INTERSTATE HOTELS & RESORTS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002 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

Interstate Hotels & Resorts, Inc.
(Exact name of Registrant as specified in its Charter)


DELAWARE		52-2101815
(State of Incorporation)		(IRS Employer Identification No.)

(Address of Principal Executive Offices)(Zip Code)

202-965-4455
(Registrant’s Telephone Number, Including Area Code)

MeriStar Hotels & Resorts, Inc.
(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 August 13, 2002 was 20,198,336.

EXPLANATORY NOTE

Interstate Hotels & Resorts, Inc., a Delaware corporation (formerly known as “MeriStar Hotels & Resorts, Inc.”) (the “Registrant”), and Interstate Hotels Corporation (“the Company”) entered into an Agreement and Plan of Merger, dated May 1, 2002 and as amended on June 3, 2002 (the “Merger Agreement”), pursuant to which the Company merged with and into the Registrant (the “Merger”). On July 31, 2002, after receiving the required stockholder approvals, pursuant to the Merger Agreement, the Registrant and the Company completed the Merger. As a result of the Merger and in accordance with the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations,” the Company will be considered the acquiring enterprise for financial reporting purposes. Accordingly, this Form 10-Q for the quarter ended June 30, 2002 presents the Company’s historical financial information for that period.

INDEX


		Page No.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets — December 31, 2001 and June 30, 2002	2
	Condensed Consolidated Statements of Operations — Three Months and Six Months Ended June 30, 2001 and June 30, 2002	3
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2001 and June 30, 2002	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	20
Item 5.	Forward Looking Information	20
Item 6.	Exhibits and Reports on Form 8-K	20

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

INTERSTATE HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)


			December 31,			June 30,
			2001			2002

			(A)			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	39,040		$	24,372
	Accounts receivable, net of allowance for doubtful accounts of $227 in 2001 and $260 in 2002			9,080			16,126
	Deferred income taxes			2,204			2,907
	Prepaid expenses and other assets			1,941			1,845

		Total current assets		52,265			45,250
Restricted cash				1,348			1,376
Marketable securities				2,548			2,518
Property and equipment, net				14,390			13,854
Officers and employees notes receivable				2,028			2,114
Affiliates notes receivable, net of reserve for uncollectible notes receivable of $666				1,718			2,119
Equity investments in hotel real estate				11,220			9,490
Deferred income taxes				5,479			6,133
Intangible and other assets				17,673			14,619

		Total assets	$	108,669		$	97,473


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable—trade		$	1,038		$	314
	Accounts payable—health trust			4,424			4,711
	Accrued payroll and related benefits			5,092			2,687
	Other accrued liabilities			7,048			10,632
	Current portion of long-term debt			1,601			6,575

		Total current liabilities		19,203			24,919
Deferred compensation				2,548			2,518
Long-term debt				39,380			14,095

		Total liabilities		61,131			41,532
Minority interest				433			433
Mandatorily redeemable preferred stock				5,070			–
Commitments and contingencies				–			–
Stockholders’ equity:
	Preferred stock, $.01 par value; 10,000,000 shares authorized; 725,000 and 10 shares issued and outstanding and classified as mandatorily redeemable preferred stock at December 31, 2001 and June 30, 2002, respectively			–			–
	Common stock, $.01 par value; 64,939,361 shares authorized; 5,730,440 and 12,271,780 shares issued and outstanding at December 31, 2001 and June 30, 2002, respectively			57			123
	Common stock options/warrants			–			790
	Paid-in capital			64,955			90,525
	Retained deficit			(22,977	)		(35,930	)

		Total stockholders’ equity		42,035			55,508

		Total liabilities and stockholders’ equity	$	108,669		$	97,473

(A) The year-end balance sheet information was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

See accompanying notes to condensed consolidated financial statements.

INTERSTATE HOTELS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)


		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2001			2002			2001			2002

Lodging revenues		$	1,423		$	779		$	2,524		$	1,455
Net management fees			6,404			6,336			12,880			11,994
Other fees			4,437			5,451			7,945			9,464

			12,264			12,566			23,349			22,913
Other revenues from managed hotels			70,454			71,874			139,859			134,315

			82,718			84,440			163,208			157,228

Lodging expenses			939			549			1,718			1,030
General and administrative			2,911			3,742			5,748			5,685
Payroll and related benefits			5,461			6,279			10,818			10,522
Tender Offer costs (Note 6)			–			881			–			1,000
Depreciation and amortization			2,694			2,582			5,400			5,110

			12,005			14,033			23,684			23,347
Other expenses from managed hotels			70,454			71,874			139,859			134,315

			82,459			85,907			163,543			157,662

Operating income (loss)			259			(1,467	)		(335	)		(434	)
Other (expense) income:
	Interest, net		(165	)		(2,160	)		(232	)		(3,135	)
	Other, net		16			–			16			–
	Earnings (losses) from equity investments in hotel real estate		141			(416	)		318			(596	)

Income (loss) before income tax expense (benefit)			251			(4,043	)		(233	)		(4,165	)
Income tax expense (benefit)			79			(1,105	)		(129	)		(1,176	)

Income (loss) before minority interest			172			(2,938	)		(104	)		(2,989	)
Minority interest			54			(12	)		90			52

Net income (loss)			118			(2,926	)		(194	)		(3,041	)
Mandatorily redeemable preferred stock:
	Dividends		159			148			318			307
	Accretion		15			340			30			355
	Conversion incentive payment		–			9,250			–			9,250

Net loss available to common stockholders		$	(56	)	$	(12,664	)	$	(542	)	$	(12,953	)

Earnings per common share and common share equivalent:
	Basic	$	(.01	)	$	(2.08	)	$	(0.08	)	$	(2.19	)

	Diluted	$	(.01	)	$	(2.08	)	$	(0.08	)	$	(2.19	)

Weighted average number of common share and common share equivalents outstanding:
	Basic		6,538,917			6,094,217			6,510,209			5,913,333

	Diluted		6,538,917			6,094,217			6,510,209			5,913,333

See accompanying notes to condensed consolidated financial statements.

INTERSTATE HOTELS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


				Six Months Ended
				June 30,

				2001			2002

Operating activities:
	Net loss			$	(194	)	$	(3,041	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			5,400			5,110
		(Earnings) losses from equity investments in hotel real estate			(318	)		596
		Minority interest			90			52
		Deferred income taxes			(793	)		(1,357	)
		Amortization of mandatorily redeemable preferred stock			376			1,375
		Stock option expense			287			790
		Other			174			2,082
	Changes in operating assets and liabilities:
		Accounts receivable, net			1,711			(7,448	)
		Prepaid expenses and other assets			555			51
		Accounts payable			(8,618	)		(2,842	)
		Accrued liabilities			(7,441	)		3,072

			Net cash used in operating activities		(8,771	)		(1,560	)

Investing activities:
	Change in restricted cash				892			(28	)
	Purchases of property and equipment, net				(388	)		(44	)
	Purchases of marketable securities				(2,921	)		(1,061	)
	Proceeds from sale of marketable securities				2,394			795
	Net cash (invested for) received from equity investments in hotel and real estate				(8,179	)		134
	Change in officers and employees notes receivable, net				1,078			(176	)
	Net investment in management agreements				(471	)		–
	Change in affiliates notes receivable, net				(154	)		1
	Merger-related acquisition costs				–			(1,729	)
	Deposits and other				(229	)		64

			Net cash used in investing activities		(7,978	)		(2,044	)

Financing activities:
	Proceeds from long-term debt				4,169			–
	Repayment of long-term debt				(49	)		(1,555	)
	Financing fees paid				(262	)		(42	)
	Proceeds from issuance of common stock				215			80
	Dividends paid on mandatorily redeemable preferred stock				(318	)		(307	)
	Common stock repurchased and retired				(71	)		–
	Conversion incentive payment				–			(9,250	)
	Other				(1	)		10

			Net cash provided by (used in) financing activities		3,683			(11,064	)

Net decrease in cash and cash equivalents					(13,066	)		(14,668	)
Cash and cash equivalents at beginning of period					51,327			39,040

Cash and cash equivalents at end of period				$	38,261		$	24,372

See accompanying notes to condensed consolidated financial statements.

INTERSTATE HOTELS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands, except per share amounts)

1. Organization and Basis of Presentation:

Interstate Hotels Corporation and its subsidiaries (the “Company”) is one of the largest independent hotel management companies in the United States based on number of properties, number of rooms and total revenues produced for owners. At June 30, 2002, the Company managed or performed related services (including insurance and risk management services, purchasing and project management services and centralized accounting services) for 136 hotels with a total of 29,038 rooms in 36 states in the United States, the District of Columbia, Canada and Russia. The Company wholly owns one of these properties, the 156-suite Pittsburgh Airport Residence Inn by Marriott (the “Owned Hotel”), which it acquired in 1999, and has non-controlling equity interests in 12 of these hotels.

The Company, together with its subsidiaries and predecessors, was formed on June 18, 1999, pursuant to a series of events culminating in the spin-off of the Company’s operations from Wyndham International, Inc. (“Wyndham”) (the “Spin-off”).

The accompanying 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 have been omitted pursuant to such rules and regulations. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements, notes thereto and other information included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2001.

The accompanying consolidated interim financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues 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.

2. Change in Accounting:

Effective January 1, 2002, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 01-14 “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.” This issue establishes standards for accounting for reimbursements received for out-of-pocket expenses incurred and the characterization as revenue and expense in the statement of operations. In accordance with EITF Issue No. 01-14, the Company has included in operating revenues and expenses the reimbursement of costs incurred on behalf of the third-party owners of the Company’s managed hotels. These costs relate primarily to payroll and benefit costs at managed hotels where the Company is the employer. These reimbursements are received based upon the costs incurred by the Company with no added margin. Therefore, the adoption of EITF Issue No. 01-14 did not impact operating income, earnings per share, cash flows or the financial position of the Company.

The effect of adopting EITF Issue No. 01-14, which was retroactively applied for all periods presented, was an increase in operating revenues and expenses of $


(A)		The year-end balance sheet information was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.