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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
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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INTERSTATE HOTELS COMPANY
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
PENNSYLVANIA 1-11731 25-1788101
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
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 number of shares of the Company's Common Stock, par value $0.01 per
share, outstanding at August 13, 1997 was 35,392,262.
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INDEX
INTERSTATE HOTELS COMPANY
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)........................................ 2
Consolidated Balance Sheets--December 31, 1996 and June 30, 1997........ 2
Consolidated Statements of Operations--Pro Forma Three Months and Six
Months Ended June 30, 1996 and June 30, 1997............................ 3
Consolidated Statements of Operations--Historical Three Months and Six
Months Ended June 30, 1996 and June 30, 1997............................ 4
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1996
and June 30, 1997....................................................... 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................... 13
Item 6. Exhibits and Reports on Form 8-K........................................ 13
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
INTERSTATE HOTELS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(A) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 32,323 $ 31,890
Accounts receivable, net......................................... 21,556 40,993
Stock subscription receivable, net............................... 14,286 --
Deferred income taxes............................................ 1,649 2,177
Prepaid expenses and other assets................................ 11,961 12,730
-------- ----------
Total current assets.......................................... 81,775 87,790
Restricted cash.................................................... 15,995 7,156
Property and equipment, net........................................ 709,151 906,194
Investments in hotel real estate................................... 5,605 12,218
Officers and employees notes receivable............................ 4,643 6,329
Intangible and other assets........................................ 66,592 70,018
-------- ----------
Total assets.................................................. $883,761 $1,089,705
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade.......................................... 12,152 9,521
Accounts payable--health trust................................... 2,440 4,595
Accrued payroll and related benefits............................. 15,072 15,450
Income taxes payable............................................. -- 1,200
Other accrued liabilities........................................ 23,926 45,191
Current portion of long-term debt................................ 11,767 58,409
-------- ----------
Total current liabilities..................................... 65,357 134,366
Long-term debt..................................................... 396,044 498,786
Deferred income taxes.............................................. 4,081 9,879
Other liabilities.................................................. 1,213 1,213
-------- ----------
Total liabilities............................................. 466,695 644,244
-------- ----------
Minority interests................................................. 7,768 11,782
-------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000 shares authorized;
no shares outstanding as of June 30, 1997..................... -- --
Common stock, $.01 par value; 75,000 shares authorized;
35,326 shares issued and outstanding as of June 30, 1997...... 352 353
Paid-in capital.................................................. 407,784 409,546
Retained earnings................................................ 1,432 24,034
Unearned compensation............................................ (270) (254)
-------- ----------
Total shareholders' equity.................................... 409,298 433,679
-------- ----------
Total liabilities and shareholders' equity.................... $883,761 $1,089,705
======== ==========
- ---------
(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 COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
PRO FORMA (NOTE 3)
-------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
Lodging revenues:
Rooms...................................... $111,571 $121,331 $214,204 $231,213
Food and beverage.......................... 33,075 33,830 64,671 64,893
Other departmental......................... 9,787 10,207 19,278 20,777
Management and related fees.................. 10,269 11,468 20,496 22,828
-------- -------- -------- --------
164,702 176,836 318,649 339,711
-------- -------- -------- --------
Lodging expenses:
Rooms...................................... 25,585 27,557 49,379 53,177
Food and beverage.......................... 24,179 24,506 47,466 48,534
Other departmental......................... 4,429 4,624 8,463 9,371
Property costs............................. 44,718 45,504 88,155 89,839
General and administrative................... 2,865 3,453 5,825 6,252
Payroll and related benefits................. 4,538 5,202 9,177 9,944
Lease expense................................ 21,221 23,686 37,954 41,917
Depreciation and amortization................ 9,565 9,733 19,136 19,406
-------- -------- -------- --------
137,100 144,265 265,555 278,440
-------- -------- -------- --------
Operating income........................ 27,602 32,571 53,094 61,271
Other expense:
Interest, net.............................. 10,630 10,243 21,503 20,614
Other, net................................. 696 827 1,436 1,369
-------- -------- -------- --------
Income before income tax expense........ 16,276 21,501 30,155 39,288
Income tax expense........................... 6,185 8,170 11,459 14,929
-------- -------- -------- --------
Net income.............................. $ 10,091 $ 13,331 $ 18,696 $ 24,359
======== ======== ======== ========
Pro forma earnings per common share
and common share equivalent................ $ .28 $ .37 $ .52 $ .68
======== ======== ======== ========
Pro forma weighted average number of common
shares and common share equivalents
outstanding................................ 35,558 35,558 35,629 35,629
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
HISTORICAL
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
Lodging revenues:
Rooms...................................... $ 2,033 $104,070 $ 2,033 $189,287
Food and beverage.......................... 1,021 32,971 1,021 58,727
Other departmental......................... 221 9,483 221 16,843
Management and related fees.................. 12,671 11,685 24,966 23,208
-------- -------- -------- --------
15,946 158,209 28,241 288,065
-------- -------- -------- --------
Lodging expenses:
Rooms...................................... 384 23,377 384 42,513
Food and beverage.......................... 743 23,999 743 44,149
Other departmental......................... 92 4,137 92 7,270
Property costs............................. 880 40,760 880 75,409
General and administrative................... 2,238 3,729 4,576 6,517
Payroll and related benefits................. 4,148 5,203 8,397 9,944
Non-cash compensation........................ 11,896 -- 11,896 --
Lease expense................................ -- 15,931 -- 28,499
Depreciation and amortization................ 1,340 9,574 2,441 17,962
-------- -------- -------- --------
21,721 126,710 29,409 232,263
-------- -------- -------- --------
Operating (loss) income................. (5,775) 31,499 (1,168) 55,802
Other (expense) income:
Interest, net.............................. (528) (10,777) (1,015) (18,132)
Other, net................................. 635 (731) 751 (1,214)
-------- -------- -------- --------
(Loss) income before income tax
expense............................... (5,668) 19,991 (1,432) 36,456
Income tax expense........................... 6,631 7,597 6,631 13,854
-------- -------- -------- --------
(Loss) income before extraordinary
items................................. (12,299) 12,394 (8,063) 22,602
Extraordinary loss from early extinguishment
of debt, net of tax benefit of $3,937...... 7,643 -- 7,643 --
-------- -------- -------- --------
Net (loss) income....................... $(19,942) $ 12,394 $(15,706) $ 22,602
======== ======== ======== ========
Earnings per common share and common share
equivalent (Note 4)........................ $ -- $ .35 $ -- $ .64
======== ======== ======== ========
Weighted average number of common shares and
common share equivalents outstanding....... -- 35,557 -- 35,587
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
------------------
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1997
--------- ---------
Cash flows from operating activities:
Net (loss) income........................................................... $ (15,706) $ 22,602
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,441 17,962
Minority interests' share of equity (loss) income from investments
in hotel real estate.................................................... (540) 1,792
Write-off of deferred financing fees...................................... 6,231 --
Non-cash stock compensation............................................... 11,896 --
Deferred income taxes..................................................... 2,694 5,270
Other..................................................................... (175) (298)
Cash (used) provided by assets and liabilities:
Accounts receivable, net.................................................. (1,489) (19,437)
Prepaid expenses and other assets......................................... (657) (658)
Accounts payable.......................................................... (3,857) (476)
Income taxes payable...................................................... -- 1,200
Other accrued liabilities................................................. 5,285 21,643
--------- ---------
Net cash provided by operating activities............................... 6,123 49,600
--------- ---------
Cash flows from investing activities:
Change in restricted cash................................................... 150 (14,704)
Acquisition of hotels, net of cash received................................. (115,490) (124,750)
Purchase of property and equipment, net..................................... (283) (31,779)
Restricted funds used to purchase property and equipment.................... 3 23,543
Investments in hotel real estate............................................ (4,931) (6,412)
Change in notes receivable, net............................................. (3,462) (1,686)
Other....................................................................... (3,245) (4,510)
--------- ---------
Net cash used in investing activities................................... (127,258) (160,298)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt................................................ 195,000 146,900
Repayment of long-term debt................................................. (240,439) (52,666)
Financing costs paid, net................................................... (9,432) (2,281)
Minority interests, net..................................................... -- 2,222
Proceeds from issuance of Common Stock, net................................. 235,151 16,090
Repayment of funds advanced to shareholders, net............................ 1,630 --
Repayment of notes payable to shareholders.................................. (30,000) --
Dividends and capital distributions paid.................................... (6,732) --
--------- ---------
Net cash provided by financing activities............................... 145,178 110,265
--------- ---------
Net increase (decrease) in cash and cash equivalents.......................... 24,043 (433)
Cash and cash equivalents at beginning of period.............................. 14,035 32,323
--------- ---------
Cash and cash equivalents at end of period.................................... $ 38,078 $ 31,890
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................... $ 2,534 $ 18,281
Cash paid for income taxes.................................................. -- 4,774
Supplemental disclosure of noncash investing and financing activities:
Notes payable issued to shareholders........................................ $ 30,000 $ --
Assets contributed for stock................................................ 9,916 --
Assumption of long-term debt related to hotel acquisitions.................. -- 55,150
The accompanying notes are an integral part of the consolidated financial
statements.
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INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS)
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1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Company (the "Company") was formed in April 1996 in
anticipation of an initial public offering of the Company's Common Stock in June
1996 (the "IPO"). As of June 30, 1997, the Company owned, managed, leased or
performed related services for 230 hotels with 45,499 rooms. The Company owned
or had a controlling interest in 32 of these hotels ( the "Owned Hotels"). In
addition, the Company entered into 85 long-term leases (the "Leased Hotels") in
connection with and since the acquisition of the management and leasing
businesses affiliated with Equity Inns, Inc., a publicly traded real estate
investment trust, in November 1996 (the "Equity Inns Transaction").
The consolidated financial statements of the Company consist of the
historical results of Interstate Hotels Corporation and Affiliates, the
Company's predecessor, and the operations of the Owned Hotels from the
respective dates of their acquisitions. The working capital and operating
results of the Leased Hotels are also included in the Company's consolidated
financial statements because the operating performance associated with such
hotels is guaranteed by the Company. Prior to the IPO, the consolidated
financial statements reflect only the historical activity of the predecessor.
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 Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the SEC on March 21,
1997.
The accompanying unaudited 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 accepted accounting principles requires management to
make estimates and assumptions. Such estimates and assumptions 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.
2. LONG-TERM DEBT:
In May 1997, the Company amended its credit facilities by converting
certain borrowings outstanding under the revolving credit facility to a $135
million term loan and increasing the revolving credit facility from $250 million
to $350 million. In addition, the Company's permitted non-recourse and
subordinated debt capacity was increased from $250 million to $290 million. The
interest rate on the revolving credit facility and certain term debt was amended
to be subject to reduced rates based on leveraged EBITDA ratio benchmarks. The
interest rate on the $135 million term loan is based on a fixed percentage of
2.25 over a reserve-adjusted Eurodollar rate.
3. PRO FORMA INFORMATION:
The unaudited pro forma consolidated statements of operations for the
three-month and six-month periods ended June 30, 1996 and 1997 are presented to
include the effects of the IPO, the acquisitions of Owned Hotels in connection
with and since the IPO through June 30, 1997, the Equity Inns Transaction, the
Company's second public offering in December 1996 and certain other adjustments
as if all of the transactions
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
(Unaudited, dollars in thousands)
------------------
had occurred on January 1, 1996. 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.
4. EARNINGS PER SHARE:
Prior to the consummation of the IPO, the predecessor of the Company was
organized as S corporations, partnerships and limited liability companies.
Accordingly, the Company believes that the earnings per share calculations
required to be presented are not meaningful for periods prior to the IPO and,
therefore, have not been provided. As such, earnings per share for the
three-month and six-month periods ended June 30, 1997 and the pro forma earnings
per share for the three-month and six month periods ended June 30, 1996 and 1997
are a more meaningful measure of the Company's results of operations.
5. NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128 "Earnings Per
Share." The new standard, which is effective for the fiscal year ending December
31, 1997, revises the disclosure requirements and simplifies the computations of
earnings per share. Management believes that the impact of this standard will
not be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The new standard, which is effective for the fiscal year ending
December 31, 1998, establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Management has not yet determined the impact of this standard.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information." The new standard, which is effective for
the fiscal year ending December 31, 1998, requires that all public business
enterprises report information about operating segments, as well as specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. Management has not yet
determined the impact of this standard.
6. ACQUISITIONS:
During the six months ended June 30, 1997, the Company acquired five Owned
Hotels with 1,519 rooms and minority interests in two other hotels for a total
aggregate acquisition cost, including closing costs, of $186.1 million. Such
acquisitions were accounted for using the purchase method of accounting. In
addition, the Company also entered into long-term leases with Equity Inns, Inc.
for 37 hotels.
In July 1997, the Company acquired one hotel with 310 rooms for a total
acquisition cost, including estimated closing costs, of approximately $37,300.
In addition, the Company entered into an operating lease for certain assets
affiliated with the hotel with an approximate fair market value of $7,000. This
acquisition has not been included in the pro forma financial results of the
Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
During the first quarter of 1997, the Company acquired three Owned Hotels
for a total aggregate acquisition cost, including closing costs, of $105.9
million: the 250-room Syracuse Marriott, the 358-suite Chicago Embassy Suites
and the 300-room St. Louis Marriott West. In addition, the Company acquired a
25% equity interest in the Waterford Hotel in Oklahoma City, Oklahoma and a 13%
equity interest in the Don Cesar Beach House in St. Petersburg, Florida for a
total aggregate acquisition cost, including closing costs, of $6.4 million. The
Company also entered into long-term leases with Equity Inns, Inc. for seven
hotels.
During the second quarter of 1997, the Company acquired two Owned Hotels
for a total aggregate acquisition cost, including closing costs, of $73.8
million: the 297-room Indian River Plantation Resort Marriott in Stuart, Florida
and the 314-room Pittsburgh Airport Marriott. In addition, the Company also
entered into long-term leases with Equity Inns, Inc. for 30 hotels.
PRO FORMA THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO PRO FORMA THREE
AND SIX MONTHS ENDED JUNE 30, 1996
Pro forma total revenues increased by $12.1 million, or 7.4%, from $164.7
million in the three months ended June 30, 1996 (the "1996 Three Months") to
$176.8 million in the three months ended June 30, 1997 (the "1997 Three Months")
and by $21.1 million, or 6.6%, from $318.6 million in the six months ended June
30, 1996 (the "1996 Six Months") to $339.7 million in the six months ended June
30, 1997 (the "1997 Six 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 $11.0
million, or 7.1%, from $154.4 million in the 1996 Three Months to $165.4 million
in the 1997 Three Months and by $18.7 million, or 6.3%, from $298.2 million in
the 1996 Six Months to $316.9 million in the 1997 Six Months. This increase was
due to the overall improvement in the operating performance of the Owned and
Leased Hotels and an overall improvement in economic conditions in certain
geographic regions.
The pro forma average daily room rate ("ADR") for the Owned Hotels
increased by 9.0%, from $101.14 during the 1996 Three Months to $110.27 during
the 1997 Three Months, and the pro forma average occupancy rate remained
relatively constant at 77.4%. For the six-month periods, the pro forma ADR for
the Owned Hotels increased by 9.1%, from $103.80 during 1996 to $113.20 during
1997, and the pro forma average occupancy rate remained relatively constant at
74.4%. This resulted in an increase in pro forma room revenue per available room
("REVPAR") of 9.0% to $85.38 during the 1997 Three Months and an increase of
9.2% to $84.21 during the 1997 Six Months. The Boston, Fort Lauderdale, Houston,
Los Angeles, New York, Philadelphia, Phoenix, San Jose and Washington, D.C.
markets had a significant positive impact on average rate and REVPAR growth. Pro
forma management and related fees increased by $1.2 million, or 11.7%, from
$10.3 million in the 1996 Three Months to $11.5 million in the 1997 Three Months
and by $2.3 million, or 11.4%, from $20.5 million in the 1996 Six Months to
$22.8 million in the 1997 Six Months primarily due to the performance
improvement of the Company's portfolio of managed hotels. Many of the management
agreements for these hotels provide for incentive management fees.
Pro forma lodging expenses, which consists of rooms, food and beverage,
property costs and other departmental expenses, increased by $3.3 million, or
3.3%, from $98.9 million in the 1996 Three Months to $102.2 million in the 1997
Three Months and by $7.4 million, or 3.9%, from $193.5 million in the 1996 Six
Months to $200.9 million in the 1997 Six Months. The pro forma operating margin
of the Owned and Leased Hotels increased from 36.0% during the 1996 Three Months
to 38.2% during the 1997 Three Months and from 35.1% during the 1996 Six Months
to 36.6% during the 1997 Six Months. This increase was attributed to the
increase in pro forma revenues and the overall improvement in operating
performance and operating efficiencies of the Owned and Leased 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 six-month periods in 1996 and
1997 remained relatively consistent due to the nonvariable nature of these
expenses. Pro forma general and administrative expenses as a percentage of pro
forma revenues
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increased to 2.0% during the 1997 Three Months compared to 1.7% during the 1996
Three Months and remained relatively constant for the six-month periods at 1.8%.
Pro forma payroll and related benefits expenses remained consistent in the
three-month and six-month periods in 1996 and 1997. Pro forma payroll and
related benefits expenses as a percentage of pro forma revenues increased
slightly to 2.9% during the 1997 Three Months compared to 2.8% during the 1996
Three Months and remained relatively constant for the six-month periods at 2.9%.
Lease expense represents base rent and participating rent that is based on
a percentage of room and food and beverage revenues from the Leased Hotels. Pro
forma lease expense increased by $2.5 million, or 11.6%, from $21.2 million in
the 1996 Three Months to $23.7 million in the 1997 Three Months and by $3.9
million, or 10.4%, from $38.0 million in the 1996 Six Months to $41.9 million in
the 1997 Six Months. This increase was due to higher Leased Hotels' room
revenues. The pro forma ADR for the Leased Hotels increased by 6.2%, from $62.21
during the 1996 Three Months to $66.09 during the 1997 Three Months, and the pro
forma average occupancy rate remained relatively constant at 76.3%. For the
six-month periods, the pro forma ADR for the Leased Hotels increased by 6.4%,
from $61.57 during 1996 to $65.53 during 1997, and the pro forma average
occupancy rate remained relatively constant at 71.6%. This resulted in an
increase in pro forma REVPAR of 5.7% to $50.40 during the 1997 Three Months and
an increase of 5.9% to $46.95 during the 1997 Six Months.
Pro forma operating income increased by $5.0 million, or 18.0%, from $27.6
million in the 1996 Three Months to $32.6 million in the 1997 Three Months and
by $8.2 million, or 15.4%, from $53.1 million in the 1996 Six Months to $61.3
million in the 1997 Six Months. The pro forma operating margin increased from
16.8% during the 1996 Three Months to 18.4% during the 1997 Three Months and
from 16.7% during the 1996 Six Months to 18.0% during the 1997 Six 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 net interest expense decreased by $0.4 million, or 3.6%, from
$10.6 million in the 1996 Three Months to $10.2 million in the 1997 Three Months
and by $0.9 million, or 4.1%, from $21.5 million in the 1996 Six Months to $20.6
million in the 1997 Six Months. This decrease was due to lower outstanding debt
balances resulting primarily from escalating scheduled principal payments on a
pro forma basis.
Pro forma income tax expense for the periods presented was computed as if
the Company had been 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
$3.2 million, or 32.1%, from $10.1 million in the 1996 Three Months to $13.3
million in the 1997 Three Months and by $5.7 million, or 30.3%, from $18.7
million in the 1996 Six Months to $24.4 million in the 1997 Six Months. The pro
forma net income margin increased from 6.1% during the 1996 Three Months to 7.5%
during the 1997 Three Months and from 5.9% during the 1996 Six Months to 7.2%
during the 1997 Six Months.
HISTORICAL THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO HISTORICAL THREE
AND SIX MONTHS ENDED JUNE 30, 1996
Total revenues increased by $142.3 million, or 892.2%, from $15.9 million
in the 1996 Three Months to $158.2 million in the 1997 Three Months and by
$259.9 million, or 920.0%, from $28.2 million in the 1996 Six Months to $288.1
million in the 1997 Six Months. This increase was attributed to lodging
revenues, which increased by $143.2 million in the three-month period and by
$261.6 million in the six-month period due to the operations of the Owned Hotels
since their respective acquisition dates and the Leased Hotels. The ADR for the
Owned Hotels was $110.42 during the 1997 Three Months and the average occupancy
rate was 77.3%, which resulted in REVPAR of $85.32. For the 1997 Six Months, the
ADR for the Owned Hotels was $111.67 and the average occupancy rate was 74.0%,
which resulted in REVPAR of $82.69. Management and related fees decreased by
$1.0 million, or 7.8%, from $12.7 million in the 1996 Three Months to $11.7
million in the 1997 Three Months and by $1.8 million, or 7.0%, from $25.0
million in the 1996 Six Months to $23.2 million
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in the 1997 Six Months primarily due to the Company's acquisitions of previously
managed hotels which resulted in the elimination of third-party management and
related fees.
Lodging expenses increased by $90.2 million in the three-month period and
by $167.2 million in the six-month period due to the operations of the Owned
Hotels since their respective acquisition dates and the Leased Hotels. The
operating margin of the Owned and Leased Hotels was 37.0% during the 1997 Three
Months and 36.1% during the 1997 Six Months.
General and administrative expenses increased by $1.5 million, or 66.6%,
from $2.2 million in the 1996 Three Months to $3.7 million in the 1997 Three
Months and by $1.9 million, or 42.4%, from $4.6 million in the 1996 Six Months
to $6.5 million in the 1997 Six Months. This increase was primarily due to
incremental expenses associated with the growth of the Company's business and
additional costs associated with the acquisitions of the Owned Hotels, as well
as additional costs associated with managing and administering a publicly held
company. General and administrative expenses as a percentage of revenues
decreased to 2.4% during the 1997 Three Months compared to 14.0% during the 1996
Three Months and to 2.3% during the 1997 Six Months compared to 16.2% during the
1996 Six Months as a result of the operations of the Owned Hotels since their
respective acquisition dates and the Leased Hotels.
Payroll and related benefits expenses increased by $1.1 million, or 25.4%,
from $4.1 million in the 1996 Three Months to $5.2 million in the 1997 Three
Months and by $1.5 million, or 18.4%, from $8.4 million in the 1996 Six Months
to $9.9 million in the 1997 Six Months. This 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 decreased to 3.3% during
the 1997 Three Months compared to 26.0% during the 1996 Three Months and to 3.5%
during the 1997 Six Months compared to 29.7% during the 1996 Six Months as a
result of the operations of the Owned Hotels since their respective acquisition
dates and the Leased Hotels.
Non-cash compensation of $11.9 million in 1996 resulted from the issuance
of 785,533 shares of Common Stock to certain executives and key employees of the
Company in consideration for the cancellation of stock options issued by the
Company's predecessor, Interstate Hotels Corporation, in 1995.
The Company had lease expense of $15.9 million in the 1997 Three Months and
$28.5 million in the 1997 Six Months due to the addition of the Leased Hotels.
The ADR for the Leased Hotels was $67.24 during the 1997 Three Months and the
average occupancy rate was 75.3%, which resulted in REVPAR of $50.66. For the
1997 Six Months, the ADR for the Leased Hotels was $66.92 and the average
occupancy rate was 71.3%, which resulted in REVPAR of $47.72.
Depreciation and amortization increased by $8.3 million, or 614.5%, from
$1.3 million in the 1996 Three Months to $9.6 million in the 1997 Three Months
and by $15.6 million, or 635.8%, from $2.4 million in the 1996 Six Months to
$18.0 million in the 1997 Six Months due to incremental depreciation related to
the acquisitions of the Owned Hotels, the amortization of deferred financing
fees and the amortization of goodwill and the cost of lease contracts associated
with the Equity Inns Transaction.
Operating income (exclusive of non-cash compensation) increased by $25.4
million, or 414.6%, from $6.1 million in the 1996 Three Months to $31.5 million
in the 1997 Three Months and by $45.1 million, or 420.2%, from $10.7 million in
the 1996 Six Months to $55.8 million in the 1997 Six Months. The operating
margin decreased from 38.4% during the 1996 Three Months to 19.9% during the
1997 Three Months and from 38.0% during the 1996 Six Months to 19.4% during the
1997 Six Months. This increase in operating income and decrease in the operating
margin reflects the inclusion of the operating results of the Owned Hotels,
which were not reflected in the Company's results prior to their respective
acquisition dates, and the Leased Hotels.
Net interest expense increased by $10.3 million to $10.8 million in the
1997 Three Months and by $17.1 million to $18.1 million in the 1997 Six Months
primarily due to additional borrowings related to the acquisitions of the Owned
Hotels.
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Other expense of $0.7 million in the 1997 Three Months and $1.2 million in
the 1997 Six Months consisted primarily of minority interests.
Income tax expense in 1997 was computed based on an effective tax rate of
38%. Income tax expense in 1996 included deferred tax expense of $4.9 million,
which was recorded in June 1996 when the Company 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 tax benefit of $3.9
million, in 1996 resulted from the early extinguishment of certain indebtedness
and was related to the payment of prepayment penalties and loan commitment fees
and the write-off of deferred financing fees.
As a result of the changes noted above, net income of $12.4 million was
recorded in the 1997 Three Months compared to a net loss of $19.9 million in the
1996 Three Months. For the six-month periods, net income of $22.6 million was
recorded in 1997 compared to a net loss of $15.7 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent assets were $31.9 million at June
30, 1997 compared to $38.1 million at June 30, 1996. The Company's principal
sources of liquidity during the 1997 Six Months were cash from operations and
borrowings under its credit facilities. Net cash provided by operations was
$49.6 million in the 1997 Six Months compared to $6.1 million in the 1996 Six
Months. The Company used cash of $160.3 million in investing activities in the
1997 Six Months, which principally related to the acquisitions of Owned Hotels
in the net amount of $124.8 million and capital expenditures of $31.6 million.
Net cash provided by financing activities in the amount of $110.3 million in the
1997 Six Months was primarily used to finance these acquisitions. The principal
source of this cash was $146.9 million from proceeds from long-term debt, offset
by long-term debt repayments of $52.7 million.
At June 30, 1997, the Company's total indebtedness was $557.2 million,
comprised of $423.7 million of term loans, $5.0 million of borrowings under its
revolving credit facility, $29.3 million of mortgage indebtedness encumbering
six Owned Hotels in which the Company owns a controlling interest, $98.6 million
of loans related to the acquisitions of five Owned Hotels, and $0.6 million of
other debt. In May 1997, the Company amended its credit facilities by converting
certain borrowings outstanding under the revolving credit facility to a $135
million term loan and increasing the revolving credit facility from $250 million
to $350 million. In addition, the Company's permitted non-recourse and
subordinated debt capacity was increased from $250 million to $290 million. The
interest rate on the revolving credit facility and certain term debt was amended
to be subject to reduced rates based on leveraged EBITDA ratio benchmarks, while
the interest rate on the $135 million term loan is based on a fixed percentage
of 2.25 over a reserve-adjusted Eurodollar rate. The repayment terms and
restricted covenants of the credit facilities remain substantially unchanged.
The Company had available funds under its revolving credit facility of
$345.0 million at June 30, 1997. In addition, at that date, the credit facility
permitted $208.2 million of nonrecourse and subordinated indebtedness. The
Company utilizes various interest rate hedge contracts to limit its interest
rate exposure on indebtedness. Future changes in interest rates applicable to
outstanding borrowings are therefore not expected to have a material impact on
the Company's results of operations.
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. At June 30, 1997, current liabilities
exceeded current assets by $46.6 million primarily as a result of the Company's
acquisitions of two Owned Hotels which were financed with $41.5 million of
short-term non-recourse loans. The Company currently expects to refinance these
loans before December 31, 1997. The Company's capital expenditure budget
relating to existing operations for 1997 is $51.1 million. Capital expenditures
(excluding acquisitions of Owned Hotels) were $16.3 million in 1996.
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
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Company). The Company also expects to pursue selective development projects,
particularly in the limited-service segment. At June 30, 1997, the Company had
three limited-service hotels under construction with total projected development
costs of $28.5 million. These properties include two Courtyard by Marriott
hotels in Orange, Connecticut and Westborough, Massachusetts and a Residence Inn
by Marriott in Pittsburgh, Pennsylvania. The total cost incurred through June
30, 1997 on these projects was $6.7 million. Management believes that the
available funds remaining under the Company's revolving credit facility,
permitted nonrecourse and subordinated indebtedness and cash provided by
operations will be sufficient to pursue the Company's acquisition strategy and
to fund its other presently foreseeable capital requirements. The Company also
expects to arrange separate financing for development projects, including the
three limited-service hotels under construction at June 30, 1997, either on a
program basis or pursuant to project-to-project financing.
The Company believes that, absent a presently unforeseen change, additional
acquisition and development opportunities will continue to exist for the
foreseeable future, and depending upon conditions in the capital and other
financial markets as well as other factors, the Company may increase its
borrowing capacity and consider the issuance of equity or debt securities, the
proceeds of which could be used to finance acquisitions and development, to
repay or refinance outstanding indebtedness or for other general corporate
purposes.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements and information
relating to the Company that are 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, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, relating to the operations and results of operations of the
Company, the Company's rapid expansion, the ownership and leasing of real
estate, competition from other hospitality companies and changes in economic
cycles, as well as the other factors described herein. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, estimated, expected or intended.
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PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the shareholders of Interstate Hotels Company was
held on May 21, 1997. The shareholders of record at the close of business on
March 14, 1997 elected six members of the Board of Directors, with votes cast as
follows:
NOMINEE VOTES FOR VOTES WITHHELD
-------------------------------------------------- ---------- --------------
Milton Fine....................................... 32,437,915 65,118
David J. Fine..................................... 32,438,054 64,979
R. Michael McCullough............................. 32,446,815 56,218
W. Thomas Parrington.............................. 32,438,215 64,818
Thomas J. Saylak.................................. 32,432,780 70,253
Steven J. Smith................................... 32,446,915 56,118
The shareholders also voted to ratify the appointment of Coopers & Lybrand,
L.L.P. as the independent accountants to audit the financial statements of the
Company, with votes cast as follows: 32,493,820 votes for, 4,244 votes against
and 4,969 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits.
EXHIBIT NO. DESCRIPTION
------------ -----------------------
27.1 Financial Data Schedule
(B) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Pittsburgh, in the
Commonwealth of Pennsylvania, on August 14, 1997.
INTERSTATE HOTELS COMPANY
By: /s/ J. WILLIAM RICHARDSON
------------------------------------
J. William Richardson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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