted for using carryover
basis.
6
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. POST-IPO ACQUISITIONS
As of September 30, 1996, the Company had acquired seven hotels (the
"Post-IPO Acquisitions") since the IPO and related transactions discussed in
Note 2. These seven hotels are: the Boston Marriott Westborough located in
Westborough, Massachusetts, the Brentwood Holiday Inn located in Brentwood,
Tennessee, the Blacksburg Marriott located in Blacksburg, Virginia, the Roanoke
Airport Marriott located in Roanoke, Virginia, the Embassy Suites Phoenix North
(formerly the Fountain Suites) located in Phoenix, Arizona, the Englewood
Radisson located in Englewood, New Jersey and the Radisson Plaza Hotel San Jose
Airport located in San Jose, California. The total aggregate purchase price of
these seven hotels was approximately $122,636.
4. PRO FORMA INFORMATION
The unaudited pro forma consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1995 and 1996 are
presented as if the transactions described in Note 2 and the Post-IPO
Acquisitions discussed in Note 3 had occurred on January 1, 1995. The pro forma
consolidated statements of operations do not include the acquisitions discussed
in Note 9. Such pro forma information is based in part upon information
contained in the Company's Registration Statement and should be read in
conjunction with the Registration Statement. In management's opinion, all 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, 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
dates or to project the results of operations of the Company for any future
period.
5. EARNINGS PER SHARE
Until immediately prior to the consummation of the Company's IPO, the
predecessors of the Company were organized as S corporations, partnerships and
limited liability companies. Accordingly, the Company believes that the
historical earnings per share calculations required in accordance with
Accounting Principles Board Opinion No. 15 are not meaningful for periods prior
to the IPO and, therefore, have not been provided. Rather, historical
three-month period ended September 30, 1996 earnings per share and pro forma
earnings per share are a more meaningful measure of the Company's results of
operations for the periods presented.
The weighted average number of common shares and common share equivalents
used in the computation of earnings per share for the periods presented was
calculated as follows:
PRO FORMA
HISTORICAL ---------------------------------------
------------------ THREE MONTHS ENDED NINE MONTHS ENDED
THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 1996 1995 AND 1996 1995 AND 1996
------------------ ------------------ -----------------
Weighted average common shares and common
share equivalents issued............... 28,545,458 28,671,401 28,671,401
Dilutive effect of stock options......... 119,091 122,114 101,408
---------- ---------- ----------
28,664,549 28,793,515 28,772,809
========== ========== ==========
The historical earnings per share has been calculated by dividing net
income by the weighted average number of shares of Common Stock deemed to be
outstanding. The pro forma earnings per share has been calculated by dividing
pro forma net income by the weighted average number of shares of Common Stock
deemed to be outstanding.
7
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
6. NON-CASH COMPENSATION
Prior to the IPO, the Company issued 785,533 shares of restricted stock to
certain executives and employees in consideration for the cancellation of
options issued by IHC in 1995. The restricted shares were valued based on the
estimated value of the Common Stock of the Company at the time the restricted
stock was issued. The issuance of the restricted stock resulted in a one-time
charge of $11,896, which is classified as non-cash compensation expense in the
accompanying consolidated statements of operations.
7. INCOME TAXES
Until immediately prior to the consummation of the IPO, IHC was organized
as S corporations, partnerships and limited liability companies for federal and
state income tax purposes. Accordingly, IHC was not subject to income tax
because all taxable income or loss of IHC was reported on the tax returns of its
owners. As a result of the change in IHC's tax status to a C corporation, the
Company recorded income tax expense amounting to $6,261 to establish deferred
taxes existing as of the date of the change in tax status. The difference
between the Company's effective income tax rate and statutory federal income tax
rate for the nine-month period ended September 30, 1996 results primarily from
the change in tax status and from state income taxes.
8. EXTRAORDINARY ITEMS
In June 1996, the Company recorded an extraordinary loss of $7,643, net of
a deferred tax benefit of $3,937, as a result of the early extinguishment of
certain debt. The extraordinary loss related principally to the write-off of
deferred financing fees, prepayment penalties and loan commitment fees.
9. SUBSEQUENT EVENTS
The Company purchased the following hotels in October 1996: the Westin
Resort Miami Beach (formerly the Doral Ocean Beach Resort) located in Miami
Beach, Florida and the Columbus Hilton located in Columbus, Georgia. The total
aggregate purchase price of these two hotels was approximately $52,500. These
acquisitions have not been included in the pro forma financial results of the
Company because consummation of the acquisitions was not probable as of
September 30, 1996.
The Company has entered into definitive agreements to purchase the
Burlington Radisson located in Burlington, Vermont and the Washington Vista
located in Washington, D.C. for an expected total aggregate purchase price of
approximately $62,000. The Company has also entered into an agreement to acquire
for 1,957,895 shares of Common Stock the hotel management business affiliated
with Equity Inns, Inc., a publicly traded real estate investment trust, and
which is conducted by Trust Management, Inc. and Trust Leasing, Inc. The Company
expects to complete these acquisitions in the fourth quarter of this year.
On November 5, 1996, the Company filed with the SEC the Registration
Statement discussed in Note 1 relating to a proposed public offering of
5,500,000 shares of Common Stock. The Company intends to use the net proceeds of
the offering to finance future acquisitions, to repay existing indebtedness and
for general corporate purposes
8
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PRO FORMA THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO PRO FORMA
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
Pro forma total revenues increased by $6.7 million, or 10.5%, from $64.3
million in the three months ended September 30, 1995 (the "1995 Three Months")
to $71.0 million in the three months ended September 30, 1996 (the "1996 Three
Months") and by $19.6 million, or 10.1%, from $194.8 million in the nine months
ended September 30, 1995 (the "1995 Nine Months") to $214.4 million in the nine
months ended September 30, 1996 (the "1996 Nine Months"). The most significant
portion of this increase related to lodging revenues, which consists of rooms,
food and beverage and other departmental revenues. Pro forma lodging revenues
increased by $5.9 million, or 10.8%, from $54.4 million in the 1995 Three Months
to $60.3 million in the 1996 Three Months and by $16.6 million, or 10.1%, from
$165.4 million in the 1995 Nine Months to $182.0 million in the 1996 Nine
Months. The increase was due to the overall improvement in the operating
performance of the Owned Hotels, which was attributed to a change in franchise
affiliations for certain of the Owned Hotels, fewer hotel renovations in 1996
than in 1995 and an overall improvement in economic conditions in certain
geographic regions. This increase in lodging revenues was consistent with the
increase in the Owned Hotels' room revenues of $4.9 million, or 14.0%, to $39.5
million in the 1996 Three Months and of $12.0 million, or 11.7%, to $114.3
million in the 1996 Nine Months. The average room rate for the Owned Hotels
increased by 11.1%, from $85.14 during the 1995 Three Months to $94.57 during
the 1996 Three Months, and occupancy increased from 75.1% to 76.7%,
respectively. For the nine-month periods, the average room rate for the Owned
Hotels increased by 9.1%, from $84.99 in 1995 to $92.71 in 1996, and occupancy
increased from 74.0% to 75.1%, respectively. This resulted in a 13.4% increase
in revenue per available room ("REVPAR") to $72.54 during the 1996 Three Months
and a 10.6% increase in REVPAR to $69.59 during the 1996 Nine Months. The
Atlanta, Chicago, Colorado Springs, Denver and Philadelphia markets had the most
significant impact on average rate and REVPAR growth. Pro forma management and
related fees increased by $0.8 million, or 8.4%, from $9.9 million in the 1995
Three Months to $10.7 million in the 1996 Three Months and by $3.0 million, or
10.2%, from $29.4 million in the 1995 Nine Months to $32.4 million in the 1996
Nine Months due primarily to the performance improvement of existing managed
hotels and incremental revenues associated with the net addition of new hotels,
many of which provide for incentive management fees and utilize the Company's
other contractual services. Such contractual services include insurance
services, purchasing and renovation services, MIS support, centralized
accounting, leasing, training and relocation programs.
Pro forma lodging expenses, which consists of rooms, food and beverage,
property costs and other departmental expenses, increased by $0.7 million, or
1.8%, from $40.5 million in the 1995 Three Months to $41.2 million in the 1996
Three Months and by $4.7 million, or 3.9%, from $121.8 million in the 1995 Nine
Months to $126.5 million in the 1996 Nine Months. The pro forma operating margin
of the Owned Hotels increased from 25.6% during the 1995 Three Months to 31.7%
during the 1996 Three Months and from 26.4% during the 1995 Nine Months to 30.5%
during the 1996 Nine Months. The increase was attributed to the increase in
revenues and the overall improvement in operating performance and operating
efficiencies of the Owned Hotels.
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. Pro forma general and
administrative expenses in the three-month and nine-month periods in 1996 and
1995 remained consistent due to the relatively fixed nature of these expenses.
Pro forma general and administrative expenses as a percentage of pro forma
revenues increased to 3.8% during the 1996 Three Months compared to 3.5% during
the 1995 Three Months and decreased slightly to 3.7% during the 1996 Nine Months
compared to 3.8% during the 1995 Nine Months as a result of operating leverage.
Pro forma payroll and related benefits expenses increased by $0.5 million,
or 13.0%, from $3.7 million in the 1995 Three Months to $4.2 million in the 1996
Three Months and by $1.5 million, or 13.0%, from $11.1 million in the 1995 Nine
Months to $12.6 million in the 1996 Nine Months. The increase was due primarily
to the addition of new employees related to the growth of the Company's hotel
management
9
11
business. Pro forma payroll and related benefits expenses as a percentage of pro
forma revenues increased to 5.9% from 5.7% during the three-month and nine-month
periods in 1996 and 1995.
Pro forma depreciation and amortization remained relatively consistent
during the three-month and nine-month periods in 1996 and 1995.
Pro forma operating income increased by $5.2 million, or 42.5%, from $12.4
million in the 1995 Three Months to $17.6 million in the 1996 Three Months and
by $12.9 million, or 34.1%, from $37.8 million in the 1995 Nine Months to $50.7
million in the 1996 Nine Months. Accordingly, pro forma operating margin
increased from 19.2% during the 1995 Three Months to 24.8% during the 1996 Three
Months and from 19.4% during the 1995 Nine Months to 23.7% during the 1996 Nine
Months. As discussed above, the improvement in the pro forma operating margin
was attributed to the increase in pro forma revenues and the overall decrease in
pro forma operating expenses as a percentage of pro forma revenues.
Pro forma income tax expense for all of the periods was computed as if the
Company were subject to federal and state income taxes, based on an effective
tax rate of 38%.
As a result of the changes noted above, pro forma net income increased by
$3.4 million, or 88.3%, from $4.0 million in the 1995 Three Months to $7.4
million in the 1996 Three Months and by $8.0 million, or 66.1%, from $12.1
million in the 1995 Nine Months to $20.1 million in the 1996 Nine Months.
Accordingly, pro forma net income margin increased from 6.1% during the 1995
Three Months to 10.5% during the 1996 Three Months and from 6.2% during the 1995
Nine Months to 9.4% during the 1996 Nine Months.
HISTORICAL THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO HISTORICAL
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
Total revenues increased by $54.3 million, or 483.2%, from $11.2 million in
the 1995 Three Months to $65.5 million in the 1996 Three Months and by $60.9
million, or 185.1%, from $32.9 million in the 1995 Nine Months to $93.8 million
in the 1996 Nine Months. The most significant portion of this increase related
to lodging revenues, which increased by $54.7 million in the three-month period
and by $58.0 million in the nine-month period due to the operations of the Owned
Hotels acquired during 1996. Net management fees in the three-month periods in
1996 and 1995 remained relatively consistent. For the nine-month periods, net
management fees increased by $2.5 million, or 13.0%, from $19.4 million in 1995
to $21.9 million in 1996 due to the addition of 35 new management contracts and
increased revenues associated with the performance improvement of existing
managed hotels. The increase in net management fees was partially offset by the
loss of 28 management contracts primarily due to the divestiture of hotels by
third-party owners. Other management-related fees increased slightly from $13.5
million in the 1995 Nine Months to $13.9 million in the 1996 Nine Months due to
incremental revenues associated with the net addition of new hotels, many of
which utilize the Company's other contractual services.
Lodging expenses were $36.8 million and $38.9 million in the 1996 Three
Months and 1996 Nine Months, respectively, due to the operations of the Owned
Hotels acquired during 1996. The operating margin of the Owned Hotels was 32.8%
during the 1996 Three Months and 33.0% during the 1996 Nine Months.
General and administrative expenses increased by $0.6 million, or 24.1%,
from $2.1 million in the 1995 Three Months to $2.7 million in the 1996 Three
Months and by $0.7 million, or 12.0%, from $6.5 million in the 1995 Nine Months
to $7.2 million in the 1996 Nine Months. This increase was due primarily to
incremental expenses associated with the growth of the Company's business and
the acquisitions of the Owned Hotels. General and administrative expenses as a
percentage of revenues decreased to 4.1% during the 1996 Three Months compared
to 19.1% during the 1995 Three Months, and decreased to 7.7% during the 1996
Nine Months compared to 19.7% during the 1995 Nine Months as a result of the
operations of the Owned Hotels acquired during 1996.
Payroll and related benefits expenses increased by $0.5 million, or 12.0%,
from $3.7 million in the 1995 Three Months to $4.2 million in the 1996 Three
Months and by $1.5 million, or 13.0%, from $11.1 million in the 1995 Nine Months
to $12.6 million in the 1996 Nine Months. The increase was related to the
addition of corporate management and staff personnel as the Company's portfolio
of hotels for which it provides management and other services grew. Payroll and
related benefits expenses as a percentage of revenues
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decreased to 6.4% during the 1996 Three Months compared to 33.1% during the 1995
Three Months, and decreased to 13.4% during the 1996 Nine Months compared to
33.8% during the 1995 Nine Months as a result of the operations of the Owned
Hotels acquired during 1996.
Non-cash compensation of $11.9 million in the 1996 Nine Months resulted
from the issuance of 785,533 shares of restricted stock to certain executives
and key employees of the Company in consideration for the cancellation of
options issued by IHC in 1995.
Depreciation and amortization increased by $4.3 million, or 453.7%, from
$1.0 million in the 1995 Three Months to $5.3 million in the 1996 Three Months
and by $4.8 million, or 162.0%, from $3.0 million in the 1995 Nine Months to
$7.8 million in the 1996 Nine Months due to the acquisitions of the Owned
Hotels.
Operating income (exclusive of non-cash compensation) increased by $12.2
million, or 276.5%, from $4.4 million in the 1995 Three Months to $16.6 million
in the 1996 Three Months and by $15.0 million, or 121.5%, from $12.3 million in
the 1995 Nine Months to $27.3 million in the 1996 Nine Months. Operating margin
decreased from 39.2% during the 1995 Three Months to 25.3% during the 1996 Three
Months and from 37.5% during the 1995 Nine Months to 29.1% during the 1996 Nine
Months. This decrease in the operating margin reflects the inclusion of the
operating expenses of the Owned Hotels which were not reflected in the Company's
results prior to their respective acquisition dates in 1996.
The Company had $0.1 of million interest income in the 1995 Three Months
compared to $4.3 million of interest expense in the 1996 Three Months and $0.2
million of interest income in the 1995 Nine Months compared to $5.3 million of
interest expense in the 1996 Nine Months. This increase in interest expense was
due primarily to additional borrowings related to the acquisitions of the Owned
Hotels in 1996.
Other, net of $0.4 million in the 1996 Three Months and $0.3 million in the
1996 Nine Months consisted primarily of minority interests.
Income tax expense for the three-month and nine-month periods ended
September 30, 1996 was computed based on an effective tax rate of 38%. The
income tax expense in the 1996 Nine Months also includes deferred tax expense of
$6.3 million which was recorded in June 1996, coinciding with the date IHC
changed its tax status from a pass-through entity for tax purposes to a C
corporation.
An extraordinary loss of $7.6 million, net of a deferred tax benefit of
$3.9 million, in the 1996 Nine Months resulted from the early extinguishment of
certain indebtedness and was related to the write-off of deferred financing
fees, prepayment penalties and loan commitment fees.
As a result of the changes noted above, net income increased by $2.9
million, or 64.7%, from $4.5 million in the 1995 Three Months to $7.4 million in
the 1996 Three Months. A net loss of $8.3 million was recorded in the 1996 Nine
Months compared to net income of $12.5 million in the 1995 Nine Months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash from operations and
borrowings under its credit facilities. Net cash provided by operations was
$14.7 million in the nine months ended September 30, 1996, compared to $16.7
million in the nine months ended September 30, 1995. The Company's cash and cash
equivalent assets were $24.3 million and $8.4 million at September 30, 1996 and
1995, respectively.
At September 30, 1996, the Company's total indebtedness was $294.3 million,
comprised of $193.8 million of term loans, $70.7 million of borrowings under the
Company's acquisition facility, $29.3 million of mortgage indebtedness
encumbering six Owned Hotels owned by a partnership in which the Company owns a
75% interest and representing the other partner's portion of such indebtedness,
and $0.5 million of notes payable in connection with the acquisition of Colony
Hotels and Resorts. In October 1996, $53.4 million of additional indebtedness
was incurred and the Company's credit facilities were amended by converting $100
million of outstanding borrowings (including $29.3 million of the indebtedness
incurred in October 1996), which were incurred primarily to finance hotel
acquisitions, to term loans under the Company's credit facilities and increasing
the Company's revolving loan capacity under its acquisition facility from $100
million to $200 million. The Company also modified its credit facilities to
increase the Company's
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permitted nonrecourse indebtedness to fund acquisitions from $50 million to $100
million and to permit the Company to incur up to $150 million of subordinated
indebtedness.
Management of the Company believes that, with respect to its current
operations, the Company's cash on hand and funds from operations will be
sufficient to cover its reasonably foreseeable working capital, ongoing capital
expenditure and debt service requirements. In the nine months ended September
30, 1996, the Company spent $2.7 million on capital expenditures at the Owned
Hotels. The Company's capital expenditure budget (before acquisitions) for 1997
is $12.3 million, which includes capital expenditures related to the Post-IPO
Acquisitions.
The Company intends to pursue a growth-oriented strategy involving, among
other things, the acquisition of interests in additional hotel properties and
hotel management companies, as well as the acquisition of additional management
contracts (which may from time to time require capital expenditures by the
Company). Management believes that the net proceeds of its proposed public
offering, its acquisition facility and cash provided by operations will be
sufficient to pursue the Company's acquisition strategy and to fund its other
presently foreseeable capital requirements. However, the Company believes that,
absent a presently unforeseen change, additional acquisition opportunities will
continue to exist for the foreseeable future and depending upon conditions in
the capital and other financial markets and other factors, the Company may from
time to time consider the issuance of debt or other securities, the proceeds of
which could be used to finance acquisitions, to refinance debt or for other
general corporate purposes.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits.
None.
(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 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 COMPANY
Date: November 13, 1996
By: /s/ J. WILLIAM RICHARDSON
------------------------------
J. William Richardson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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