<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, 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
November 9, 2000 was 46,042,187.
<PAGE>
MERISTAR HOSPITALITY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three Months and Nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 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 11
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II. OTHER INFORMATION 18
ITEM 5: OTHER INFORMATION 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 18
</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, 2000 December 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
Assets
Investments in hotel properties $3,177,025 $3,118,723
Accumulated depreciation (258,800) (182,430)
---------- ----------
2,918,225 2,936,293
Cash and cash equivalents - 2,556
Accounts receivable, net 2,319 1,328
Prepaid expenses and other 1,589 9,137
Note receivable from Lessee - 57,110
Due from Lessee 20,619 11,476
Investments in and advances to affiliates 42,096 40,085
Restricted cash 20,188 17,188
Intangible assets, net of accumulated amortization
of $8,719 and $5,742 17,316 19,028
---------- ----------
$3,022,352 $3,094,201
========== ==========
Liabilities, Minority Interests and Stockholders' Equity
Accounts payable, accrued expenses and other liabilities $ 118,283 $ 58,055
Accrued interest 26,532 31,380
Income taxes payable 803 730
Dividends and distributions payable 25,329 26,263
Deferred income taxes 10,241 9,345
Long-term debt 1,609,823 1,676,771
---------- ----------
Total liabilities 1,791,011 1,802,544
---------- ----------
Minority interests 118,234 121,055
Stockholders' Equity:
Preferred stock, par value $0.01 per share
Authorized - 100,000 shares - -
Common stock, par value $0.01 per share
Authorized - 100,000 shares
Issued - 48,417 and 47,664 shares 484 477
Additional paid-in capital 1,176,310 1,164,750
Retained earnings (8,826) 16,874
Accumulated other comprehensive income (6,178) (5,247)
Unearned stock-based compensation (7,963) -
Less common stock held in treasury - 2,398 and
407 shares (40,720) (6,252)
---------- ----------
Total stockholders' equity 1,113,107 1,170,602
---------- ----------
$3,022,352 $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 Nine months ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Participating lease revenue $115,391 $101,676 $260,422 $236,466
Office rental and other revenues 2,240 1,538 5,848 4,896
-------- -------- -------- --------
Total revenue 117,631 103,214 266,270 241,362
-------- -------- -------- --------
Operating expenses:
Office rental and other operating expenses 454 474 1,797 1,458
Administrative and general 2,110 1,300 6,260 4,043
Property taxes, insurance and other 11,555 10,555 36,648 36,570
Depreciation and amortization 28,387 25,398 83,130 73,864
-------- -------- -------- --------
Total operating expenses 42,506 37,727 127,835 115,935
-------- -------- -------- --------
Net operating income 75,125 65,487 138,435 125,427
Interest expense, net 29,108 24,125 87,525 74,621
-------- -------- -------- --------
Income before minority interests, income taxes,
gain on sale of assets and extraordinary
(loss)/gain 46,017 41,362 50,910 50,806
Minority interests 3,916 2,976 5,163 4,822
-------- -------- -------- --------
Income before income taxes, gain on sale of
assets and extraordinary (loss)/gain 42,101 38,386 45,747 45,984
Income taxes 842 677 915 829
-------- -------- -------- --------
Income before gain on sale of assets and
extraordinary (loss)/gain 41,259 37,709 44,832 45,155
Gain on sale of assets, net of tax effect of $70 - - 3,425 -
Extraordinary (loss)/gain on early extinguishment
of debt, net of tax effect of $62 and $93 - (4,532) 3,054 (4,532)
-------- -------- -------- --------
Net income $ 41,259 $ 33,177 $ 51,311 $ 40,623
======== ======== ======== ========
Earnings per share:
Basic:
Income before extraordinary (loss)/gain $ 0.89 $ 0.79 $ 1.03 $ 0.96
Extraordinary (loss)/gain - (0.10) 0.06 (0.10)
-------- -------- -------- --------
Net income $ 0.89 $ 0.69 $ 1.09 $ 0.86
======== ======== ======== ========
Diluted:
Income before extraordinary (loss)/gain $ 0.83 $ 0.75 $ 1.02 $ 0.94
Extraordinary (loss)/gain - (0.08) 0.06 (0.09)
-------- -------- -------- --------
Net income $ 0.83 $ 0.67 $ 1.08 $ 0.85
======== ======== ======== ========
</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>
Nine months ended
September 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 51,311 $ 40,623
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 83,130 73,864
Gain on sale of assets, before tax effect (3,495) -
Extraordinary (gain)/loss on early extinguishment of debt,
before tax effect (3,116) 4,625
Minority interests 5,163 4,822
Amortization of unearned stock based compensation 776 -
Deferred income taxes 896 140
Changes in operating assets and liabilities:
Accounts receivable, net (991) 2,593
Prepaid expenses and other 7,548 (502)
Intangible assets, net - (114)
Due from Lessee (9,143) (11,059)
Accounts payable, accrued expenses and other liabilities 53,172 64,602
Accrued interest (4,848) 4,802
Income tax payable 73 598
--------- ---------
Net cash provided by operating activities 180,476 184,994
--------- ---------
Investing activities:
Investment in hotel properties, net (75,289) (134,096)
Proceeds from disposition of assets 24,148 -
Investments in and advances to affiliates, net (2,011) (31,925)
Purchases of minority interests - (72)
Repayment of notes receivable 57,110 11,000
Change in restricted cash (3,000) (6,731)
--------- ---------
Net cash provided by (used in) investing activities 958 (161,824)
--------- ---------
Financing activities:
Deferred costs (1,599) (6,760)
Proceeds from issuance of long-term debt 121,291 381,923
Principal payments on long-term debt (185,123) (321,381)
Proceeds from issuance of common stock, net 1,792 1,499
Purchase of OP units (7,535) -
Purchase of treasury stock (34,468) -
Dividends paid to stockholders (77,945) (79,165)
Distributions to minority investors (425) (445)
--------- ---------
Net cash used in financing activities (184,012) (24,329)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 22 3
--------- ---------
Net decrease in cash and cash equivalents (2,556) (1,156)
Cash and cash equivalents, beginning of period 2,556 4,180
--------- ---------
Cash and cash equivalents, end of period $ - $ 3,024
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERISTAR HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 nine months
ended September 30, 2000, net income was $41,259 and $51,311, respectively,
other comprehensive income, net of tax, was $(397) and $(931), respectively, and
comprehensive income was $40,862 and $50,380, respectively. 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.
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 reportable segment. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Revenues for Canadian operations totaled $1,914 and $5,092 for the
three and nine months ended September 30, 2000. Revenues for Canadian
operations for the three and nine months ended September 30, 1999, were $2,207
and $5,504 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
6
<PAGE>
of contingent rental income until the 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's interim financial
results were reported in accordance with the requirements of SAB No. 101. The
effect of SAB No. 101 was to recognized additional contingent rental income of
$19,032 and $10,420 for the three months ended September 30, 2000 and 1999,
respectively. Contingent rental income of $40,290 and $45,894 was deferred for
the nine months ended September 30, 2000 and 1999, respectively. As of September
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
and does not believe this will have a material effect 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>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
New Credit Facility................ $ 867,000 $ 908,000
New Secured Facility............... 325,687 328,954
Subordinated Notes................. 202,332 202,041
Convertible Notes.................. 154,300 172,500
Mortgage debt and other............ 60,504 65,276
---------- ----------
$1,609,823 $1,676,771
========== ==========
</TABLE>
As of September 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 September 30, 2000 aggregate future maturities of the above obligations
are as follows:
2000..................................... $ 2,650
2001..................................... 28,239
2002..................................... 47,897
2003..................................... 636,589
2004..................................... 361,168
Thereafter............................... 533,280
----------
$1,609,823
==========
5. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On September 25, 2000, the Company declared a dividend for the three months
ended September 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 October 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 Nine months ended
------------------------ -----------------------
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION:
Income before extraordinary gain/(loss) $41,259 $37,709 $48,257 $45,155
Dividends paid on unvested restricted stock (288) - (622) -
------- ------- ------- -------
Income available to common stockholders 40,971 37,709 47,635 45,155
Weighted average number of shares of Common
Stock outstanding 46,003 47,683 46,379 47,274
------- ------- ------- -------
Basic EPS before extraordinary gain/(loss) $ 0.89 $0.79 $1.03 $ 0.96
======= ======= ======= =======
DILUTED EPS COMPUTATION:
Income before extraordinary gain/(loss) $40,971 $37,709 $47,635 $45,155
Minority interest, net of tax 138 3,358 415 4,291
Interest on Convertible Notes, net of tax 1,796 2,094 - -
Dividends on unvested restricted stock 88 - - -
------- ------- ------- -------
Adjusted net income $42,993 $43,161 $48,050 $49,466
======= ======= ======= =======
Weighted average number of shares of Common
Stock outstanding 46,003 47,683 46,379 47,274
Common stock equivalents-OP Units 429 5,009 429 4,981
Common stock equivalents-Stock options 439 89 209 136
Common stock equivalents-Convertible Notes 4,538 5,074 - -
Common stock equivalents-restricted stock 174 - - -
------- ------- ------- -------
Total weighted average number of diluted
shares of Common Stock outstanding 51,583 57,855 47,017 52,391
======= ======= ======= =======
Diluted EPS before extraordinary gain/(loss) $ 0.83 $0.75 $1.02 $ 0.94
======= ======= ======= =======
</TABLE>
8
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
------- -------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest, net of capitalized interest of
$5,676 and $8,068, respectively....................... $92,373 $69,819
Income taxes.......................................... 580 435
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 26,951
Dividends reinvested.................................. 68 -
Issuance of restricted stock.......................... 9,683 -
Deferred purchase price............................... 8,000 -
</TABLE>
8. PARTICIPATING LEASE AGREEMENTS
The Company's Participating Leases have noncancelable remaining terms of
approximately ten 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 $94,642 and $296,027 for the three
and nine months ended September 30, 2000. Total lease payments for the three and
nine months ended September 30, 1999 were $87,072 and $278,176 respectively.
Lease payments from OpCo were $87,975 and $279,066 for the three and nine months
ended September 30, 2000. Lease payments from OpCo for the three and nine months
ended September 30, 1999 were $84,377 and $263,851, respectively.
The Company has entered into an agreement with OpCo to convert all 106 leases
with OpCo to management contracts effective January 1, 2001. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations for
further discussion).
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 September 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 $7,963 of
unearned stock-based compensation recorded as a reduction to stockholders'
equity on the Company's condensed consolidated balance sheet as of September 30,
2000.
9
<PAGE>
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 within the next five years. The acquisition was funded using
existing cash and borrowings on the New Credit Facility.
10
<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"). As of
September 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
Corporation.
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 owners other than the REIT or TRS. 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 entered into an agreement to convert all 106 leases with
MeriStar Hotels & Resorts to management contracts beginning January 1, 2001.
The leases will be held by the Company in a wholly-owned TRS. The management
agreements have been structured to mirror the current economics and terms of the
existing leases. The conversion does not result in any cash consideration to be
exchanged between the parties.
Under the new management agreements, the base management fee is 2.5 percent of
total hotel revenue with incentives up to an additional 1.5 percent of total
revenue if certain operating thresholds are achieved. The agreements have an
initial term of ten years. Additionally, they have three five-year renewal
options at OpCo's option, provided that the laws regarding REITs are not changed
to allow REITs to manage hotels. In connection with the RMA and the assignment
of the leases to the TRS, the Company will bear the full operating risk
associated with its properties.
FINANCIAL CONDITION
SEPTEMBER 30, 2000 COMPARED WITH DECEMBER 31, 1999
Total assets decreased by $71.8 million to $3,022.4 million at September 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, OpCo's repayment of the note receivable and
depreciation on hotel assets, partially offset by the purchase of a full service
hotel.
Total liabilities decreased by $11.5 million to $1,791.0 million at
September 30, 2000 from $1,802.5 million at December 31, 1999. This decrease was
due to $66.9 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, partially offset by the effect of deferring $40.3 million of revenue
under the provisions of Staff Accounting Bulletin ("SAB") No. 101 and an
increase in accrued expenses and other liabilities based on the timing of
payments.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999.
Total revenue increased by $14.4 million to $117.6 million in the three months
ended September 30, 2000 from $103.2 million in the three months ended
September 30, 1999. This increase was primarily attributable to an increase in
participating lease revenue resulting from an increase in room revenue 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:
<TABLE>
<CAPTION>
2000 1999 Change
-------- ------- ------
<S> <C> <C> <C>
RevPAR $ 76.80 $72.42 6.05%
ADR $103.83 $97.06 6.98%
Occupancy 74.0% 74.6% (0.8)%
</TABLE>
Operating expenses increased to $42.5 million for the three months ended
September 30, 2000 from $37.7 million for the same period in 1999. This
increase is primarily due to an increase in depreciation on hotel assets and an
increase in administrative and insurance costs.
Net interest expense increased to $29.1 million for the three months ended
September 30, 2000 from $24.1 million for the same period in 1999. This increase
was primarily attributable to lower capitalized interest and an increase in
interest rates during 1999 and 2000 on the Company's variable rate debt and swap
arrangements, partially offset by a lower average debt balance during the third
quarter of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999.
Total revenue increased by $24.9 million to $266.3 million in the nine months
ended September 30, 2000 from $241.4 million in the nine months ended
September 30, 1999. This increase was primarily attributable to an increase in
participating lease revenue resulting from an increase in room revenue at our
hotels under lease. On a pro forma basis for the nine-month period, revenue per
available room ("RevPAR"), same-store average daily rate ("ADR") and occupancy
were as follows.
<TABLE>
<CAPTION>
2000 1999 Change
-------- ------- ------
<S> <C> <C> <C>
RevPAR $ 80.29 $ 76.02 5.62%
ADR $108.33 $102.36 5.83%
Occupancy 74.1% 74.3% (0.3)%
</TABLE>
Operating expenses increased to $127.8 million for the nine months ended
September 30, 2000 from $115.9 million for the same period in 1999. This
increase is primarily due to an increase in depreciation on hotel assets and an
increase in administrative costs.
Net interest expense increased to $87.5 million for the nine months ended
September 30, 2000 from $74.6 million for the same period in 1999. This increase
was primarily attributable to lower capitalized interest and an increase in
interest rates during 1999 and 2000 on the Company's variable rate debt and swap
agreements, partially offset by a lower average debt balance during the first
three quarters of 2000. In addition, during the nine months ended September 30,
2000, several of our swap agreements have expired. The company has entered into
new swap agreements to replace those swaps that have expired.
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
12
<PAGE>
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 nine month
periods ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Income before gain on sale of assets and
extraordinary gain $41,259 $ 44,832
Minority interest to Common OP Unit Holders 3,775 4,739
Interest on convertible debt 1,833 5,656
Hotel depreciation and amortization 27,380 80,184
Deferred cost on sale of asset 1,542 1,542
------- --------
Diluted FFO $75,789 $136,953
======= ========
</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 SAB 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 recognize additional
contingent rental income of $19,032 and $10,420 for the three months ended
September 30, 2000 and 1999, respectively. Contingent rental income of $40,290
and $45,894 was deferred for the nine months ended September 30, 2000 and 1999,
respectively. As of September 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
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 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 $ 56,093 $ 19,032 $ 75,125
Interest expense (29,108) - (29,108)
Minority interests (2,285) (1,631) (3,916)
Income taxes (494) (348) (842)
-------- -------- --------
Net income $ 24,206 $ 17,053 $ 41,259
======== ======== ========
Diluted funds from operations $ 57,105 $ 18,684 $ 75,789
======== ======== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 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 $ 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, 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 $178,725 $(40,290) $138,435
Interest expense (87,525) - (87,525)
Minority interests (8,443) 3,280 (5,163)
Income taxes (1,655) 740 (915)
Gain on sale of assets, net of tax 3,425 - 3,425
Extraordinary gain, net of tax 3,054 - 3,054
-------- -------- --------
Net income $ 87,581 $(36,270) $ 51,311
======== ======== ========
Diluted funds from operations $176,503 $(39,550) $136,953
======== ======== ========
Retained earnings $ 27,444 $(36,270) $ (8,826)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 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 $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>
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 through December 31, 2000. After the
participating leases are converted to management contracts on January 1, 2001,
the Company will fund its continuing operations through the operation of its
hotels. 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 $180.5 million of net cash in the nine months
ended September 30, 2000. Investing activities provided $1.0 million of cash
during the first nine 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 capital expenditures. Net cash used in financing
activities of $184.0 million resulted primarily from dividends paid, repurchase
of Company stock and net repayments on the Company's credit facilities.
At September 30, 2000 and November 9, 2000, the Company had $129.0 million and
$88.0 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 nine months ended September 30, 2000, the
Company spent approximately $50.5 million on property capital expenditures. The
Company expects to spend approximately $12.0 million during the remainder of
2000 to complete 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 September 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 participating lease
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.
15
<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
Interest Variable Interest
Expected Maturity Fixed Rate Rate Rate Rate
--------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
2000 $ 2,650 8.4% $ - N/A
2001 11,239 8.4% 17,000 8.6%
2002 15,897 8.5% 32,000 8.6%
2003 8,589 8.1% 628,000 8.2%
2004 171,168 5.1% 190,000 8.6%
Thereafter 533,280 8.2% - N/A
---------- ------ ---------- ------
Total $742,823 7.5% $867,000 8.3%
========== ====== ========== ======
Fair Value at 9/30/00 $693,721 $867,000
========== ==========
</TABLE>
As of September 30, 2000, the Company has six swap agreements with notional
principal amounts totaling $600 million. These swap agreements provide hedges
against the impact future interest rates have on the Company's floating London
Interbank Offered Rate ("LIBOR") rate debt instruments. The swap agreements
effectively fix the 30-day LIBOR between 6.0% and 7.2%. The swap agreements
expire between September 2001 and June 2003. For the nine months ended
September 30, 2000, the Company has received net payments of $2,876 on these
swaps and other similar swaps that expired before September 30, 2000.
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%.
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%.
As of September 30, 2000, after consideration of the hedge agreements described
above, the Company has 83% of its debt fixed and its overall weighted average
interest rate is 7.9%.
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 nine months ended September 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 nine
months ended September 30, 2000 and 1999. Accordingly, the Company was not
subject
16
<PAGE>
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.
17
<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; and changes in the laws and governmental regulations applicable to
the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.6 Form of Employment Agreement between MeriStar Hospitality Corporation
and Paul W. Whetsell.
10.9 Form of Employment Agreement between MeriStar Hospitality Corporation
and John Emery.
27 Financial Data Schedule
18
<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 13, 2000 /s/ John Emery
---------------------------------------
John Emery
Chief Operating Officer
19
