<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, 1998 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 1-14331
MERISTAR HOTELS & RESORTS, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 51-0379982
(State of Incorporation) (IRS Employer Identification No.)
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(Address of Principal Executive Offices)(Zip Code)
202-965-4455
(Registrant's Telephone Number, Including Area Code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 13, 1998 was 25,429,080.
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 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 14
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------- --------------------
(unaudited) (Predecessor Entity)
<S> <C> <C>
Assets
Cash and cash equivalents $ 12,499 $ 27,022
Accounts receivable, net 61,516 7,162
Prepaid expenses 7,818 1,097
Deposits and other 10,786 756
-------- --------
Total current assets 92,619 36,037
Fixed assets
Furniture, fixtures, and equipment 5,566 2,701
Accumulated depreciation (768) (418)
-------- --------
Total fixed assets, net 4,798 2,283
Investments in and advances to affiliates 7,752 10,158
Intangible assets, net of accumulated
amortization of $2,255 and $719 143,997 35,941
Escrows and restricted funds 2,667 -
-------- --------
$251,833 $ 84,419
======== ========
Liabilities, Minority Interests, Owners' Equity
and Stockholders' Equity
Accounts payable $ 31,055 $ 2,082
Accrued expenses and other liabilities 66,387 14,360
Due to affiliates, net 20,333 22,287
Income taxes payable 304 -
Long-term debt, current portion 770 392
-------- --------
Total current liabilities 118,849 39,121
Deferred income taxes 1,619 -
Long-term debt 56,543 589
-------- --------
Total liabilities 177,011 39,710
Minority interests 18,369 3,800
Owners' equity - 40,909
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 100,000 shares
Issued and outstanding 25,429 shares 254 -
Paid-in capital 53,014 -
Retained earnings 3,185 -
-------- --------
$251,833 $ 84,419
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
INCLUDING PREDECESSOR ENTITY
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenue
Rooms $143,581 $ 924 $198,315 $ 924
Food and beverage 39,336 438 42,918 438
Other operating departments 9,787 43 12,551 43
Management and other fees 2,794 5,353 12,945 7,959
-------- -------- -------- -------
Total revenue 195,498 6,758 266,729 9,364
-------- -------- -------- -------
Operating expenses by department:
Rooms 33,266 187 45,195 187
Food and beverage 30,745 282 33,404 282
Other operating expenses 5,020 22 6,286 22
Undistributed operating expenses:
Administrative and general 27,970 2,117 42,385 6,115
Property operating costs 26,610 308 36,662 399
Participating lease expense 63,210 450 89,241 450
Depreciation and amortization 1,069 192 1,977 684
-------- -------- -------- -------
Total operating expenses 187,890 3,558 255,150 8,139
-------- -------- -------- -------
Net operating income 7,608 3,200 11,579 1,225
Interest expense, net 807 8 837 34
Equity in losses of affiliates 327 - 1,195 -
-------- -------- -------- -------
Income before minority interests
and income taxes 6,474 3,192 9,547 1,191
Minority interests 945 106 1,037 138
Income taxes 1,924 - 1,924 -
-------- -------- -------- -------
Net income $ 3,605 $ 3,086 $ 6,586 $1,053
-------- -------- -------- -------
Earnings per share :
Basic $0.13 N/A $0.13 N/A
Diluted 0.12 N/A 0.12 N/A
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Operating activities:
Net income $ 6,586 $ 1,053
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,977 684
Minority interests 1,037 138
Deferred income taxes 1,619 -
Changes in operating assets and liabilities:
Accounts receivable, net (56,628) (1,568)
Deposits, prepaid expenses, and other (18,056) (617)
Accounts payable 23,540 783
Accrued expenses and other liabilities 62,134 2,057
Due to affiliates (1,954) (18,649)
Income taxes payable 304 -
--------- --------
Net cash provided by (used in) operating activities 20,559 (16,119)
--------- --------
Investing activities:
Purchases of fixed assets (5,266) (914)
Investments in and advances to affiliates (2,250) (3,547)
Purchases of intangible assets (105,877) (1,395)
Increase in restricted cash (2,588) -
--------- --------
Net cash used in investing activities (115,981) (5,856)
--------- --------
Financing activities:
Proceeds (payments) from long term debt, net 56,197 (250)
Proceeds from issuances of common stock, net 957 -
Contributions from CapStar 23,745 15,132
--------- --------
Net cash provided by financing activities 80,899 14,882
--------- --------
Decrease in cash and cash equivalents (14,523) (7,093)
Cash and cash equivalents, beginning of period 27,022 18,148
--------- --------
Cash and cash equivalents, end of period $ 12,499 $ 11,055
--------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
MeriStar Hotels & Resorts, Inc. (the "Company") was spun off by Capstar Hotel
Company ("CapStar") on August 3, 1998 (the "Spin-Off") to become the lessee,
manager and operator of various hotel assets, including those which were
previously owned, leased and managed by CapStar and certain of its affiliates.
CapStar distributed to its stockholders, on a share-for-share basis, all of the
outstanding shares of the Company's common stock, par value $0.01 per share
("Common Stock"). On August 3, 1998, CapStar merged (the "Merger") with and
into American General Hospitality Corporation ("AGH"), a Maryland corporation
operating as a real estate investment trust, to form MeriStar Hospitality
Corporation (the "REIT").
Immediately following the Spin-Off and the Merger, the Company acquired 100% of
the partnership interests in AGH Leasing, L.P. ("AGH Leasing"), the third-party
lessee of most of the hotels owned by AGH, and acquired substantially all of the
assets and certain liabilities of American General Hospitality, Inc. ("AGHI")
the third-party manager of most of the hotels owned by AGH and certain other
hotels. The Company thereby became the lessee, manager and operator of most of
the hotels owned by AGH. The purchase price of $95,000 was funded with a
combination of cash and units of limited partnership interest ("OP Units") in
the Company's subsidiary operating partnership. In accordance with generally
accepted accounting principles ("GAAP"), the acquisitions have been accounted
for as a purchase and therefore, the operating results of AGHI and AGH Leasing
are included in the Company's consolidated financial statements from the date of
acquisition.
Pursuant to an intercompany agreement, the Company and the REIT provide each
other with, among other things, reciprocal rights to participate in certain
transactions entered into by each party. In particular, the Company has a right
of first refusal to become the lessee of any real property acquired by the REIT.
The Company also provides the REIT with certain services including
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services, for which the Company is
compensated in an amount that the REIT would be charged by an unaffiliated third
party for comparable services.
As of September 30, 1998, the Company leased or managed 201 hotels with 41,920
rooms in 36 states, the District of Columbia, Canada and the U.S. Virgin
Islands.
The consolidated interim financial statements of the Company for the three and
nine-month periods ended September 30, 1998 and 1997, include the historical
results of the Company's predecessor entity, the management and leasing
operations of CapStar. The operating results of AGHI and AGH Leasing have been
included in the Company's consolidated financial statements since August 3,
1998.
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 ("SEC"). 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
Registration Statement on Form S-1, filed with the SEC. Certain 1997 amounts
have been reclassified to conform to 1998 presentation.
6
<PAGE>
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.
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF 98-9. EITF 98-9 affects the recognition of contingent rental
expense in interim periods. This pronouncement requires a lessee to recognize
contingent rental expense for interim periods prior to the achievement of the
specified target that triggers the contingent rental expense, if the achievement
of that target by the end of the fiscal year is considered probable. This new
accounting pronouncement relates only to the Company's recognition of lease
expense in interim periods for financial reporting purposes; it has no effect on
the timing of rent payments under the Company's leases or the Company's annual
lease expense calculations. Under the provisions of EITF 98-9, the Company has
deferred recognition of $4,000 of lease expense as of September 30,
1998.
3. RIGHTS OFFERING
In conjunction with the Spin-Off, the Company distributed to holders of REIT
Common Stock and REIT OP Units, one right for every six shares or units owned.
Each right entitled its holder to purchase a share of Common Stock at a
subscription price of $2.84 per share, for a subscription period from August 13,
1998 through August 31, 1998. The Rights Offering resulted in the sale of
approximately 480,000 shares of Common Stock with net proceeds to the Company of
$957.
4. LONG-TERM DEBT
On August 3, 1998, the Company entered into a three-year, $75,000 revolving
credit agreement (the "Credit Agreement") with the REIT. The interest rate on
the Credit Agreement is 350 basis points over LIBOR. The Credit Agreement
contains certain covenants, including maintenance of financial ratios, reporting
requirements and other customary restrictions. As of September 30, 1998, the
Company had $55,500 in outstanding borrowings under the Credit Agreement, with a
weighted average interest rate of 9.1%.
5. EARNINGS PER SHARE
Earnings per share ("EPS") has been calculated on income from the date of the
Spin-Off, August 3, 1998, through September 30, 1998 for both the three and nine
months ended September 30, 1998. Prior to the Spin-Off, the predecessor entity
of the Company was organized as a limited partnership and was not subject to the
provisions of Statement of Financial Accounting Standards No. 128. Accordingly,
no EPS has been calculated for the three and nine months ended September 30,
1997. The following table presents the computation of basic and diluted EPS
(all amounts in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE
COMPUTATION:
<S> <C>
Net income $ 3,185
Weighted average number of shares
of Common Stock outstanding 25,189
------------
Basic earnings per share $ 0.13
============
DILUTED EARNINGS PER SHARE
COMPUTATION:
Net income $ 3,185
Minority interest, net of tax 562
------------
Adjusted net income $ 3,747
============
Weighted average number of shares
of Common Stock outstanding 25,189
Common Stock equivalents-OP Units 4,891
Common Stock equivalents-stock options 41
------------
Total weighted average number of
diluted shares of Common Stock
outstanding 30,121
------------
Diluted earnings per share $ 0.12
============
</TABLE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 398 $ 42
Supplemental disclosure of non-cash investing
and financing activities:
OP Units issued in purchase
of intangible assets 11,201 -
Assets contributed by CapStar 41,449 -
Liabilities contributed by Capstar (11,768) -
Debt contributed by Capstar (1,116) -
--------
Net assets contributed by CapStar 28,565 -
</TABLE>
8
<PAGE>
7. PARTICIPATING LEASE AGREEMENTS
The Company's participating leases have noncancelable remaining terms ranging
from 10 to 15 years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The rent payable 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 ("CPI"). Percentage
rent applicable to other revenues is calculated by multiplying fixed percentages
by the total amounts of such revenues. Total lease expense from all of the
Company's leases was $63,210 and $89,241 for the three and nine months ended
September 30, 1998. Lease expense paid to the REIT for the three and nine months
ended September 30, 1998 was $47,461.
8. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma information is presented assuming the Spin-Off and the
acquisition of AGHI and AGH Leasing had been consummated at January 1, 1997. In
management's opinion, all pro forma adjustments necessary to reflect the
material effects of these transactions have been made. The pro forma
information does not purport to present what the actual results of operations of
the Company would have been if the Spin-Off and acquisition had occurred on such
dates, nor to project the results of operations of the Company for any future
period.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Total revenue $787,640 $704,223
Net income $ 7,123 $ 1,420
Diluted EPS $ 0.28 $ 0.07
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On August 3, 1998, the management and leasing operations of CapStar Hotel
Company ("CapStar") were spun-off (the "Spin-Off") in a taxable transaction in
which CapStar distributed on a share-for-share basis all shares of common stock,
par value $0.01 per share, ("Common Stock") of MeriStar Hotels & Resorts, Inc.
(the "Company"). The Company thereby became the lessee, manager and operator of
various hotel assets, including those which were previously owned, leased and
managed by CapStar and certain of its affiliates. On August 3, 1998, CapStar
merged (the "Merger") with and into American General Hospitality Corporation
("AGH"), a Maryland corporation operating as a real estate investment trust, to
form MeriStar Hospitality Corporation (the "REIT").
Immediately following the Spin-Off and the Merger, the Company acquired 100% of
the partnership interests in AGH Leasing, L.P., ("AGH Leasing"), the third-party
lessee of most of the hotels owned by AGH, and substantially all of the assets
and liabilities of American General Hospitality, Inc. ("AGHI"), the third-party
manager of most of the AGH hotels. As a result, the Company became the lessee
and manager of most of the hotels owned by the REIT. The purchase price of $95.0
million was paid with a combination of cash and units of limited partnership
interest ("OP Units") in the Company's subsidiary operating partnerships. In
accordance with generally accepted accounting principles, the acquisitions have
been accounted for as a purchase and therefore, the operating results of AGHI
and AGH Leasing have been included in the Company's consolidated financial
statements since the date of acquisition.
The Company's financial statements include the historical results of the
Company's predecessor entity, the management and leasing operations of CapStar,
for all periods and include the operating results of AGH Leasing and AGHI since
August 3, 1998. In addition, prior to August 3, 1998, the Company managed
substantially all of the hotels owned by CapStar and received management fee
revenues from such hotels. Since August 3, 1998, the Company has leased these
hotels from the REIT and therefore records no management fees from such hotels
but instead records room, food and beverage, and other operating department
revenues and expenses from such leases. Therefore, the Company's financial
condition and results of operations as of September 30, 1998 and December 31,
1997 and for the periods ended September 30, 1998 and 1997 reflect significantly
differing numbers of managed and leased hotels throughout the periods. The
following table outlines the Company's historical portfolio of managed and
leased hotels:
<TABLE>
<CAPTION>
MERISTAR CAPSTAR THIRD PARTY OTHER
LEASED MANAGED MANAGED LEASED TOTAL
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/98 102 26,751 -- -- 47 7,729 52 7,440 201 41,920
12/31/97 -- -- 47 12,019 27 4,631 40 5,687 114 22,337
9/30/97 -- -- 41 10,521 27 4,732 1 196 69 15,449
12/31/96 -- -- 19 5,166 28 4,619 --- --- 47 9,785
</TABLE>
FINANCIAL CONDITION
SEPTEMBER 30, 1998 COMPARED WITH DECEMBER 31, 1997
Total assets increased by $167.4 million to $251.8 million at September 30, 1998
from $84.4 million at December 31, 1997. Total liabilities increased by
$137.3 million to $177.0 million from $39.7 million. The increases in assets and
liabilities result primarily from the August 3, 1998 purchase of AGHI and AGH
Leasing. Minority interests increased by $14.6 million from $3.8 million to
$18.4 million primarily due to the issuance of OP Units in conjunction with the
acquisitions of AGHI and AGH Leasing.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenue increased by $188.7 million or 2,775% to $195.5 million in the
three-month period ended September 30, 1998 compared to $6.8 million in the
three-month period ended September 30, 1997. This increase results from the
increase in the number of hotels leased as described above. Management fees and
other revenue decreased because of the change in CapStar hotels from managed to
leased as described above.
Operating expenses increased $184.3 to $187.9 million in the three-month period
ended September 30, 1998 compared to $3.6 million in the three-month period
ended September 30, 1997. The increase reflects the increase in the number of
leased and managed hotels, which resulted in and includes the costs of
additional personnel and other administrative costs incurred in conjunction with
the Company's growth.
Net operating income increased $4.4 million , or 138% , to $7.6 million in the
three-month period ended September 30, 1998 compared to $3.2 million in the
three-month period ended September 30, 1997. Earnings before interest, taxes,
depreciation and amortization (EBITDA) increased $5.3 million to $8.7 million in
the three-month period ended September 30, 1998 compared to $3.4 million in the
three-month period ended September 30, 1997. These increases resulted primarily
from the increase in the number of leased and managed hotels, offset partially
by the costs of additional personnel and other administrative costs incurred as
described above.
Equity in loss of affiliates was $0.3 million in the three-month period ended
September 30, 1998, due to the Company's share of net loss of affiliates
accounted for using the equity method. The Company acquired all such investments
subsequent to September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
Total revenue increased by $257.3 million or 2,737% to $266.7 million in the
nine-month period ended September 30, 1998 compared to $9.4 million in the nine-
month period ended September 30, 1997. This increase results from the increase
in the number of leased and managed hotels as described above.
Operating expenses increased $247.1 million to $255.2 million in the nine-month
period ended September 30, 1998 compared to $8.1 million in the nine-month
period ended September 30, 1997. The increase reflects the increase in the
number of leased and managed hotels, which resulted in and includes the costs of
additional personnel and other administrative costs incurred in conjunction with
the Company's growth.
Net operating income increased $10.4 million, or 845% , to $11.6 million in the
nine-month period ended September 30, 1998 compared to $1.2 million in the nine-
month period ended September 30, 1997 and EBITDA grew $11.7 million to $13.6
million in the nine-month period ended September 30, 1998 from $1.9 million in
the nine-month period ended September 30, 1997. These increases resulted
primarily from the increase in the number of leased and managed hotels, offset
partially by the costs of additional personnel and other administrative costs
incurred as described above.
Equity in loss of affiliates was $1.2 million in the nine-month period ended
September 30, 1998, due to the Company's share of net loss of affiliates
accounted for using the equity method. The Company acquired all such investments
subsequent to September 30, 1997.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations are funded through cash generated from hotel
management and leasing operations and borrowings on the Company's credit
facility. Business acquisitions and investments in affiliates are financed
through a combination of internally generated cash, external borrowings and the
issuance of OP Units and/or Common Stock.
Operating activities provided $20.6 million of net cash in the nine-month period
ended September 30, 1998, mainly due to higher levels of net income,
depreciation and amortization, and accrued expenses and other liabilities due to
the increase in hotels leased. The Company used $116.0 million of cash in
investing activities for the first nine months of 1998, primarily for the
purchase of AGHI and AGH Leasing. Net cash provided by financing activities of
$80.9 million resulted from borrowings under the Company's credit facility and
contributions from CapStar. In conjunction with the Spin-Off, the operating
assets and liabilities of the hotels leased from the REIT were transferred to
the Company, resulting in a payable to the REIT of $20,333 at September 30,
1998.
On August 3, 1998, the Company entered into a three-year, $75,000 revolving
credit agreement (the "Credit Agreement") with the REIT. The interest rate on
the Credit Agreement is 350 basis points over LIBOR. The Credit Agreement
contains certain covenants, including maintenance of financial ratios, reporting
requirements and other customary restrictions. As of September 30, 1998, the
Company had $55,500 in outstanding borrowings under the Credit Agreement, with a
weighted average interest rate of 9.1%.
Under the terms of the participating leases between the Company and the REIT,
the REIT will generally be required to fund significant capital expenditures at
the hotels owned by the REIT.
The Company believes cash generated by operations, together with anticipated
borrowing capacity under the credit facility, will be sufficient to fund its
existing working capital, ongoing capital expenditures, and debt service
requirements. In addition, the Company expects to continue to seek acquisitions
of hotel management businesses and management contracts. The Company expects to
finance these future acquisitions through a combination of anticipated borrowing
capacity under its credit facility and the issuance of OP Units and/or Common
Stock. The Company believes these sources of capital will be sufficient to
provide for the Company's long-term capital needs.
YEAR 2000 CONVERSION
The Company is in the process of conducting a review of its computer systems to
identify the systems that could be affected by the "Year 2000" problem and has
initiated an implementation plan to address the problem.
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected, this could result in
a major systems failure or miscalculations.
The Company's leased and managed hotel properties contain various information
technology and embedded technology systems. Both types of systems contain
microprocessors and microcontrollers that must be assessed for Year 2000
compliance. The Company has developed a comprehensive implementation plan to
address the potential Year 2000 problems caused by such systems. This plan
involves six stages: increase awareness of issue; assign responsibility for
coordinating response to issue; information collection; analysis; modification,
repair or replacement; and testing. The Company is currently in its information
collection stage, and expects to complete this stage by late November 1998. The
subsequent stages are expected to be completed as follows: analysis -- December
1998; modification, repair or replacement -- April 1999; and testing -- June
1999. As an additional part of its implementation plan to address the Year 2000
problem, the Company has also initiated communications with third parties with
which it has material relationships to determine the extent of potential Year
2000 problems with these parties' services provided to the Company.
The most critical of these services involve such items as reservations systems
for the Company's hotels. Without such systems, the Company could suffer a
material decline in business at many of its properties. The Company expects to
complete its communications and assessment of third parties' services by March
1999. Also, the Company expects to develop contingency plans in 1999 to allow
for manual or other alternative operation of certain computerized systems, in
the event that modification, repair, and replacement efforts are not completed
timely.
The Company anticipates completing its Year 2000 implementation plan no later
than June 30, 1999, which is prior to any anticipated impact on its operating
systems. Historical costs incurred to address the Year 2000 problem include
approximately $0.2 million. The Company expects that essentially all of the
future expenditures required to modify, repair, and replace computerized systems
at its leased and managed hotel properties will be the financial responsibility
of the owners of those properties. The Company has not yet developed a final
cost estimate related to fixing Year 2000 issues, but an initial estimate of
these remediation costs for all of its leased and managed properties is $15-25
million. This cost estimate is based on the Company's preliminary assessment,
and will be refined and adjusted as the Company continues to complete the stages
of its implementation plan to address the potential Year 2000 problems.
12
<PAGE>
Based on its preliminary assessment, the Company believes that its risks of Year
2000 non-compliance (that is, its "most reasonably likely worst case scenario"),
with modifications to existing software and converting to new software, will not
pose significant operational problems for the Company's computer systems as so
modified and converted. If, however, such modifications and conversions are not
completed timely, the Year 2000 problem could have a material impact on the
Company's financial position and operations. The Company's operations are
highly dependent upon efficient operating systems at its properties. To the
extent that the Year 2000 problems materially affect the conduct of operations
at those properties, it is likely that the Company's ability to efficiently
manage operations would be materially affected. Also, as discussed above, the
vast majority of expenditures related to Year 2000 problems at the Company's
leased and managed properties will be the financial responsibility of the owners
of those properties. To the extent that those owners are unable or unwilling to
modify, repair, and replace systems with potential Year 2000 problems, the
Company could suffer material adverse financial consequences.
SEASONALITY
Demand in the lodging industry is affected by recurring seasonal patterns.
Demand is lower in the winter months due to decreased travel and higher in the
spring and summer months during peak travel season. Therefore, the Company's
operations are seasonal in nature. Assuming other factors remain constant, 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.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 successfully to
implement its operating strategy; the Company's ability to manage expansion;
lease rental rates; changes in economic cycles; competition from other
hospitality companies; the ability of the REIT to acquire properties which will
be leased to the Company; the availability of financing to the Company and to
the REIT; changes in the laws and governmental regulations applicable to the
relationship between the REIT and the Company; and special risks associated with
the Merger (including the integration of CapStar with AGH and changes in the
laws and governmental regulations applicable to the structure of the Merger and
the related transactions.)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 -- Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 3, 1998 and filed on August 14, 1998,
regarding the spin-off of MeriStar Hotels & Resorts, Inc. and the acquisitions
of American General Hospitality, Inc. and AGH Leasing, L.P.
14
<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 Hotels & Resorts, Inc.
Dated: November 16, 1998 /s/ JAMES A. CALDER
---------------------
James A. Calder
Chief Financial Officer
15
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