-----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, Vfy6/m8fvZLs4ZkYHXmQR/q/WmolucNQJjQXt1EPeMsrXe55As5EF2dW6+T8b8Sd txjwRqDx+7k7WUUfKyc1Pw== /in/edgar/work/20000810/0000928385-00-002163/0000928385-00-002163.txt : 20000921 0000928385-00-002163.hdr.sgml : 20000921 ACCESSION NUMBER: 0000928385-00-002163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERISTAR HOTELS & RESORTS INC CENTRAL INDEX KEY: 0001059341 STANDARD INDUSTRIAL CLASSIFICATION: [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: 691942 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 0001.txt 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 June 30, 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 August 9, 2000 was 35,862,997. MERISTAR HOTELS & RESORTS, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 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 11 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 PART II. OTHER INFORMATION 18 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18 ITEM 5: OTHER INFORMATION 18 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 18 2 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 2000 December 31, 1999 ------------- ----------------- (unaudited) Assets Current Assets: Cash and cash equivalents $ 7,506 $ 1,726 Accounts receivable, net of allowance for doubtful accounts of $3,694 and $2,090 73,868 47,976 Prepaid expenses 21,835 3,589 Deposits and other 15,248 8,388 -------- -------- Total current assets 118,457 61,679 -------- -------- Fixed assets: Furniture, fixtures, and equipment 25,130 14,832 Accumulated depreciation (3,502) (2,522) -------- -------- Total fixed assets, net 21,628 12,310 -------- -------- Investments in and advances to affiliates 36,689 30,018 Intangible assets, net of accumulated amortization of $10,672 and $7,927 191,904 153,927 Deferred tax asset 905 - Restricted cash - 210 -------- -------- $369,583 $258,144 ======== ======== Liabilities, Minority Interests, and Stockholders' Equity Current Liabilities: Accounts payable, accrued expenses and other liabilities $125,324 $ 96,603 Due to MeriStar Hospitality Corporation 22,925 11,476 Income taxes payable 150 80 Long-term debt, current portion 217 10 -------- -------- Total current liabilities 148,616 108,169 Deferred income taxes 24,099 13,247 Long-term debt 85,192 57,752 -------- -------- Total liabilities 257,907 179,168 Minority interests 14,373 13,774 Commitments and contingencies Stockholders' equity: Common stock, par value $0.01 per share: Authorized - 100,000 shares Issued and outstanding - 35,863 and 29,625 shares 359 296 Additional paid-in capital 74,727 57,637 Retained earnings 22,166 7,236 Accumulated other comprehensive income: Translation adjustment 123 33 Unrealized loss on investments (72) - -------- -------- Total stockholders' equity 97,303 65,202 -------- -------- $369,583 $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 Six Months Ended June 30, June 30, --------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenue: Rooms $253,242 $242,598 $489,548 $470,911 Food and beverage 80,193 76,888 154,579 149,201 Corporate housing 9,392 - 9,392 - Other operating departments 25,186 22,294 49,594 45,661 Management and other fees 4,675 3,443 10,071 5,288 -------- -------- -------- -------- Total revenue 372,688 345,223 713,184 671,061 -------- -------- -------- -------- Operating expenses by department: Rooms 56,868 56,041 110,868 108,608 Food and beverage 56,619 55,456 110,643 108,752 Corporate housing 6,037 - 6,037 - Other operating departments expenses 14,113 11,527 27,553 22,239 Undistributed operating expenses: Administrative and general 58,155 53,005 115,624 108,714 Property operating costs 48,535 47,464 96,749 92,903 Participating lease expense 107,071 102,338 213,312 208,613 Depreciation and amortization 2,119 1,487 3,762 3,036 -------- -------- -------- -------- Total operating expenses 349,517 327,318 684,548 652,865 -------- -------- -------- -------- Net operating income 23,171 17,905 28,636 18,196 Interest expense, net 1,353 1,280 2,544 2,506 -------- -------- -------- -------- Income before minority interests and income taxes 21,818 16,625 26,092 15,690 Minority interests 1,738 2,605 2,139 2,444 -------- -------- -------- -------- Income before income taxes 20,080 14,020 23,953 13,246 Income taxes 7,590 5,210 9,023 4,901 -------- -------- -------- -------- Net income $ 12,490 $ 8,810 $ 14,930 $ 8,345 ======== ======== ======== ======== Other comprehensive income: Foreign currency translation adjustment 122 (5) 90 (33) Unrealized loss on investments (72) - (72) - -------- -------- -------- -------- Comprehensive income $ 12,540 $ 8,805 $ 14,948 $ 8,312 ======== ======== ======== ======== Earnings per share: Basic $ 0.38 $ 0.32 $ 0.46 $ 0.32 ======== ======== ======== ======== Diluted $ 0.37 $ 0.31 $ 0.45 $ 0.31 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS) Six Months Ended June 30, ------------------- 2000 1999 --------- -------- Operating activities: Net income $ 14,930 $ 8,345 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,762 3,036 Minority interests 2,139 2,444 Deferred income taxes 9,118 4,901 Changes in operating assets and liabilities: Accounts receivable, net (21,544) (8,998) Deposits and other (5,548) (4,563) Prepaid expenses (12,561) (2,296) Accounts payable, accrued expenses and other liabilities 10,534 8,582 Income taxes payable (100) - Due to MeriStar Hospitality Corporation 11,449 10,716 --------- -------- Net cash provided by operating activities 12,179 22,167 --------- -------- Investing activities: Purchases of fixed assets (4,334) (2,092) Investments in and advances to affiliates, net (6,671) (15,075) Purchases of intangible assets (1,604) (251) Cash paid to BridgeStreet Accommodations shareholders (12,216) - Change in restricted cash 210 359 --------- -------- Net cash used in investing activities (24,615) (17,059) --------- -------- Financing activities: Proceeds from issuance of long term debt 138,500 76,000 Principal payments on long term debt (110,979) (95,014) Purchase of OP units (1,149) - BridgeStreet Accommodations debt repaid (12,021) - Proceeds from issuances of common stock, net 5,488 5,611 Deferred financing costs (1,600) - --------- -------- Net cash provided by (used in) financing activities 18,239 (13,403) --------- -------- Effect of exchange rate changes on cash (23) (57) Net increase (decrease) in cash and cash equivalents 5,780 (8,352) Cash and cash equivalents, beginning of period 1,726 11,155 --------- -------- Cash and cash equivalents, end of period $ 7,506 $ 2,803 ========= ======== See accompanying notes to condensed consolidated financial statements. 5 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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. On May 31, 2000, the Company completed the acquisition of BridgeStreet Accommodations, Inc. ("BridgeStreet"). BridgeStreet provides corporate housing services in the United States, Canada, and the United Kingdom. The Company is continuing to operate its corporate housing division under the BridgeStreet name. The consolidated interim financial statements of the company for the three and six months ended June 30, 2000 include the operating results of BridgeStreet since May 31, 2000. As of June 30, 2000, the Company leased or managed 217 hotels with 46,937 rooms in 33 states, the District of Columbia, Canada, Puerto Rico and the U.S. Virgin Islands. In addition, BridgeStreet had approximately 3,600 accommodations under lease in the United States, Canada, and the United Kingdom at June 30, 2000. 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 6 those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. The Company's hotel participating leases have noncancelable remaining terms ranging from 9 to 14 years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent payable under each participating lease is the greater of base rent or percentage rent, as defined. Percentage rent applicable to room and food and beverage hotel revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index. Percentage rent applicable to other revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. In 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 periods ended June 30, 2000 and 1999. As of June 30, 2000 and 1999, this resulted in a prepaid expense of $10,126 and $2,900, respectively, which are included on the Company's condensed consolidated balance sheets. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which amended SFAS No. 133 to defer the effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 which provides additional guidance and amendments to SFAS No. 133. The Company is currently in the process of evaluating the effect this new standard will have on its financial statements. 3. LONG-TERM DEBT Long-term debt consists of the following: June 30, December 31, 2000 1999 ------- ----------- New Credit Facility................................ $85,000 $ - Credit Facility.................................... - 57,000 Other.............................................. 409 762 ------- ------- 85,409 57,762 Less current portion............................... (217) (10) ------- ------- $85,192 $57,752 ======= ======= On February 29, 2000, the Company entered into a $100,000 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 borrowed $65,000 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 $75,000 to $50,000. Aggregate future maturities of the above obligations are as follows: 2000 - $217; 2001 - $192; and 2002 - $85,000. 7 4. EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share ("EPS"):
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- ------------------------------- 2000 1999 2000 1999 ----------- -------------- ------------ ----------- BASIC EPS COMPUTATION: Net income $12,490 $ 8,810 $14,930 $ 8,345 Weighted average number of shares of Common Stock outstanding 33,128 27,366 32,380 26,426 ------- ------- ------- ------- Basic earnings per share $ 0.38 $ 0.32 $ 0.46 $ 0.32 ======= ======= ======= ======= DILUTED EPS COMPUTATION: Net income $12,490 $ 8,810 $14,930 $ 8,345 Minority interest, net of tax 999 - 1,333 1,540 ------- ------- ------- ------- Adjusted net income $13,489 $ 8,810 $16,263 $ 9,885 ======= ======= ======= ======= Weighted average number of shares of Common Stock outstanding 33,128 27,366 32,380 26,426 Common stock equivalents-OP Units 3,303 392 3,603 5,669 Common stock equivalents-stock options 85 266 95 145 ------- ------- ------- ------- Total weighted average number of diluted shares of common stock outstanding 36,516 28,024 36,078 32,240 ------- ------- ------- ------- Diluted earnings per share $ 0.37 $ 0.31 $ 0.45 $ 0.31 ======= ======= ======= =======
5. SUPPLEMENTAL CASH FLOW INFORMATION Six Months Ended June 30, ------------------ 2000 1999 -------- ------- Cash paid for interest and income taxes: Interest $ 2,353 $2,573 Income Taxes 70 1 Non-cash investing and financing activities: Conversion of OP Units to common stock 391 3,453 Issuance of common stock to BridgeStreet shareholders 11,239 Fair value of assets acquired 17,223 - Fair value of liabilities acquired (16,083) - Fair value of debt assumed (12,021) - -------- ------ Fair value of net liabilities assumed (10,881) - ======== ====== 8 6. SEGMENTS The Company is organized into four primary operating divisions: hotel operations ("Hotel Operations"), corporate housing, 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 and the segment information for 1999 has been reclassified accordingly. The Company's management evaluates performance of each segment based on earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The following are the segment disclosures for the Hotel Operations for the three months ended June 30: 2000 1999 ----------------- ----------------- Revenue $362,222 $344,273 ================= ================= EBITDA $ 25,049 $ 19,443 ================= ================ The following are the segment disclosures for the Hotel Operations as of and for the six months ended June 30: 2000 1999 ----------------- ----------------- Revenue $701,059 $668,389 ================= ================= EBITDA $ 32,135 $ 21,029 ================= ================= Total Assets $180,053 $133,784 ================= ================= The following is a reconciliation of the segment information to the Company's consolidated financial information for the three months ended June 30:
2000 1999 ----------------------------------------------------------------------- Revenues EBITDA Revenues EBITDA ---------------------------------- -------------------------------- Hotel Operations $362,222 $25,049 $344,041 $19,151 Other 10,466 241 1,182 241 ---------------------------------- -------------------------------- Per Financial Statements $372,688 $25,290 $345,223 $19,392 ================================== ================================
The following is a reconciliation of the segment information to the Company's consolidated financial information as of and for the six months ended June 30: 2000 1999 ----------------------------------------------- ---------------------------------------------- Revenues EBITDA Assets Revenues EBITDA Assets ----------------------------------------------- ---------------------------------------------- Hotel Operations $701,059 $32,135 $180,053 $668,389 $21,029 $133,784 Other 12,125 263 189,530 2,672 203 135,113 ----------------------------------------------- ---------------------------------------------- Per Financial Statements $713,184 $32,398 $369,583 $671,061 $21,232 $268,897 =============================================== ==============================================
The other items in the tables above represent operating segment activity and assets for the non-reportable segments and non-operating segment activity and assets. The non-operating segment activity and assets are primarily unallocated corporate, expenses and intangibles and other miscellaneous assets. 9 Revenues for foreign operations for the three months ended June 30 were as follows: 2000 1999 ----------------- ----------------- Canada $6,527 $5,698 ================= ================= United Kingdom $2,180 $ - ================= ================= Revenues for foreign operations for the six months ended June 30 were as follows: 2000 1999 ----------------- ----------------- Canada $10,952 $10,182 ================= ================= United Kingdom $ 2,180 $ - ================= ================= 7. ACQUISITION On May 31, 2000, the Company completed the acquisition 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. The Company issued 4,072 shares of common stock and paid $12,216 to BridgeStreet's shareholders. In addition, the Company repaid $12,021 of BridgeStreet's outstanding debt as part of the acquisition. BridgeStreet provides corporate housing services in the United States, Canada, and the United Kingdom. The total purchase price of the acquisition was approximately $44,907, which resulted in $34,335 of goodwill. The goodwill will be amortized on a straight line basis over 35 years. In accordance with generally accepted accounting principles, the acquisition was accounted for as a purchase. Accordingly, the operating results of BridgeStreet have been included in the Company's condensed consolidated financial statements since May 31, 2000, the date of acquisition. The following unaudited pro forma consolidated results of operations are presented as if the acquisition of BridgeStreet had been made at the beginning of the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 ------------ --------- ---------- --------- Revenue $390,227 $368,961 $754,136 $717,987 Net Income $ 11,800 $ 8,369 $ 13,013 $ 7,812 Earnings Per Share: Basic $ 0.33 $ 0.27 $ 0.36 $ 0.26 Diluted $ 0.32 $ 0.26 $ 0.36 $ 0.25 The pro forma consolidated results of operations include adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented or the future results of the combined operations. 10 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 hospitality-related properties and services in the hotel, corporate housing, golf, and vacation ownership areas. 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. As of June 30, 2000, we leased or managed 217 hotels with 46,937 rooms in 33 states, the District of Columbia, Canada, Puerto Rico, and the U.S. Virgin Islands. We also manage or are otherwise affiliated with 10 golf courses. Our golf course management operations are not material to any period presented. On May 31, 2000, we completed the acquisition 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. In addition, we repaid $12.0 million of BridgeStreet's outstanding debt as part of the acquisition. BridgeStreet provides corporate housing services in the United States, Canada, and the United Kingdom. The total purchase price of the acquisition was approximately $44.9 million. As of June 30, 2000, BridgeStreet had approximately 3,600 apartments under lease in the United States, Canada, and the United Kingdom. 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 current 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, we cannot currently 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 expect to conclude these negotiations during 2000 and transfer the leases to MeriStar Hospitality Corporation effective January 1, 2001. 11 FINANCIAL CONDITION ASSETS Our total assets increased by $111.5 million to $369.6 million at June 30, 2000 from $258.1 million at December 31, 1999 primarily due to the following: . Investments in and advances to affiliates increased by $6.6 million due to our investments in MIP Lessee, L.P., STS Hotel Net and other hotel ventures; . Accounts receivable increased $25.9 million due to: . An increase of $66.4 million in our revenues in the second quarter of 2000 compared to the fourth quarter of 1999; and . The addition of $4.4 million of BridgeStreet's accounts receivable. . Cash and cash equivalents increased $5.8 million resulting from net operating activity and additional net borrowings on our credit facility; . Prepaid expenses increased $18.2 million due to: . The addition of $5.9 million of BridgeStreet's prepaid expenses; and . The establishment of a $10.1 million prepaid lease expense under Emerging Issues Task Force Issue No. 98-9. This prepaid balance only exists at interim periods. . Furniture, fixtures, and equipment increased $9.3 million during the six months ended June 30, 2000 primarily due to the addition of $6.7 million of BridgeStreet's furniture, fixtures, and equipment; and . Intangible assets increased $38.0 million primarily due to the acquisition of BridgeStreet. Our assets include a substantial amount of intangible assets, primarily related to our acquisitions of hotel management companies and BridgeStreet. 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 June 30, 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 $78.7 million to $257.9 million at June 30, 2000 from $179.2 million at December 31, 1999 primarily due to the following: . Accounts payable, accrued expenses and other liabilities increased $28.7 million due to: . Higher operating expenses before participating lease expense for the second quarter 2000 as compared to the fourth quarter 1999; and . The addition of $14.1 million of BridgeStreet's liabilities. . Due to MeriStar Hospitality Corporation increased $11.4 million primarily due to the participating rent payable balance at June 30, 2000 being higher than at December 31, 1999; and . Long-term debt increased $27.6 million due to borrowings under our new credit facility to fund short term operating requirements and the acquisition of BridgeStreet. STOCKHOLDERS' EQUITY Stockholders' equity increased $32.1 million primarily due to: . The issuance of 4,072,099 shares of our common stock to BridgeStreet's shareholders; . The sale of 1,818,182 shares of our common stock to our joint venture partner in MIP Lessee, L.P.; and . Net income of $14.9 million through June 2000. 12 RESULTS OF OPERATIONS Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 REVENUES Total revenue increased $27.5 million or 8.0% to $372.7 million in the three months ended June 30, 2000 compared to $345.2 million in the three months ended June 30, 1999. The increase in revenue is primarily the result of a 30% increase in the number of third party managed hotels, the acquisition of BridgeStreet, and a 6.1% improvement in revenue per available room from our leased hotels. This improvement in revenue per available room was the result of a 6.1% 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 $ 79.32 $74.75 6.1% Average daily rate $103.77 $97.78 6.1% Occupancy 76.4% 76.4% 0.0% OPERATING EXPENSES Operating expenses increased $22.2 million or 6.8% to $349.5 million in the three months ended June 30, 2000 compared to $327.3 million in the three months ended June 30, 1999. The increase reflects the acquisition of BridgeStreet and 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 $25.3 million in the three months ended June 30, 2000 compared to $19.4 million in the three months ended June 30, 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 $1.2 million increase in management and other fees; . Our acquisition of BridgeStreet resulted in $0.9 million of earnings before interest, taxes, depreciation and amortization; and . The remaining $3.8 million increase in earnings before interest, taxes, depreciation and amortization resulted from the increase in revenues at our leased hotels. Minority interest decreased by $0.9 million primarily due to the conversion of operating partnership units. Taxes increased by $2.4 million due to higher operating income as compared to 1999. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 REVENUES Total revenue increased $42.1 million or 6.3% to $713.2 million in the six months ended June 30, 2000 compared to $671.1 million in the six months ended June 30, 1999. The increase in revenue is primarily the result of a 30% increase in the number of third party managed hotels, the acquisition of BridgeStreet, and a 4.6% improvement in revenue per available room from our leased hotels. This improvement in revenue per available room was primarily the result of a 5.2% increase in the average daily rate. The following table provides our operating statistics for our leased hotels on a pro forma basis: 2000 1999 Change -------------- -------------- -------------- Revenue per available room $ 76.66 $73.31 4.6% Average daily rate $104.63 $99.48 5.2% Occupancy 73.3% 73.7% (0.5)% OPERATING EXPENSES Operating expenses increased $31.7 million or 4.9% to $684.5 million in the six months ended June 30, 2000 compared to $652.9 million in the six months ended June 30, 1999. The increase reflects the acquisition of BridgeStreet and 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 $32.4 million in the six months ended June 30, 2000 compared to $21.2 million in the six months ended June 30, 1999. The increase in earnings before interest, taxes, 13 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 $4.8 million increase in management and other fees; . Our acquisition of BridgeStreet resulted in $0.9 million of earnings before interest, taxes, depreciation and amortization; and . The remaining $5.5 million increase in earnings before interest, taxes, depreciation and amortization resulted from the increase in revenues at our leased hotels. Minority interest decreased by $0.3 million primarily due to the conversion of operating partnership units. Taxes increased by $4.1 million 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 periods ended June 30, 2000 and 1999. As of June 30, 2000 and 1999, this resulted in a prepaid expense of $10,126 and $2,900, 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 June 30, 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 $13,559 $ 9,612 $23,171 Interest expense, net (1,353) - (1,353) Minority interest (1,036) (702) (1,738) Income taxes (4,242) (3,348) (7,590) ------- ------- ------- Net income $ 6,928 $ 5,562 $12,490 ======= ======= ======= Diluted earnings per share $ 0.21 $ 0.37 ======= ======= Three Months Ended June 30, 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 $11,085 $ 6,820 $17,905 Interest expense, net (1,280) - (1,280) Minority interest (1,557) (1,048) (2,605) Income taxes (2,978) (2,232) (5,210) ------- ------- ------- Net income $ 5,270 $ 3,540 $ 8,810 ======= ======= ======= Diluted earnings per share $ 0.19 $ 0.31 ======= ======= 14 Six Months Ended June 30, 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 $18,510 $10,126 $28,636 Interest expense, net (2,544) - (2,544) Minority interest (1,323) (816) (2,139) Income taxes (5,527) (3,496) (9,023) ------- ------- ------- Net income $ 9,116 $ 5,814 $14,930 ======= ======= ======= Diluted earnings per share $ 0.28 $ 0.45 ======= ======= Six Months Ended June 30, 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 $15,296 $2,900 $18,196 Interest expense, net (2,506) - (2,506) Minority interest (2,069) (375) (2,444) Income taxes (3,967) (934) (4,901) ------- ------ ------- Net income $ 6,754 $1,591 $ 8,345 ======= ====== ======= Diluted earnings per share $ 0.25 $ 0.31 ======= ======= LIQUIDITY AND CAPITAL RESOURCES Sources of Cash Our continuing operations are funded through cash generated from hotel management and leasing operations, and corporate housing 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 $12.2 million of cash from operations in the first six months of 2000. We generated $18.2 million of cash from financing activities during the first six months of 2000 primarily from the following: . We borrowed $27.5 million on our credit facilities; . We repaid $12.0 million of the BridgeStreet debt as part of our acquisition of BridgeStreet; and . We received $5.5 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 $24.6 million of cash in investing activities during the first six months of 2000 primarily for the following: . We purchased $4.3 million of fixed assets; . We invested $6.7 million in hotel partnerships; and . We paid $12.2 million in cash to BridgeStreet shareholders during the acquisition. 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 15 February 2002 with an optional one-year extension. We borrowed $65 million to repay the borrowings outstanding under the revolving credit agreement with MeriStar Hospitality Corporation. At June 30, 2000, we had $15.0 million of unused capacity under the senior secured revolving credit facility. 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 corporate housing business by entering new markets. We also expect to expand our business into vacation ownership management. We expect to finance future acquisitions through a combination of additional borrowings under our credit facilities and the issuance of operating partnership units 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. Corporate housing activity peaks in the summer months and declines during the fourth quarter and the first part of the first quarter. We expect to have lower revenue, operating income and cash flow from corporate housing in the first and fourth quarters. 16 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. In April 2000, we entered into a $40 million periodic rate collar agreement with a financial institution in order to hedge against the impact future interest rate fluctuations may have on our floating rate debt. The rate collar agreement establishes the London Interbank Offered Rate at a floor rate of 6.05% and a ceiling rate of 8.5%. During the three months ended June 30, 2000, we made no payments related to this instrument. Our credit facility long-term debt of $85.0 million at June 30, 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 10.2% at June 30, 2000. We have determined that the fair value of the debt approximates its carrying value. Although we conduct business in Canada and the United Kingdom, these foreign operations were not material to our consolidated financial position, results of operations or cash flows as of and for the three and six months ended June 30, 2000. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the three and six months ended June 30, 1999. 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. 17 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the stockholders of the Registrant was held on May 18, 2000. At that meeting, the following matters were submitted to a vote of the stockholders of MeriStar Hotels & Resorts, Inc.: ITEM No. 1 To reelect six members of the Board of Directors; three of the reelected members to serve for a two-year term expiring on the date of the Annual Meeting in 2002 and until their successors have been duly elected and qualified and three of the reelected members to serve for a three-year term expiring on the date of the Annual Meeting in 2003 and until their successors have been duly elected and qualified. Election of Directors For Withheld --------------------- --- -------- S. Kirk Kinsell 23,500,358 118,049 David E. McCaslin 22,805,100 813,307 James B. McCurry 23,506,708 111,699 Kent R. Hance 23,606,125 12,282 Paul W. Whetsell 22,805,100 813,307 James R. Worms 23,608,458 9,949 ITEM No. 2 To ratify the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 2000. For 23,592,673 Against 16,411 Abstain 9,323 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; and changes in the laws and governmental regulations applicable to the relationship between the REIT and the Company. 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. 18 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: August 9, 2000 /s/ James A. Calder --------------------------- James A. Calder Chief Financial Officer 19 EX-27 2 0002.txt EXHIBIT 27
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 7,505 0 77,562 3,694 7,467 118,456 25,130 3,502 371,824 159,975 85,192 0 0 359 96,944 371,824 0 713,184 0 255,101 429,447 0 2,544 23,953 9,023 14,930 0 0 0 14,930 0 0
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