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 September 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.)

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)

MeriStar Hotels and 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 November 11, 2002 was 20,303,540.

INTERSTATE HOTELS & RESORTS, INC.

INDEX

Page


PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
	Condensed Consolidated Balance Sheets - September 30, 2002 and December 31, 2001	3
	Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) – Three Months and Nine Months Ended September 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
ITEM 2:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
ITEM 4:	CONTROLS AND PROCEDURES	29
PART II. OTHER INFORMATION
ITEM 1:	LEGAL PROCEEDINGS	30
ITEM 2:	CHANGES IN SECURITIES	30
ITEM 4:	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	30
ITEM 5:	OTHER INFORMATION	32
ITEM 6:	EXHIBITS AND REPORTS ON FORM 8-K	33

PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

INTERSTATE HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


					September 30,			December 31,
					2002			2001

					(unaudited)
Assets
Current Assets:
				Cash and cash equivalents	$	12,937		$	39,040
				Accounts receivable, net of allowance for doubtful accounts of $3,896 and $227, in 2002 and 2001, respectively		23,776			9,080
				Due from MeriStar Hospitality		9,954			—
				Deferred income taxes		—			2,204
				Prepaid expenses and other		10,715			1,941

Total current assets						57,382			52,265
Restricted cash						1,049			1,348
Marketable securities						2,186			2,548
Property and equipment, net						27,975			14,390
Officers and employees notes receivable						217			2,028
Investments in and advances to affiliates, net of reserve of $666 in 2002 and 2001						28,852			12,938
Deferred income taxes						15,264			5,479
Goodwill						90,750			—
Intangible and other assets, net of accumulated amortization						69,535			17,673

	Total assets				$	293,210		$	108,669

Liabilities, Minority Interests, and Stockholders’ Equity
Current Liabilities:
			Accounts payable and accrued expenses		$	67,365		$	17,602
			Income taxes payable			547			—
			Long-term debt, current portion			1,219			1,601

Total current liabilities						69,131			19,203
Deferred compensation						2,186			2,548
Long-term debt, excluding current portion						136,020			39,380

Total liabilities						207,337			61,131

Minority interests						6,859			433
Mandatorily redeemable preferred stock						—			5,070
Stockholders’ equity:
			Preferred stock, par value $0.01 per share; 1,000,000 shares authorized; 0 and 725,000 shares issued and outstanding and classified as mandatorily redeemable preferred stock at September 30, 2002 and December 31, 2001, respectively			—			—
		Common stock, par value $0.01 per share; 50,000,000 shares authorized; 20,273,480 and 5,730,440 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively				203			57
				Paid-in capital		137,135			64,955
				Accumulated deficit		(58,358	)		(22,977	)
		Accumulated other comprehensive income				34			—

Total stockholders’ equity						79,014			42,035

Total liabilities, minority interests and stockholders’ equity					$	293,210		$	108,669

See accompanying notes to condensed consolidated financial statements.

INTERSTATE HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Revenue:
	Lodging	$	832		$	1,223		$	2,287		$	3,747
	Corporate housing		19,779			—			19,779			—
	Management and other fees		15,688			8,837			34,095			29,662

			36,299			10,060			56,161			33,409
	Other revenue from managed properties		163,347			67,816			297,662			207,674

Total revenue			199,646			77,876			353,823			241,083

Operating expenses by department:
	Lodging		575			918			1,606			2,636
	Corporate housing		15,327			—			15,327			—
Undistributed operating expenses:
	Administrative and general		14,803			7,261			30,010			23,827
	Depreciation and amortization		4,024			2,685			9,133			8,085
	Merger costs		3,430			—			5,653			—
	Restructuring expenses		12,820			—			12,820			—
	Tender offer costs		—			—			1,000			—

			50,979			10,864			75,549			34,548
Other expenses from managed properties			163,347			67,816			297,662			207,674

Total operating expenses			214,326			78,680			373,211			242,222

Net operating loss			(14,680	)		(804	)		(19,388	)		(1,139	)
Interest expense, net			1,562			560			3,474			792
Equity in loss of affiliates			1,074			2,556			1,670			2,222
Loss on impairment of investment in hotel real estate			—			3,026			—			3,026

Loss before minority interests and income taxes			(17,316	)		(6,946	)		(24,532	)		(7,179	)
Minority interests			243			39			295			130
Income tax expense (benefit)			1,818			(2,794	)		641			(2,924	)

Net loss			(19,377	)		(4,191	)		(25,468	)		(4,385	)
Mandatorily redeemable preferred stock:
	Dividends		—			158			307			476
	Accretion		—			16			356			46
	Conversion incentive payments		—			—			9,250			—

Net loss available to common shareholders			(19,377	)		(4,365	)		(35,381	)		(4,907	)
Other comprehensive income (loss):
	Foreign currency translation adjustment		33			—			33			—
	Unrealized gain on investments		1			—			1			—

Comprehensive loss		$	(19,343	)	$	(4,365	)	$	(35,347	)	$	(4,907	)

Basic and diluted loss per common share:
	Net loss available to common shareholders	$	(1.12	)	$	(0.78	)	$	(3.14	)	$	(0.84	)
Pro forma amounts assuming the new incentive management fee revenue recognition method is applied retroactively:
	Net loss available to common shareholders	$	(19,377	)	$	(6,036	)	$	(35,381	)	$	(9,848	)
	Net loss per basic and diluted share	$	(1.12	)	$	(1.08	)	$	(3.14	)	$	(1.68	)

See accompanying notes to condensed consolidated financial statements.

INTERSTATE HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)


					Nine Months Ended
					September 30,

					2002			2001

Cash flows from operating activities:
		Net loss			$	(25,468	)	$	(4,385	)
Adjustments to reconcile net loss to net cash used in operating activities
			Depreciation and amortization			9,133			8,085
			Forgiveness of officers and employees notes receivable			1,866			—
			Write off of deferred financing fees			2,465			—
			Equity in loss of affiliates			1,670			2,258
			Loss on impairment of equity investment in hotel real estate			—			3,026
			Minority interests			295			130
			Deferred income taxes			2,119			(3,601	)
			Amortization of mandatorily redeemable preferred stock			1,375			563
			Other			1,830			385
			Changes in operating assets and liabilities, excluding effects of merger:
				Accounts receivable, net		551			2,805
				Prepaid expenses and other current assets		1,137			388
				Accounts payable, accrued expenses and other liabilities		(3,126	)		(16,075	)
				Due to MeriStar Hospitality Corporation		(2,081	)		—

	Net cash used in operating activities					(8,234	)		(6,421	)

	Cash flows from investing activities:
		Changes in restricted cash				299			825
		Purchases of property and equipment, net				(528	)		(469	)
		Purchases of franchise agreements				(483	)		—
		Merger-related acquisition costs				(3,486	)		—
		Cash acquired in merger transaction				1,766			—
				Purchases of marketable securities		(2,080	)		(2,475	)
				Proceeds from sale of marketable securities		1,911			2,791
				Net cash invested for equity investments in hotel real estate		(1,360	)		(8,112	)
	Change in officers and employees notes receivable, net					(145	)		1,085
	Net investment in management contracts					—			(471	)
	Change in advances to affiliates					217			8,001
	Deposits and other					110			(1,200	)

Net cash used in investing activities						(3,779	)		(25	)

Cash flows from financing activities:
	Proceeds from issuance of long-term debt					22,000			4,169
	Principal payments on long-term debt					(26,811	)		(8,325	)
	Financing fees paid					(42	)		(1,491	)
	Proceeds from issuances of common stock					320			214
	Dividends paid on mandatorily redeemable preferred stock					(307	)		(476	)
	Accounts payable – related parties					—			(1	)
	Conversion incentive payments					(9,250	)		—
	Common stock repurchased and retired					—			(2,000	)

Net cash used in financing activities						(14,090	)		(7,910	)

Effect of exchange rate changes on cash						—			—