<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 1-11903
MERISTAR HOSPITALITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 72-2648842
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
202-295-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period for which the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, par value $0.01 per share, outstanding at
May 13, 1999 was 47,520,292.
<PAGE>
The Form 10-Q for MeriStar Hospitality Corporation, which was filed on May 17,
1999, was inadvertently filed without the signature page. There were no changes
made to the document; we are submitting the document in its entirety to include
the signature page.
<PAGE>
MERISTAR HOSPITALITY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 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 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 14
MARKET RISK
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- ------------------
(unaudited)
<S> <C> <C>
Assets
Investments in hotel properties $2,963,402 $2,909,439
Accumulated depreciation (106,757) (83,797)
---------- ----------
2,856,645 2,825,642
Cash and cash equivalents 31,789 4,180
Accounts receivable, net 491 3,044
Income tax receivable 313 339
Deposits 1,618 1,618
Prepaid expenses, inventory and other 3,063 2,259
Note receivable from Lessee 57,000 67,000
Due from Lessee 25,363 7,437
Investments in and advances to affiliates 40,691 8,787
Restricted cash 11,342 11,879
Properties held for sale 45,708 48,104
Intangible assets, net of accumulated amortization
of $3,494 and $2,666 19,365 18,171
---------- ----------
$3,093,388 $2,998,460
========== ==========
Liabilities, Minority Interests and Stockholders' Equity
Accounts payable $ 5,179 $ 2,111
Accrued expenses and other liabilities 74,328 45,549
Accrued interest 25,106 24,472
Dividends and distributions payable 26,570 25,988
Deferred income taxes 8,457 8,453
Long-term debt 1,688,328 1,602,352
---------- ----------
Total liabilities 1,827,968 1,708,925
---------- ----------
Minority interests 138,588 138,543
Stockholders' Equity:
Common stock, par value $.01 per share
Authorized - 100,000 shares
Issued and outstanding - 46,837 and 46,718 shares 468 467
Additional paid-in capital 1,136,085 1,133,357
Retained earnings (2,648) 23,655
Accumulated other comprehensive income (7,073) (6,487)
---------- ----------
Total stockholders' equity 1,126,832 1,150,992
---------- ----------
$3,093,388 $2,998,460
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------
1999 1998
---- ----
<S> <C> <C>
Revenue:
Participating lease revenue $62,812 $ -
Hotel operations - 141,597
Office rental and other revenues 1,281 2,005
------- --------
Total revenue 64,093 143,602
------- --------
Hotel operating expenses - 54,840
Office rental and other operating expenses 496 19,508
Administrative and general 1,548 25,245
Property taxes, insurance and other 13,589 16,789
Depreciation and amortization 23,888 9,508
------- --------
Total operating expenses 39,521 125,890
------- --------
Net operating income 24,572 17,712
Interest expense, net 24,089 9,972
------- --------
Income before minority interests and income taxes 483 7,740
Minority interests 208 561
------- --------
Income before income taxes 275 7,179
Income taxes 8 2,728
------- --------
Net income $ 267 $ 4,451
======= ========
Earnings per share
Basic $ 0.01 $ 0.18
======= ========
Diluted $ - $ 0.18
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 267 $ 4,451
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 23,888 9,508
Minority interests 208 561
Deferred income taxes 4 -
Changes in operating assets and liabilities:
Accounts receivable, net 2,553 (9,191)
Deposits, prepaid expenses, inventory and other (804) 5,239
Accounts payable 3,068 2,619
Accrued expenses and other liabilities 28,779 9,707
Accrued interest 634 3,001
Due from lessee (17,926) -
Income taxes receivable 26 43
-------- ---------
Net cash provided by operating activities 40,697 25,938
-------- ---------
Investing activities:
Investment in hotel properties, net (49,780) (213,593)
Purchases of intangible assets (1,334) -
Investments in and advances to affiliates, net (31,904) 62
Purchases of minority interests - (28)
Repayments of notes receivable 10,000 -
Change in restricted cash 537 (5)
-------- ---------
Net cash used in investing activities (72,481) (213,564)
-------- ---------
Financing activities:
Deferred costs (688) (1,062)
Proceeds from long-term debt 86,976 183,000
Principal payments on long-term debt (1,000) (324)
Proceeds from issuances of common stock, net 267 441
Dividends paid to stockholders (25,998) -
Distributions to minority investors (162) (163)
-------- ---------
Net cash provided by financing activities 59,395 181,892
-------- ---------
Effect of exchange rate changes on cash
and cash equivalents (2) (122)
-------- ---------
Net increase (decrease) in cash and cash equivalents 27,609 (5,856)
Cash and cash equivalents, beginning of period 4,180 83,429
-------- ---------
Cash and cash equivalents, end of period $ 31,789 $ 77,573
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
MeriStar Hospitality Corporation (the "Company") was formed on August 3, 1998,
as a result of the merger (the "Merger") of CapStar Hotel Company ("CapStar")
with and into American General Hospitality Corporation ("AGH"), a Maryland
corporation operating as a real estate investment trust ("REIT"). The Company
owns a portfolio of primarily upscale, full-service hotels, diversified by
franchise and brand affiliations, in the United States and Canada. Substantially
all of the Company's hotels are leased to and operated by MeriStar Hotels &
Resorts, Inc. ("OpCo"). As of March 31, 1999, the Company owned 117 hotels with
29,468 rooms.
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. 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.
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.
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires an enterprise to display comprehensive income
and its components in a financial statement to be included in an enterprise's
full set of annual financial statements or in the notes to interim financial
statements. Comprehensive income represents a measure of all changes in equity
of an enterprise that result from recognized transactions and other economic
events for the period other than transactions with owners in their capacity as
owners. Comprehensive income of the Company includes net income and other
comprehensive income from foreign currency items. For the three months ended
March 31, 1999, net income was $267, other comprehensive income (loss), net of
tax, was $(586), and comprehensive income (loss) was $(319). For the three
months ended March 31, 1998, net income was $4,451, other comprehensive income,
net of tax, was $507, and comprehensive income was $4,958.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," requires a public entity to report
selected information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Based on the
guidance provided in the standard, the Company has determined that its business
is conducted in one operating segment.
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."
This issue addresses lessor revenue and lessee expense recognition in interim
periods related to rental agreements which provide for minimum rental payments,
plus contingent rents based on the lessee's operations, such as a percentage of
sales in excess of an annual specified sales target. The EITF reached a final
consensus that lessors, such as the Company, should defer recognition of
contingent rental income until specified
6
<PAGE>
targets are met. The Company adopted EITF No. 98-9 effective July 1, 1998. The
effect of this change was to defer recognition of contingent rental income of
$29,384 for the three months ended March 31, 1999. This amount is included in
accrued expenses and other liabilities on the Company's condensed consolidated
balance sheet.
The effect of EITF No. 98-9 on the Company's financial statements for the three
months ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Before Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
------------- ------------- -------------
<S> <C> <C> <C>
Net operating income $ 53,956 $(29,384) $ 24,572
Interest expense (24,089) - (24,089)
Minority interests (3,104) 2,896 (208)
Income taxes (821) 813 (8)
-------- -------- --------
Net income $ 25,942 $(25,675) $ 267
======== ======== ========
Diluted funds from operations $ 53,999 $(28,571) $ 25,428
======== ======== ========
Retained Earnings $ 23,027 $(25,675) $ (2,648)
======== ======== ========
</TABLE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently in the process of evaluating the
effect this new standard will have on its financial statements.
<TABLE>
<CAPTION>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
New Credit Facility........................ $ 944,000 $ 910,000
Secured Facility........................... 250,000 250,000
Convertible Notes.......................... 172,500 172,500
Subordinated Notes......................... 201,750 149,826
Non-Recourse Facility...................... 52,750 52,750
Mortgage debt and other.................... 67,328 67,276
---------- ----------
$1,688,328 $1,602,352
========== ==========
</TABLE>
On March 18, 1999, the Company sold $55,000 aggregate principal amount (issue
price of $51,906, net of discount) of 8.75% senior subordinated notes due 2007,
generating net proceeds of $51,219 to the Company. The Company plans to use the
net proceeds to repay indebtedness under its New Credit Facility and to invest
in real estate ventures.
7
<PAGE>
Aggregate future maturities of the above obligations are as follows:
<TABLE>
<S> <C>
1999................................................... $ 6,161
2000................................................... 308,170
2001................................................... 23,513
2002................................................... 42,731
2003................................................... 704,994
Thereafter............................................. 602,759
----------
$1,688,328
==========
</TABLE>
4. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On March 17, 1999, the Company declared a first quarter dividend of $0.505 per
share of common stock ("Common Stock") and unit of limited partnership interest
("OP Unit") in the Company's subsidiary operating partnership. The dividend was
paid on April 30, 1999.
5. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share ("EPS"):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
BASIC EPS
COMPUTATION:
Net income $ 267 $ 4,451
Weighted average number
Of shares of common
Stock outstanding 46,796 24,889
------- -------
Basic earnings per share $ 0.01 $ 0.18
======= =======
DILUTED EPS
COMPUTATION:
Net income $ 267 $ 4,451
Minority interest, net of tax (120) -
------- -------
Adjusted net income $ 147 $ 4,451
======= =======
Weighted average number
of shares of common
stock outstanding 46,796 24,889
Common stock equivalents- OP Units 672 -
Common stock equivalents-
Stock options 87 240
------- -------
Total weighted average number
of diluted shares of
Common stock outstanding 47,555 25,129
======= =======
Diluted earnings per share $ - $ 0.18
======= =======
</TABLE>
8
<PAGE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest, net of capitalized interest of
$2,610 and $821, respectively................. $23,456 $8,301
Income taxes.................................. 55 2,685
Non-cash investing and financing activities:
OP Units issued in purchase of property and
equipment..................................... 1,488 --
Conversion of OP Units to common stock........ 1 --
</TABLE>
7. PARTICIPATING LEASE AGREEMENTS
The Company's Participating Leases have noncancelable remaining terms ranging
from 10 to 12 years , subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each percentage 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 ("CPI"). Percentage
rent applicable to other revenues is calculated by multiplying fixed percentages
by the total amounts of such revenues. Prior to the effect of EITF No. 98-9 (see
Note 2) total lease payments received on all of the Company's leases was $92,195
for the three months ended March 31, 1999. Lease payments received from OpCo for
the three months ended March 31, 1999 were $87,606.
8. ACQUISITION AND DISPOSITION
On January 11, 1999, the Company completed the acquisition of the Holiday Inn
Madison, a 194-room hotel located in Madison, Wisconsin, for a purchase price of
$12.0 million. The acquisition was funded using existing cash and borrowings on
the New Credit Facility.
On January 21, 1999, the Company sold The Lodge at the Seaport, a 77-room hotel
in Mystic, Connecticut, for $3.0 million.
9. INVESTMENTS IN AND ADVANCES TO AFFILIATES
On March 31, 1999, the Company invested $40,500 in MeriStar Investment
Partners, LP, a joint venture established to acquire upscale, full-service
hotels. The Company's investment is in the form of a preferred partnership
interest; the Company will receive a 16% preferred return on its investment.
The Company's ultimate equity investment in this partnership will be
up to $60,000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
MeriStar Hospitality Corporation (the "Company") owns a portfolio of primarily
upscale, full-service hotels, diversified by franchise and brand affiliations,
in the United States and Canada. Substantially all of the Company's hotels are
leased to and operated by MeriStar Hotels & Resorts, Inc. ("OpCo"), an
affiliated entity. As of March 31, 1999, the Company owned 117 hotels with
29,468 rooms, 109 of which are leased and operated by OpCo.
On August 3, 1998, CapStar Hotel Company ("CapStar") merged (the "Merger") with
and into American General Hospitality Corporation ("AGH"), with the surviving
entity being named "MeriStar Hospitality Corporation". In conjunction with the
Merger, CapStar also distributed on a pro rata basis to its stockholders all of
the capital stock of OpCo, which consisted of CapStar's hotel operations
(including leased hotels) and management business (the "Spin-Off").
The Merger was accounted for as a purchase for financial reporting purposes. In
accordance with the provisions of Accounting Principles Board Opinion No. 16,
"Business Combinations," CapStar was considered the acquiring enterprise for
financial reporting purposes. The Company established a new accounting basis for
AGH's assets and liabilities based on their fair values. For financial reporting
purposes, the results of operations of AGH were included in the Company's
statement of operations from August 3, 1998.
Prior to August 3, 1998, the Company's consolidated financial statements
included the operating results for the owned and leased hotels as well as
management fees from hotels managed for third-party owners. Subsequent to August
3, 1998, the Company owns certain hotels which are leased to hotel operators and
no longer manages hotels. Therefore, the financial statements for the periods
ended March 31, 1999 and 1998 reflect differing numbers of owned, leased, and
managed hotels throughout the periods. The following table outlines the
Company's portfolio of owned, leased and managed hotels:
<TABLE>
<CAPTION>
OWNED LEASED MANAGED TOTAL
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 117 29,468 -- -- -- -- 117 29,468
December 31, 1998 117 29,351 -- -- -- -- 117 29,351
March 31, 1998 55 14,414 45 6,410 40 6,899 140 27,723
December 31, 1997 47 12,019 40 5,687 27 4,631 114 22,337
</TABLE>
FINANCIAL CONDITION
MARCH 31, 1999 COMPARED WITH DECEMBER 31, 1998
Total assets increased by $94.9 million to $3,093.4 million at March 31, 1999
from $2,998.5 million at December 31, 1998. This growth was due mainly to the
Company's investment of $40.5 million in MeriStar Investment Partners, LP and
cash received from new subordinated notes issued in March 1999.
Total liabilities increased by $119.1 million to $1,828.0 million at March 31,
1999 from $1,708.9 million at December 31, 1998 due mainly to an increase in
long-term debt and the effect of deferring $29.4 million of revenue under the
Emerging Issues Task Force ("EITF") Issue No. 98-9. Long-term debt increased by
$86.0 million to $1,688.3 million at March 31, 1999 from $1,602.3 million at
December 31, 1998 as a result of borrowings under the New Credit Facility and
the issuance of $55 million of new subordinated notes.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Total revenue decreased by $79.5 million or 55.4% from $143.6 million in the
three-month period ended March 31, 1998 to $64.1 million in the three-month
period ended March 31, 1999. This decrease was primarily attributable to the
change in the types of revenues recorded in the Company's financial statements
in periods before and after the Merger. On a pro forma basis for the quarter,
revenue per available room ("RevPAR") increased 4.2 percent to $75.89 compared
to $72.86 in 1998. Same-store average daily rate ("ADR") for such hotels rose
1.3 percent from $105.65 on a pro forma basis in 1998 to $106.97 in 1999, and
occupancy increased to 70.9 percent, compared to 69.0 percent on a pro forma
basis in the same period in 1998.
Hotel department and other operating expenses decreased in 1999 because after
August 3, 1998, in conjunction with the Merger and Spin-Off, all hotel
operations were leased to OpCo.
Net interest expense increased to $24.1 million for the three months ended March
31, 1999 from $10.0 million for the same period in 1998. This increase was
attributable to the borrowings made to finance the acquisition of hotels during
1998 and the new debt associated with the Merger.
The White Paper on Funds From Operations ("FFO") approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 defines FFO as net income (loss) (computed in
accordance with generally accepted accounting principles ("GAAP")), excluding
gains (or losses) from debt restructuring and sales of properties, plus real
estate related depreciation and amortization and after comparable adjustments
for the Company's portion of these items related to unconsolidated entities and
joint ventures. The Company believes that FFO is helpful to investors as a
measure of the performance of an equity real estate investment trust ("REIT")
because, along with cash flow from operating activities, financing activities
and investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital expenditures
and to fund other cash needs. The Company computes FFO in accordance with
standards established by NAREIT which may not be comparable to FFO reported by
other REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than the
Company. FFO does not represent cash generated from operating activities
determined by GAAP and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's financial
performance or to cash flow from operating activities (determined in accordance
with GAAP) as a measure of the Company's liquidity, nor is it indicative of
funds available to fund the Company's cash needs, including its ability to make
cash distributions. FFO may include funds that may not be available for
management's discretionary use due to functional requirements to conserve funds
for capital expenditures and property acquisitions, and other commitments and
uncertainties. In addition, the Company includes the effect of adding back
deferred revenue resulting from EITF Issue No. 98-9, "Accounting for Contingent
Rent in Interim Financial Periods," in the calculation of FFO.
The following is a reconciliation between net income and FFO for the three
months ended March 31, 1999 (in thousands):
Net income $ 267
Effect of EITF No. 98-9 (net of income taxes) 28,571
Minority interest to Common OP Unit Holders 45
Interest on convertible debt 2,093
Hotel depreciation and amortization 23,023
-------
Diluted FFO $53,999
=======
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash generated
from operations, and funds from external borrowings and debt and equity
offerings. The Company expects to fund its continuing operations through cash
generated by its participating leases. The Company also expects to finance hotel
acquisitions and joint venture investments through a combination of internally
generated cash, external borrowings, and the issuance of units of the Company's
subsidiary operating partnership and/or common stock. Additionally, the Company
will be required, in order to maintain favorable tax treatment accorded to a
REIT under the Internal Revenue Code, to distribute to stockholders at least 95%
of its REIT taxable income. The Company expects to fund such distributions
through cash generated from operations or borrowings on the Company's credit
facilities.
Operating activities provided $40.7 million of net cash in the three-month
period ended March 31, 1999 mainly due to higher levels of depreciation and
amortization and accrued expenses and other liabilities. The Company used $72.5
million of cash in investing activities for the first three months of 1999,
primarily for capital expenditures and the investment in MeriStar Investment
Partners. Net cash provided by financing activities of $59.4 million resulted
primarily from net borrowings under the Company's credit facilities, offset
partially by dividends paid.
On March 18, 1999, the Company sold $55.0 million aggregate principal amount
(issue price of $51.9 million, net of discount) of 8.75% senior subordinated
notes due 2007, generating net proceeds of $51.2 million to the Company. The
Company plans to use the net proceeds to repay indebtedness under its New Credit
Facility and to invest in real estate ventures.
At March 31, 1999, the Company had available $56.0 million under the credit
facility's revolving facility and $47.2 million, under the non-recourse
facility. As of May 13, 1999, the Company has available $53.6 million under the
credit facility's revolving facility and $47.2 million under the non-recourse
facility.
Capital for renovation work is expected to be provided by a combination of
internally generated cash and external borrowings. Once initial renovation
programs for a hotel are completed, the Company expects to spend approximately
4% annually of hotel revenues for ongoing capital expenditure programs,
including room and facilities refurbishments, renovations, and furniture and
equipment replacements. During the three-month period ended March 31, 1999, the
Company incurred approximately $55 million of costs. The Company expects to
spend approximately $120 million during the remainder of 1999 to complete
initial renovation programs and to fund ongoing capital expenditures for its
owned hotels.
The Company believes cash generated by operations, together with borrowing
capacity under its credit facilities will be sufficient to fund its existing
working capital, ongoing capital expenditures, and debt service requirements.
The Company believes, however, that its future capital decisions will also be
made in response to specific acquisition and/or investment opportunities,
depending on conditions in the capital and other financial markets. Accordingly,
the Company may consider increasing its borrowing capacity or issuing additional
debt or equity securities, the proceeds of which could be used to finance
acquisitions or investments, or to refinance existing debt.
SEASONALITY
Demand in the lodging industry is affected by recurring seasonal patterns.
Demand is lower in the winter months due to decreased travel and higher in the
spring and summer months during peak travel season. 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 is in the process of conducting a review of 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.
12
<PAGE>
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 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 analysis stage, and expects to
complete this stage in May 1999. As the Company progresses through the analysis
stage, it has also begun a portion of its modification, repair or replacement
work. The subsequent stages are expected to be completed as follows:
modification, repair or replacement -- August 1999; and testing -- September
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 these outside parties' services in
May 1999. Also, the Company expects to develop 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 September 30, 1999, which is prior to any anticipated impact on its
operating systems. Historical costs incurred to address the Year 2000 problem
approximate $0.8 million. The Company has not yet completed a final cost
estimate related to fixing Year 2000 issues, but an initial estimate of these
remediation costs for its properties is $10-15 million. This cost estimate is
based on the Company's preliminary 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 participating lease revenue earned from the lessees of its
properties. These participating lease revenue amounts are based upon revenues
generated at the leased properties. To the extent that the Year 2000 problems
materially affect the conduct of operations at those properties, it is likely
that those lessees' revenues would be affected, and that the Company's
participating lease revenues would ultimately be affected.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on long-
term debt obligations that impact the fair value of these obligations. The
Company's policy is to manage interest rates through the use of a combination of
fixed and variable rate debt. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve its objectives, the
Company borrows at a combination of fixed and variable rates, and may enter into
derivative financial instruments such as interest rate swaps, caps and treasury
locks in order to mitigate its interest rate risk on a related financial
instrument. The Company does not enter into derivative or interest rate
transactions for speculative purposes. The Company has no cash flow exposure
due to general interest rate changes for its fixed long-term debt obligations.
All items described are non-trading.
The table below presents the principal amounts, weighted average interest rates,
and fair values by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes (dollars in thousands).
<TABLE>
<CAPTION>
LONG-TERM DEBT
--------------------------------------------------------------------
AVERAGE AVERAGE
INTEREST VARIABLE RATE
EXPECTED MATURITY FIXED RATE RATE RATE INTEREST
- ----------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
1999 $ 5,161 8.0% $ 1,000 7.1%
2000 3,420 8.0% 304,750 6.6%
2001 6,513 8.0% 17,000 7.1%
2002 10,731 8.0% 32,000 7.1%
2003 2,994 8.0% 702,000 7.0%
Thereafter 412,759 7.2% 190,000 7.1%
---------- -------- ---------- --------
Total $441,578 7.8% $1,246,750 7.0%
========== ======== ========== ========
Fair Value at 3/31/99 $441,578 $1,246,750
========== ==========
</TABLE>
During 1998, the Company entered into six separate $100 million swap agreements
with financial institutions in order to hedge against the impact future interest
rate fluctuations may have on the Company's existing floating rate debt
instruments. The swap agreements effectively fix 30-day LIBOR at between 4.9%
and 5.4%. During the period ended March 31, 1999, the Company made payments
totaling $233,000 relating to these hedges. This amount is included in interest
expense. The hedge agreements terminate at various times between November 1999
and September 2000.
On February 18, 1997, the Company entered into a $40 million swap agreement and
a $40 million collar agreement with Lehman Brothers Special Financing, Inc. and
Canadian Imperial Bank of Commerce, respectively. The swap agreement
effectively fixes 30-day LIBOR at 5.9% while the collar agreement creates a 30-
day London Interbank Offered Rate ("LIBOR") floor of 5.1% and ceiling of 7.5%.
During the three-month periods ended March 31, 1999 and 1998 the Company made
payments totaling $41,000 and $8,000, respectively relating to these hedges.
This amount is included in interest expense. Both hedge agreements terminate in
September 1999.
Additionally, in anticipation of the August 1997 offering of $150 million
aggregate principal amount of its 8.75% senior subordinated notes due 2007 (the
"Subordinated Notes"), the Company entered into separate hedge transactions
during June and July 1997. Upon completion of the Subordinated Notes offering,
the Company terminated the underlying swap agreements, resulting in a net
payment to the Company of $836,000. This amount was deferred and is being
recognized as a reduction to interest expense over the life of the underlying
debt. As a result, the effective interest rate on the Subordinated Notes has
been reduced to 8.69%.
Although the Company conducts business in Canada, the Canadian operations were
not material to the Company's consolidated financial position, results of
operations or cash flows as of March 31, 1999 or for the three-months then
ended. Additionally, foreign currency transaction gains and losses were not
material to the Company's results of operations for the three-months ended March
31, 1998. Accordingly, the Company was not subject to material foreign currency
exchange rate risk from the effects that exchange rate movements of foreign
currencies would have on the Company's future costs or on future cash flows it
would receive from its foreign subsidiaries. To date, the Company has not
entered into any significant foreign currency forward exchange contracts or
other derivative financial instruments to
14
<PAGE>
hedge the effects of adverse fluctuations in foreign currency exchange rates.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
Certain statements in this Form 10-Q and in the future filings by the Company
with the SEC, in the Company's press releases, and in oral statements made by or
with the approval of an authorized executive officer constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievement expressed or implied by such forward-looking
statements. Such factors include: the ability of the Company to implement its
acquisition strategy and operating strategy; the Company's ability to manage
rapid expansion; changes in economic cycles; competition from other hospitality
companies; changes in the laws and governmental regulations applicable to the
Company; and special risks associated with the Merger (including the integration
of the Company 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 and filed on August 14, 1998, regarding
the merger of CapStar Hotel Company with and into American General Hospitality
Corporation.
15
<PAGE>
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 Hospitality Corporation
/s/ John Emery
John Emery
Chief Financial Officer
Dated: May 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 31,789
<SECURITIES> 0
<RECEIVABLES> 491
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,963,402
<DEPRECIATION> 106,757
<TOTAL-ASSETS> 3,093,388
<CURRENT-LIABILITIES> 0
<BONDS> 1,688,328
0
0
<COMMON> 468
<OTHER-SE> 1,126,364
<TOTAL-LIABILITY-AND-EQUITY> 3,093,388
<SALES> 0
<TOTAL-REVENUES> 64,093
<CGS> 0
<TOTAL-COSTS> 496
<OTHER-EXPENSES> 39,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,089
<INCOME-PRETAX> 275
<INCOME-TAX> 8
<INCOME-CONTINUING> 267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 267
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.00
</TABLE>
