<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 June 30, 2000 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
August 8, 2000 was 45,988,691.
<PAGE>
MERISTAR HOSPITALITY CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 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
MARKET RISK 15
PART II. OTHER INFORMATION 17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 17
ITEM 5: OTHER INFORMATION 17
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 17
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>
June 30, 2000 December 31, 1999
-------------- ------------------
(unaudited)
Assets
<S> <C> <C>
Investments in hotel properties $3,164,046 $3,118,723
Accumulated depreciation (232,136) (182,430)
---------- -----------------
2,931,910 2,936,293
Cash and cash equivalents 603 2,556
Accounts receivable, net 4,966 1,328
Prepaid expenses and other 842 9,137
Note receivable from Lessee - 57,110
Due from Lessee 22,925 11,476
Investments in and advances to affiliates 45,596 40,085
Restricted cash 18,665 17,188
Intangible assets, net of accumulated amortization
of $7,707 and $5,742 18,141 19,028
---------- -----------------
$3,043,648 $3,094,201
========== =================
Liabilities, Minority Interests and Stockholders' Equity
Accounts payable, accrued expenses and other liabilities $ 134,952 $ 58,055
Accrued interest 30,236 31,380
Income taxes payable 615 730
Dividends and distributions payable 25,331 26,263
Deferred income taxes 9,401 9,345
Long-term debt 1,632,490 1,676,771
---------- -----------------
Total liabilities 1,833,025 1,802,544
---------- -----------------
Minority interests 114,459 121,055
Stockholders' Equity:
Preferred stock, par value $0.01 per share
Authorized - 100,000 shares - -
Common stock, par value $0.01 per share
Authorized - 250,000 shares
Issued - 48,385 and 47,664 shares 484 477
Additional paid-in capital 1,175,680 1,164,750
Retained earnings (24,734) 16,874
Accumulated other comprehensive income (5,781) (5,247)
Unearned stock-based compensation (8,765) -
Less common stock held in treasury - 2,398 and 407
shares (40,720) (6,252)
---------- -----------------
Total stockholders' equity 1,096,164 1,170,602
---------- -----------------
$3,043,648 $3,094,201
========== =================
</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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Participating lease revenue $79,508 $71,979 $145,031 $134,790
Office rental and other revenues 2,031 2,076 3,608 3,358
------- ------- -------- --------
Total revenue 81,539 74,055 148,639 138,148
------- ------- -------- --------
Operating expenses:
Office rental and other operating expenses 737 488 1,343 984
Administrative and general 2,379 1,208 4,150 2,743
Property taxes, insurance and other 12,402 12,413 25,093 26,015
Depreciation and amortization 28,113 24,578 54,743 48,466
------- ------- -------- --------
Total operating expenses 43,631 38,687 85,329 78,208
------- ------- -------- --------
Net operating income 37,908 35,368 63,310 59,940
Interest expense, net 29,657 26,407 58,417 50,496
------- ------- -------- --------
Income before minority interests, income taxes,
gain on sale of assets and extraordinary gain 8,251 8,961 4,893 9,444
Minority interests 1,109 1,638 1,247 1,846
------- ------- -------- --------
Income before income taxes, gain on sale of
assets and extraordinary gain 7,142 7,323 3,646 7,598
Income taxes 143 144 73 152
------- ------- -------- --------
Income before gain on sale of assets and
extraordinary gain 6,999 7,179 3,573 7,446
Gain on sale of assets, net of tax effect of $70 3,425 - 3,425 -
Extraordinary gain on early extinguishment
of debt, net of tax effect of $62 - - 3,054 -
------- ------- -------- --------
Net income $10,424 $ 7,179 $ 10,052 $ 7,446
======= ======= ======== ========
Earnings per share:
Basic:
Income before extraordinary gain $ 0.22 $ 0.15 $ 0.14 $ 0.16
Extraordinary gain - - 0.07 -
------- ------- -------- --------
Net income $ 0.22 $ 0.15 $ 0.21 $ 0.16
======= ======= ======== ========
Diluted:
Income before extraordinary gain $ 0.22 $ 0.15 $ 0.14 $ 0.16
Extraordinary gain - - 0.07 -
------- ------- -------- --------
Net income $ 0.22 $ 0.15 $ 0.21 $ 0.16
======= ======= ======== ========
</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>
Six Months Ended
June 30,
--------
2000 1999
---- ----
Operating activities:
<S> <C> <C>
Net income $ 10,052 $ 7,446
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 54,743 48,466
Gain on sale of assets, before tax effect (3,495) -
Extraordinary gain on early extinguishment of debt,
before tax effect (3,116) -
Minority interests 1,247 1,846
Amortization of unearned stock based compensation 395 -
Deferred income taxes 56 38
Changes in operating assets and liabilities:
Accounts receivable, net (3,638) 686
Prepaid expenses and other 8,295 (34)
Due from Lessee (11,449) (10,716)
Accounts payable, accrued expenses and other liabilities 69,253 59,915
Accrued interest (1,144) (2,667)
Income tax payable (115) 967
--------- ---------
Net cash provided by operating activities 121,084 105,947
--------- ---------
Investing activities:
Investment in hotel properties, net (61,243) (90,964)
Proceeds from disposition of assets 24,148 -
Purchases of intangible assets - (1,364)
Investments in and advances to affiliates, net (5,511) (31,898)
Repayment of notes receivable 57,110 19,000
Change in restricted cash (1,477) (783)
--------- ---------
Net cash provided by (used in) investing activities 13,027 (106,009)
--------- ---------
Financing activities:
Deferred costs (1,412) (752)
Proceeds from issuance of long-term debt 100,194 81,918
Principal payments on long-term debt (141,359) (2,132)
Proceeds from issuance of common stock, net 1,207 1,297
Purchase of OP units (7,535) -
Purchase of treasury stock (34,468) -
Dividends paid to stockholders (52,366) (52,560)
Distributions to minority investors (303) (282)
--------- ---------
Net cash (used in) provided by financing activities (136,042) 27,489
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (22) 59
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,953) 27,486
Cash and cash equivalents, beginning of period 2,556 4,180
--------- ---------
Cash and cash equivalents, end of period $ 603 $ 31,666
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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 June 30, 2000, the Company owned 114
hotels with 29,090 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, 1999. Certain 1999 amounts
have been reclassified to conform to the 2000 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 six months
ended June 30, 2000, net income was $10,424 and $10,052, respectively, other
comprehensive income, net of tax, was $(379) and $(534), respectively, and
comprehensive income was $10,045 and $9,518, respectively. For the three and six
months ended June 30, 1999, net income was $7,179 and $7,446, respectively,
other comprehensive income, net of tax, was $1,383 and $797, repectively and
comprehensive income was $8,562 and $8,243, respectively.
SFAS 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 $1,753 and $3,178 for the
three and six months ended June 30, 2000. Revenues for Canadian operations for
the three and six months ended June 30, 1999, were $1,879 and $3,297
respectively.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements". SAB No.
101 addresses lessor revenue 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. SAB No. 101 requires the deferral of contingent
rental income until the specified targets are met. This accounting pronouncement
relates only to the
6
<PAGE>
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. During 1999, the Company's interim financial results were
reported in accordance with the requirements of SAB No. 101. The effect of SAB
No. 101 was to defer recognition of contingent rental income of $26,643 and
$26,930 for the three months ended June 30, 2000 and 1999, respectively.
Contingent rental income of $59,322 and $56,314 was deferred for the six months
ended June 30, 2000 and 1999, respectively. As of June 30, 2000 and 1999, these
amounts are included in accounts payable, accrued expenses and other liabilities
on the Company's condensed consolidated balance sheets.
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 balance sheet 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. In June 2000, the FASB issued SFAS No. 138 which provides
additional guidance and amendments to SFAS No. 133. The Company is currently in
the process of evaluating the effect this new standard will have on its
financial statements.
3. NOTE RECEIVABLE FROM LESSEE
On March 1, 2000, OpCo repaid the remaining balance of $57,100 on its revolving
credit agreement with the Company. The revolving credit agreement was also
amended to reduce the maximum borrowing limit from $75,000 to $50,000. Any
amounts outstanding will bear interest at the rate of the 30-day London
Interbank Offered Rate plus 350 basis points.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
New Credit Facility........................ $ 888,000 $908,000
New Secured Facility....................... 326,798 328,954
Subordinated Notes......................... 202,235 202,041
Convertible Notes.......................... 154,300 172,500
Mortgage debt and other.................... 61,157 65,276
---------- ----------
$1,632,490 $1,676,771
========== ==========
</TABLE>
As of June 30, 2000 the Company has repurchased $18,200 of its Convertible Notes
at a discount. This resulted in an extraordinary gain of $3,116 ($3,054, net of
tax effect).
As of June 30, 2000 aggregate future maturities of the above obligations are as
follows:
2000 ..................... $ 5,459
2001 ..................... 28,194
2002 ..................... 47,896
2003 ..................... 656,589
2004 ..................... 361,168
Thereafter ............... 533,184
----------
$1,632,490
==========
5. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On June 21, 2000, the Company declared a dividend for the three months ended
June 30, 2000 of $0.505 per share of common stock ("Common Stock") and per unit
of limited partnership interest ("OP Unit") in the Company's subsidiary
operating partnership. The dividend was paid on July 31, 2000.
7
<PAGE>
6. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share ("EPS"):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
BASIC EPS
COMPUTATION:
<S> <C> <C> <C> <C>
Income before extraordinary gain $10,424 $ 7,179 $ 6,998 $ 7,446
Dividends paid on unvested
restricted stock (288) -- (335) --
------- ------- ------- -------
Income available to common shareholders 10,136 7,179 6,663 7,446
Weighted average number
of shares of Common
Stock outstanding 45,480 47,343 45,997 47,069
------- ------- ------- -------
Basic EPS before extraordinary gain $ 0.22 $ 0.15 $ 0.14 $ 0.16
======= ======= ======= =======
DILUTED EPS
COMPUTATION:
Income available to common shareholers $10,136 $ 7,179 $ 6,663 $ 7,446
Minority interest, net of tax 647 387 -- --
------- ------- ------- -------
Adjusted net income $10,783 $ 7,566 $ 6,663 $ 7,446
======= ======= ======= =======
Weighted average number
of shares of Common
Stock outstanding 45,480 47,343 45,997 47,069
Common stock equivalents-
OP Units 2,919 3,682 -- --
Common stock equivalents-
Stock options 243 316 149 179
------- ------- ------- -------
Total weighted average number
of diluted shares of
Common Stock outstanding 48,642 51,341 46,146 47,248
======= ======= ======= =======
Diluted EPS before extraordinary gain $ 0.22 $ 0.15 $ 0.14 $ 0.16
======= ======= ======= =======
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Cash paid for interest and income taxes:
Interest, net of capitalized interest of
$3,530 and $3,636, respectively .................. $59,471 $53,163
Income taxes ...................................... 264 332
Non-cash investing and financing activities:
Deferred financing costs written-off .............. 334 --
OP Units issued in purchase of property and
equipment ......................................... -- 1,488
Conversion of OP Units to Common Stock ............ 24 22,675
Dividends reinvested .............................. 23 --
Issuance of restricted stock ...................... 9,683 --
Deferred purchase price ........................... 8,000 --
8
<PAGE>
8. 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 in the Participating Leases. The rent due under each
Participating Lease is the greater of base rent or percentage rent, as defined.
Percentage rent applicable to room and food and beverage hotel revenue varies by
lease and is calculated by multiplying fixed percentages by the total amounts of
such revenues over specified threshold amounts. Both the minimum rent and the
revenue thresholds used in computing percentage rents are subject to annual
adjustments based on increases in the United States Consumer Price Index.
Percentage rent applicable to other revenues is calculated by multiplying fixed
percentages by the total amounts of such revenues. Total lease payments on all
of the Company's leases were $108,631 and $201,385 for the three and six months
ended June 30, 2000. Total lease payments for the three and six months ended
June 30, 1999 were $98,908 and $191,053, respectively. Lease payments from OpCo
were $102,895 and $191,091 for the three and six months ended June 30, 2000.
Lease payments from OpCo for the three and six months ended June 30, 1999 were
$91,868 and $179,474, respectively.
9. STOCK-BASED COMPENSATION
In December 1999, the Company's Compensation Committee approved the grant of
common stock and other equity compensation to certain of the Company's
employees.
As of June 30, 2000, the Company has granted 570,000 shares of restricted stock
to employees. This restricted stock vests ratably over a three-year or five-
year period. The issuance of restricted stock has resulted in $8,765 of
unearned stock-based compensation recorded as a reduction to stockholders'
equity on the Company's condensed consolidated balance sheet as of June 30,
2000.
10. ACQUISITIONS AND DISPOSITIONS
On May 11, 2000, the Company sold three limited service hotels and received
proceeds of $24,148. This resulted in a gain on sale of assets of $3,495
($3,425, net of tax).
On May 31, 2000, the Company purchased a full service hotel for $19,400. Of the
$19.400, $11,400 was paid in cash and $8,000 will be paid from the hotel's
future cash flow. The acquisition was funded using existing cash and borrowings
on the New Credit Facility.
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 Hotel & Resorts, Inc. ("OpCo"), an affiliated
entity. As of June 30, 2000, the Company owned 114 hotels with 29,090 rooms, 106
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").
In order to maintain its tax status as a Real Estate Investment Trust ("REIT"),
the Company has not been permitted to engage in the operations of its hotel
properties. To comply with this requirement, the Company has leased all of its
real property to third-party lessee/managers - OpCo and Prime Hospitality.
In December 1999, the REIT Modernization Act (the "RMA") became law. The RMA
will permit the Company to create a wholly-owned taxable REIT subsidiary (the
"TRS"), which will be subject to taxation similar to a C-Corporation. The TRS
will be allowed to lease the real property owned by the Company. Also, although
a TRS can lease real property from a REIT, it will be restricted from being
involved in certain activities prohibited by the RMA. First, a TRS will not be
permitted to manage the properties itself; it will need to enter into an "arms
length" management agreement with an independent third-party manager that is
actively involved in the trade or business of hotel management and manages
properties on behalf of other owners. Second, a TRS will not be permitted to
lease a property that contains gambling operations. Third, a TRS will be
restricted from owning a brand or franchise. The RMA does not permit a REIT to
establish a TRS until January 1, 2001.
The Company believes that establishing a TRS to lease its properties will
provide a more efficient alignment of and ability to capture the economic
interests of property ownership. The Company has established a subcommittee of
independent members of the Board of Directors to negotiate the transfer of its
existing leases with OpCo to the Company's TRS. Concurrent with the transfer of
the leases to the TRS, the Company expects to enter into management agreements
with OpCo to manage its properties in accordance with the RMA rules described
above. The Company and OpCo are currently in negotiations with regard to the
conversion of the leases to management agreements. Neither the Company nor Opco
expect to pay or receive consideration in connection with this transaction. The
Company is aiming to conclude these negotiations during 2000 and transfer those
leases to its TRS effective January 1, 2001.
FINANCIAL CONDITION
JUNE 30, 2000 COMPARED WITH DECEMBER 31, 1999
Total assets decreased by $50.6 million to $3,043.6 million at June 30, 2000
from $3,094.2 million at December 31, 1999. This decrease was due mainly to the
Company repaying long-term debt from the cash generated from the sale of the
three limited service hotels and OpCo's repayment of the note receivable,
partially offset by the purchase of a full service hotel.
Total liabilities increased by $30.5 million to $1,833.0 million at June 30,
2000 from $1,802.5 million at December 31, 1999. This increase was due to the
effect of deferring $59.3 million of revenue under the provisions of Staff
Accounting Bulletin ("SAB") No. 101, an increase in accrued expenses and
other liabilities based on the timing of payments and accruing $8.0 million of
deferred purchase price for the hotel acquired by the Company. This increase was
partially offset by $44.3 million in repayments of long-term debt using proceeds
from the repayment of the note receivable and from the sale of the three limited
service hotels.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999.
Total revenue increased by $7.4 million to $81.5 million in the three months
ended June 30, 2000 from $74.1 million in the three months ended June 30, 1999.
This increase was primarily attributable to an increase in participating lease
revenue resulting from an increase in room rates obtained at our hotels under
lease. On a pro forma basis for the quarter, revenue per available room
("RevPAR"), same-store average daily rate ("ADR") and occupancy were as follows.
2000 1999 Change
---- ---- ------
RevPAR $ 84.44 $ 78.86 7.1%
ADR $109.46 $102.56 6.7%
Occupancy 77.1% 76.9% 0.3%
Net interest expense increased to $29.7 million for the three months ended June
30, 2000 from $26.4 million for the same period in 1999. This increase was
attributable to the increase in interest rates during 1999 and 2000 on the
Company's variable rate debt, partially offset by a lower average debt balance
during the second quarter of 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999.
Total revenue increased by $10.5 million to $148.6 million in the six months
ended June 30, 2000 from $138.1 million in the six months ended June 30, 1999.
This increase was primarily attributable to an increase in participating lease
revenue resulting from an increase in room rates obtained at our hotels under
lease. On a pro forma basis for the six-month period, revenue per available
room ("RevPAR"), same-store average daily rate ("ADR") and occupancy were as
follows.
2000 1999 Change
---- ---- ------
RevPAR $ 81.59 $ 77.54 5.2%
ADR $110.41 $104.71 5.4%
Occupancy 73.9% 74.0% (0.1)%
Net interest expense increased to $58.4 million for the six months ended June
30, 2000 from $50.5 million for the same period in 1999. This increase was
attributable to the increase in interest rates during 1999 and 2000 on the
Company's variable rate debt, partially offset by a lower average debt balance
during the first two quarters of 2000.
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 October 1999 defines FFO as net income (loss) (computed in
accordance with generally accepted accounting principles ("GAAP")), excluding
gains (or losses) from 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.
Extraordinary items under GAAP are excluded from the calculation of FFO. 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. 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.
The following is a reconciliation between net income before the gain on the sale
of assets and extraordinary gain and diluted FFO for the three and six month
periods ended June 30, 2000 (in thousands):
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------ ----------------
<S> <C> <C>
Income before gain on sale of assets and
extraordinary gain $ 6,999 $ 3,573
Minority interest to Common OP Unit Holders 968 964
Interest on convertible debt 1,832 3,823
Hotel depreciation and amortization 27,106 52,804
------- -------
Diluted FFO $36,905 $61,164
======= =======
</TABLE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB
No. 101 addresses lessor revenue 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. SAB No. 101 requires the deferral 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 effect of SAB No. 101 was to
defer recognition of contingent rental income of $26,643 and $26,930 for the
three months ended June 30, 2000 and 1999, respectively. Contingent rental
income of $59,322 and $56,314 was deferred for the six months ended June 30,
2000 and 1999, respectively. As of June 30, 2000 and 1999, these amounts are
included in accounts payable, accrued expenses and other liabilities on the
Company's condensed consolidated balance sheets.
The effect of SAB No. 101 on the Company's financial statements is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
--------------------------------
Prior to Effect Effect After Effect
of of of
SAB No. 101 SAB No. 101 SAB No. 101
---------------- ------------ -------------
<S> <C> <C> <C>
Net operating income $ 64,551 $(26,643) $ 37,908
Interest expense (29,657) - (29,657)
Minority interests (3,209) 2,100 (1,109)
Income taxes (634) 491 (143)
Gain on sale of assets, net of tax 3,425 - 3,425
-------- -------- --------
Net income $ 34,476 $(24,052) $ 10,424
======== ======== ========
Diluted funds from operations $ 63,057 $(26,152) $ 36,905
======== ======== ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
--------------------------------
Prior to Effect Effect After Effect
of of of
SAB No. 101 SAB No. 101 SAB No. 101
---------------- ------------- -------------
<S> <C> <C> <C>
Net operating income $ 62,298 $(26,930) $ 35,368
Interest expense (26,407) - (26,407)
Minority interests (3,661) 2,023 (1,638)
Income taxes (359) 215 (144)
-------- -------- --------
Net income $ 31,871 $(24,692) $ 7,179
======== ======== ========
Diluted funds from operations $ 61,031 $(26,715) $ 34,316
======== ======== ========
<CAPTION>
Six Months Ended June 30, 2000
------------------------------
Prior to Effect Effect After Effect
of of of
SAB No. 101 SAB No. 101 SAB No. 101
---------------- ------------- -------------
<S> <C> <C> <C>
Net operating income $122,632 $(59,322) $ 63,310
Interest expense (58,417) - (58,417)
Minority interests (6,158) 4,911 (1,247)
Income taxes (1,161) 1,088 (73)
Gain on sale of assets, net of tax 3,425 - 3,425
Extraordinary gain, net of tax 3,054 - 3,054
-------- -------- --------
Net income $ 63,375 $(53,323) $ 10,052
======== ======== ========
Diluted funds from operations $119,398 $(58,234) $ 61,164
======== ======== ========
Retained Earnings $ 29,589 $(53,323) $(24,734)
======== ======== ========
<CAPTION>
Six Months Ended June 30, 1999
------------------------------
Prior to Effect Effect After Effect
of of of
SAB No. 101 SAB No. 101 SAB No. 101
---------------- ------------- -------------
<S> <C> <C> <C>
Net operating income $116,254 $(56,314) $ 59,940
Interest expense (50,496) - (50,496)
Minority interests (6,765) 4,919 (1,846)
Income taxes (1,180) 1,028 (152)
-------- -------- --------
Net income $ 57,813 $(50,367) $ 7,446
======== ======== ========
Diluted funds from operations $115,030 $(55,286) $ 59,744
======== ======== ========
Retained Earnings $ 28,435 $(50,367) $(21,932)
======== ======== ========
</TABLE>
13
<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 cash
generated from operations, 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, borrowings on the Company's credit facilities or
through its preferred return on its investment in MeriStar Investment Partners.
Operating activities provided $121.1 million of net cash in the six months ended
June 30, 2000. Investing activities provided $13.0 million of cash during the
first six months of 2000, primarily due to the Company selling three hotels and
the repayment of the note receivable from OpCo, offset by the purchase of one
hotel and other capital expenditures. Net cash used in financing activities of
$136.0 million resulted primarily from dividends paid, repurchase of Company
stock and net repayments on the Company's credit facilities.
At June 30, 2000 and August 8, 2000, the Company had $109.0 million and $99.0
million, respectively, available 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 six months ended June 30, 2000, the Company
spent approximately $38.5 million on capital expenditures.The Company expects to
spend approximately $30.0 million during the remainder of 2000 to complete
initial renovation programs and to fund ongoing capital expenditures for its
hotels. The Company also spent $11.4 million to the buy a full-service hotel.
The Company's Board of Directors has authorized the Company to repurchase of up
to five million shares of its common stock from time to time in open market or
privately negotiated transactions. Stock repurchases are subject to prevailing
market conditions and other considerations. The Company expects the program to
be funded primarily through selected asset sales. As of June 30, 2000, the
Company has repurchased a total of 2,397,576 shares for $40.7 million.
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, to refinance existing debt, or repurchase common
stock.
SEASONALITY
Demand in the lodging industry is affected by recurring seasonal patterns. For
non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season.
For resort properties, demand is generally higher in winter and early spring.
Since the majority of the Company's hotels are non-resort properties, the
Company's operations generally reflect non-resort seasonality patterns.
Excluding the effect of SAB No. 101, 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.
14
<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.
The table below presents the principal amounts (in thousands of dollars) for the
Company's fixed and variable rate debt instruments, weighted-average interest
rates, and fair values by year of expected maturity to evaluate the expected
cash flows and sensitivity to interest rate changes.
<TABLE>
<CAPTION>
Long-term Debt
-----------------------------------------------------------------------------
Average Average
Expected Maturity Fixed Rate Interest Rate Variable Rate Interest Rate
------------------------ ---------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
2000 $ 4,459 8.3% $ 1,000 7.3%
2001 11,194 8.4% 17,000 7.3%
2002 15,896 8.5% 32,000 7.3%
2003 8,589 8.1% 648,000 8.0%
2004 171,168 5.1% 190,000 7.3%
Thereafter 533,184 8.2% - N/A
---------------- ----------------- --------------- --------------
Total $744,490 7.5% $888,000 7.8%
================ ================= =============== ==============
Fair Value at 6/30/00 $693,493 $888,000
================ ===============
</TABLE>
During June 2000, the Company entered into two 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 agreement effectively fixes 30-day LIBOR between
7.1% and 7.2%. There were no payments made during the three and six months ended
June 30, 2000 relating to these hedges. The swap agreements will replace two
$100 million swap agreements that are to expire in September 2000. The hedge
agreements terminate in June 2002.
In April 2000, the Company entered into a $100 million periodic swap agreement
with a financial institution in order to hedge against the impact future
interest rate fluctuations may have on the Company's existing floating rate debt
instruments. The swap agreement effectively fixes 30-day London Interbank
Offered Rate ("LIBOR") at 6.4%. If LIBOR is greater than or equal to 7.5% on the
reset date, the amounts paid or received will be zero for that month. During the
three months ended June 30, 2000 the Company has made net payments of $11,000
relating to this hedge. The amounts are included in interest expense. The hedge
agreement expires in April 2003.
During September 1999, the Company entered into two 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 replaced two $100 million swap
agreements that were to expire in November 1999. The swap agreements effectively
fix 30-day LIBOR at 6.0%. During the three and six months ended June 30, 2000,
the Company received $149,000 and $175,000, respectively, relating to these
hedges. These amounts are included in interest expense. The hedge agreements
terminate in September 2001.
In anticipation of the August 1999 completion the 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 $5.1
million. 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 is 7.76%.
During 1998, the Company entered into six separate $100 million swap agreements.
The swap agreements effectively fix
15
<PAGE>
30-day LIBOR at between 4.9% and 5.4%. During the three months ended June 30,
2000 and 1999, the Company received (made) net payments of $770,000 and
$(211,000), respectively, relating to these hedges. During the six months ended
June 30, 2000 and 1999, the Company received net payments of $1,445,000 and
$22,000, respectively. These amounts are included in interest expense. The hedge
agreements terminate at various times between November 1999 and September 2000.
As of June 30, 2000, there are three swap agreeements which have not yet
expired.
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 is
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 during the three and six months ended June 30, 2000 and
1999. Additionally, foreign currency transaction gains and losses were not
material to the Company's results of operations for the three and six months
ended June 30, 2000 and 1999. 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Registrant was held on May 18,
2000.
At that meeting, the following matters were submitted to a vote of the
stockholders of MeriStar Hospitality Corporation:
ITEM No. 1
To reelect three members of the Board of Directors to serve for a three-year
term expiring on the date of the Annual meeting in 2003 and until their
successors have been duly elected and qualified.
Steven D. Jorns For 32,441,085
Abstain 131,681
Daniel L. Doctoroff For 31,299,944
Abstain 1,272,822
William S. Janes For 32,419,757
Abstain 153,009
ITEM No. 2
To ratify the appointment of KPMG LLP as independent auditors for the Company
for the fiscal year ending December 31, 2000.
For 32,498,555
Against 34,191
Abstain 40,020
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; and changes in the laws and governmental regulations applicable to
the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 -- Financial Data Schedule
17
<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: August 8, 2000
/s/ John Emery
---------------------
John Emery
Chief Operating Officer
18
