INTERSTATE HOTELS & RESORTS INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 31, 2005

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission of File Number 1-14331

Interstate Hotels & Resorts, Inc.


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

4501 North Fairfax Drive Arlington, VA		22203 (Zip Code)
(Address of Principal Executive Offices)

www.ihrco.com

This Form 10-Q can be accessed at no charge through the above website.

(703) 387-3100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period for which the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). þ

The number of shares of Common Stock, par value $0.01 per share, outstanding at May 1, 2005, was 30,772,583.

INTERSTATE HOTELS & RESORTS, INC.

INDEX


		Page

PART I. FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)
	Consolidated Balance Sheets — March 31, 2005 and December 31, 2004		2
	Consolidated Statements of Operations and Comprehensive Income (Loss) — Three months ended March 31, 2005 and 2004		3
	Consolidated Statements of Cash Flows — Three months ended March 31, 2005 and 2004		4
	Notes to Consolidated Financial Statements		5

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3:	Quantitative and Qualitative Disclosures About Market Risk		20

Item 4:	Controls and Procedures		21
PART II. OTHER INFORMATION

Item 1:	Legal Proceedings		23

Item 5:	Other Information		23

Item 6:	Exhibits		23

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)


			March 31,			December 31,
			2005			2004

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	133		$	16,481
	Restricted cash			2,507			690
	Accounts receivable, net of allowance for doubtful accounts of $3,224 at March 31, 2005 and $3,090 at December 31, 2004			33,439			32,765
	Due from related parties, net of allowance for doubtful accounts of $793 at March 31, 2005 and $836 at December 31, 2004			8,876			12,368
	Prepaid expenses and other current assets			11,836			8,929

		Total current assets		56,791			71,233
Marketable securities				1,566			1,706
Property and equipment, net				49,157			19,981
Officers and employees notes receivable				94			83
Investments in and advances to affiliates				9,655			12,155
Notes receivable				5,172			5,180
Deferred income taxes				19,242			18,312
Goodwill				96,809			96,802
Intangible assets, net				50,835			51,162

		Total assets	$	289,321		$	276,614

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	5,819		$	5,651
	Accrued expenses			63,198			61,003
	Current portion of long-term debt			5,750			5,750

		Total current liabilities		74,767			72,404
Deferred compensation				1,566			1,706
Long-term debt				95,723			83,447

		Total liabilities		172,056			157,557
Minority interest				934			930
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued			—			—
	Common stock, $.01 par value; 250,000,000 shares authorized; 30,672,238 and 30,629,519 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively			307			307
	Treasury stock			(69	)		(69	)
	Paid-in capital			189,074			188,865
	Accumulated other comprehensive income			311			892
	Accumulated deficit			(73,292	)		(71,868	)

		Total stockholders’ equity		116,331			118,127

		Total liabilities, minority interest and stockholders’ equity	$	289,321		$	276,614

The accompanying notes are an integral part of the consolidated financial statements.

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands, except per share amounts)


			Three months ended
			March 31,

			2005			2004

Revenue:
	Lodging revenue		$	2,562		$	723
	Management fees			7,380			5,713
	Management fees-related parties			6,619			7,965
	Corporate housing			27,399			24,250
	Other revenue			2,955			3,252

				46,915			41,903
	Other revenue from managed properties			204,297			179,540

		Total revenue		251,212			221,443

Operating expenses by department:
	Lodging expenses			1,950			518
	Corporate housing			23,409			20,382
Undistributed operating expenses:
	Administrative and general			18,031			17,464
	Depreciation and amortization			2,239			2,395
	Restructuring and severance expenses			2,023			127
	Asset impairments and write-offs			1,062			4,493

				48,714			45,379
	Other expenses from managed properties			204,297			179,540

		Total operating expenses		253,011			224,919

OPERATING LOSS				(1,799	)		(3,476	)
Interest income				138			280
Interest expense				(3,932	)		(2,002	)
Equity in earnings (losses) of affiliates				2,842			(776	)
Gain on sale of investments				385			—

LOSS BEFORE MINORITY INTEREST AND INCOME TAXES				(2,366	)		(5,974	)
Income tax benefit				924			2,554
Minority interest benefit				18			46

LOSS FROM CONTINUING OPERATIONS				(1,424	)		(3,374	)
Loss from discontinued operations, net				—			(370	)

NET LOSS				(1,424	)		(3,744	)
Other comprehensive loss, net of tax:
	Foreign currency translation loss			(97	)		(85	)
	Unrealized loss on investments			(484	)		—

	COMPREHENSIVE LOSS		$	(2,005	)	$	(3,829	)

Weighted average number of basic common shares outstanding (in thousands)				30,656			30,070
Basic loss per share from continuing operations			$	(0.05	)	$	(0.11	)
Basic loss per share from discontinued operations				—			(0.01	)

Basic loss per share			$	(0.05	)	$	(0.12	)

Weighted average number of diluted common shares outstanding (in thousands)				30,656			30,070
Diluted loss per share from continuing operations			$	(0.05	)	$	(0.11	)
Diluted loss per share from discontinued operations				—			(0.01	)

Diluted loss per share			$	(0.05	)	$	(0.12	)

The accompanying notes are an integral part of the consolidated financial statements

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


					Three months ended
					March 31,

					2005			2004

OPERATING ACTIVITIES:
	Net loss				$	(1,424	)	$	(3,744	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization				2,239			2,424
		Amortization and write-off of deferred financing fees				2,032			—
		Equity in losses of affiliates				(2,842	)		776
		Asset impairments and write-offs				1,062			4,493
		Minority interest				(18	)		(46	)
		Deferred income taxes				(924	)		(2,433	)
		Gain on sale of investments				(385	)		—
		Changes in assets and liabilities:
			Accounts receivable, net			(674	)		5,991
			Prepaid expenses and other current assets			(2,907	)		1,211
			Accounts payable and accrued expenses			2,646			(14,033	)
			Due from related parties			3,492			(2,174	)
			Other changes in asset and liability accounts			295			523

				Cash provided by (used in) operations		2,592			(7,012	)

INVESTING ACTIVITIES:
	Proceeds from the sale of investments					483			—
	Change in restricted cash					(1,817	)		1,395
	Purchases of property and equipment					(30,610	)		(662	)
	Purchases of intangible assets					(394	)		(162	)
	Net (contributions) distributions from equity investments					4,709			(563	)
	Change in officers and employees notes receivable, net					(11	)		(4	)

				Cash provided by (used in) investing activities		(27,640	)		4

FINANCING ACTIVITIES:
	Proceeds from borrowings					106,200			20,000
	Repayment of borrowings					(93,924	)		(15,906	)
	Net proceeds from issuance of common stock					17			561
	Financing fees paid					(3,506	)		—

				Cash provided by financing activities		8,787			4,655

Effect of exchange rate on cash						(87	)		249
Net decrease in cash and cash equivalents						(16,348	)		(2,104	)
Cash and cash equivalents at beginning of period						16,481			7,450

Cash and cash equivalents at end of period					$	133		$	5,346

The accompanying notes are an integral part of the consolidated financial statements.

INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	BUSINESS SUMMARY

We are the largest independent U.S. hotel management company not affiliated with a hotel brand, measured by number of rooms under management. We manage a portfolio of hospitality properties and provide related services in the hotel, corporate housing, resort, conference center and golf markets. We also own two hotel properties and hold non-controlling interests in 10 joint ventures which hold ownership interests in 22 of our managed properties as of March 31, 2005. Our portfolio is diversified by franchise and brand affiliations. The related services we provide include insurance and risk management services, purchasing and project management services, information technology and telecommunications services and centralized accounting services.

As of March 31, 2005, we managed 316 properties, with 71,789 rooms in 41 states, the District of Columbia, Canada, Russia and Portugal. As of March 31, 2005, we had 3,035 apartments under lease or management through our BridgeStreet corporate housing division in the United States, France and the United Kingdom.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

We have prepared these unaudited interim financial statements according to the rules and regulations of the Securities and Exchange Commission. Accordingly, we have omitted certain information and footnote disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. These interim financial statements should be read in conjunction with the financial statements, accompanying notes and other information included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004.

In our opinion, the accompanying unaudited consolidated interim financial statements reflect all normal and recurring adjustments 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 accounting principles generally accepted in the United States of America requires us 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. Our actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of our results for the entire year.

Certain reclassifications have been made to our prior year financial statements to conform to our current presentation.

Stock-Based Compensation

We maintain stock-based employee compensation plans. Prior to 2003, we accounted for those plans in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and applied those provisions prospectively to all employee awards granted, modified or settled

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

after January 1, 2003. The following table illustrates the effect on net loss and loss per share if the fair value based method had been applied to all of our outstanding and unvested awards.


		Three months ended
		March 31,

		2005			2004

Net loss, as reported		$	(1,424	)	$	(3,744	)
Add: Stock-based employee compensation expense included in reported net loss, net of tax			53			41
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax			(63	)		(66	)

Net loss, pro forma		$	(1,434	)	$	(3,769	)

Loss per share:
	Basic, as reported	$	(0.05	)	$	(0.12	)
	Basic, pro forma	$	(0.05	)	$	(0.13	)
	Diluted, as reported	$	(0.05	)	$	(0.12	)
	Diluted, pro forma	$	(0.05	)	$	(0.13	)

The effects of applying SFAS No. 123 for disclosing compensation costs may not be representative of the effects on reported net income (loss) and earnings (loss) per share for future years.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (“FAS 123R”), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The provisions of FAS 123R are effective for the first quarter of 2006. The adoption of this standard is not expected to have a material effect on our consolidated financial position and results of operations as we currently use the fair value method prescribed in SFAS No. 123.


3.	EARNINGS PER SHARE

We calculate our basic earnings per common share by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Our diluted earnings per common share assumes the issuance of common stock for all potentially dilutive stock equivalents outstanding. In periods in which there is a loss,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

diluted shares outstanding will equal basic shares outstanding as there would be no dilutive securities. Basic and diluted earnings per common share for the three months ended March 31 are as follows:


	2005			2004

Loss from continuing operations	$	(1,424	)	$	(3,374	)
Loss from discontinued operations, net		—			(370	)

Net loss	$	(1,424	)	$	(3,744	)

Weighted average number of basic shares outstanding (in thousands)		30,656			30,070
Basic loss per share from continuing operations	$	(0.05	)	$	(0.11	)
Basic loss per share from discontinued operations	$	—		$	(0.01	)

Basic loss per share	$	(0.05	)	$	(0.12	)

Weighted average number of diluted shares outstanding (in thousands)		30,656			30,070
Diluted loss per share from continuing operations	$	(0.05	)	$	(0.11	)
Diluted loss per share from discontinued operations	$	—		$	(0.01	)

Diluted loss per share	$	(0.05	)	$	(0.12	)

The number of potentially dilutive securities not included above (in thousands), were 519 and 560 at March 31, 2005 and 2004, respectively. These securities include unvested options, operating partnership units and unvested restricted stock.


4.	INVESTMENTS AND ADVANCES TO AFFILIATES

Our investments and advances to our joint ventures and affiliated companies consist of the following:


		March 31,		December 31,
		2005		2004

MIP Lessee, L.P.		$	3,031	$	4,856
S.D. Bridgeworks, LLC			1,004		253
CNL/IHC Partners, L.P.			2,483		2,477
Interconn Ponte Vedra Company, L.P.			2,592		2,334
Other			545		2,235

	Total	$	9,655	$	12,155

On January 6, 2005, our joint venture S.D. Bridgeworks, LLC, sold the Hilton San Diego Gaslamp hotel. Our total proceeds from the sale of the hotel are expected to be approximately $3,700, of which we have received $2,859 as of March 31, 2005. Our portion of equity in the joint venture’s earnings related to the gain on the sale is approximately $3,700.

The recoverability of the carrying values of our investments and advances to our investees is dependent upon operating results of the underlying real estate investments. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying investments could result in future losses or the inability to recover the carrying value of these long-lived assets.

The debt of all investees is non-recourse to us, and we do not guarantee any of our investees’ obligations.

Presented below is the combined summarized financial information of MIP Lessee, L.P. and S.D. Bridgeworks, LLC for the three months ended March 31, 2005 and 2004. Summarized profit and loss information for these investees is required by Regulation S-X to be disclosed in interim periods, as they have

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

met certain financial tests in relation to our consolidated financial position and results of operations. The summarized information is as follows:


	Three months ended
	March 31,

	2005		2004

Revenues	$	20,665	$	30,836
Operating expenses		16,187		22,524
Net income (loss)		24,030		(4,531	)
Our share of the above earnings (losses)		2,795		(623	)


5.	INTANGIBLE ASSETS

Intangible assets consist of the following: