<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 March 31, 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 1-14331
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 May 8, 2000 was 31,763,024.
<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 -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 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 14
PART II. OTHER INFORMATION 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 13,099 $ 1,726
Accounts receivable, net of allowance for doubtful
accounts of $2,410 and $2,090 68,955 47,976
Prepaid expenses 5,509 3,589
Deposits and other 9,120 8,388
-------- --------
Total current assets 96,683 61,679
-------- --------
Fixed assets:
Furniture, fixtures, and equipment 16,161 14,832
Accumulated depreciation (2,893) (2,522)
-------- --------
Total fixed assets, net 13,268 12,310
-------- --------
Investments in and advances to affiliates 33,075 30,018
Intangible assets, net of accumulated
amortization of $9,198 and $7,927 154,604 153,927
Restricted cash 4 210
-------- --------
$297,634 $258,144
======== ========
Liabilities, Minority Interests, and Stockholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $106,634 $ 96,603
Due to affiliates, net 23,725 11,476
Income taxes payable 80 80
Long-term debt, current portion 224 10
-------- --------
Total current liabilities 130,663 108,169
Deferred income taxes 14,680 13,247
Long-term debt 65,136 57,752
-------- --------
Total liabilities 210,479 179,168
Minority interests 13,784 13,774
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share:
Authorized - 100,000 shares
Issued and outstanding -31,729 and 29,625 shares 317 296
Additional paid-in capital 63,377 57,637
Retained earnings 9,676 7,236
Accumulated other comprehensive income 1 33
-------- --------
Total stockholders' equity 73,371 65,202
-------- --------
$297,634 $258,144
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Revenue:
Rooms $236,306 $228,313
Food and beverage 74,386 72,313
Other operating departments 24,408 23,367
Management and other fees 5,396 1,845
-------- --------
Total revenue 340,496 325,838
-------- --------
Operating expenses by department:
Rooms 54,000 52,567
Food and beverage 54,024 53,296
Other operating departments expenses 13,440 10,712
Undistributed operating expenses:
Administrative and general 57,469 55,709
Property operating costs 48,214 45,439
Participating lease expense 106,241 106,275
Depreciation and amortization 1,643 1,549
-------- --------
Total operating expenses 335,031 325,547
-------- --------
Net operating income 5,465 291
Interest expense, net 1,191 1,226
-------- --------
Income before minority interests and income taxes 4,274 (935)
Minority interests 401 (161)
-------- --------
Income before income taxes 3,873 (774)
Income taxes 1,433 (309)
-------- --------
Net income $ 2,440 $ (465)
======== ========
Earnings per share :
Basic $0.08 $ (0.02)
======== ========
Diluted $0.08 $ (0.02)
======== ========
</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>
Three Months Ended
March 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 2,440 $ (465)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,643 1,549
Minority interests 401 (161)
Deferred income taxes 1,433 (309)
Changes in operating assets and liabilities:
Accounts receivable, net (20,979) (16,232)
Deposits and other (732) (1,595)
Prepaid expenses (1,920) 361
Accounts payable, accrued expenses and other liabilities 10,031 19,774
Due to affiliates, net 12,249 17,926
-------- --------
Net cash provided by operating activities 4,566 20,848
-------- --------
Investing activities:
Purchases of fixed assets (1,315) (794)
Investments in and advances to affiliates (3,057) (13,814)
Purchases of intangible assets (348) (159)
Change in restricted cash 206 564
-------- --------
Net cash used in investing activities (4,514) (14,203)
-------- --------
Financing activities:
Proceeds from issuance of long term debt 101,500 48,000
Principal payments on long term debt (93,902) (58,170)
Proceeds from issuances of common stock, net 5,329 246
Deferred costs (1,600) -
-------- --------
Net cash provided by (used in) financing activities 11,327 (9,924)
-------- --------
Effect of exchange rate changes on cash (6) (70)
-------- --------
Net increase (decrease) in cash and cash equivalents 11,373 (3,349)
Cash and cash equivalents, beginning of period 1,726 11,155
-------- --------
Cash and cash equivalents, end of period $ 13,099 $ 7,806
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERISTAR HOTELS & RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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.
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, renovation supervision, corporate, accounting, finance,
insurance, legal, tax, information technology, human resources, acquisition
identification and due diligence, 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 March 31, 2000, the Company leased or managed 217 hotels with 46,325 rooms
in 33 states, the District of Columbia, Canada and the U.S. Virgin Islands.
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 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.
The Company's participating leases have noncancelable remaining terms ranging
from 9 to 14 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
6
<PAGE>
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.
In accordance with Emerging Issues Task Force ("EITF") Issue No. 98-9,
"Accounting for Contingent Rent in Interim Financial Periods", during interim
reporting periods the Company recognizes contingent rental expense prior to the
achievement of the specified target that triggers the contingent rental expense
if the achievement of the specified target by the end of the fiscal year is
considered probable. This 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. The Company has made
cash lease payments in excess of the expense that the Company is required to
recognize under EITF No. 98-9 for the interim period ended March 31, 2000. The
Company recognized lease expense in excess of the cash lease payments during the
interim period ended March 31, 1999. As of March 31, 2000 and 1999, this
resulted in a prepaid expense of $514 and an accrued liability of $3,920,
respectively, which are included on the Company's condensed consolidated balance
sheets.
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires an enterprise to display comprehensive income
and its components in a financial statement to be included in an enterprise's
full set of annual financial statements or in the notes to interim financial
statements. Comprehensive income represents a measure of all changes in equity
of an enterprise that result from recognized transactions and other economic
events for the period other than transactions with owners in their capacity as
owners. Comprehensive income of the Company includes net income and other
comprehensive income from foreign currency items. For the three months ended
March 31, 2000, net income was $2,440, other comprehensive income, net of tax,
was $(32) and comprehensive income was $2,408. For the three months ended March
31, 1999, net income was $(465), other comprehensive income, net of tax, was
$(28) and comprehensive income was $(493).
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ -----------------
<S> <C> <C>
New Credit Facility.......................... $65,000 $ -
Credit Facility.............................. - 57,000
Other........................................ 360 762
------------------ -----------------
65,360 57,762
Less current portion......................... (224) (10)
------------------ -----------------
$65,136 $57,752
================== =================
</TABLE>
On February 29, 2000, the Company entered into a $100 million senior secured
credit facility with a syndicate of banks (the "New Credit Facility"). The New
Credit Facility bears interest at the 30-day London Inter-Bank Offered Rate
plus 350 basis points and expires in February 2002 with a one-year extension
option. On March 1, 2000, the Company drew down $65 million at an interest rate
of 9.4% to repay the borrowings outstanding under the revolving credit agreement
with the REIT (the "Credit Facility").
Upon execution of the New Credit Facility, the Credit Facility was amended to
reduce the maximum borrowing limit from $75 million to $50 million.
Aggregate future maturities of the above obligations are as follows: 2000-$224;
2001-$136; and 2002-$65,000.
7
<PAGE>
4. EARNINGS PER SHARE
Earnings per share ("EPS") has been calculated using net income for the three
months ended March 31, 2000 and 1999. The following tables present the
computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31,
-------------------------------
<S> <C> <C>
2000 1999
------- -------
BASIC EPS
COMPUTATION:
Net income $ 2,440 $ (465)
Weighted average number of shares 25,485
of Common Stock outstanding 31,632 --------
-------
Basic earnings per share $ 0.08 $ (0.02)
======= ========
DILUTED EPS
COMPUTATION:
Net income $ 2,440 $ (465)
Minority interest, net of tax 44 -
------- --------
Adjusted net income $ 2,484 $ (465)
======= ========
Weighted average number of shares 25,485
of Common Stock outstanding 31,632
Common stock equivalents-OP Units 1,024 -
Common stock equivalents-stock 106 -
options ------- --------
Total weighted average number of
diluted shares of common stock
outstanding 32,762 25,485
------- --------
Diluted earnings per share $ 0.08 $ (0.02)
======= ========
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31,
---------------------------------
<S> <C> <C>
2000 1999
------- -------
Cash paid for interest $ 761 $1,469
Non-cash investing and financing activities:
Conversion of OP Units to common stock 391 -
</TABLE>
6. SEGMENTS
The Company is organized into three primary operating divisions: hotel
operations ("Hotel Operations"), golf management and vacation ownership. Each
division is managed separately because of its distinctive products and services.
Hotel Operations is the Company's only reportable operating segment. In 1999,
the Company was organized into three different operating segments: upscale,
full-service hotels ("Hotels"); premium limited-service hotels and inns
("Inns"); and resort properties ("Resorts"). In 2000, the Company reorganized
its operations into the current operating divisions. The 1999 operating
segments have been combined with other hotel operations to form the Hotel
Operations operating division. The Company's management evaluates performance
of each segment based on earnings before interest, taxes, depreciation, and
amortization ("EBITDA"). The accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
8
<PAGE>
The following are the segment disclosures for the Hotel Operations as of and for
the three months ended March 31:
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
Revenue $338,827 $324,348
---------------- ----------------
EBITDA $ 7,086 $ 1,878
---------------- ----------------
Total Assets $295,300 $272,726
================ ================
</TABLE>
The following is a reconciliation of the segment information to the Company's
consolidated data as of and for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Revenues EBITDA Assets
---------------- ---------------- -----------
<S> <C> <C> <C>
Hotel Operations $338,827 $7,086 $295,300
Other Items 1,669 22 2,334
---------------- ---------------- -----------
Per Financial Statements $340,496 $7,108 $297,634
================ ================ ===========
</TABLE>
The following is a reconciliation of the segment information to the Company's
consolidated data as of and for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
Revenues EBITDA Assets
---------------- ---------------- -----------
<S> <C> <C> <C>
Hotel Operations $324,348 $1,878 $272,726
Other Items 1,490 (38) 1,652
---------------- ---------------- -----------
Per Financial Statements $325,838 $1,840 $274,378
===================================================
</TABLE>
The other items in the tables above represent operating segment activity and
assets for the non-reportable segments.
Revenues for Canadian operations totaled $4,425 and $4,484 for the three months
ended March 31, 2000 and 1999, respectively.
7. ACQUISITION
On March 23, 2000, the Company entered into an agreement to acquire all of the
outstanding shares of common stock of BridgeStreet Accommodations, Inc.
("BridgeStreet") for $1.50 in cash and 0.5 shares of the Company's common stock
for each share of BridgeStreet common stock outstanding. BridgeStreet provides
corporate housing services in the United States, Toronto, Canada, and the United
Kingdom. The transaction is expected to close during the second quarter of 2000.
Based on the current stock price, the total purchase price of the acquisition
would be approximately $38.6 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are the lessee, manager and operator of a portfolio of primarily upscale,
full-service hotels in the United States and Canada. Our portfolio is
diversified by franchise and brand affiliations. Our subsidiary, MeriStar H&R
Operating Company, L.P., conducts all of our operations. We are the sole
general partner of MeriStar H&R and control its operations.
On August 3, 1998, American General Hospitality Corporation and CapStar Hotel
Company merged together to form MeriStar Hospitality Corporation, a real estate
investment trust. As part of that merger, CapStar formed our company to become
the lessee, manager and operator of substantially all of the hotels owned or
leased by American General and CapStar before the merger. At the time of the
merger, CapStar distributed all of the shares of our common stock to its
stockholders and we became a separate, publicly traded company.
We manage all of the hotels CapStar leased and/or managed for third-party owners
before the merger. Immediately after the merger, we acquired all of the
partnership interests in AGH Leasing, L.P., the third-party lessee that leased
most of the hotels American General owned. We also acquired substantially all
of the assets and some liabilities of American General Hospitality, Inc., the
third-party manager that managed most of the hotels American General owned.
The following table outlines our historical portfolio of managed and leased
hotels as of the dates indicated:
<TABLE>
<CAPTION>
REIT OTHER THIRD PARTY
LEASED LEASED MANAGED TOTAL
--------------------------------------------------------------------------------------------------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/31/00 108 28,055 52 7,538 57 10,732 217 46,325
12/31/99 108 28,055 53 7,600 54 9,693 215 45,348
3/31/99 109 28,175 53 7,608 41 6,800 203 42,583
12/31/98 109 28,058 53 7,608 41 6,800 203 42,466
</TABLE>
We also manage or are otherwise affiliated with 10 golf courses. Our golf
course management operations are not material to any period presented.
In December 1999, the Real Estate Investment Trust Modernization Act became law.
The Real Estate Investment Trust Modernization Act now permits real estate
investment trusts to create a taxable subsidiary on or after January 1, 2000,
which will be subject to taxation similar to a C-Corporation. MeriStar
Hospitality Corporation plans to establish a taxable subsidiary. The taxable
subsidiary will be allowed to lease the real property owned by MeriStar
Hospitality Corporation. Therefore, all of our lease contracts with MeriStar
Hospitality Corporation will be transferred to their taxable subsidiary.
Concurrently, we expect to enter into management agreements with MeriStar
Hospitality Corporation for these same hotels.
We have established a subcommittee of independent members of our Board of
Directors to negotiate the transfer of our existing leases. Since this process
is a significant change from the business structure we have maintained, it is
not currently possible to predict the outcome of these negotiations. The amount
of consideration, if any, to be exchanged with MeriStar Hospitality Corporation
is subject to completion of these negotiations. We intend to conclude these
negotiations during 2000 and to transfer the leases to MeriStar Hospitality
Corporation effective January 1, 2001.
On March 23, 2000, we entered into an agreement to acquire all of the
outstanding shares of common stock of BridgeStreet Accommodations, Inc. for
$1.50 in cash and 0.5 shares of our common stock for each share of BridgeStreet
common stock outstanding. BridgeStreet provides corporate housing services in
the United States, Toronto, Canada, and the United Kingdom. We expect this
transaction to close during the second quarter of 2000. Based on the current
stock price, the total purchase price of the acquisition would be approximately
$38.6 million.
<PAGE>
Financial Condition
Assets
- ------
Our total assets increased by $39.5 million to $297.6 million at March 31, 2000
from $258.1 million at December 31, 1999 primarily due to the following:
. Investments in and advances to affiliates increased by $3.1 million due
to our investments in MIP Lessee, L.P.; STS Hotel Net, a company that
provides high-speed Internet portals to guest rooms; and other hotel
ventures;
. Accounts receivable increased $21.0 million due to an increase of $34.2
million in our revenues in the first quarter of 2000 compared to the
fourth quarter of 1999; and
. Cash and cash equivalents increased $11.4 million resulting from net
operating activity and additional borrowings on our credit facility.
Our assets include a substantial amount of intangible assets, primarily related
to our acquisitions of hotel management companies in 1997 and 1998. We evaluate
the carrying values of our long-lived intangible assets periodically in relation
to their operating performance and expected future undiscounted cash flows of
the underlying assets. Through March 31, 2000, our evaluations have not
indicated a need to adjust the carrying value of our intangible assets. Over the
past two years, however, the lodging industry has experienced the negative
effects of the supply of new rooms in some hotel product types and geographic
regions exceeding demand. As a result, we will continue to regularly evaluate
the recoverability of our intangible assets.
Liabilities
- -----------
Our total liabilities increased by $31.3 million to $210.5 million at March 31,
2000 from $179.2 million at December 31, 1999 primarily due to the following:
. Accounts payable, accrued expenses and other liabilities increased $10.0
million due to higher operating expenses before participating lease
expense for the first quarter 2000 as compared to the fourth quarter
1999;
. Due to affiliates increased $12.2 million primarily due to the
participating rent payable balance at March 31, 2000 being $13.2 million
higher than at December 31, 1999; and
. Long-term debt increased $7.3 million due to borrowings under our new
credit facility to fund short term operating requirements.
Stockholders' Equity
- --------------------
Stockholders' equity increased $8.2 million primarily due to the sale of
1,818,182 shares of our common stock to our joint venture partner in MIP Lessee,
L.P. and the net income of $2.4 million for the quarter.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues
- ---------
Total revenue increased $14.7 million or 4.5% to $340.5 million in the three
months ended March 31, 2000 compared to $325.8 million in the three months ended
March 31, 1999. The increase in revenue is primarily the result of an increase
in the number of third party managed hotels and a 3.4% improvement in revenue
per available room from our leased hotels. This improvement in revenue per
available room was primarily the result of a 4.3% increase in the average daily
rate. The following table provides our operating statistics for our leased
hotels on a pro forma basis for the quarter:
<TABLE>
<S> <C> <C> <C>
2000 1999 Change
------------- ------------- -------------
Revenue per available room $ 79.31 $ 76.71 3.4%
Average daily rate $112.44 $107.84 4.3%
Occupancy 70.5% 71.1% (0.08)%
</TABLE>
<PAGE>
Operating Expenses
- ------------------
Operating expenses increased $9.5 million or 2.9% to $335.0 million in the three
months ended March 31, 2000 compared to $325.5 million in the three months ended
March 31, 1999. The increase reflects the increased departmental operating costs
of our leased hotels associated with the increase in revenue.
Earnings Before Interest, Taxes, Depreciation and Amortization
- --------------------------------------------------------------
Earnings before interest, taxes, depreciation and amortization increased to $7.1
million in the three months ended March 31, 2000 compared to $1.8 million in the
three months ended March 31, 1999. The increase in earnings before interest,
taxes, depreciation and amortization is primarily due to the increase in the
number of hotels managed by us in 2000 compared to 1999. This increase in
managed hotels resulted in a $3.6 million increase in management and other fees.
The remaining $1.7 million increase in earnings before interest, taxes,
depreciation and amortization resulted from the increase in revenues at our
leased hotels.
Minority interest and taxes increased by $0.6 million and $1.7 million,
respectively, due to higher operating income as compared to 1999.
Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in
Interim Financial Periods" 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 accounting
pronouncement relates only to our recognition of lease expense in interim
periods for financial reporting purposes; it has no effect on the timing of rent
payments under our leases or our annual lease expense calculations. We made cash
lease payments in excess of the expense we were required to recognize under EITF
No. 98-9 during the interim period ended March 31, 2000. We recognized lease
expense in excess of the cash lease payments during the interim period ended
March 31, 1999. As of March 31, 2000 and 1999, this resulted in a prepaid
expense of $514 and an accrued liability of $3,920, respectively, which are
included on our condensed consolidated balance sheets. The effect on our
financial statements is as follows (in thousands, except for per share amounts):
Three Months Ended March 31, 2000
---------------------------------
<TABLE>
<CAPTION>
Prior to Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
---------------- -------------- --------------
<S> <C> <C> <C>
Net operating income $ 4,951 $ 514 $ 5,465
Interest expense, net (1,191) - (1,191)
Minority interest (287) (114) (401)
Income taxes (1,285) (148) (1,433)
------- ----- -------
Net income $ 2,188 $ 252 $ 2,440
======= ===== =======
Diluted earnings per share $ 0.07 $0.08
======= =======
</TABLE>
Three Months Ended March 31, 1999
---------------------------------
<TABLE>
<CAPTION>
Prior to Effect Effect After Effect
of of of
EITF No. 98-9 EITF No. 98-9 EITF No. 98-9
---------------- -------------- --------------
<S> <C> <C> <C>
Net operating income $ 4,211 $(3,920) $ 291
Interest expense, net (1,226) - (1,226)
Minority interest (512) 673 161
Income taxes (989) 1,298 309
------- ------- -------
Net income $ 1,484 $(1,949) $ (465)
======= ======= =======
Diluted earnings per share $ 0.06 $(0.02)
======= =======
</TABLE>
<PAGE>
Liquidity and Capital Resources
Sources of Cash
Our continuing operations are funded through cash generated from hotel
management and leasing operations. We finance business acquisitions and
investments in affiliates through a combination of internally generated cash,
external borrowings and the issuance of partnership interests and/or common
stock. We generated $4.6 million from operations in the first three months of
2000.
We generated $11.3 million of cash from financing activities during the first
three months of 2000 primarily from the following:
. We received $65.0 million from our new credit facility;
. We made $57.1 million of net principal payments on our credit facility
with MeriStar Hospitality Corporation; and
. We received $5.3 million from the issuances of our common stock.
Under the terms of the participating lease agreements with our lessors, our
lessors will generally be required to fund significant capital expenditures at
the hotels we lease.
Uses of Cash
We used $4.5 million of cash in investing activities during the first three
months of 2000 primarily for the following:
. Our $1.3 million of fixed asset purchases; and
. Our investments of $3.1 million in hotel partnerships.
Revolving Credit Facilities
On February 29, 2000, we entered into a $100.0 million senior secured revolving
credit facility with a syndicate of banks. The credit facility bears interest at
the 30-day London Inter-Bank Offered Rate plus 350 basis points and expires in
February 2002 with an optional one-year extension. We drew down $65 million at
an interest rate of 9.4% to repay the borrowings outstanding under the revolving
credit agreement with MeriStar Hospitality Corporation.
Upon execution of this new credit facility, the facility with MeriStar
Hospitality Corporation was amended to reduce the maximum borrowing limit from
$75 million to $50 million.
Summary
We believe cash generated by our operations, together with anticipated borrowing
capacity under our credit facilities, will be sufficient to fund our
requirements for working capital, capital expenditures, and debt service. We
expect to continue to seek acquisitions of hotel, resort and golf management
businesses and management contracts. In addition, we expect to expand our
business into vacation ownership development and management and, through the
acquisition of BridgeStreet, to corporate (extended-stay) housing. We expect to
finance future acquisitions through a combination of additional borrowings under
our credit facilities and the issuance of partnership interests and/or our
common stock. We believe these sources of capital will be sufficient to provide
for our long-term capital needs.
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 our hotels are non-resort properties, our operations
generally reflect non-resort seasonality patterns. Excluding the effect of
Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in
Interim Financial Periods", we have 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our credit
facilities that impact the fair value of these obligations. Our interest rate
risk management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. We have not
entered into any derivative or interest rate transactions.
Our long-term debt of $65.0 million at March 31, 2000 matures in February 2002
with an optional one-year extension. Interest on the debt is variable, based on
the 30-day London Interbank Offered Rate plus 350 basis points. The interest
rate was 9.4% at March 31, 2000. We have determined that the fair value of the
debt approximates its carrying value.
Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows as of and for the three months ended March 31, 2000. Additionally,
foreign currency transaction gains and losses were not material to our results
of operations for the three months ended March 31, 2000. Accordingly, we were
not subject to material foreign currency exchange rate risk from the effects
that exchange rate movements of foreign currencies would have on our future
costs or on future cash flows we would receive from our foreign subsidiaries.
To date, we have 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.
<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 successfully
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
Current Report on Form 8-K dated and filed on March 24, 2000,
regarding the merger of MeriStar Hotels & Resorts, Inc. with BridgeStreet
Accommodations, Inc.
<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: May 8, 2000 /s/ James A. Calder
-------------------
James A. Calder
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,099
<SECURITIES> 0
<RECEIVABLES> 71,365
<ALLOWANCES> 2,410
<INVENTORY> 6,792
<CURRENT-ASSETS> 96,683
<PP&E> 16,161
<DEPRECIATION> 2,893
<TOTAL-ASSETS> 297,634
<CURRENT-LIABILITIES> 130,663
<BONDS> 65,136
0
0
<COMMON> 317
<OTHER-SE> 73,054
<TOTAL-LIABILITY-AND-EQUITY> 297,634
<SALES> 0
<TOTAL-REVENUES> 340,496
<CGS> 0
<TOTAL-COSTS> 121,464
<OTHER-EXPENSES> 213,968
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,191
<INCOME-PRETAX> 3,873
<INCOME-TAX> 1,433
<INCOME-CONTINUING> 2,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,440
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
