-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BuGsNQhUtmYpab/wqjPibEtJq/GAQMLq0ZQa/keBAw6rbm2yfc/61CKQjFXqPWq7 oWPf33VIMHY82YcZJ1rKZw== 0000928385-00-001498.txt : 20000512 0000928385-00-001498.hdr.sgml : 20000512 ACCESSION NUMBER: 0000928385-00-001498 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERISTAR HOTELS & RESORTS INC CENTRAL INDEX KEY: 0001059341 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 510379982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14331 FILM NUMBER: 626581 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVE NW CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 2029654455 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVE N W CITY: WASHINGTON STATE: DC ZIP: 20007 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to COMMISSION FILE NUMBER 1-14331 MERISTAR HOTELS & RESORTS, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 51-0379982 (State of Incorporation) (IRS Employer Identification No.) 1010 WISCONSIN AVENUE, N.W. WASHINGTON, D.C. 20007 (Address of Principal Executive Offices)(Zip Code) 202-965-4455 (Registrant's Telephone Number, Including Area Code) NONE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period for which the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of Common Stock, par value $0.01 per share, outstanding at May 8, 2000 was 31,763,024. MERISTAR HOTELS & RESORTS, INC. INDEX
Page ---- PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II. OTHER INFORMATION 15 ITEM 5: OTHER INFORMATION 15 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
2 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, 2000 December 31, 1999 -------------- ----------------- (unaudited) Assets Current Assets: Cash and cash equivalents $ 13,099 $ 1,726 Accounts receivable, net of allowance for doubtful accounts of $2,410 and $2,090 68,955 47,976 Prepaid expenses 5,509 3,589 Deposits and other 9,120 8,388 -------- -------- Total current assets 96,683 61,679 -------- -------- Fixed assets: Furniture, fixtures, and equipment 16,161 14,832 Accumulated depreciation (2,893) (2,522) -------- -------- Total fixed assets, net 13,268 12,310 -------- -------- Investments in and advances to affiliates 33,075 30,018 Intangible assets, net of accumulated amortization of $9,198 and $7,927 154,604 153,927 Restricted cash 4 210 -------- -------- $297,634 $258,144 ======== ======== Liabilities, Minority Interests, and Stockholders' Equity Current Liabilities: Accounts payable, accrued expenses and other liabilities $106,634 $ 96,603 Due to affiliates, net 23,725 11,476 Income taxes payable 80 80 Long-term debt, current portion 224 10 -------- -------- Total current liabilities 130,663 108,169 Deferred income taxes 14,680 13,247 Long-term debt 65,136 57,752 -------- -------- Total liabilities 210,479 179,168 Minority interests 13,784 13,774 Commitments and contingencies Stockholders' equity: Common stock, par value $0.01 per share: Authorized - 100,000 shares Issued and outstanding -31,729 and 29,625 shares 317 296 Additional paid-in capital 63,377 57,637 Retained earnings 9,676 7,236 Accumulated other comprehensive income 1 33 -------- -------- Total stockholders' equity 73,371 65,202 -------- -------- $297,634 $258,144 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, -------------------- 2000 1999 --------- -------- Revenue: Rooms $236,306 $228,313 Food and beverage 74,386 72,313 Other operating departments 24,408 23,367 Management and other fees 5,396 1,845 -------- -------- Total revenue 340,496 325,838 -------- -------- Operating expenses by department: Rooms 54,000 52,567 Food and beverage 54,024 53,296 Other operating departments expenses 13,440 10,712 Undistributed operating expenses: Administrative and general 57,469 55,709 Property operating costs 48,214 45,439 Participating lease expense 106,241 106,275 Depreciation and amortization 1,643 1,549 -------- -------- Total operating expenses 335,031 325,547 -------- -------- Net operating income 5,465 291 Interest expense, net 1,191 1,226 -------- -------- Income before minority interests and income taxes 4,274 (935) Minority interests 401 (161) -------- -------- Income before income taxes 3,873 (774) Income taxes 1,433 (309) -------- -------- Net income $ 2,440 $ (465) ======== ======== Earnings per share : Basic $0.08 $ (0.02) ======== ======== Diluted $0.08 $ (0.02) ======== ========
See accompanying notes to condensed consolidated financial statements. 4 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS)
Three Months Ended March 31, ---------------------- 2000 1999 -------- -------- Operating activities: Net income $ 2,440 $ (465) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,643 1,549 Minority interests 401 (161) Deferred income taxes 1,433 (309) Changes in operating assets and liabilities: Accounts receivable, net (20,979) (16,232) Deposits and other (732) (1,595) Prepaid expenses (1,920) 361 Accounts payable, accrued expenses and other liabilities 10,031 19,774 Due to affiliates, net 12,249 17,926 -------- -------- Net cash provided by operating activities 4,566 20,848 -------- -------- Investing activities: Purchases of fixed assets (1,315) (794) Investments in and advances to affiliates (3,057) (13,814) Purchases of intangible assets (348) (159) Change in restricted cash 206 564 -------- -------- Net cash used in investing activities (4,514) (14,203) -------- -------- Financing activities: Proceeds from issuance of long term debt 101,500 48,000 Principal payments on long term debt (93,902) (58,170) Proceeds from issuances of common stock, net 5,329 246 Deferred costs (1,600) - -------- -------- Net cash provided by (used in) financing activities 11,327 (9,924) -------- -------- Effect of exchange rate changes on cash (6) (70) -------- -------- Net increase (decrease) in cash and cash equivalents 11,373 (3,349) Cash and cash equivalents, beginning of period 1,726 11,155 -------- -------- Cash and cash equivalents, end of period $ 13,099 $ 7,806 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 UNAUDITED (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. ORGANIZATION MeriStar Hotels & Resorts, Inc. (the "Company") was spun off by Capstar Hotel Company ("CapStar") on August 3, 1998 (the "Spin-Off") to become the lessee, manager and operator of various hotel assets, including those which were previously owned, leased and managed by CapStar and certain of its affiliates. CapStar distributed to its stockholders, on a share-for-share basis, all of the outstanding shares of the Company's common stock, par value $0.01 per share ("Common Stock"). On August 3, 1998, CapStar merged (the "Merger") with and into American General Hospitality Corporation ("AGH"), a Maryland corporation operating as a real estate investment trust, to form MeriStar Hospitality Corporation (the "REIT"). Immediately following the Spin-Off and the Merger, the Company acquired 100% of the partnership interests in AGH Leasing, L.P. ("AGH Leasing"), the third-party lessee of most of the hotels owned by AGH, and acquired substantially all of the assets and certain liabilities of American General Hospitality, Inc. ("AGHI"), the third-party manager of most of the hotels owned by AGH and certain other hotels. The Company thereby became the lessee, manager and operator of most of the hotels owned by AGH. Pursuant to an intercompany agreement, the Company and the REIT provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by each party. In particular, the Company has a right of first refusal to become the lessee of any real property acquired by the REIT. The Company also provides the REIT with certain services including administrative, renovation supervision, corporate, accounting, finance, insurance, legal, tax, information technology, human resources, acquisition identification and due diligence, and operational services, for which the Company is compensated in an amount that the REIT would be charged by an unaffiliated third party for comparable services. As of March 31, 2000, the Company leased or managed 217 hotels with 46,325 rooms in 33 states, the District of Columbia, Canada and the U.S. Virgin Islands. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying condensed consolidated interim financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated interim financial statements should be read in conjunction with the financial statements, notes thereto and other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain 1999 amounts have been reclassified to conform to the 2000 presentation. The accompanying unaudited condensed consolidated interim financial statements reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the financial condition and results of operations and cash flows for the periods presented. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. The Company's participating leases have noncancelable remaining terms ranging from 9 to 14 years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent payable under each participating lease is the greater of base rent or percentage rent, as defined. Percentage rent applicable to room and food and beverage hotel revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over 6 specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index. Percentage rent applicable to other revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. In accordance with Emerging Issues Task Force ("EITF") Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods", during interim reporting periods the Company recognizes contingent rental expense prior to the achievement of the specified target that triggers the contingent rental expense if the achievement of the specified target by the end of the fiscal year is considered probable. This accounting pronouncement relates only to the Company's recognition of lease expense in interim periods for financial reporting purposes; it has no effect on the timing of rent payments under the Company's leases or the Company's annual lease expense calculations. The Company has made cash lease payments in excess of the expense that the Company is required to recognize under EITF No. 98-9 for the interim period ended March 31, 2000. The Company recognized lease expense in excess of the cash lease payments during the interim period ended March 31, 1999. As of March 31, 2000 and 1999, this resulted in a prepaid expense of $514 and an accrued liability of $3,920, respectively, which are included on the Company's condensed consolidated balance sheets. Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," requires an enterprise to display comprehensive income and its components in a financial statement to be included in an enterprise's full set of annual financial statements or in the notes to interim financial statements. Comprehensive income represents a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events for the period other than transactions with owners in their capacity as owners. Comprehensive income of the Company includes net income and other comprehensive income from foreign currency items. For the three months ended March 31, 2000, net income was $2,440, other comprehensive income, net of tax, was $(32) and comprehensive income was $2,408. For the three months ended March 31, 1999, net income was $(465), other comprehensive income, net of tax, was $(28) and comprehensive income was $(493). 3. LONG-TERM DEBT Long-term debt consists of the following:
March 31, December 31, 2000 1999 ------------------ ----------------- New Credit Facility.......................... $65,000 $ - Credit Facility.............................. - 57,000 Other........................................ 360 762 ------------------ ----------------- 65,360 57,762 Less current portion......................... (224) (10) ------------------ ----------------- $65,136 $57,752 ================== =================
On February 29, 2000, the Company entered into a $100 million senior secured credit facility with a syndicate of banks (the "New Credit Facility"). The New Credit Facility bears interest at the 30-day London Inter-Bank Offered Rate plus 350 basis points and expires in February 2002 with a one-year extension option. On March 1, 2000, the Company drew down $65 million at an interest rate of 9.4% to repay the borrowings outstanding under the revolving credit agreement with the REIT (the "Credit Facility"). Upon execution of the New Credit Facility, the Credit Facility was amended to reduce the maximum borrowing limit from $75 million to $50 million. Aggregate future maturities of the above obligations are as follows: 2000-$224; 2001-$136; and 2002-$65,000. 7 4. EARNINGS PER SHARE Earnings per share ("EPS") has been calculated using net income for the three months ended March 31, 2000 and 1999. The following tables present the computation of basic and diluted EPS:
Three Months Ended ------------------------------- March 31, ------------------------------- 2000 1999 ------- ------- BASIC EPS COMPUTATION: Net income $ 2,440 $ (465) Weighted average number of shares 25,485 of Common Stock outstanding 31,632 -------- ------- Basic earnings per share $ 0.08 $ (0.02) ======= ======== DILUTED EPS COMPUTATION: Net income $ 2,440 $ (465) Minority interest, net of tax 44 - ------- -------- Adjusted net income $ 2,484 $ (465) ======= ======== Weighted average number of shares 25,485 of Common Stock outstanding 31,632 Common stock equivalents-OP Units 1,024 - Common stock equivalents-stock 106 - options ------- -------- Total weighted average number of diluted shares of common stock outstanding 32,762 25,485 ------- -------- Diluted earnings per share $ 0.08 $ (0.02) ======= ========
5. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended --------------------------------- March 31, --------------------------------- 2000 1999 ------- ------- Cash paid for interest $ 761 $1,469 Non-cash investing and financing activities: Conversion of OP Units to common stock 391 -
6. SEGMENTS The Company is organized into three primary operating divisions: hotel operations ("Hotel Operations"), golf management and vacation ownership. Each division is managed separately because of its distinctive products and services. Hotel Operations is the Company's only reportable operating segment. In 1999, the Company was organized into three different operating segments: upscale, full-service hotels ("Hotels"); premium limited-service hotels and inns ("Inns"); and resort properties ("Resorts"). In 2000, the Company reorganized its operations into the current operating divisions. The 1999 operating segments have been combined with other hotel operations to form the Hotel Operations operating division. The Company's management evaluates performance of each segment based on earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. 8 The following are the segment disclosures for the Hotel Operations as of and for the three months ended March 31:
2000 1999 ---------------- ---------------- Revenue $338,827 $324,348 ---------------- ---------------- EBITDA $ 7,086 $ 1,878 ---------------- ---------------- Total Assets $295,300 $272,726 ================ ================
The following is a reconciliation of the segment information to the Company's consolidated data as of and for the three months ended March 31, 2000:
Revenues EBITDA Assets ---------------- ---------------- ----------- Hotel Operations $338,827 $7,086 $295,300 Other Items 1,669 22 2,334 ---------------- ---------------- ----------- Per Financial Statements $340,496 $7,108 $297,634 ================ ================ ===========
The following is a reconciliation of the segment information to the Company's consolidated data as of and for the three months ended March 31, 1999:
Revenues EBITDA Assets ---------------- ---------------- ----------- Hotel Operations $324,348 $1,878 $272,726 Other Items 1,490 (38) 1,652 ---------------- ---------------- ----------- Per Financial Statements $325,838 $1,840 $274,378 ===================================================
The other items in the tables above represent operating segment activity and assets for the non-reportable segments. Revenues for Canadian operations totaled $4,425 and $4,484 for the three months ended March 31, 2000 and 1999, respectively. 7. ACQUISITION On March 23, 2000, the Company entered into an agreement to acquire all of the outstanding shares of common stock of BridgeStreet Accommodations, Inc. ("BridgeStreet") for $1.50 in cash and 0.5 shares of the Company's common stock for each share of BridgeStreet common stock outstanding. BridgeStreet provides corporate housing services in the United States, Toronto, Canada, and the United Kingdom. The transaction is expected to close during the second quarter of 2000. Based on the current stock price, the total purchase price of the acquisition would be approximately $38.6 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are the lessee, manager and operator of a portfolio of primarily upscale, full-service hotels in the United States and Canada. Our portfolio is diversified by franchise and brand affiliations. Our subsidiary, MeriStar H&R Operating Company, L.P., conducts all of our operations. We are the sole general partner of MeriStar H&R and control its operations. On August 3, 1998, American General Hospitality Corporation and CapStar Hotel Company merged together to form MeriStar Hospitality Corporation, a real estate investment trust. As part of that merger, CapStar formed our company to become the lessee, manager and operator of substantially all of the hotels owned or leased by American General and CapStar before the merger. At the time of the merger, CapStar distributed all of the shares of our common stock to its stockholders and we became a separate, publicly traded company. We manage all of the hotels CapStar leased and/or managed for third-party owners before the merger. Immediately after the merger, we acquired all of the partnership interests in AGH Leasing, L.P., the third-party lessee that leased most of the hotels American General owned. We also acquired substantially all of the assets and some liabilities of American General Hospitality, Inc., the third-party manager that managed most of the hotels American General owned. The following table outlines our historical portfolio of managed and leased hotels as of the dates indicated:
REIT OTHER THIRD PARTY LEASED LEASED MANAGED TOTAL -------------------------------------------------------------------------------------------------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 3/31/00 108 28,055 52 7,538 57 10,732 217 46,325 12/31/99 108 28,055 53 7,600 54 9,693 215 45,348 3/31/99 109 28,175 53 7,608 41 6,800 203 42,583 12/31/98 109 28,058 53 7,608 41 6,800 203 42,466
We also manage or are otherwise affiliated with 10 golf courses. Our golf course management operations are not material to any period presented. In December 1999, the Real Estate Investment Trust Modernization Act became law. The Real Estate Investment Trust Modernization Act now permits real estate investment trusts to create a taxable subsidiary on or after January 1, 2000, which will be subject to taxation similar to a C-Corporation. MeriStar Hospitality Corporation plans to establish a taxable subsidiary. The taxable subsidiary will be allowed to lease the real property owned by MeriStar Hospitality Corporation. Therefore, all of our lease contracts with MeriStar Hospitality Corporation will be transferred to their taxable subsidiary. Concurrently, we expect to enter into management agreements with MeriStar Hospitality Corporation for these same hotels. We have established a subcommittee of independent members of our Board of Directors to negotiate the transfer of our existing leases. Since this process is a significant change from the business structure we have maintained, it is not currently possible to predict the outcome of these negotiations. The amount of consideration, if any, to be exchanged with MeriStar Hospitality Corporation is subject to completion of these negotiations. We intend to conclude these negotiations during 2000 and to transfer the leases to MeriStar Hospitality Corporation effective January 1, 2001. On March 23, 2000, we entered into an agreement to acquire all of the outstanding shares of common stock of BridgeStreet Accommodations, Inc. for $1.50 in cash and 0.5 shares of our common stock for each share of BridgeStreet common stock outstanding. BridgeStreet provides corporate housing services in the United States, Toronto, Canada, and the United Kingdom. We expect this transaction to close during the second quarter of 2000. Based on the current stock price, the total purchase price of the acquisition would be approximately $38.6 million. Financial Condition Assets - ------ Our total assets increased by $39.5 million to $297.6 million at March 31, 2000 from $258.1 million at December 31, 1999 primarily due to the following: . Investments in and advances to affiliates increased by $3.1 million due to our investments in MIP Lessee, L.P.; STS Hotel Net, a company that provides high-speed Internet portals to guest rooms; and other hotel ventures; . Accounts receivable increased $21.0 million due to an increase of $34.2 million in our revenues in the first quarter of 2000 compared to the fourth quarter of 1999; and . Cash and cash equivalents increased $11.4 million resulting from net operating activity and additional borrowings on our credit facility. Our assets include a substantial amount of intangible assets, primarily related to our acquisitions of hotel management companies in 1997 and 1998. We evaluate the carrying values of our long-lived intangible assets periodically in relation to their operating performance and expected future undiscounted cash flows of the underlying assets. Through March 31, 2000, our evaluations have not indicated a need to adjust the carrying value of our intangible assets. Over the past two years, however, the lodging industry has experienced the negative effects of the supply of new rooms in some hotel product types and geographic regions exceeding demand. As a result, we will continue to regularly evaluate the recoverability of our intangible assets. Liabilities - ----------- Our total liabilities increased by $31.3 million to $210.5 million at March 31, 2000 from $179.2 million at December 31, 1999 primarily due to the following: . Accounts payable, accrued expenses and other liabilities increased $10.0 million due to higher operating expenses before participating lease expense for the first quarter 2000 as compared to the fourth quarter 1999; . Due to affiliates increased $12.2 million primarily due to the participating rent payable balance at March 31, 2000 being $13.2 million higher than at December 31, 1999; and . Long-term debt increased $7.3 million due to borrowings under our new credit facility to fund short term operating requirements. Stockholders' Equity - -------------------- Stockholders' equity increased $8.2 million primarily due to the sale of 1,818,182 shares of our common stock to our joint venture partner in MIP Lessee, L.P. and the net income of $2.4 million for the quarter. Results of Operations Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Revenues - --------- Total revenue increased $14.7 million or 4.5% to $340.5 million in the three months ended March 31, 2000 compared to $325.8 million in the three months ended March 31, 1999. The increase in revenue is primarily the result of an increase in the number of third party managed hotels and a 3.4% improvement in revenue per available room from our leased hotels. This improvement in revenue per available room was primarily the result of a 4.3% increase in the average daily rate. The following table provides our operating statistics for our leased hotels on a pro forma basis for the quarter: 2000 1999 Change ------------- ------------- ------------- Revenue per available room $ 79.31 $ 76.71 3.4% Average daily rate $112.44 $107.84 4.3% Occupancy 70.5% 71.1% (0.08)%
Operating Expenses - ------------------ Operating expenses increased $9.5 million or 2.9% to $335.0 million in the three months ended March 31, 2000 compared to $325.5 million in the three months ended March 31, 1999. The increase reflects the increased departmental operating costs of our leased hotels associated with the increase in revenue. Earnings Before Interest, Taxes, Depreciation and Amortization - -------------------------------------------------------------- Earnings before interest, taxes, depreciation and amortization increased to $7.1 million in the three months ended March 31, 2000 compared to $1.8 million in the three months ended March 31, 1999. The increase in earnings before interest, taxes, depreciation and amortization is primarily due to the increase in the number of hotels managed by us in 2000 compared to 1999. This increase in managed hotels resulted in a $3.6 million increase in management and other fees. The remaining $1.7 million increase in earnings before interest, taxes, depreciation and amortization resulted from the increase in revenues at our leased hotels. Minority interest and taxes increased by $0.6 million and $1.7 million, respectively, due to higher operating income as compared to 1999. Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods" requires a lessee to recognize contingent rental expense for interim periods prior to the achievement of the specified target that triggers the contingent rental expense, if the achievement of that target by the end of the fiscal year is considered probable. This accounting pronouncement relates only to our recognition of lease expense in interim periods for financial reporting purposes; it has no effect on the timing of rent payments under our leases or our annual lease expense calculations. We made cash lease payments in excess of the expense we were required to recognize under EITF No. 98-9 during the interim period ended March 31, 2000. We recognized lease expense in excess of the cash lease payments during the interim period ended March 31, 1999. As of March 31, 2000 and 1999, this resulted in a prepaid expense of $514 and an accrued liability of $3,920, respectively, which are included on our condensed consolidated balance sheets. The effect on our financial statements is as follows (in thousands, except for per share amounts): Three Months Ended March 31, 2000 ---------------------------------
Prior to Effect Effect After Effect of of of EITF No. 98-9 EITF No. 98-9 EITF No. 98-9 ---------------- -------------- -------------- Net operating income $ 4,951 $ 514 $ 5,465 Interest expense, net (1,191) - (1,191) Minority interest (287) (114) (401) Income taxes (1,285) (148) (1,433) ------- ----- ------- Net income $ 2,188 $ 252 $ 2,440 ======= ===== ======= Diluted earnings per share $ 0.07 $0.08 ======= =======
Three Months Ended March 31, 1999 ---------------------------------
Prior to Effect Effect After Effect of of of EITF No. 98-9 EITF No. 98-9 EITF No. 98-9 ---------------- -------------- -------------- Net operating income $ 4,211 $(3,920) $ 291 Interest expense, net (1,226) - (1,226) Minority interest (512) 673 161 Income taxes (989) 1,298 309 ------- ------- ------- Net income $ 1,484 $(1,949) $ (465) ======= ======= ======= Diluted earnings per share $ 0.06 $(0.02) ======= =======
Liquidity and Capital Resources Sources of Cash Our continuing operations are funded through cash generated from hotel management and leasing operations. We finance business acquisitions and investments in affiliates through a combination of internally generated cash, external borrowings and the issuance of partnership interests and/or common stock. We generated $4.6 million from operations in the first three months of 2000. We generated $11.3 million of cash from financing activities during the first three months of 2000 primarily from the following: . We received $65.0 million from our new credit facility; . We made $57.1 million of net principal payments on our credit facility with MeriStar Hospitality Corporation; and . We received $5.3 million from the issuances of our common stock. Under the terms of the participating lease agreements with our lessors, our lessors will generally be required to fund significant capital expenditures at the hotels we lease. Uses of Cash We used $4.5 million of cash in investing activities during the first three months of 2000 primarily for the following: . Our $1.3 million of fixed asset purchases; and . Our investments of $3.1 million in hotel partnerships. Revolving Credit Facilities On February 29, 2000, we entered into a $100.0 million senior secured revolving credit facility with a syndicate of banks. The credit facility bears interest at the 30-day London Inter-Bank Offered Rate plus 350 basis points and expires in February 2002 with an optional one-year extension. We drew down $65 million at an interest rate of 9.4% to repay the borrowings outstanding under the revolving credit agreement with MeriStar Hospitality Corporation. Upon execution of this new credit facility, the facility with MeriStar Hospitality Corporation was amended to reduce the maximum borrowing limit from $75 million to $50 million. Summary We believe cash generated by our operations, together with anticipated borrowing capacity under our credit facilities, will be sufficient to fund our requirements for working capital, capital expenditures, and debt service. We expect to continue to seek acquisitions of hotel, resort and golf management businesses and management contracts. In addition, we expect to expand our business into vacation ownership development and management and, through the acquisition of BridgeStreet, to corporate (extended-stay) housing. We expect to finance future acquisitions through a combination of additional borrowings under our credit facilities and the issuance of partnership interests and/or our common stock. We believe these sources of capital will be sufficient to provide for our long-term capital needs. Seasonality Demand in the lodging industry is affected by recurring seasonal patterns. For non-resort properties, demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. For resort properties, demand is generally higher in winter and early spring. Since the majority of our hotels are non-resort properties, our operations generally reflect non-resort seasonality patterns. Excluding the effect of Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods", we have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates on our credit facilities that impact the fair value of these obligations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We have not entered into any derivative or interest rate transactions. Our long-term debt of $65.0 million at March 31, 2000 matures in February 2002 with an optional one-year extension. Interest on the debt is variable, based on the 30-day London Interbank Offered Rate plus 350 basis points. The interest rate was 9.4% at March 31, 2000. We have determined that the fair value of the debt approximates its carrying value. Although we conduct business in Canada, the Canadian operations were not material to our consolidated financial position, results of operations or cash flows as of and for the three months ended March 31, 2000. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the three months ended March 31, 2000. Accordingly, we were not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign subsidiaries. To date, we have not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION Forward-Looking Statements Certain statements in this Form 10-Q and in the future filings by the Company with the SEC, in the Company's press releases, and in oral statements made by or with the approval of an authorized executive officer constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include: the ability of the Company to successfully implement its operating strategy; the Company's ability to manage expansion; lease rental rates; changes in economic cycles; competition from other hospitality companies; the ability of the REIT to acquire properties which will be leased to the Company; the availability of financing to the Company and to the REIT; changes in the laws and governmental regulations applicable to the relationship between the REIT and the Company; and special risks associated with the Merger (including the integration of CapStar with AGH and changes in the laws and governmental regulations applicable to the structure of the Merger and the related transactions). ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27 -- Financial Data Schedule Current Report on Form 8-K dated and filed on March 24, 2000, regarding the merger of MeriStar Hotels & Resorts, Inc. with BridgeStreet Accommodations, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MeriStar Hotels & Resorts, Inc. Dated: May 8, 2000 /s/ James A. Calder ------------------- James A. Calder Chief Financial Officer EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-2000 JAN-1-2000 MAR-31-2000 13,099 0 71,365 2,410 6,792 96,683 16,161 2,893 297,634 130,663 65,136 0 0 317 73,054 297,634 0 340,496 0 121,464 213,968 0 1,191 3,873 1,433 2,440 0 0 0 2,440 0.08 0.08
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