<PAGE>
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 1-11903
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
November 8, 1999 was 47,725,699.
<PAGE>
MERISTAR HOSPITALITY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II. OTHER INFORMATION 19
ITEM 5: OTHER INFORMATION 19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 19
</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>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
Assets
Investments in hotel properties $3,091,676 $2,957,543
Accumulated depreciation (154,771) (83,797)
------------------ -----------------
2,936,905 2,873,746
Cash and cash equivalents 3,024 4,180
Accounts receivable, net 451 3,044
Income taxes receivable - 339
Deposits 1,618 1,618
Prepaid expenses and other 3,100 2,259
Note receivable from Lessee 56,000 67,000
Due from Lessee 18,496 7,437
Investments in and advances to affiliates 40,712 8,787
Restricted cash 18,610 11,879
Intangible assets, net of accumulated amortization
of $4,786 and $2,666 $ 19,712 18,171
------------------ -----------------
$3,098,628 $2,998,460
================== =================
Liabilities, Minority Interests and Stockholders' Equity
Accounts payable $ 1,405 $ 2,111
Accrued expenses and other liabilities 110,857 45,549
Accrued interest 29,274 24,472
Income taxes payable 598 -
Dividends and distributions payable 26,467 25,988
Deferred income taxes 8,593 8,453
Long-term debt 1,662,606 1,602,352
------------------ -----------------
Total liabilities 1,839,800 1,708,925
------------------ -----------------
Minority interests 117,408 138,543
Stockholders' Equity:
Common stock, par value $0.01 per share
Authorized - 100,000 shares
Issued and outstanding - 47,683 and 46,718 shares 477 467
Additional paid-in capital 1,161,799 1,133,357
Retained earnings (15,204) 23,655
Accumulated other comprehensive income (5,652) (6,487)
------------------ -----------------
Total stockholders' equity 1,141,420 1,150,992
------------------ -----------------
$3,098,628 $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 Nine Months Ended
September 30, September 30,
------------ -------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Participating lease revenue $101,676 $ 44,100 $236,466 $ 44,100
Hotel operations - 57,811 - 380,480
Office rental and other revenues 1,538 2,390 4,896 7,468
-------- -------- -------- --------
Total revenue 103,214 104,301 241,362 432,048
-------- -------- -------- --------
Hotel operating expenses - 22,146 - 142,662
Office rental and other operating expenses 474 9,375 1,458 52,144
Administrative and general 1,306 10,241 4,070 60,803
Property taxes, insurance and other 10,549 14,994 36,543 53,264
Depreciation and amortization 25,398 17,726 73,864 37,572
Spin-off costs - 7,345 - 8,481
-------- -------- -------- --------
Total operating expenses 37,727 81,827 115,935 354,926
-------- -------- -------- --------
Net operating income 65,487 22,474 125,427 77,122
Interest expense, net 24,125 17,045 74,621 39,120
-------- -------- -------- --------
Income before minority interests, income taxes,
extraordinary loss and cumulative effect of
accounting change 41,362 5,429 50,806 38,002
Minority interests 2,976 (32) 4,822 1,814
-------- -------- -------- --------
Income before income taxes, extraordinary
loss and cumulative effect of accounting change 38,386 5,461 45,984 36,188
Income taxes 677 1,593 829 12,964
-------- -------- -------- --------
Income before extraordinary loss and
cumulative effect of accounting change 37,709 3,868 45,155 23,224
Extraordinary loss from early extinguishment
of debt, net of tax benefit 4,532 4,080 4,532 4,080
Cumulative effect of accounting change, net of
tax benefit - 921 - 921
-------- -------- -------- --------
Net income $ 33,177 $ (1,133) $ 40,623 $ 18,223
======== ======== ======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share:
Basic:
Income before extraordinary loss and
cumulative effect of accounting change $ 0.79 $ 0.10 $ 0.96 $ 0.79
Extraordinary loss (0.10) (0.11) (0.10) (0.14)
Cumulative effect of accounting change - (0.02) - (0.03)
------ ------ ------ ------
Net income $ 0.69 $(0.03) $ 0.86 $ 0.62
====== ====== ====== ======
Diluted:
Income before extraordinary loss and
cumulative effect of accounting change $ 0.75 $ 0.08 $ 0.94 $ 0.74
Extraordinary loss (0.08) (0.09) (0.09) (0.13)
Cumulative effect of accounting change - (0.02) - (0.03)
------ ------ ------ ------
Net income $ 0.67 $(0.03) $ 0.85 $ 0.58
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 40,623 $ 18,223
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 73,864 37,572
Non-cash spin-off costs - 3,205
Extraordinary loss on early extinguishment of debt 4,625 6,163
Cumulative effect of accounting change - 1,485
Minority interests 4,822 1,814
Deferred income taxes 140 1,802
Changes in operating assets and liabilities:
Accounts receivable, net 2,593 27,196
Deposits, prepaid expenses and other (841) 6,532
Income tax receivable 339 -
Intangible assets, net (114) -
Accounts payable (706) (5,287)
Accrued expenses and other liabilities 65,308 4,076
Accrued interest 4,802 14,348
Income taxes payable 598 11,447
Due from lessee (11,059) (20,333)
--------- ---------
Net cash provided by operating activities 184,994 108,243
--------- ---------
Investing activities:
Investment in hotel properties, net (134,096) (467,612)
Purchases of intangible assets - (5,425)
Investments in and advances to affiliates, net (31,925) (652)
Purchases of minority interests (72) (44)
Funding of notes receivable - (55,706)
Repayments of notes receivable 11,000 -
Change in restricted cash (6,731) (8,096)
--------- ---------
Net cash used in investing activities (161,824) (537,535)
--------- ---------
Financing activities:
Deferred costs (6,760) (4,251)
Proceeds from issuance of long-term debt 381,923 372,865
Principal payments on long-term debt (321,381) -
Proceeds from issuance of common stock, net 1,499 1,660
Spin-off to stockholders - (23,745)
Dividends paid to stockholders (79,165) -
Distributions to minority investors (445) (488)
--------- ---------
Net cash (used in) provided by financing activities (24,329) 346,041
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 3 195
--------- ---------
Net decrease in cash and cash equivalents (1,156) (83,056)
Cash and cash equivalents, beginning of period 4,180 83,429
--------- ---------
Cash and cash equivalents, end of period $ 3,024 $ 373
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 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 and nine months
ended September 30, 1999, net income was $33,177 and $40,623, respectively;
other comprehensive income, net of tax, was $38 and $835, respectively; and
comprehensive income was $33,215 and $41,458, respectively. For the three and
nine months ended September 30, 1998, net income was $(1,133) and $18,223,
respectively; other comprehensive income, net of tax, was $(3,792) and $(4,832),
respectively; and comprehensive income was $(4,925) and $13,391, respectively.
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. Based on the guidance provided in the standard, the Company has
determined that its business is conducted in one operating segment. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Revenues for Canadian operations totaled
$2,207 and $5,504 for the three and nine months ended September 30, 1999,
respectively.
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
7
<PAGE>
the lessee's operations, such as a percentage of sales in excess of an annual
specified sales target. The EITF requires the deferral of contingent rental
income until specified targets are met. The EITF reached a final consensus that
lessors, such as the Company, should defer recognition of contingent rental
income until specified targets are met. This accounting pronouncement relates
only to the Company's recognition of lease revenue in interim periods for
financial reporting purposes; it has no effect on the timing of rent payments
under the Company's leases. The Company adopted EITF No. 98-9 effective July 1,
1998. The effect of this change was to recognize $10,420 of additional
contingent rental income for the three months ended September 30, 1999 and to
defer recognition of contingent rental income of $45,894 for the nine months
ended September 30, 1999. As of September 30, 1999 $45,894 is included in
accrued expenses and other liabilities on the Company's condensed consolidated
balance sheets for deferred contingent rental income.
The effect of EITF No. 98-9 on the Company's financial statements is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------
Prior to 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 $ 55,067 $10,420 $ 65,487
Interest expense (24,125) - (24,125)
Minority interests (2,439) (537) (2,976)
Income taxes (537) (140) (677)
Extraordinary loss, net of tax (4,532) - (4,532)
-------- ------- --------
Net income $ 23,434 $ 9,743 $ 33,177
======== ======= ========
Diluted funds from operations $ 56,679 $10,280 $ 66,959
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------
Prior to 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 $171,321 $(45,894) $125,427
Interest expense (74,621) - (74,621)
Minority interests (9,204) 4,382 (4,822)
Income taxes (1,717) 888 (829)
Extraordinary loss, net of tax (4,532) - (4,532)
-------- -------- --------
Net income $ 81,247 $(40,624) $ 40,623
======== ======== ========
Diluted funds from operations $171,709 $(45,006) $126,703
======== ======== ========
Retained earnings $ 25,420 $(40,624) $(15,204)
======== ======== ========
</TABLE>
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, the FASB issued SFAS No. 137 which amended SFAS
No. 133 to defer the effective date to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company is currently in the process of
evaluating the effect this new standard will have on its financial statements.
8
<PAGE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
New Credit Facility........................... $ 893,000 $ 910,000
New Secured Facility.......................... 330,000 -
Secured Facility.............................. - 250,000
Subordinated Notes............................ 201,944 149,826
Convertible Notes............................. 172,500 172,500
Mortgage debt and other....................... 65,162 67,276
Non-Recourse Facility......................... - 52,750
---------- ----------
$1,662,606 $1,602,352
========== ==========
</TABLE>
On August 12, 1999, the Company completed a $330.0 million 10-year non-recourse
financing ("New Secured Facility") secured by a portfolio of 19 hotels. The
loan bears a fixed interest rate of 7.75% and matures in 2009. The Company used
the net proceeds to repay the Secured Facility and the Non-Recourse Facility.
In connection with obtaining the New Secured Facility, the Company incurred
approximately $4,625 of expense ($4,532 net of tax effect), as an extraordinary
loss associated with the write-off of unamortized deferred financing costs
related to the repayment of the Secured Facility and Non-Recourse Facility.
Aggregate future maturities of the above obligations are as follows:
1999..................................... $ 2,208
2000..................................... 5,924
2001..................................... 23,516
2002..................................... 42,735
2003..................................... 654,998
Thereafter............................... 933,225
--------
$1,662,606
==========
4. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On September 15, 1999, the Company declared a third 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 October 29, 1999.
9
<PAGE>
5. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share ("EPS"):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EPS
COMPUTATION:
Income before extraordinary item $37,709 $ 3,868 $45,155 $23,224
Weighted average number
of shares of common
stock outstanding 47,683 38,776 47,274 29,523
-------- ------ ------- -------
Basic earnings per share $ 0.79 $ 0.10 $ 0.96 $ 0.79
======== ======= ======= =======
DILUTED EPS
COMPUTATION:
Income before extraordinary item $37,709 $ 3,868 $45,155 $23,224
Minority interest, net of tax 3,358 (301) 4,291 (351)
Interest on convertible debt, net of
tax 2,094 - - -
-------- ------- ------- -------
Adjusted net income $43,161 $ 3,567 $49,446 $22,873
======== ======= ======= =======
Weighted average number
of shares of common
stock outstanding 47,683 38,776 47,274 29,523
Common stock equivalents-
OP Units 5,009 3,318 4,981 744
Common stock equivalents-
Stock options 89 193 136 495
Convertible debt 5,074 - - -
-------- ------- ------- -------
Total weighted average number
of diluted shares of
common stock outstanding 57,855 42,287 52,391 30,762
-------- ------- ------- -------
Diluted earnings per share $ 0.75 $ 0.08 $ 0.94 $ 0.74
======== ======= ======= =======
</TABLE>
10
<PAGE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash paid for interest and income taxes:
Interest, net of capitalized interest of
$8,068 and $2,133, respectively $69,819 $ 24,744
Income taxes 435 97
Non-cash investing and financing activities:
OP Units issued in purchase of property and
equipment 1,488 -
Conversion of OP Units to common stock 26,951 -
Book value of assets distributed to spun-off affiliate - 41,449
Book value of liabilities distributed to spun-off affiliate - (11,768)
Book value of debt distributed to spun-off affiliate - (1,116)
----------
Book value of net assets distributed to spun-off affiliate 28,565
==========
Fair value of assets acquired in Merger - 1,306,018
Fair value of liabilities assumed in Merger - (26,167)
Fair value of debt assumed in Merger - (515,952)
----------
Fair value of net assets acquired in Merger 763,899
==========
</TABLE>
7. PARTICIPATING LEASE AGREEMENTS
The Company's Participating Leases have noncancelable remaining terms ranging
from 9 to 11 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. Total lease payments on all of the
Company's leases were $87,072 and $278,176 for the three and nine months ended
September 30, 1999, respectively. Lease payments from OpCo for the three and
nine months ended September 30, 1999 were $84,377 and $263,851, respectively.
11
<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 Hotel & Resorts, Inc. ("OpCo"), an affiliated
entity. As of September 30, 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 September 30, 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>
September 30, 1999 117 29,468 --- --- --- --- 117 29,468
December 31, 1998 117 29,351 --- --- --- --- 117 29,351
September 30, 1998 110 28,044 --- --- --- --- 110 28,044
December 31, 1997 47 12,019 40 5,687 27 4,631 114 22,337
</TABLE>
FINANCIAL CONDITION
SEPTEMBER 30, 1999 COMPARED WITH DECEMBER 31, 1998
Total assets increased by $100.1 million to $3,098.6 million at September 30,
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 net additional investments in hotel properties.
Total liabilities increased by $130.9 million to $1,839.8 million at September
30, 1999 from $1,708.9 million at December 31, 1998 due mainly to an increase in
long-term debt and the effect of deferring $45.9 million of revenue under the
provisions of Emerging Issues Task Force ("EITF") Issue No. 98-9. Long-term
debt increased by $60.2 million to $1,662.6 million at September 30, 1999 from
$1,602.4 million at December 31, 1998 as a result of borrowing $330 million
under the New Secured Facility, the issuance of $55 million of new subordinated
notes, offset by net payments of $17.0 million on the New Credit Facility and
the repayment of the $250 million Secured Facility and the $52.8 million Non-
Recourse Facility.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenue decreased by $1.1 million from $104.3 million in the three months
ended September 30, 1998 to $103.2 million in the three months ended September
30, 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 3.3 percent to $72.36 compared to $70.08 in 1998.
Same-store average daily rate ("ADR") for such hotels rose 2.2 percent from
$95.04 on a pro forma basis in 1998 to $97.09 in 1999, and occupancy increased
1.1 percent to 74.5 percent compared to 73.7 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 then-existing
hotel operations were leased to OpCo.
Net interest expense increased to $24.1 million for the three months ended
September 30, 1999 from $17.0 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, offset by a lower
average interest rate.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total revenue decreased by $190.6 million from $432.0 million in the nine months
ended September 30, 1998 to $241.4 million in the nine months ended September
30, 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, revenue per available room ("RevPAR")
increased 3.8 percent to $76.11 compared to $73.29 in 1998. Same-store average
daily rate ("ADR") for such hotels rose 1.4 percent from $100.84 on a pro forma
basis in 1998 to $102.28 in 1999, and occupancy increased 2.3 percent to 74.4
percent compared to 72.7 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 then-existing
hotel operations were leased to OpCo.
Net interest expense increased to $74.6 million for the nine months ended
September 30, 1999 from $39.1 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, offset by a lower
average interest rate.
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
13
<PAGE>
Periods," in the calculation of FFO.
The following is a reconciliation between income before extraordinary item and
diluted FFO for the three and nine months ended September 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Income before extraordinary item $ 37,709 $ 45,155
Effect of EITF No. 98-9 (net of income taxes) (10,280) 45,006
Minority interest to Common OP Unit Holders 2,835 4,398
Interest on convertible debt 2,094 6,214
Hotel depreciation and amortization 24,321 70,936
-------- --------
Diluted FFO $ 56,679 $171,709
======== ========
</TABLE>
14
<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
must, in order to maintain favorable tax treatment accorded to a REIT under the
Internal Revenue Code, 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 $185.0 million of net cash in the nine months
ended September 30, 1999 mainly due to higher levels of earnings, depreciation
and amortization, and accrued expenses and other liabilities. The Company used
$161.8 million of cash in investing activities for the first nine months of
1999, primarily for capital expenditures and a preferred equity investment in a
joint venture established to acquire upscale, full-service hotels. Net cash used
in financing activities of $24.3 million resulted primarily from dividends paid,
partially offset by net borrowings under the Company's credit facilities.
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 used the net proceeds to repay indebtedness under its New Credit
Facility and to invest in real estate ventures.
On August 12, 1999, the Company completed a $330.0 million 10-year non-recourse
financing ("New Secured Facility") secured by a portfolio of 19 hotels. The
loan bears a fixed interest rate of 7.75% and matures in 2009. The Company used
the net proceeds to repay the Secured Facility and the Non-Recourse Facility.
At September 30, 1999, the Company had available $105.0 million under the New
Credit Facility. As of November 8, 1999, the Company has available $80 million
under the New Credit 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 nine months ended September 30, 1999, the
Company spent approximately $134.1 million on capital expenditures. The Company
expects to spend approximately $40.9 million during the remainder of 1999 to
complete initial renovation programs and to fund ongoing capital expenditures
for its owned hotels.
The Company's Board of Directors has authorized the repurchase of up to five
million shares of its common stock from time to time in open market or privately
negotiated transactions. The stock repurchase is subject to prevailing market
conditions and other considerations. The Company expects the program to be
funded primarily through selected asset sales.
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.
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
15
<PAGE>
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 hotel properties contain various information technology and
embedded technology systems. Both types of systems contain microprocessors and
microcontrollers that must be assessed for Year 2000 compliance. The Company
has developed a comprehensive implementation plan to address the potential Year
2000 problems caused by such systems. This plan involves six stages: increase
awareness of issue; assign responsibility for coordinating response to issue;
information collection; analysis; modification, repair or replacement; and
testing. The Company is currently in its modification, repair or replacement
and testing stages and expects to complete these stages in December.
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 these outside 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
$1.1 million. The Company's current estimate of these remediation costs to fix
Year 2000 issues is $6-7 million. This cost estimate is based on the Company's
current assessment, and will be refined and adjusted as the Company continues to
complete the stages of its implementation plan to address the potential Year
2000 problems.
Based on its preliminary assessment, the Company believes that its risks of Year
2000 non-compliance (that is, its "most reasonably likely worst case scenario"),
with modifications to existing software and converting to new software, will not
pose significant operational problems for the Company's computer systems as so
modified and converted. If, however, such modifications and conversions are not
completed timely, the Year 2000 problem could have a material impact on the
Company's financial position and operations. The Company's operations are highly
dependent upon 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.
16
<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).
Long-term Debt
---------------------------------------------------------
Average Variable Average
Expected Maturity Fixed Rate Interest Rate Rate Interest Rate
- ----------------- ---------- ------------- --------- -------------
1999 $ 2,208 8.0% $ 0 0%
2000 3,924 8.0% 2,000 7.3%
2001 6,516 8.0% 17,000 7.3%
2002 10,735 8.0% 32,000 7.3%
2003 2,998 8.0% 652,000 7.3%
Thereafter 743,225 7.3% 190,000 7.3%
---------- ------------- --------- -------------
Total $769,606 7.4% $893,000 7.3%
========== ============= ========= =============
During October 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 three and nine months ended September 30,
1999, the Company received $177 and $247, respectively, relating to these
hedges. These amounts are included as a reduction to interest expense. The hedge
agreements terminate at various times between November 1999 and September 2000.
During September 1999, the Company entered into two separate $100 million swap
agreements effectively replacing two $100 million swap agreements that were to
expire in November 1999. The swap agreements effectively fix 30-day LIBOR at
6.0%. There were no payments made during the three and nine months ended
September 30, 1999 relating to these hedges. The hedge agreements terminate in
September 2001.
In anticipation of the August 1999 $330.0 million 10-year non-recourse financing
("New Secured Facility"), the Company entered into two separate hedge
transactions during July 1999. Upon completion of the New Secured Facility, the
Company terminated the underlying treasury lock agreements, resulting in a net
payment to the Company of $5,142. 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 New Secured Facility has
been reduced to 7.59%.
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 months ended September 30, 1999 and 1998 the Company made total payments
of $65 and $23, respectively, relating to these hedges. During the nine months
ended September 30, 1999 and 1998 the Company made total payments of $246 and
$62, respectively, relating to these hedges. These amounts are included in
interest expense. Both hedge agreements terminated 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
17
<PAGE>
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. 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 September 30, 1999 or for the three or nine
months then ended. Additionally, foreign currency transaction gains and losses
were not material to the Company's results of operations for the three or nine
months ended September 30, 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 hedge the effects of
adverse fluctuations in foreign currency exchange rates.
18
<PAGE>
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
<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
Dated: November 9, 1999
/s/ John Emery
---------------------
John Emery
Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,024
<SECURITIES> 0
<RECEIVABLES> 451
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,091,676
<DEPRECIATION> 154,771
<TOTAL-ASSETS> 3,098,628
<CURRENT-LIABILITIES> 0
<BONDS> 1,662,606
0
0
<COMMON> 477
<OTHER-SE> 1,140,943
<TOTAL-LIABILITY-AND-EQUITY> 3,098,628
<SALES> 0
<TOTAL-REVENUES> 241,362
<CGS> 0
<TOTAL-COSTS> 1,458
<OTHER-EXPENSES> 119,299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,621
<INCOME-PRETAX> 45,984
<INCOME-TAX> 829
<INCOME-CONTINUING> 45,155
<DISCONTINUED> 0
<EXTRAORDINARY> 4,532
<CHANGES> 0
<NET-INCOME> 40,623
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
