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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
------------------------
INTERSTATE HOTELS COMPANY
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
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<S> <C> <C>
PENNSYLVANIA 1-11731 25-1788101
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
</TABLE>
The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
The number of shares of the Company's Common Stock, par value $0.01 per
share, outstanding at October 31, 1997 was 35,420,813.
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INDEX
INTERSTATE HOTELS COMPANY
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<CAPTION>
PAGE NO.
--------
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)...................................... 2
Consolidated Balance Sheets--December 31, 1996 and September 30,
1997.................................................................. 2
Consolidated Statements of Operations--Pro Forma Three Months and Nine
Months Ended September 30, 1996 and September 30, 1997................ 3
Consolidated Statements of Operations--Historical Three Months and
Nine Months Ended September 30, 1996 and September 30, 1997........... 4
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1996 and September 30, 1997........................................... 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................... 13
</TABLE>
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
INTERSTATE HOTELS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(A) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 32,323 $ 31,924
Accounts receivable, net........................................ 21,556 48,653
Stock subscription receivable, net.............................. 14,286 --
Deferred income taxes........................................... 1,649 2,283
Prepaid expenses and other assets............................... 11,961 14,161
-------- ----------
Total current assets.......................................... 81,775 97,021
Restricted cash................................................... 15,995 7,745
Property and equipment, net....................................... 709,151 1,140,291
Investments in hotel real estate.................................. 5,605 24,518
Officers and employees notes receivable........................... 4,643 5,184
Intangible and other assets....................................... 66,592 75,494
-------- ----------
Total assets.................................................. $883,761 $1,350,253
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade......................................... 12,152 14,297
Accounts payable--health trust.................................. 2,440 7,372
Accrued payroll and related benefits............................ 15,072 19,584
Income taxes payable............................................ -- 142
Other accrued liabilities....................................... 23,926 56,005
Current portion of long-term debt............................... 11,767 61,059
-------- ----------
Total current liabilities..................................... 65,357 158,459
Long-term debt.................................................... 396,044 714,445
Deferred income taxes............................................. 4,081 13,878
Other liabilities................................................. 1,213 1,213
-------- ----------
Total liabilities............................................. 466,695 887,995
-------- ----------
Minority interests................................................ 7,768 17,141
-------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000 shares authorized; no
shares outstanding............................................ -- --
Common stock, $.01 par value; 75,000 shares authorized; 35,421
shares issued and outstanding as of September 30, 1997........ 352 354
Paid-in capital................................................. 407,784 411,644
Retained earnings............................................... 1,432 33,932
Unearned compensation........................................... (270) (813)
-------- ----------
Total shareholders' equity.................................... 409,298 445,117
-------- ----------
Total liabilities and shareholders' equity.................... $883,761 $1,350,253
======== ==========
</TABLE>
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(A) The year-end balance sheet information was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The accompanying notes are an integral part of the consolidated financial
statements.
2
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INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------
<TABLE>
<CAPTION>
PRO FORMA (NOTE 3)
-------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Lodging revenues:
Rooms..................................... $127,039 $138,029 $367,828 $400,429
Food and beverage......................... 34,954 35,972 116,054 117,965
Other departmental........................ 10,046 11,138 31,654 34,357
Management and related fees................. 9,096 9,471 27,634 30,877
-------- -------- -------- --------
181,135 194,610 543,170 583,628
-------- -------- -------- --------
Lodging expenses:
Rooms..................................... 29,046 31,856 84,573 92,320
Food and beverage......................... 27,688 27,432 87,298 88,694
Other departmental........................ 4,533 5,126 14,182 15,552
Property costs............................ 50,784 52,662 153,561 157,505
General and administrative.................. 2,984 3,975 8,809 10,227
Payroll and related benefits................ 4,557 5,767 13,734 15,711
Lease expense............................... 22,784 26,341 61,589 69,673
Depreciation and amortization............... 11,650 11,446 34,112 34,179
-------- -------- -------- --------
154,026 164,605 457,858 483,861
-------- -------- -------- --------
Operating income....................... 27,109 30,005 85,312 99,767
Other expense:
Interest, net............................. 13,485 11,710 40,809 36,670
Other, net................................ 1,656 1,737 5,008 5,430
-------- -------- -------- --------
Income before income tax expense....... 11,968 16,558 39,495 57,667
Income tax expense.......................... 4,548 6,292 15,008 21,913
-------- -------- -------- --------
Net income............................. $ 7,420 $ 10,266 $ 24,487 $ 35,754
======== ======== ======== ========
Pro forma earnings per common share and
common share equivalent................... $ .21 $ .29 $ .69 $ 1.00
======== ======== ======== ========
Pro forma weighted average number of common
shares and common share equivalents
outstanding............................... 35,779 35,779 35,738 35,738
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Lodging revenues:
Rooms.......................................... $35,318 $128,845 $ 37,351 $318,132
Food and beverage.............................. 15,771 32,159 16,792 90,886
Other departmental............................. 3,619 10,407 3,840 27,250
Management and related fees...................... 10,822 10,113 35,788 33,321
-------- -------- -------- --------
65,530 181,524 93,771 469,589
-------- -------- -------- --------
Lodging expenses:
Rooms.......................................... 7,680 29,714 8,064 72,227
Food and beverage.............................. 11,770 24,349 12,513 68,498
Other departmental............................. 1,588 4,658 1,680 11,928
Property costs................................. 15,738 48,002 16,618 123,411
General and administrative....................... 2,664 4,111 7,240 10,628
Payroll and related benefits..................... 4,167 5,767 12,564 15,711
Non-cash compensation............................ -- -- 11,896 --
Lease expense.................................... -- 26,411 -- 54,910
Depreciation and amortization.................... 5,321 10,562 7,762 28,524
-------- -------- -------- --------
48,928 153,574 78,337 385,837
-------- -------- -------- --------
Operating income............................ 16,602 27,950 15,434 83,752
Other (expense) income:
Interest, net.................................. (4,300) (11,364) (5,315) (29,496)
Other, net..................................... (422) (588) 329 (1,802)
-------- -------- -------- --------
Income before income tax expense............ 11,880 15,998 10,448 52,454
Income tax expense............................... 4,514 6,100 11,145 19,954
-------- -------- -------- --------
Income (loss) before extraordinary items.... 7,366 9,898 (697) 32,500
Extraordinary loss from early extinguishment of
debt, net of tax benefit of $3,937............. -- -- 7,643 --
-------- -------- -------- --------
Net income (loss)........................... $ 7,366 $ 9,898 $ (8,340) $ 32,500
======== ======== ======== ========
Earnings per common share and common share
equivalent (Note 5)............................ $ .26 $ .28 $ -- $ .91
======== ======== ======== ========
Weighted average number of common shares and
common share equivalents outstanding........... 28,665 35,753 -- 35,638
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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INTERSTATE HOTELS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
---------------------
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997
--------- ---------
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Cash flows from operating activities:
Net (loss) income............................................ $ (8,340) $ 32,500
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................. 7,762 28,524
Minority interests' share of equity (loss) income from
investments in hotel real estate........................ (106) 2,636
Write-off of deferred financing fees...................... 6,231 --
Non-cash compensation..................................... 11,896 --
Deferred income taxes..................................... 1,835 9,163
Other..................................................... (340) (537)
Cash (used in) provided by assets and liabilities:
Accounts receivable, net.................................. (3,348) (27,097)
Prepaid expenses and other assets......................... (3,486) (2,122)
Accounts payable.......................................... (2,566) 7,077
Income taxes payable...................................... 2,373 142
Accrued liabilities....................................... 2,799 36,591
--------- ---------
Net cash provided by operating activities............... 14,710 86,877
--------- ---------
Cash flows from investing activities:
Change in restricted cash................................. (2,661) (36,035)
Acquisitions of hotels, net of cash received.............. (236,673) (338,315)
Purchase of property and equipment, net................... (1,148) (60,718)
Restricted funds used to purchase property and
equipment............................................... 674 44,285
Investments in hotel real estate.......................... (5,146) (18,525)
Change in notes receivable, net........................... (3,289) (541)
Other..................................................... 2,172 (10,641)
--------- ---------
Net cash used in investing activities................... (246,071) (420,490)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 265,750 369,400
Repayment of long-term debt............................... (241,689) (56,857)
Financing costs paid, net................................. (9,349) (3,925)
Minority interests, net................................... (1,736) 6,737
Proceeds from issuance of Common Stock, net............... 263,752 17,859
Repayment of funds advanced to shareholders, net.......... 1,630 --
Repayment of notes payable to shareholders................ (30,000) --
Dividends and capital distributions paid.................. (6,732) --
--------- ---------
Net cash provided by financing activities............... 241,626 333,214
--------- ---------
Net change in cash and cash equivalents........................ 10,265 (399)
Cash and cash equivalents at beginning of period............... 14,035 32,323
--------- ---------
Cash and cash equivalents at end of period..................... $ 24,300 $ 31,924
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest....................................... $ 5,957 $ 29,729
Cash paid for income taxes................................... -- 8,039
Supplemental disclosure of noncash investing and financing
activities:
Notes payable issued to shareholders......................... $ 30,000 $ --
Issuance of Common Stock for acquisitions.................... 8,300 --
Assumption of debt related to acquisitions................... -- 55,150
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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INTERSTATE HOTELS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS)
---------------------
1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Company (the "Company") was formed in April 1996 in
anticipation of an initial public offering of the Company's Common Stock in June
1996 (the "IPO"). As of September 30, 1997, the Company owned, managed, leased
or performed related services for a portfolio of 232 hotels with a total of
46,591 rooms. The Company owned or had a controlling interest in 39 of these
hotels ( the "Owned Hotels"). In addition, the Company has also entered into 88
long-term operating leases (the "Leased Hotels") in connection with and since
the acquisition of the management and leasing businesses affiliated with Equity
Inns, Inc., a publicly traded real estate investment trust, in November 1996
(the "Equity Inns Transaction").
The consolidated financial statements of the Company consist of the
historical results of Interstate Hotels Corporation and Affiliates, the
Company's predecessors, and the operations of the Owned Hotels from the
respective dates of their acquisitions. The working capital and operating
results of the Leased Hotels are also included in the Company's consolidated
financial statements because the operating performance associated with such
hotels is guaranteed by the Company. Prior to the IPO, the consolidated
financial statements reflected only the historical operations of the
predecessors.
The accompanying consolidated interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The consolidated interim financial statements should be
read in conjunction with the financial statements, notes thereto and other
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation, in all material respects, of the financial position and results of
operations for the periods presented. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year.
2. LONG-TERM DEBT:
In May 1997, the Company amended its credit facilities by converting
certain borrowings outstanding under the revolving credit facility to a $135,000
term loan and increasing the revolving credit facility from $200,000 to
$350,000. In addition, the Company's permitted non-recourse and subordinated
debt capacity was increased from $250,000 to $290,000. The interest rate on the
revolving credit facility and certain term debt was amended to be subject to
reduced rates based on leveraged EBITDA ratio benchmarks. The interest rate on
the $135,000 term loan is based on a fixed percentage of 2.25 over a
reserve-adjusted Eurodollar rate.
3. PRO FORMA INFORMATION:
The unaudited pro forma consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1996 and 1997 are
presented to include the effects of the IPO, the acquisitions of Owned Hotels in
connection with and since the IPO through September 30, 1997, the Equity Inns
Transaction, the Company's second public offering in December 1996, the
Company's debt restructuring in May 1997 and certain other adjustments as if all
of the transactions had occurred on January 1, 1996. The pro forma information
also includes a pending sale of 49% of the Company's current interest in three
of the Owned Hotels to Host Marriott
6
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS)
---------------------
3. PRO FORMA INFORMATION-CONTINUED
Corporation. In management's opinion, all material pro forma adjustments
necessary to reflect the effects of these transactions have been made. The pro
forma information does not include earnings on the Company's pro forma cash and
cash equivalents or certain one-time charges to income (such as non-recurring
takeover and repositioning costs associated with acquisitions), and does not
purport to present what the actual results of operations of the Company would
have been if the previously mentioned transactions had occurred on such dates or
to project the results of operations of the Company for any future period.
4. ACQUISITIONS:
During the nine months ended September 30, 1997, the Company acquired 11
Owned Hotels with a total of 3,619 rooms and minority interests in four other
hotels for a total acquisition price of $406,700 with closing costs of
approximately $5,300. Such acquisitions were accounted for using the purchase
method of accounting. In connection with three of these acquisitions, the
Company entered into operating leases for certain furniture, fixtures and
equipment of these hotels with an approximate fair market value of $17,000. In
addition, one Owned Hotel with 121 rooms, which the Company developed for a
total cost of approximately $9,700, was opened in September 1997. The Company
also entered into long-term operating leases with Equity Inns, Inc. for 40
hotels during this same period.
5. EARNINGS PER SHARE:
Prior to the consummation of the IPO, the predecessors of the Company were
organized as S corporations, partnerships and limited liability companies.
Accordingly, the Company believes that the historical earnings per share
calculation required to be presented is not meaningful for the nine-month period
ended September 30, 1996 and, therefore, has not been provided.
6. NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share." The new standard, which is effective for the fiscal year ending December
31, 1997, revises the disclosure requirements and simplifies the computation of
earnings per share. Management believes that the impact of this standard will
not be material.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information." The new standard, which is effective for
the fiscal year ending December 31, 1998, requires that all public business
enterprises report information about operating segments, as well as specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. Management has not yet
determined the impact of this standard.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
During the third quarter of 1997, the Company acquired six Owned Hotels:
the 310-room Arlington Dallas Marriott in Arlington, Texas, the 508-room
Parsippany Hilton in Parsippany, New Jersey, the 253-room Gateway Hilton in
Newark, New Jersey, the 359-room Albany Marriott in Albany, New York, the
350-room San Diego Marriott Mission Valley in San Diego, California and the
320-room Minneapolis Marriott Southwest in Minnetonka, Minnesota. In addition,
one Owned Hotel, the 121-room Courtyard by Marriott in Orange, Connecticut, was
opened on September 22, 1997. Also during the third quarter of 1997, the Company
acquired a 25% minority interest in the Manhattan Beach Marriott in Manhattan
Beach, California and a 10% minority interest in the Ontario Airport Marriott in
Ontario, California and entered into long-term operating leases with Equity
Inns, Inc. for three hotels.
At September 30, 1997, the Company owned or had a controlling interest in
39 hotels with a total of 11,482 rooms, compared to 21 hotels with a total of
6,027 rooms at September 30, 1996. In addition, the Company had long-term
operating leases for 98 hotels with a total of 11,346 rooms at September 30,
1997, compared to long-term operating leases for nine hotels with a total of 683
rooms at September 30, 1996.
PRO FORMA THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Pro forma total revenues increased by $13.5 million, or 7.4%, from $181.1
million in the three months ended September 30, 1996 (the "1996 Three Months")
to $194.6 million in the three months ended September 30, 1997 (the "1997 Three
Months") and by $40.4 million, or 7.4%, from $543.2 million in the nine months
ended September 30, 1996 (the "1996 Nine Months") to $583.6 million in the nine
months ended September 30, 1997 (the "1997 Nine Months"). The most significant
portion of this increase related to lodging revenues, which consists of rooms,
food and beverage and other departmental revenues. Pro forma lodging revenues
increased by $13.1 million, or 7.6%, from $172.0 million in the 1996 Three
Months to $185.1 million in the 1997 Three Months and by $37.3 million, or 7.2%,
from $515.5 million in the 1996 Nine Months to $552.8 million in the 1997 Nine
Months. This increase was due to the overall improvement in the operating
performance of the Owned and Leased Hotels and an overall improvement in
economic conditions in certain geographic regions.
The pro forma average daily room rate ("ADR") for the Owned Hotels
increased by 6.8%, from $100.26 during the 1996 Three Months to $107.09 during
the 1997 Three Months, and the pro forma average occupancy rate decreased
slightly to 74.7%. For the nine-month periods, the pro forma ADR for the Owned
Hotels increased by 8.1%, from $101.71 during 1996 to $109.97 during 1997, and
the pro forma average occupancy rate decreased slightly to 74.3%. This resulted
in an increase in pro forma room revenue per available room ("REVPAR") of 3.6%
to $79.98 during the 1997 Three Months and an increase of 6.9% to $81.70 during
the 1997 Nine Months. The Boston, Fort Lauderdale, Houston, Chicago, New York,
Philadelphia, and Washington, D.C. markets had a significant positive impact on
ADR and REVPAR growth. Pro forma management and related fees increased slightly
in the three-month periods from 1996 to 1997 and by $3.3 million, or 11.7%, from
$27.6 million in the 1996 Nine Months to $30.9 million in the 1997 Nine Months
primarily due to the performance improvement of the Company's portfolio of
managed hotels. Many of the management agreements for these hotels provide for
incentive management fees.
Pro forma lodging expenses, which consists of rooms, food and beverage,
property costs and other departmental expenses, increased by $5.0 million, or
4.5%, from $112.1 million in the 1996 Three Months to $117.1 million in the 1997
Three Months and by $14.5 million, or 4.3%, from $339.6 million in the 1996 Nine
Months to $354.1 million in the 1997 Nine Months. The pro forma operating margin
of the Owned and Leased Hotels increased from 34.9% during the 1996 Three Months
to 36.8% during the 1997 Three Months and from 34.1% during the 1996 Nine Months
to 35.9% during the 1997 Nine Months. This increase was attributed to the
increase in pro forma revenues and the overall improvement in operating
performance and operating efficiencies of the Owned and Leased Hotels.
Lease expense represents base rent and participating rent that is based on
a percentage of rooms and food and beverage revenues from the Leased Hotels. Pro
forma lease expense increased by $3.5 million, or 15.6%, from $22.8 million in
the 1996 Three Months to $26.3 million in the 1997 Three Months and by $8.1
million, or
8
<PAGE> 10
13.1%, from $61.6 million in the 1996 Nine Months to $69.7 million in the 1997
Nine Months. This increase was due to higher Leased Hotels' room revenues. The
pro forma ADR for the Leased Hotels increased by 14.2%, from $60.06 during the
1996 Three Months to $68.60 during the 1997 Three Months, and the pro forma
average occupancy rate decreased slightly to 76.3%. For the nine-month periods,
the pro forma ADR for the Leased Hotels increased by 12.3%, from $57.57 during
1996 to $64.67 during 1997, and the pro forma average occupancy rate decreased
slightly to 67.0%. This resulted in an increase in pro forma REVPAR of 12.6% to
$52.34 during the 1997 Three Months and an increase of 8.4% to $43.34 during the
1997 Nine Months.
Pro forma operating income increased by $2.9 million, or 10.7%, from $27.1
million in the 1996 Three Months to $30.0 million in the 1997 Three Months and
by $14.5 million, or 16.9%, from $85.3 million in the 1996 Nine Months to $99.8
million in the 1997 Nine Months. The pro forma operating margin increased from
15.0% during the 1996 Three Months to 15.4% during the 1997 Three Months and
from 15.7% during the 1996 Nine Months to 17.1% during the 1997 Nine Months.
Pro forma net interest expense decreased by $1.8 million, or 13.2%, from
$13.5 million in the 1996 Three Months to $11.7 million in the 1997 Three Months
and by $4.1 million, or 10.1%, from $40.8 million in the 1996 Nine Months to
$36.7 million in the 1997 Nine Months. This decrease was due to lower
outstanding debt balances resulting primarily from escalating scheduled
principal payments on a pro forma basis.
Pro forma income tax expense for the periods presented was computed as if
the Company had been subject to federal and state income taxes, based on an
effective tax rate of 38%.
As a result of the changes noted above, pro forma net income increased by
$2.9 million, or 38.4%, from $7.4 million in the 1996 Three Months to $10.3
million in the 1997 Three Months and by $11.3 million, or 46.0%, from $24.5
million in the 1996 Nine Months to $35.8 million in the 1997 Nine Months. The
pro forma net income margin increased from 4.1% during the 1996 Three Months to
5.3% during the 1997 Three Months and from 4.5% during the 1996 Nine Months to
6.1% during the 1997 Nine Months.
HISTORICAL THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO HISTORICAL
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Total revenues increased by $116.0 million, or 177.0%, from $65.5 million
in the 1996 Three Months to $181.5 million in the 1997 Three Months and by
$375.8 million, or 400.8%, from $93.8 million in the 1996 Nine Months to $469.6
million in the 1997 Nine Months. The most significant portion of this increase
related to lodging revenues which increased by $116.7 million, or 213.3%, from
$54.7 million in the 1996 Three Months to $171.4 million in the 1997 Three
Months and by $378.3 million to $436.3 million in the 1997 Nine Months. This
increase was due to the operations of the Owned and Leased Hotels since their
respective acquisition or inception dates. The ADR for the Owned Hotels
increased by 10.9%, from $96.32 during the 1996 Three Months to $106.83 during
the 1997 Three Months, and the average occupancy rate decreased slightly to
73.9%. This resulted in an increase in REVPAR of 7.4% to $78.90 during the 1997
Three Months. For the 1997 Nine Months, the ADR for the Owned Hotels was $108.55
and the average occupancy rate was 75.5%, which resulted in REVPAR of $81.90.
Management and related fees decreased by $0.7 million, or 6.5%, from $10.8
million in the 1996 Three Months to $10.1 million in the 1997 Three Months and
by $2.5 million, or 6.9%, from $35.8 million in the 1996 Nine Months to $33.3
million in the 1997 Nine Months primarily due to the Company's acquisitions of
previously managed hotels which resulted in the elimination of third-party
management and related fees.
Lodging expenses increased by $69.9 million, or 190.2%, from $36.8 million
in the 1996 Three Months to $106.7 million in the 1997 Three Months and by
$237.2 million to $276.1 million in the 1997 Nine Months. This increase was due
to the operations of the Owned and Leased Hotels since their respective
acquisition or inception dates. The operating margin of the Owned and Leased
Hotels increased from 32.8% during the 1996 Three Months to 37.7% during the
1997 Three Months. This increase was attributed to the increase in revenues and
the overall improvement in operating performance and operating efficiencies of
the Owned and Leased Hotels. For the 1997 Nine Months, the operating margin of
the Owned and Leased Hotels was 36.7%.
General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel
9
<PAGE> 11
support services, as well as general corporate expenses. General and
administrative expenses increased by $1.4 million, or 54.3%, from $2.7 million
in the 1996 Three Months to $4.1 million in the 1997 Three Months and by $3.4
million, or 46.8%, from $7.2 million in the 1996 Nine Months to $10.6 million in
the 1997 Nine Months. This increase was primarily due to incremental expenses
associated with the growth of the Company's business and additional
non-recurring costs associated with the acquisitions of the Owned Hotels and
property repositionings, as well as additional costs associated with managing
and administering a publicly held company. General and administrative expenses
as a percentage of revenues decreased to 2.3% during the 1997 Three Months
compared to 4.1% during the 1996 Three Months and to 2.3% during the 1997 Nine
Months compared to 7.7% during the 1996 Nine Months as a result of the
operations of the Owned and Leased Hotels since their respective acquisition or
inception dates.
Payroll and related benefits expenses increased by $1.6 million, or 38.4%,
from $4.2 million in the 1996 Three Months to $5.8 million in the 1997 Three
Months and by $3.1 million, or 25.0%, from $12.6 million in the 1996 Nine Months
to $15.7 million in the 1997 Nine Months. This increase was related to the
addition of corporate management and staff personnel as the Company's portfolio
of hotels for which it provides management and other services grew, primarily
resulting from the Equity Inns Transaction. Payroll and related benefits
expenses as a percentage of revenues decreased to 3.2% during the 1997 Three
Months compared to 6.4% during the 1996 Three Months and to 3.3% during the 1997
Nine Months compared to 13.4% during the 1996 Nine Months as a result of the
operations of the Owned and Leased Hotels since their respective acquisition or
inception dates.
Non-cash compensation of $11.9 million in the 1996 Nine Months resulted
from the issuance of 785,533 shares of Common Stock to certain executives and
key employees of the Company in consideration for the cancellation of stock
options issued by one of the Company's predecessors, Interstate Hotels
Corporation, in 1995.
The Company had lease expense of $26.4 million in the 1997 Three Months and
$54.9 million in the 1997 Nine Months due to the addition of the Leased Hotels.
The ADR for the Leased Hotels was $68.80 during the 1997 Three Months and the
average occupancy rate was 76.1%, which resulted in REVPAR of $52.34. For the
1997 Nine Months, the ADR for the Leased Hotels was $67.78 and the average
occupancy rate was 73.4%, which resulted in REVPAR of $49.78.
Depreciation and amortization increased by $5.3 million, or 98.5%, from
$5.3 million in the 1996 Three Months to $10.6 million in the 1997 Three Months
and by $20.7 million to $28.5 million in the 1997 Nine Months due to incremental
depreciation related to the acquisitions of the Owned Hotels, the amortization
of deferred financing fees and the amortization of goodwill and the cost of
lease contracts associated with the Equity Inns Transaction.
Operating income (exclusive of non-cash compensation) increased by $11.3
million, or 68.4%, from $16.6 million in the 1996 Three Months to $27.9 million
in the 1997 Three Months and by $56.5 million, or 206.4%, from $27.3 million in
the 1996 Nine Months to $83.8 million in the 1997 Nine Months. The operating
margin decreased from 25.3% during the 1996 Three Months to 15.4% during the
1997 Three Months. This increase in operating income and decrease in the
operating margin reflects the inclusion of the operating results of the Owned
and Leased Hotels, which were not reflected in the Company's results prior to
their respective acquisition or inception dates. For the 1997 Nine Months, the
operating margin was 17.8%.
Net interest expense increased by $7.1 million, or 164.3%, from 4.3 million
in the 1996 Three Months to $11.4 million in the 1997 Three Months and by $24.2
million to $29.5 million in the 1997 Nine Months primarily due to additional
borrowings related to the acquisitions of the Owned Hotels.
Other expense of $0.6 million in the 1997 Three Months and $1.8 million in
the 1997 Nine Months consisted primarily of minority interests.
Income tax expense in both 1996 and 1997 was computed based on an effective
tax rate of 38%. Income tax expense in the 1996 Nine Months included deferred
tax expense of $4.9 million, which was recorded in June 1996 when the Company
changed its tax status from a pass-through entity for tax purposes to a C
corporation.
10
<PAGE> 12
An extraordinary loss of $7.6 million, net of a tax benefit of $3.9
million, in the 1996 Nine Months resulted from the early extinguishment of
certain indebtedness and was related to the payment of prepayment penalties and
loan commitment fees and the write-off of deferred financing fees.
As a result of the changes noted above, net income increased by $2.5
million, or 34.4%, from $7.4 million in the 1996 Three Months to $9.9 million in
the 1997 Three Months. For the nine-month periods, net income of $32.5 million
was recorded in 1997 compared to a net loss of $8.3 million in 1996. The net
income margin decreased from 11.2% during the 1996 Three Months to 5.5% during
the 1997 Three Months. For the 1997 Nine Months, the net income margin was 6.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent assets were $31.9 million at
September 30, 1997 compared to $32.3 million at December 31, 1996. At September
30, 1997, current liabilities exceeded current assets by $61.4 million primarily
as a result of the Company's acquisitions of two Owned Hotels which were
financed with $41.5 million of short-term non-recourse loans. The Company
expects to refinance these loans by December 31, 1997. The Company's principal
sources of liquidity during the 1997 Nine Months were cash from operations and
borrowings under its credit facilities. Net cash provided by operations was
$86.9 million in the 1997 Nine Months compared to $14.7 million in the 1996 Nine
Months. The Company used cash of $420.5 million in investing activities in the
1997 Nine Months, which principally related to the acquisitions of Owned Hotels
and investments in hotel real estate in the amount of $356.9 million and capital
expenditures of $60.7 million. The Company's capital expenditure budget relating
to existing operations for 1997 and 1996 is $70.5 million and $16.3 million,
respectively. The increase is due primarily to capital expenditures related to
renovations of hotels that were acquired during 1996 and 1997. Net cash provided
by financing activities in the amount of $333.2 million in the 1997 Nine Months
was primarily used to finance hotel acquisitions. The principal source of this
cash was $369.4 million from proceeds from long-term debt, offset by long-term
debt repayments of $56.9 million.
At September 30, 1997, the Company's total indebtedness was $775.5 million,
comprised of $419.7 million of term loans, $193.5 million of borrowings under
its revolving credit facility, $29.3 million of mortgage indebtedness
encumbering six Owned Hotels in which the Company owns a controlling interest,
$132.4 million of loans related to the acquisitions of six Owned Hotels, and
$0.6 million of other debt. The Company utilizes various interest rate hedge
contracts to limit its interest rate exposure on indebtedness. Future changes in
interest rates applicable to outstanding borrowings are therefore not expected
to have a material impact on the Company's results of operations. Management of
the Company believes that, with respect to its current operations, the Company's
cash on hand and funds from operations will be sufficient to cover its
reasonably foreseeable working capital, ongoing capital expenditure and debt
service requirements.
Since its IPO, the Company has pursued a growth-oriented strategy
involving, among other things, the acquisition of interests in additional hotel
properties and hotel management companies, as well as the acquisition of
additional management contracts (which may from time to time require capital
expenditures by the Company). The Company is also pursuing selective development
projects, particularly in the limited-service segment. At September 30, 1997,
the Company had three limited-service hotels under construction with total
projected development costs of $29.3 million. These properties consist of two
Courtyard by Marriott hotels in Westborough, Massachusetts and St. Louis,
Missouri and a Residence Inn by Marriott in Pittsburgh, Pennsylvania. The total
cost incurred through September 30, 1997 on these projects was $11.3 million. In
addition, the Company opened a Courtyard by Marriott in Orange, Connecticut
which it had developed for a total cost of $9.7 million. Management believes
that the capital resources available to the Company will be sufficient to pursue
the Company's acquisition strategy and to fund its other presently foreseeable
capital requirements. The Company also expects to arrange separate financing for
development projects, including the three limited-service hotels under
construction at September 30, 1997, either on a program basis or pursuant to
project-by-project financing.
The Company believes that, absent a presently unforeseen change, additional
acquisition and development opportunities will continue to exist for the
foreseeable future, and depending upon conditions in the capital and other
financial markets as well as other factors, the Company may increase its
borrowing capacity and consider
11
<PAGE> 13
the issuance of equity or debt securities, the proceeds of which could be used
to finance acquisitions and development, to repay or refinance outstanding
indebtedness or for other general corporate purposes.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used herein, words such as "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, relating to the operations and results of operations of the
Company, the Company's rapid expansion, the ownership and leasing of real
estate, competition from other hospitality companies and changes in economic
cycles, as well as the other factors described herein. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, estimated, expected or intended.
12
<PAGE> 14
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------ ----------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(B) Reports on Form 8-K.
1. On September 12, 1997, the Company filed a Current Report on Form 8-K to
report the acquisition of substantially all of the equity interests in a
limited partnership that owns three hotels: the 359-room Albany Marriott
in Albany, New York, the 320-room Minneapolis Marriott Southwest in
Minnetonka, Minnesota and the 350-room San Diego Marriott Mission Valley
in San Diego, California. The total purchase price, including estimated
capital expenditures for anticipated renovations and closing costs, was
approximately $98.8 million.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Pittsburgh, in the
Commonwealth of Pennsylvania, on November 14, 1997.
INTERSTATE HOTELS COMPANY
By: /s/ J. WILLIAM RICHARDSON
----------------------------------
J. William Richardson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,924
<SECURITIES> 0
<RECEIVABLES> 49,199
<ALLOWANCES> (546)
<INVENTORY> 0
<CURRENT-ASSETS> 97,021
<PP&E> 1,228,225
<DEPRECIATION> (87,934)
<TOTAL-ASSETS> 1,350,253
<CURRENT-LIABILITIES> 158,459
<BONDS> 775,504
0
0
<COMMON> 354
<OTHER-SE> 444,763
<TOTAL-LIABILITY-AND-EQUITY> 1,350,253
<SALES> 0
<TOTAL-REVENUES> 469,589
<CGS> 0
<TOTAL-COSTS> 385,837
<OTHER-EXPENSES> 1,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,496
<INCOME-PRETAX> 52,454
<INCOME-TAX> 19,954
<INCOME-CONTINUING> 32,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,500
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
