-----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, E+za+eVs+clmrXYrMrmb9gxDioufcoeVHY03jwnoEMENeTlZ5hXdhIvbAf2kjtTk /GV0xAHsU5L7sv/3VpaAxw== 0000928385-99-003304.txt : 19991111 0000928385-99-003304.hdr.sgml : 19991111 ACCESSION NUMBER: 0000928385-99-003304 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991110 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: 99746037 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 September 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 November 8, 1999 was 29,531,599. MERISTAR HOTELS & RESORTS, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 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 11 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) September 30, 1999 December 31, 1998 ------------------ ----------------- (unaudited) Assets Current Assets: Cash and cash equivalents $ 3,581 $ 11,155 Accounts receivable, net of allowance for doubtful accounts of $2,467 and $2,285 65,474 61,987 Prepaid expenses 11,217 4,193 Deposits and other 13,595 11,085 -------- -------- Total current assets 93,867 88,420 Fixed assets: Furniture, fixtures, and equipment 10,721 7,325 Accumulated depreciation (2,159) (1,099) -------- -------- Total fixed assets, net 8,562 6,226 Investments in and advances to affiliates 20,960 5,495 Intangible assets, net of accumulated amortization of $6,729 and $3,338 152,987 146,782 Restricted cash 190 606 -------- -------- $276,566 $247,529 ======== ======== Liabilities, Minority Interests, and Stockholders' Equity Current Liabilities: Accounts payable $ 22,394 $ 28,401 Accrued expenses and other liabilities 80,990 70,016 Due to affiliates, net 18,496 7,437 Income taxes payable 34 69 Long-term debt, current portion 5 27 -------- -------- Total current liabilities 121,919 105,950 Deferred income taxes 15,180 9,367 Long-term debt 56,814 67,785 -------- -------- Total liabilities 193,913 183,102 Minority interests 14,597 19,693 Commitments and contingencies Stockholders' equity: Common stock, par value $0.01 per share: Authorized -- 100,000 shares Issued and outstanding -29,498 and 25,437 shares 295 254 Additional paid-in capital 57,312 43,929 Retained earnings 10,449 551 -------- -------- Total stockholders' equity 68,056 44,734 -------- -------- $276,566 $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 Nine Months Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 -------- --------- -------- --------- Revenue: Rooms $226,310 $143,581 $697,221 $198,315 Food and beverage 64,852 39,336 214,053 42,918 Other operating departments 21,551 9,787 67,212 12,551 Management and other fees 2,075 2,794 7,363 12,945 -------- -------- -------- -------- Total revenue 314,788 195,498 985,849 266,729 -------- -------- -------- -------- Operating expenses by department: Rooms 55,146 33,266 163,963 45,195 Food and beverage 52,248 30,745 164,724 33,404 Other operating departments expenses 11,699 5,020 36,366 6,286 Undistributed operating expenses: Administrative and general 43,054 27,970 138,840 42,385 Property operating costs 50,076 26,610 149,546 36,662 Participating lease expense 97,396 63,210 306,009 89,241 Depreciation and amortization 1,418 1,069 4,454 1,977 -------- -------- -------- -------- Total operating expenses 311,037 187,890 963,902 255,150 -------- -------- -------- -------- Net operating income 3,751 7,608 21,947 11,579 Interest expense, net 1,037 807 3,543 837 Equity in earnings of affiliates - (327) - (1,195) -------- -------- -------- -------- Income before minority interests and income taxes 2,714 6,474 18,404 9,547 Minority interests 250 945 2,694 1,037 -------- -------- -------- -------- Income before income taxes 2,464 5,529 15,710 8,510 Income taxes 911 1,924 5,812 1,924 -------- -------- -------- -------- Net income $ 1,553 $ 3,605 $ 9,898 $ 6,586 ======== ======== ======== ======== Earnings per share: Basic $0.05 $0.13 $0.36 $0.13 ======== ======== ======== ======== Diluted $0.05 $0.12 $0.36 $0.12 ======== ======== ======== ========
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) Nine Months Ended September 30, -------------------- 1999 1998 -------- --------- Operating activities: Net income $ 9,898 $ 6,586 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,454 1,977 Minority interests 2,694 1,037 Deferred income taxes 5,813 1,619 Changes in operating assets and liabilities: Accounts receivable, net (3,487) (56,628) Deposits and other (2,510) (10,238) Prepaid expenses (7,024) (7,818) Accounts payable (6,007) 23,540 Accrued expenses and other liabilities 4,238 62,134 Due to affiliates, net 11,059 (1,954) Income taxes payable (35) 304 -------- --------- Net cash provided by operating activities 19,093 20,559 -------- --------- Investing activities: Purchases of fixed assets, net (3,644) (5,266) Investments in and advances to affiliates (15,465) (2,250) Purchases of intangible assets (2,860) (105,877) Change in restricted cash 416 (2,588) -------- --------- Net cash used in investing activities (21,553) (115,981) -------- --------- Financing activities: (Payments) proceeds from long term debt, net (10,993) 56,197 Proceeds from issuances of common stock, net 5,879 957 Contributions from CapStar -- 23,745 -------- --------- Net cash (used in) provided by financing activities (5,114) 80,899 -------- --------- Net decrease in cash and cash equivalents (7,574) (14,523) Cash and cash equivalents, beginning of period 11,155 27,022 -------- --------- Cash and cash equivalents, end of period $ 3,581 $ 12,499 ======== =========
See accompanying notes to condensed consolidated financial statements. 5 MERISTAR HOTELS & RESORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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. The Company has finalized the accounting related to the acquisitions of AGH Leasing and AGHI. Based on the allocation of the purchase price to the net assets acquired, the Company recorded goodwill of approximately $38.9 million. Goodwill is being amortized on a straight-line basis over 40 years. 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 September 30, 1999, the Company leased or managed 209 hotels with 44,035 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 nine months ended September 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 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 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 for the interim period ended September 30, 1999. This has resulted in a prepaid expense of $6.3 million, which is included on the Company's condensed consolidated balance sheet as of September 30, 1999. The effect of EITF No. 98-9 on the Company's financial statements is as follows: Three Months Ended September 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 $ 306 $ 3,445 $ 3,751 Interest expense, net (1,037) - (1,037) Minority interest 205 (455) (250) Income taxes 195 (1,106) (911) ------- ------- ------- Net income $ (331) $ 1,884 $ 1,553 ======= ======= ======= Diluted EPS $ (0.01) $ 0.05 ======= =======
7 Nine Months Ended September 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 $15,602 $ 6,345 $21,947 Interest expense, net (3,543) - (3,543) Minority interest (1,864) (830) (2,694) Income taxes (3,772) (2,040) (5,812) ------- ------- ------- Net income $ 6,423 $ 3,475 $ 9,898 ======= ======= ======= Diluted EPS $ 0.23 $ 0.36 ======= =======
3. EARNINGS PER SHARE Earnings per share ("EPS") has been calculated using net income for the three and nine months ended September 30, 1999. EPS has been calculated on income from the date of the Spin-Off, August 3, 1998, through September 30, 1998 for both the three and nine months ended September 30, 1998. The following tables present the computation of basic and diluted EPS:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---------------- ----------------- ---------------- ------------------ BASIC EARNINGS PER SHARE COMPUTATION: Net income $1,553 $3,185 $9,898 $3,185 Weighted average number of shares of Common Stock outstanding 29,043 25,189 27,298 25,189 ------------------------------------------------------------------------ Basic earnings per share $0.05 $0.13 $0.36 $0.13 ========================================================================
8
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---------------- ----------------- ---------------- ------------------ DILUTED EARNINGS PER SHARE COMPUTATION: Net income $1,553 $3,185 $9,898 $3,185 Minority interest, net of tax (30) 562 - 562 ------------------------------------------------------------------------- Adjusted net income $1,523 $3,747 $9,898 $3,747 ========================================================================= Weighted average number of shares of Common Stock outstanding 29,043 25,189 27,298 25,189 Common stock equivalents-OP Units 678 4,891 392 4,891 Common stock equivalents-stock options 186 41 160 41 ------------------------------------------------------------------------- Total weighted average number of diluted shares of common stock outstanding 29,907 30,121 27,850 30,121 ========================================================================= Diluted earnings per share $0.05 $0.12 $0.36 $0.12 =========================================================================
4. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended September 30, ------------------------------- 1999 1998 -------- -------- Cash paid for interest and income taxes: Interest $3,674 $ 398 Income taxes 35 - Non-cash investing and financing activities: Conversion of OP Units to common stock 7,790 - OP Units issued and/or assumption of liabilities in purchase of intangible assets 6,736 11,201 Assets contributed by CapStar - 41,449 Liabilities contributed by CapStar - (11,768) Debt contributed by CapStar - (1,116) ------- -------- Net Assets contributed by CapStar - 28,565
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 September 30, 1999 and December 31, 1998 and for the three and nine months ended September 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 9 information of the management and leasing operations of CapStar, its predecessor entity, for the three and nine months ended September 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 nine months ended September 30, 1999.
Three Months Ended September 30, 1999 -------------------------------------------------------------- Total Hotels Inns Resorts Segments -------------------------------------------------------------- Revenues $205,133 $48,936 $56,926 $310,995 -------------------------------------------------------------- Participating Lease Expense $63,742 $19,601 $14,053 $97,396 -------------------------------------------------------------- EBITDA $5,530 $2,418 $(3,343) $4,605 --------------------------------------------------------------
Nine Months Ended September 30, 1999 -------------------------------------------------------------- Total Hotels Inns Resorts Segments -------------------------------------------------------------- Revenues $615,361 $142,694 $216,480 $974,535 -------------------------------------------------------------- Participating Lease Expense $193,263 $57,701 $55,045 $306,009 -------------------------------------------------------------- EBITDA $15,757 $5,692 $11,627 $33,076 -------------------------------------------------------------- Total Assets $74,932 $17,226 $9,537 $101,695 --------------------------------------------------------------
The following is a reconciliation of the segment information to the Company's consolidated data for the three months ended September 30, 1999:
Participating Revenues Lease Expense EBITDA ------------------------------------------ Total Segments $310,995 $97,396 $4,605 Other Items 3,793 - 564 ------------------------------------------ Per Financial Statements $314,788 $97,396 $5,169 ==========================================
The following is a reconciliation of the segment information to the Company's consolidated data for the nine months ended September 30, 1999:
Participating Revenues Lease Expense EBITDA Assets ------------------------------------------------------ Total Segments $974,535 $306,009 $33,076 $101,695 Other Items 11,314 - (6,675) 174,871 ------------------------------------------------------ Per Financial Statements $985,849 $306,009 $26,401 $276,566 =======================================================
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 $6,163 and $16,345 for the three and nine months ended September 30, 1999, respectively. 10 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 September 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 - --------------------------------------------------------------------------------------------------------------------------- 9/30/99 109 28,175 - - 47 8,260 53 7,600 209 44,035 12/31/98 109 28,058 - - 41 6,800 53 7,608 203 42,466 9/30/98 102 26,751 - - 47 7,729 52 7,440 201 41,920 12/31/97 - - 47 12,019 27 4,631 40 5,687 114 22,337
FINANCIAL CONDITION SEPTEMBER 30, 1999 COMPARED WITH DECEMBER 31, 1998 Total assets increased by $29.1 million to $276.6 million at September 30, 1999 from $247.5 million at December 31, 1998. Total liabilities increased by $10.8 million to $193.9 million from $183.1 million. The increase in assets primarily results from increases in prepaid expenses ($7.0 million), investments in and advances to affiliates ($15.5 million), and intangible assets ($6.2 million). The increase in prepaid expenses is due to the Company making cash lease payments in excess of the expense the Company is required to recognize under EITF No.98-9; this results in a prepaid expense of $6.3 million. 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 intangibles is a result of the final purchase price adjustment relating to 11 the acquisitions of AGH Leasing and AGHI. The increase in liabilities primarily results from an $11.0 million increase in accrued expenses and other liabilities due to increased sales volume and an $11.1 million increase in due to affiliates, primarily representing a higher amount of participating lease payable at September 30, 1999 compared to December 31, 1998. These increases were partially offset by an $11.0 million decrease in long-term debt. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1998 Total revenue increased by $119.3 million to $314.8 million in the three months ended September 30, 1999 compared to $195.5 million in the three months ended September 30, 1998. This increase results from the increase in the number of hotels leased as described above. Operating expenses increased $123.1 million to $311.0 million in the three months ended September 30,1999 compared to $187.9 million in the three months ended September 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 decreased $3.8 million, to approximately $3.8 million in the three months ended September 30, 1999 compared to $7.6 million in the three months ended September 30, 1998. The decrease 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 September 30, 1999 is as follows:
Total Hotels Inns Resorts Segments ------------------------------------------ EBITDA.....................$5,530 $2,418 $(3,343) $4,605
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1998 Total revenue increased by $719.1 million to $985.8 million in the nine months ended September 30, 1999 compared to $266.7 million in the nine months ended September 30, 1998. This increase results from the increase in the number of hotels leased as described above. Operating expenses increased $708.7 million to $963.9 million in the nine months ended September 30,1999 compared to $255.2 million in the nine months ended September 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 $10.3 million, to approximately $21.9 million in the nine months ended September 30, 1999 compared to approximately $11.6 million in the nine months ended September 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 nine months ended September 30, 1999 is as follows:
Total Hotels Inns Resorts Segments ------------------------------------------ EBITDA.................. ..$15,757 $5,692 $11,627 $33,076
12 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 $19.1 million of net cash in the nine months ended September 30, 1999, mainly due to higher levels of earnings, depreciation and amortization, and net operating liabilities. The Company used $21.6 million of cash in investing activities for the first nine months of 1999, primarily for the investments in hotel partnerships. Net cash used in financing activities of $5.1 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 September 30, 1999, the Company had available $44.0 million under the Credit Facility. As of November 8, 1999, the Company had available $49 million under the Credit Facility. On April 15, 1999, the Company issued $5 million of Common Stock in a private placement with the Company's joint venture partner in MeriStar Investment Partners. 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. 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 13 Company is currently in its modification, repair or replacement and testing stages, and expects to complete these stages in December 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 completed its communications and assessment of third parties' services in September 1999. Also, the Company is reviewing and updating its contingency plans 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 in December 1999 prior to any anticipated impact on its operating systems. As of September 30, 1999, historical costs incurred to address the Year 2000 problem approximate $0.5 million. The Company anticipates that it will incur $0.3 million of additional costs to address the Year 2000 problem. 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 $8-10 million. This cost estimate is based on the Company's current assessment 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. 14 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 15 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: November 9, 1999 /s/ James A. Calder -------------------------------- James A. Calder Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 3,581 0 67,941 2,467 6,243 93,867 10,721 2,159 276,566 121,919 56,814 0 0 295 67,761 276,566 0 985,849 0 365,053 601,543 0 3,543 15,710 5,812 9,898 0 0 0 9,898 0.36 0.36
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