SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997 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 1-12017
CAPSTAR HOTEL COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1979383
(State of Incorporation) (I.R.S. Employer
Identification No.)
1010 WISCONSIN AVENUE, N.W.
SUITE 650
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 ("Common
Stock"), outstanding at May 14, 1997 was 18,504,321.
<PAGE>
CAPSTAR HOTEL COMPANY
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
Assets
Cash and cash equivalents $ 16,580 $ 21,784
Accounts receivable, net 12,836 8,109
Deposits, prepaid expenses, and other 33,157 5,942
-------- -------
Total current assets 62,573 35,835
Property and equipment
Land 67,431 58,127
Building and improvements 318,068 248,376
Furniture, fixtures, and equipment 39,488 32,698
Construction in progress 3,588 3,891
-------- --------
428,575 343,092
Accumulated depreciation (11,675) (8,641)
-------- --------
Total property and equipment, net 416,900 334,451
Deferred costs, net of accumulated amortization
of $1,267 and $802 at March 31, 1997 and
December 31, 1996 8,492 8,225
Investments in partnerships 2,641 650
Restricted cash 362 0
-------- --------
$ 490,968 $ 379,161
======== ========
Liabilities, Minority Interest, and
Stockholders' Equity
Accounts payable $ 9,610 $ 4,125
Accrued expenses and other liabilities 14,831 10,737
Income taxes payable 1,264 1,436
Long term debt, current portion 1,075 498
-------- --------
Total current liabilities 26,780 16,796
Deferred tax liability 1,181 1,181
Long term debt 165,689 199,863
-------- --------
Total liabilities 193,650 217,840
Minority interest 612 606
Common Stock (49,000,000 shares authorized,
at $0.01 par value, 18,504,321 and
12,754,321 issued and outstanding at
March 31, 1997 and December 31, 1996 ) 185 128
Paid in capital 292,527 158,533
Retained earnings 3,994 2,054
-------- --------
$ 490,968 $ 379,161
======== ========
See accompanying notes to condensed consolidated financial statements.
2
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CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Revenue
Rooms ............................................... $ 31,260 $ 10,714
Food and beverage ................................... 13,828 4,755
Management fees and other revenue ................... 3,020 2,565
------------ ------------
Total revenue ......................................... 48,108 18,034
------------ ------------
Hotel operating expenses by department
Rooms ............................................... 7,764 2,907
Food and beverage ................................... 11,231 3,782
Other operating expenses ............................ 1,167 433
Undistributed operating expenses
Administrative and general .......................... 8,846 4,769
Property operating costs ............................ 5,874 1,533
Property taxes, insurance and other ................. 2,193 792
Depreciation and amortization ....................... 3,499 1,671
------------ ------------
Total operating expenses .............................. 40,574 15,887
Interest expense, net ................................. 4,252 2,783
------------ ------------
Income (loss) before minority interest and income taxes 3,282 (636)
Minority interest ..................................... (48) (6)
------------ ------------
Income (loss) before income taxes ..................... 3,234 (642)
Income taxes .......................................... 1,294 --
------------ ------------
Net income (loss) ..................................... $ 1,940 $ (642)
============ ============
Earnings per share .................................... $ 0.14 --
============ ============
Weighted average number of shares outstanding ......... 13,732,304 --
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................... $ 1,940 $ (642)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization ....................... 3,499 1,672
Minority interest ................................... 48 6
Changes in operating assets and liabilities:
Accounts receivable, net ....................... (4,727) (2,497)
Deposits, prepaid expenses, and other .......... (27,215) (1,147)
Accounts payable ............................... 5,485 1,842
Accrued expenses and other liabilities ......... 4,094 3,153
Income taxes payable ........................... (172) 0
--------- ---------
Net cash (used in) provided by
operating activities (17,048) .......................... 2,387
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ................. (69,855) (56,895)
Investments in partnerships ......................... (1,991) 0
Purchases of minority interest ...................... (42) (33)
Additions to restricted cash for capital improvements (362) (11,289)
--------- ---------
improvements
Net cash used in investing activities .................... (72,250) (68,217)
--------- ---------
Cash flows from financing activities:
Deferred financing costs ............................ (732) (1,650)
Release of restricted deposits for
hedge agreement ................................... 0 1,023
Proceeds from long term debt ........................ 0 67,870
Payments of long term debt and capital leases ....... (225) (48)
Repayments of line of credit, net ................... (49,000) 0
Proceeds from issuance of Common Stock, net ......... 134,051 0
Distributions to limited partners ................... 0 (172)
Distributions to minority investors ................. 0 (104)
--------- ---------
Net cash provided by financing activities ................ 84,094 66,919
--------- ---------
Net change in cash and cash equivalents .................. (5,204) 1,089
Cash and cash equivalents, beginning of period ........... 21,784 6,832
--------- ---------
Cash and cash equivalents, end of period ................. $ 16,580 $ 7,921
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................. $ 3,986 $ 2,009
========= =========
Capitalized interest costs ............................. $ 99 $ 76
========= =========
Supplemental disclosure of non-cash
investing activities:
Additions to equipment through capital leases .......... $ 0 $ 725
========= =========
Deferred financing fees not yet paid ................... $ 0 $ 338
========= =========
Long term debt assumed in purchase of property
and equipment ........................................ $ 15,628 $ 0
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION
The corporate structure of CapStar Hotel Company and its subsidiaries
(collectively, the "Company") was formed pursuant to a Formation Agreement,
dated June 20, 1996. The principal activity of the Company is to acquire, own,
renovate, reposition and manage upscale, full-service hotels throughout North
America. As of March 31, 1997, the Company owned twenty-four hotels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All significant intercompany transactions and balances have been eliminated in
the consolidation.
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 (the "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, filed with the SEC on February 20, 1997.
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.
Certain 1996 amounts have been reclassified to conform with 1997 presentation.
3. COMMON STOCK OFFERING
On March 12, 1997, the Company completed an offering of 5,750,000 shares of
common stock ("Common Stock") at a price of $24.75 per share (the "Offering").
After underwriting discounts, commissions and other Offering expenses, net
proceeds to the Company were $134,051. The proceeds of the Offering were used to
repay a portion of the Company's outstanding indebtedness and to fund the
acquisition of certain hotels.
4. EARNINGS PER SHARE
Earnings per share ("EPS") for the three months ended March 31, 1997 has been
calculated using the weighted average number of shares of Common Stock and
Common Stock Equivalents outstanding during the period of 13,732,304.
Prior to the consummation of the Company's initial public offering on August 20,
1996, the Company conducted its operations through predecessor entities that
were organized as limited partnerships. Therefore, earnings per share
disclosures are not presented for the three months ended March 31, 1996 because
these limited partnerships were not subject to the provisions of Accounting
Principles Board Opinion No. 15 ("APB No. 15").
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128") supersedes APB No. 15 and specifies computation, presentation, and
disclosure requirements for earnings per share. SFAS No. 128, which is effective
for financial statements for periods ending after December 15, 1997, replaces
Primary EPS and Fully
5
<PAGE>
Diluted EPS with Basic EPS and Diluted EPS, respectively. Basic EPS excludes all
of the dilutive effects of potential common shares while Diluted EPS reflects
potential dilution. Had the Company implemented the requirements of SFAS No.
128, both Basic EPS and Diluted EPS would have been $0.14 for the three months
ended March 31, 1997.
5. LONG TERM DEBT
Long term debt consisted of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Credit Facility $ 100,000 $ 149,000
Subordinated Debt 50,000 50,000
Mortgage debt 15,534 0
Notes payable 598 665
Capital leases 632 696
-------- --------
166,764 200,361
Less current portion (1,075) (498)
-------- --------
$ 165,689 $ 199,863
======== ========
On September 30, 1996, the Company entered into a $225,000 Senior Secured
Revolving Credit Facility (the "Credit Facility"). The Credit Facility provides
for acquisition loans, working and renovation capital and letters of credit. The
Credit Facility has an initial term of three years, which can be extended at the
Company's option using two additional one-year periods upon the satisfaction of
certain conditions. The Credit Facility is collateralized by substantially all
of the Company's assets. Interest on the Credit Facility is payable monthly at
the Company's election of the lenders' prime rate plus 0.5% or LIBOR plus 2.0%.
The interest rate for the Credit Facility was approximately 7.6% at March 31,
1997.
On December 13, 1996, the Company entered into a $50,000 unsecured senior
subordinated credit facility (the "Subordinated Debt"). The Subordinated Debt is
due on December 31, 1999 and may be extended at the Company's option for two
additional one-year periods upon the satisfaction of certain conditions.
Interest on the Subordinated Debt is payable monthly and is calculated at LIBOR
plus 4.0%. At March 31, 1997, the interest rate for the Subordinated Debt was
approximately 9.5%.
On January 31, 1997, the Company assumed a $15,628 mortgage in connection with
the acquisition of the Westchase Hilton in Houston, Texas. This note matures in
2012 and requires monthly principal and interest payments using an effective
interest rate of approximately 7.5%.
6
<PAGE>
Aggregate maturities of the above obligations are as follows:
1997 $ 789
1998 1,098
1999 150,961
2000 825
2001 825
Thereafter 12,266
--------
$ 166,764
========
6. SUBSEQUENT EVENTS
In April 1997, the Company acquired the Highgate Portfolio, a group of six
upscale, full-service hotels containing 1,358 rooms for a purchase price of
$100,000. The acquisition was funded with proceeds from the Offering, the
issuance of operating units and existing cash.
In April 1997, the Company acquired the 171-room Holiday Inn in Tinton Falls,
New Jersey, and the 163-room Holiday Inn Sports Complex in Kansas City,
Missouri. The combined purchase price of $10,128 was funded through existing
cash and the Credit Facility. Certain senior executives of the Company own
minority interests in the partnerships from which these two hotels were
purchased. The acquisitions of the properties were negotiated with the majority
owners of these partnerships who are not affiliated with the Company and the
terms were approved by independent directors of the Company. Management believes
that the purchase prices were determined through arm's-length negotiations
between the Company and these majority owners.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
At December 31, 1995, the Company owned and operated five hotels and acquired or
assumed operations of five additional hotels during the first quarter of 1996 on
the following dates: February 2, February 16, February 22, February 29, and
March 8, bringing the total of hotels owned at March 31, 1996 to 10. At December
31, 1996, the Company owned 19 hotels and acquired five additional hotels during
the first quarter of 1997 on the following dates: January 27, January 31 (two
hotels), March 17, and March 28, bringing the total of hotels owned at March 31,
1997 to 24. Therefore, the financial statements for the three months ended March
31, 1997 and 1996, reflect differing numbers of hotels owned throughout the
periods.
FINANCIAL CONDITION
MARCH 31, 1997 COMPARED WITH DECEMBER 31, 1996
Total assets increased by $111.8 million to $491.0 million at March 31, 1997
from $379.2 million at December 31, 1996. This growth was due to the acquisition
of five hotels during the first quarter of 1997 and deposits related to certain
hotels acquired during April 1997.
Long term debt decreased by $33.6 million to $166.8 million at March 31, 1997
from $200.4 million at December 31, 1996. This decrease represents the net of
long term debt repayments using the proceeds from the Common Stock offering and
long term debt borrowing related to hotel purchases. Common Stock and paid in
capital increased $134.1 million as a result of the net proceeds from the Common
Stock offering.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,1996
Total revenues increased by $30.1 million or 167% from $18.0 million in the
three month period ended March 31, 1996 to $48.1 million in the three month
period ended March 31, 1997. This substantial increase was primarily
attributable to the acquisition of 14 additional hotels since the end of the
first quarter of 1996.
Operating expenses increased due to the larger number of hotels owned during the
first quarter of 1997.
Net interest expense of $4.3 million for the three months ended March 31, 1997
increased from $2.8 million for the three months ended March 31, 1996, due to an
increase in the average debt balance outstanding during the first quarter of
1997.
Net income of $1.9 million in the three months ended March 31, 1997 represented
a $2.5 million increase from the net loss of $0.6 million in the three months
ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash on hand, cash generated from
operations, and borrowings under credit facilities as well as proceeds from
equity offerings. The Company's continuing operations are funded through cash
generated from hotel operations. Hotel acquisitions and joint venture
investments are financed through a combination of internally generated cash,
external borrowings and the issuance of operating partnership units and/or
Common Stock.
Through March 31, 1997, the Company has invested $34.1 million in capital
improvements in connection with initial renovation programs and ongoing capital
expenditure programs since the first hotel acquisition on March 3, 1995. For the
three months ended March 31, 1997, the Company spent $8.5 million on initial
renovation and ongoing capital
8
<PAGE>
expenditure programs. An additional $12.8 million is expected to be spent during
the remaining nine months of 1997 on the initial and ongoing programs at the 24
hotels owned at March 31, 1997.
Capital for renovation work has been and will be provided by a combination of
internally generated cash and borrowings under credit facilities. Once initial
renovation programs are completed, the Company expects to spend approximately 4%
of revenues on an annual basis for ongoing capital expenditure programs,
including room and facilities refurbishments, renovations, and furniture and
equipment replacements. The Company believes that these investments will enhance
the competitive position of its hotels.
Management believes that the Company will have access to sufficient capital
resources to fund its operating and administrative expenses, to continue to
service its debt obligations and to acquire additional hotels.
SEASONALITY
Demand at many of the hotels is affected by recurring seasonal patterns. Demand
is typically lower in the winter months due to decreased travel and higher in
the spring and summer months during peak travel season. Accordingly, the
Company's operations are seasonal in nature, with lower revenue, operating
profit and cash flow in the first and fourth quarters and higher revenue,
operating profit and cash flow in the second and third quarters.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) On February 13, 1997, the Company entered into an Acquisition
Agreement pursuant to which its subsidiary operating partnership,
CapStar Management Company, L.P., became obligated to issue 809,523
common limited partnership units ("Common Units") and 392,157
preferred limited partnership units ("Preferred Units") to certain
principals of Highgate Hotels, Inc.
ITEM 5. OTHER INFORMATION
(a) On April 30, 1997, the Company acquired the 171-room Holiday Inn in
Tinton Falls, New Jersey, and the 163-room Holiday Inn Sports
Complex in Kansas City, Missouri. The combined purchase price of
$10,128,000 was funded through existing cash and the Credit
Facility.
(b) 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 the Private Securities Litigation Reform Act of 1995.
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 achievements
expressed or implied by such forward-looking statements. Such
factors include: the ability of the Company to implement its
acquisition strategy and operating strategy; the Company's ability
to manage rapid expansion; changes in economic cycles; competition
from other hospitality companies; and changes in the laws and
governmental regulations applicable to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No.
27 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
10
<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.
CAPSTAR HOTEL COMPANY
Date: May 14, 1997 /s/ PAUL W. WHETSELL
---------------------
Paul W. Whetsell
President and Chief Executive Officer
Date: May 14, 1997 /s/ W. MICHAEL KARNES
----------------------
W. Michael Karnes
Chief Financial and Accounting Officer
11
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,580
<SECURITIES> 0
<RECEIVABLES> 13,007
<ALLOWANCES> 171
<INVENTORY> 1,865
<CURRENT-ASSETS> 62,573
<PP&E> 428,575
<DEPRECIATION> 11,675
<TOTAL-ASSETS> 490,968
<CURRENT-LIABILITIES> 26,780
<BONDS> 166,764
0
0
<COMMON> 85
<OTHER-SE> 296,521
<TOTAL-LIABILITY-AND-EQUITY> 490,968
<SALES> 48,108
<TOTAL-REVENUES> 48,108
<CGS> 20,162
<TOTAL-COSTS> 20,162
<OTHER-EXPENSES> 20,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,252
<INCOME-PRETAX> 3,234
<INCOME-TAX> 1,294
<INCOME-CONTINUING> 1,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,940
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
