-----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, HeAVRQXIweQPhnjAIH1iPIiVSTIcBeQz8R8QsS4BvQqEIheoO58u6IlzJaTcEj8l UPHWz8jKp7NLSmZre5fZNg== 0000928385-99-002483.txt : 19990809 0000928385-99-002483.hdr.sgml : 19990809 ACCESSION NUMBER: 0000928385-99-002483 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 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: 99679966 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 June 30, 1999 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 4, 1999 was 28,162,881. MERISTAR HOTELS & RESORTS, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15 PART II. OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5: OTHER INFORMATION 17 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 17 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, 1999 December 31, 1998 -------------- ------------------ (unaudited) Assets Current Assets: Cash and cash equivalents $ 2,803 $ 11,155 Accounts receivable, net of allowance for doubtful accounts of $2,520 and $2,285 70,985 61,987 Prepaid expenses 6,489 4,193 Deposits and other 15,648 11,085 -------- -------- Total current assets 95,925 88,420 Fixed assets: Furniture, fixtures, and equipment 9,200 7,325 Accumulated depreciation (1,787) (1,099) -------- -------- Total fixed assets, net 7,413 6,226 Investments in and advances to affiliates 20,570 5,495 Intangible assets, net of accumulated amortization of $5,629 and $3,338 144,742 146,782 Restricted cash 247 606 -------- -------- $268,897 $247,529 ======== ======== Liabilities, Minority Interests, and Stockholders' Equity Current Liabilities: Accounts payable $ 25,879 $ 28,401 Accrued expenses and other liabilities 81,120 70,016 Due to affiliates, net 18,153 7,437 Income taxes payable 68 69 Long-term debt, current portion 7 27 -------- -------- Total current liabilities 125,227 105,950 Deferred income taxes 14,268 9,367 Long-term debt 48,791 67,785 -------- -------- Total liabilities 188,286 183,102 Minority interests 18,684 19,693 Commitments and contingencies Stockholders' equity: Common stock, par value $.01 per share: Authorized 100,000 shares Issued and outstanding 28,150 and 25,437 shares 282 254 Additional paid-in capital 52,749 43,929 Retained earnings 8,896 551 -------- -------- Total stockholders' equity 61,927 44,734 -------- -------- $268,897 $247,529 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDING PREDECESSOR ENTITY UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended June 30, June 30, --------- -------- 1999 1998 1999 1998 --------- -------- -------- -------- Revenue: Rooms $242,598 $31,330 $470,911 $54,734 Food and beverage 76,888 2,225 149,201 3,582 Other operating departments 22,294 1,545 45,661 2,764 Management and other fees 3,443 6,001 5,288 10,151 -------- ------- -------- ------- Total revenue 345,223 41,101 671,061 71,231 -------- ------- -------- ------- Operating expenses by department: Rooms 56,844 6,805 108,817 11,929 Food and beverage 57,415 1,664 112,476 2,659 Other operating department expenses 12,833 768 24,667 1,266 Undistributed operating expenses: Administrative and general 44,395 7,452 95,786 14,415 Property operating costs 52,006 5,910 99,470 10,052 Participating lease expense 102,338 15,376 208,613 26,031 Depreciation and amortization 1,487 487 3,036 908 -------- ------- -------- ------- Total operating expenses 327,318 38,462 652,865 67,260 -------- ------- -------- ------- Net operating income 17,905 2,639 18,196 3,971 Interest expense, net 1,280 12 2,506 30 Equity in earnings of affiliates - (347) - (868) -------- ------- -------- ------- Income before minority interests and income taxes 16,625 2,280 15,690 3,073 Minority interests 2,605 57 2,444 92 -------- ------- -------- ------- Income before income taxes 14,020 2,223 13,246 2,981 Income taxes 5,210 - 4,901 - -------- ------- -------- ------- Net income $ 8,810 $ 2,223 $ 8,345 $ 2,981 ======== ======= ======== ======= Earnings per share : Basic $0.32 N/A $0.32 N/A ======== ======== Diluted $0.31 N/A $0.31 N/A ======== ========
See accompanying notes to condensed consolidated financial statements. 4 MERISTAR HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INCLUDING PREDECESSOR ENTITY UNAUDITED (IN THOUSANDS)
Six Months Ended June 30, -------- 1999 1998 ---- ---- Operating activities: Net income $ 8,345 $ 2,981 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,036 908 Equity in earnings of affiliates - 868 Minority interests 2,444 92 Deferred income taxes 4,901 - Changes in operating assets and liabilities: Accounts receivable, net (8,998) (792) Deposits and other (4,563) (2,187) Prepaid expenses (2,296) 291 Accounts payable (2,522) 10,541 Accrued expenses and other liabilities 11,104 (646) Due to affiliates, net 10,716 (21,405) -------- -------- Net cash provided by (used in) operating activities 22,167 (9,349) -------- -------- Investing activities: Purchases of fixed assets, net (2,149) (1,571) Investments in and advances to affiliates (15,075) 3,998 Purchases of intangible assets (251) (1,202) Change in restricted cash 359 (72) -------- -------- Net cash provided by (used in) investing activities (17,116) 1,153 -------- -------- Financing activities: Principal payments on long term debt (19,014) (289) Proceeds from issuances of common stock, net 5,611 - -------- -------- Net cash used in financing activities (13,403) (289) -------- -------- Net decrease in cash and cash equivalents (8,352) (8,485) Cash and cash equivalents, beginning of period 11,155 27,022 -------- -------- Cash and cash equivalents, end of period $ 2,803 $ 18,537 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (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. The purchase price of $95.0 million was funded with a combination of cash and units of limited partnership interest ("OP Units") in the Company's subsidiary operating partnership. In accordance with generally accepted accounting principles ("GAAP"), the acquisitions have been accounted for as a purchase and therefore, the operating results of AGHI and AGH Leasing are included in the Company's consolidated financial statements from the date of acquisition. 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, corporate, accounting, financial, insurance, legal, tax, data processing, 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 June 30, 1999, the Company leased or managed 208 hotels with 44,020 rooms in 34 states, the District of Columbia, Canada and the U.S. Virgin Islands. The consolidated interim financial statements of the Company for the six months ended June 30, 1998 include the historical results of the Company's predecessor entity, the management and leasing operations of CapStar. The operating results of AGHI and AGH Leasing have been included in the Company's consolidated financial statements since August 3, 1998. 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, 1998. Certain 1998 amounts have been reclassified to conform to 1999 presentation. 6 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 10 to 15 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 May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods". EITF No. 98-9 affects the recognition of contingent rental expense in interim periods. This pronouncement 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 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 adopted EITF No. 98-9 effective July 1, 1998. The Company has made cash lease payments in excess of the expense the Company is required to recognize under EITF No. 98-9. This has resulted in a prepaid expense of $2.9 million, which is included on the Company's condensed consolidated balance sheet as of June 30, 1999. The effect of EITF No. 98-9 on the Company's financial statements is as follows:
Three Months Ended June 30, 1999 -------------------------------- Prior to Effect After Effect of of Effect 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 EPS $ 0.19 $ 0.31 ======= =======
7
Six Months Ended June 30, 1999 ------------------------------ Prior to Effect After Effect of of Effect 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 EPS $ 0.25 $ 0.31 ======= =======
3. EARNINGS PER SHARE Earnings per share ("EPS") has been calculated using net income for the three and six months ended June 30, 1999. Prior to the Spin-Off, the predecessor entities of the Company were partnerships. Accordingly, no EPS has been calculated for the three and six months ended June 30, 1998. The following tables present the computation of basic and diluted EPS for the three and six months ended June 30, 1999:
Three Months Ended June 30, Six Months Ended June 30, 1999 1999 ---- ---- BASIC EARNINGS PER SHARE COMPUTATION: Net income $8,810 $8,345 Weighted average number of shares of Common Stock outstanding 27,366 26,426 --------------------- -------------------- Basic earnings per share $0.32 $0.32 ===================== ====================
8
Three Months Ended June 30, Six Months Ended June 30, 1999 1999 ---- ---- DILUTED EARNINGS PER SHARE COMPUTATION: Net income $8,810 $8,345 Minority interest, net of tax - 1,540 --------------------- -------------------- Adjusted net income $8,810 $9,885 ===================== ==================== Weighted average number of shares of Common Stock outstanding 27,366 26,426 Common stock equivalents-OP Units 392 5,669 Common stock equivalents-stock options 266 145 --------------------- -------------------- Total weighted average number of diluted shares of common stock outstanding 28,024 32,240 ===================== ==================== Diluted earnings per share $0.31 $0.31 ===================== ====================
4. SUPPLEMENTAL CASH FLOW INFORMATION Six Months Ended June 30, -------- 1999 1998 ------ ----- Cash paid for interest and income taxes: Interest $2,573 $ 30 Income taxes 1 - Non-cash investing and financing activities: Conversion of OP Units to common stock $3,453 -
5. SEGMENTS The Company is organized into three primary operating divisions. Each division is managed separately because of its distinctive products and services offered by the hotel properties within the operating division. These operating divisions are the Company's three reportable operating segments: upscale, full- service hotels ("Hotels"); premium limited-service hotels and inns ("Inns"); and resort properties ("Resorts"). 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 Company's financial condition and results of operations as of June 30, 1999 and December 31, 1998 and for the three and six months ended June 30, 1999 and 1998 reflect significantly differing numbers of managed and leased hotels throughout the periods. Consequently, the Company has determined that it is not practicable to present the segment information of the management and leasing operations of CapStar, its predecessor entity, for the three and six months ended June 30, 1998. Also, prior to the Spin-Off, the management and leasing operations of CapStar conducted its business primarily in only one operating segment. Therefore, the segment disclosures presented below are for the three and six months ended June 30, 1999. 9
Three Months Ended June 30, 1999 -------------------------------- Total Hotels Inns Resorts Segments ------------------------------------------------------------------ Revenues $218,895 $49,942 $ 74,639 $343,476 =========== ========== =========== =========== Participating Lease Expense $64,629 $20,000 $17,709 $102,338 =========== ========== =========== =========== EBITDA $14,268 $3,104 $4,732 $22,104 =========== ========== =========== ===========
Six Months Ended June 30, 1999 ------------------------------
Total Hotels Inns Resorts Segments ------------------------------------------------------------------- Revenues $410,228 $93,758 $159,554 $663,540 ============= ============ ============= ============== Participating Lease Expense $129,521 $38,100 $40,992 $208,613 ============= ============ ============= ============== EBITDA $10,227 $3,274 $14,970 $28,471 ============= ============ ============= ============== Total Assets $62,883 $17,608 $18,562 $99,053 ============= ============ ============= ==============
The following is a reconciliation of the segment information to the Company's consolidated data for the three months ended June 30, 1999:
Participating Revenues Lease EBITDA Expense ------------------------------------------ Total Segments $343,476 $102,338 $22,104 Other Items 1,747 - (2,712) ------------------------------------------ Per Financial Statements $345,223 $102,338 $19,392 ==========================================
The following is a reconciliation of the segment information to the Company's consolidated data for the six months ended June 30, 1999:
Participating Revenues Lease EBITDA Assets Expense -------------------------------------------------------- Total Segments $663,540 $208,613 $28,471 $99,053 Other Items 7,521 - (7,239) 169,844 -------------------------------------------------------- Per Financial Statements $671,061 $208,613 $21,232 $268,897 =========================================================
The other items in the tables above represent non-operating segment activity and assets. These are primarily unallocated corporate expenses and non-segment activities, and intangible and other miscellaneous assets. Revenues for Canadian operations totaled $5,698 and $10,182 for the three and six month periods ended June 30, 1999, respectively. 10 6. INVESTMENTS IN AND ADVANCES TO AFFILIATES During March 1999, the Company invested $2.5 million as an equity investment in a joint venture established to acquire upscale, full-service hotels. The Company's ultimate investment in this joint venture may increase to up to $10 million. The Company will manage all hotels acquired by the joint venture. As part of the joint venture transaction, the Company sold $5 million of its common stock to the joint venture partner at a price of $2.75 per share on April 15, 1999. When the joint venture reaches $200 million in invested assets, that joint venture partner has the right to acquire up to an additional $5 million of common stock at fair market value, based on a 20-day pricing period. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On August 3, 1998, CapStar Hotel Company ("CapStar") spun-off (the "Spin-Off") its management and leasing operations in a taxable transaction in which CapStar distributed on a share-for-share basis all shares of common stock, par value $0.01 per share, ("Common Stock") of MeriStar Hotels & Resorts, Inc. (the "Company"). The Company thereby became 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. 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 substantially all of the assets and liabilities of American General Hospitality, Inc. ("AGHI"), the third-party manager of most of the AGH hotels. As a result, the Company became the lessee and manager of most of the hotels owned by the REIT. The purchase price of $95.0 million was paid with a combination of cash and units of limited partnership interest ("OP Units") in the Company's subsidiary operating partnerships. In accordance with generally accepted accounting principles, the acquisitions have been accounted for as a purchase and therefore, the operating results of AGHI and AGH Leasing have been included in the Company's consolidated financial statements since the date of acquisition. The Company's financial statements include the historical results of the Company's predecessor entity, the management and leasing operations of CapStar, for all periods in the year ended December 31, 1998 and include the operating results of AGH Leasing and AGHI for the period August 3, 1998 through December 31, 1998. In addition, prior to August 3, 1998, the Company managed substantially all of the hotels owned by CapStar and received management fee revenues from such hotels. Since August 3, 1998, the Company has leased these hotels from the REIT and therefore records no management fees from such hotels but instead records room, food and beverage and other operating department revenues and expenses from such leases. Therefore, the Company's results of operations for the periods ended June 30, 1999 and 1998 reflect significantly differing numbers of managed and leased hotels throughout the periods. The following table outlines the Company's historical portfolio of managed and leased hotels:
REIT CAPSTAR THIRD PARTY OTHER LEASED MANAGED MANAGED LEASED TOTAL ------------------------------------------------------------------------------------------------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------------------------------------------------------------------------------------------------------- 6/30/99 109 28,175 -- -- 46 8,237 53 7,608 208 44,020 12/31/98 109 28,058 -- -- 41 6,800 53 7,608 203 42,466 6/30/98 -- -- 57 15,328 40 6,899 45 6,410 142 28,637 12/31/97 -- -- 47 12,019 27 4,631 40 5,687 114 22,337
12 FINANCIAL CONDITION JUNE 30, 1999 COMPARED WITH DECEMBER 31, 1998 Total assets increased by $21.4 million to $268.9 million at June 30, 1999 from $247.5 million at December 31, 1998. Total liabilities increased by $5.2 million to $188.3 million from $183.1 million. The increase in assets primarily results from a $9.0 million increase in accounts receivable coupled with a $15.1 million increase in investments in and advances to affiliates. The increase in accounts receivable is due to higher sales volume during the period. The increase in investments in and advances to affiliates is a result of the Company's investments in several hotel ownership joint ventures in 1999. The increase in liabilities primarily results from a $18.0 million increase in accrued expenses and other liabilities due to increased sales volume and a $3.8 million increase in due to affiliates, primarily representing a higher amount of participating lease payable at June 30, 1999 compared to December 31, 1998, partially offset by a $19.0 million decrease in long-term debt. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998 Total revenue increased by $304.1 million to $345.2 million in the three-month period ended June 30, 1999 compared to $41.1 million in the three-month period ended June 30, 1998. This increase results from the increase in the number of hotels leased as described above. Operating expenses increased $288.8 to $327.3 million in the three months ended June 30,1999 compared to $38.5 million in the three months ended June 30, 1998. The increase reflects the greater number of leased and managed hotels, and includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased $15.3 million, to approximately $17.9 million in the three months ended June 30, 1999 compared to $2.6 million in the three months ended June 30, 1998. The increase in net operating income is due to the change in the types of revenues and expenses recorded in the Company's financial statements in periods before and after the Merger. EBITDA for the Company's three operating segments for the three months ended June 30, 1999 is as follows: Total Hotels Inns Resorts Segments ------ ---- ------- -------- EBITDA................ $14,268 $3,104 $4,732 $22,104
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998 Total revenue increased by $599.9 million to $671.1 million in the six-month period ended June 30, 1999 compared to $71.2 million in the six-month period ended June 30, 1998. This increase results from the increase in the number of hotels leased as described above. Operating expenses increased $585.6 million to $652.9 million in the six months ended June 30,1999 compared to $67.3 million in the six months ended June 30, 1998. The increase reflects the greater number of leased and managed hotels, and includes the costs of additional personnel and other administrative costs incurred in conjunction with the Company's growth. Net operating income increased $14.2 million, to approximately $18.2 million in the six months ended June 30, 1999 compared to approximately $4.0 million in the six months ended June 30, 1998. The increase in net operating income is due to the change in the types of revenues and expenses recorded in the Company's financial statements in periods before and after the Merger. 13 EBITDA for the Company's three operating segments for the six months ended June 30, 1999 is as follows: Total Hotels Inns Resorts Segments ------ ---- ------- -------- EBITDA............................... $ 10,227 $3,274 $14,970 $28,471
LIQUIDITY AND CAPITAL RESOURCES The Company's continuing operations are funded through cash generated from hotel management and leasing operations. Business acquisitions and investments in affiliates are financed through a combination of internally generated cash, external borrowings and the issuance of OP Units and/or Common Stock. Operating activities provided $22.2 million of net cash in the six months ended June 30, 1999, mainly due to higher levels of earnings, depreciation and amortization, and net operating liabilities. The Company used $17.1 million of cash in investing activities for the first six months of 1999, primarily for the investments in hotel partnerships. Net cash used by financing activities of approximately $13.4 million resulted from principal payments on long-term debt, net of proceeds from issuances of Common Stock. On March 3, 1999, the Company amended its unsecured revolving credit facility (the "Credit Facility") with the REIT to increase the total borrowings available under the Credit Facility to $100.0 million. At June 30, 1999, the Company had available $52.0 million under the Credit Facility. As of August 4, 1999, the Company had available $43.0 million under the Credit Facility. On April 15, 1999, the Company issued $5 million of Common Stock in a private placement. The stock was issued at a price of $2.75 per share. The proceeds from this sale of stock were used to pay down debt on the Credit Facility. Under the terms of the participating leases and management agreements between the Company and lessors or third-party owners, the lessors and third-party owners will generally be required to fund significant capital expenditures at the hotels operated by the Company. The Company believes cash generated by operations, together with anticipated borrowing capacity under the Credit Facility, will be sufficient to fund its existing working capital, ongoing capital expenditures, and debt service requirements. In addition, the Company expects to continue to seek acquisitions of hotel management businesses and management contracts. The Company expects to finance these future acquisitions through a combination of anticipated borrowing capacity under its Credit Facility and the issuance of OP Units and/or Common Stock. The Company believes these sources of capital will be sufficient to provide for the Company's long-term capital needs. SEASONALITY Demand in the lodging industry is affected by recurring seasonal patterns. Excluding resort hotel properties, demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. The majority of the properties operated by the Company are non-resort properties. Therefore, the Company's operations are seasonal in nature. Assuming other factors remain constant and excluding resort hotel properties and the effect of EITF 98-9 on reporting in interim periods, the Company has 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. YEAR 2000 CONVERSION The Company has reviewed its computer systems to identify the systems that could be affected by the "Year 2000" problem and has initiated an implementation plan to address the problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, this could result in a major systems failure or miscalculations. 14 The Company's leased and managed hotel properties contain various information technology and embedded technology systems. Both types of systems contain microprocessors and microcontrollers that must be assessed for Year 2000 compliance. The Company has developed a comprehensive implementation plan to address the potential Year 2000 problems caused by such systems. This plan involves six stages: increase awareness of issue; assign responsibility for coordinating response to issue; information collection; analysis; modification, repair or replacement; and testing. The Company is currently in its modification, repair or replacement stage, and expects to complete this stage and testing in October 1999. As an additional part of its implementation plan to address the Year 2000 problem, the Company has also initiated communications with third parties with which it has material relationships to determine the extent of potential Year 2000 problems with these parties' services provided to the Company. The most critical of these services involve such items as reservations systems for the Company's hotels. Without such systems, the Company could suffer a material decline in business at many of its properties. The Company expects to complete its communications and assessment of third parties' services in September 1999. Also, the Company expects to review and update its contingency plans in 1999 to allow for manual or other alternative operation of certain computerized systems, in the event that modification, repair, and replacement efforts are not completed timely. The Company anticipates completing its Year 2000 implementation plan no later than October 31, 1999, which is prior to any anticipated impact on its operating systems. As of June 30, 1999, historical costs incurred to address the Year 2000 problem approximate $0.3 million. The Company expects that essentially all of the future expenditures required to modify, repair or replace computerized systems at its leased and managed hotel properties will be the financial responsibility of the owners of those properties, rather than the Company. The Company's current estimate of these remediation costs for all of its leased and managed properties (including those properties leased from the REIT) to fix Year 2000 issues is $10-12 million. This cost estimate is based on the Company's current assessment, and will be refined and adjusted as the Company continues to complete the stages of its implementation plan to address the potential Year 2000 problems. Based on its preliminary assessment, the Company believes that its risks of Year 2000 non-compliance (that is, its "most reasonably likely worst case scenario"), with modifications to existing software and converting to new software, will not pose significant operational problems for the Company's computer systems as so modified and converted. If, however, such modifications and conversions are not completed timely, the Year 2000 problem could have a material impact on the Company's financial position and operations. The Company's operations are highly dependent upon efficient operating systems at its properties. To the extent that the Year 2000 problems materially affect the conduct of operations at those properties, it is likely that the Company's ability to efficiently manage operations would be materially affected. Also, as discussed above, the vast majority of expenditures related to Year 2000 problems at the Company's leased and managed properties will be the financial responsibility of the owners of those properties. To the extent that those owners are unable or unwilling to modify, repair, and replace systems with potential Year 2000 problems, the Company could suffer material adverse financial consequences. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes since the Company filed the Form 10-K on March 22, 1999. 15 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 11, 1999. At that meeting, the following matters were submitted to a vote of the stockholders of MeriStar Hotels & Resorts, Inc.: ITEM No. 1 To amend the MeriStar Hotels & Resort, Inc. Incentive Plan (the "Plan") to increase the maximum number of shares of Common Stock that may be issued under the Plan from twelve percent to fifteen percent of the number of outstanding shares of Common Stock.
For 10,124,783 Against 6,503,015 Abstain 2,832
ITEM No. 2 To ratify the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 1999.
For 24,677,862 Against 1,230 Abstain 4,034
16 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 (b) Reports on Form 8-K Current Report on Form 8-K dated August 3, 1998 and filed on August 14, 1998, regarding the spin-off of MeriStar Hotels & Resorts, Inc. and the acquisitions of American General Hospitality, Inc. and AGH Leasing, L.P. 17 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 6, 1999 /s/ James A. Calder ------------------- James A. Calder Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 2,803 0 73,505 2,520 6,606 95,925 9,200 1,787 268,897 125,227 48,798 0 0 282 61,645 268,897 0 671,061 0 245,960 409,349 0 2,506 13,246 4,901 8,345 0 0 0 8,345 0.32 0.31
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