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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996
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 issuer as specified in its charter)
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<S> <C>
DELAWARE 52-1979383
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(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
</TABLE>
<TABLE>
<S> <C>
1010 WISCONSIN AVENUE, N.W., WASHINGTON, 20007
D.C. ---------
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(Address of principal executive offices) (Zip
code)
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Registrant's telephone number, including area code: (202) 965-4455
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
Title of each class Name of each exchange on which
- ------------------------------------ registered:
----------------------------------------
Common Stock, par value $.01 per New York Stock Exchange
share
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None.
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 than 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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Based on the average sale price at February 19, 1997, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$226,625,000.
The number of shares of the Registrant's common stock outstanding as of
February 19, 1997 was 12,754,321.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III--Those portions of the Registrant's definitive proxy statement relating
to Registrant's 1997 Annual Meeting of Shareholders which are incorporated into
Items 10, 11, 12, and 13.
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PART I
ITEM 1. BUSINESS
THE COMPANY
CapStar Hotel Company and its subsidiaries ("CapStar" or the "Company") is a
hotel management and investment company which acquires, renovates, repositions
and manages hotels throughout the United States. CapStar owns and manages 22
upscale, full-service hotels (the "Owned Hotels") which contain 5,981 rooms and
manages an additional 29 hotels owned by third parties which contain 4,681 rooms
(the "Managed Hotels"). CapStar's portfolio of Owned Hotels and Managed Hotels
includes 51 hotels which contain 10,622 rooms (the "Hotels"). The Company's
business strategy is to acquire hotel properties with the potential for cash
flow growth and to renovate, reposition and operate each hotel according to a
business plan specifically tailored to the characteristics of the hotel and its
market. The Owned Hotels are located in markets which have recently experienced
strong economic growth, including Albuquerque, Atlanta, Charlotte, Chicago,
Cleveland, Denver, Houston, Los Angeles, Salt Lake City, Seattle and Washington,
D.C. The Owned Hotels include hotels operated under nationally recognized brand
names such as Hilton-TM-, Sheraton-Registered Trademark-, Westin-TM-,
Marriott-Registered Trademark-, Doubletree-TM- and Embassy
Suites-Registered Trademark-. For the year ended December 31, 1996, on a pro
forma basis, the operating performance of the Owned Hotels (excluding the ten
hotels purchased since September 30, 1996) improved significantly, as
demonstrated by the following table:
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<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER
31,
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<S> <C> <C> <C>
PERCENTAGE
1995 1996 INCREASE
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<CAPTION>
<S> <C> <C> <C>
Revenues (in thousands).............................. $ 109,798 $ 118,329 7.8%
Gross Operating Profit (in thousands)................ $ 30,947 $ 37,909 22.5%
Average Occupancy.................................... 72.4% 72.9% 0.7%
Average Daily Rate ("ADR")........................... $ 75.25 $ 83.82 11.4%
Revenue Per Available Room ("RevPAR")................ $ 54.44 $ 61.11 12.3%
</TABLE>
Additionally, the performance of the Owned Hotels compares favorably with that
of the industry in general. For the year ended December 31, 1996, RevPAR for the
Owned Hotels (excluding the ten hotels purchased since September 30, 1996)
increased 12.3%, while RevPAR for all upscale hotels increased 5.4%, as reported
by Smith Travel Research, an independent industry research organization which
has not consented to the data presented in this Annual Report on Form 10-K and
has not provided any form of consultation. For the year ended December 31, 1996,
RevPAR at all of the Owned Hotels (including the ten hotels purchased since
September 30, 1996) increased 10.1%.
The Company completed its Initial Public Offering in August 1996. Since the
IPO, the Company has significantly expanded its portfolio by completing the
purchase of ten upscale, full-service hotels containing 2,465 rooms for an
aggregate total acquisition cost, including estimated closing costs, planned
renovations and initial working capital ("Total Acquisition Cost") of $181.6
million. The Company has also entered into a contract with Highgate Hotels Inc.
and certain affiliates ("Highgate Hotels") to acquire six upscale, full-service
hotels containing 1,358 rooms (the "Highgate Portfolio") for a Total Acquisition
Cost of approximately $104.7 million. See "Recent Developments--The Highgate
Portfolio." The Company has also entered into contracts to acquire two
additional hotels containing 367 rooms for a Total Acquisition Cost of $26.7
million (the "Additional Acquisitions"). In addition to the acquisition of these
hotels, the Company has entered into a joint venture to acquire the 456-room
Holiday Inn Riverfront in St. Louis, Missouri and has entered into three new
long-term management agreements.
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During the year ended December 31, 1996, the Company spent a total of $21.6
million on renovations at the Owned Hotels and intends to spend an additional
$21.7 million completing its renovation programs (including $8.4 million to
renovate and reposition the Highgate Portfolio and the Additional Acquisitions).
See "Special Note Regarding Forward--Looking Statements."
As a fully integrated owner and manager, CapStar intends to capitalize on
its management experience and expertise by continuing to make opportunistic
acquisitions of full-service hotels, securing additional management contracts
and improving the operating performance of the hotels. The Company's senior
management team has successfully managed hotels in all segments of the lodging
industry, with particular emphasis on upscale, full-service hotels. Senior
management has an average of approximately 20 years of experience in the hotel
industry. Since the inception of the Company's management business in 1987, the
Company has achieved consistent growth, even during periods of relative industry
weakness. The Company attributes its management success to its ability (i) to
analyze each hotel as a unique property and identify those particular cash flow
growth opportunities which each hotel presents, (ii) to create and implement
marketing plans that properly position each hotel within its local market, and
(iii) to develop management programs that emphasize guest service, labor
productivity, revenue yield and cost control. The Company has a distinct
management culture that stresses creativity, loyalty and entrepreneurship and
was developed to emphasize operations from an owner's perspective. This culture
is reinforced by the fact that 33 members of management will hold, directly or
indirectly, an aggregate of 5.5% of the Company's common stock, par value $.01
per share (the "Common Stock") upon completion of the offering by the Company of
5,000,000 shares of Common Stock (the "Offering") for which a Registration
Statement on Form S-1 was filed with the Securities and Exchange Commission on
February 20, 1997.
The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
hotels and further believes that there are currently many attractive
opportunities to acquire properties in this segment of the industry at prices
below replacement cost. The upscale, full-service segment is attractive for
several reasons. First, the Company expects that there will be no significant
increases in the supply of upscale, full-service hotels in the next several
years because the cost of new construction generally does not justify new hotel
development. Second, upscale, full-service hotels appeal to a wide variety of
customers, thus reducing the risk of decreasing demand from any particular
customer group. Additionally, such hotels have particular appeal to business
executives and upscale leisure travelers, customers who are generally less price
sensitive than travelers who use limited-service hotels. Third, because
full-service hotels have a higher proportion of fixed costs to variable costs
than other segments of the lodging industry, full-service hotels afford greater
operating leverage than limited-service hotels, resulting in increasingly higher
profit margins as revenues increase. Finally, full-service hotels require a
greater depth of management expertise than limited-service hotels, and the
Company believes that its superior management skills provide it with a
significant competitive advantage in their operation.
RECENT DEVELOPMENTS
In August 1996, the Company completed its IPO at a price of $18 per share,
generating net proceeds of approximately $110 million to the Company. Since
completing the IPO, the Company has continued to execute the hotel acquisition
and operating strategies that it had pursued prior to the IPO which has resulted
in significant growth in the Company's hotel portfolio. The Company's
acquisition, financing, and management activities since the IPO are discussed
below.
POST-IPO ACQUISITIONS
At the time of the IPO, the Company owned 12 upscale, full-service hotels,
containing 3,516 rooms. Since the IPO, the Company has acquired ten additional
upscale, full-service Owned Hotels containing 2,465 rooms. These newly acquired
hotels are operated under nationally recognized brand names such as Hilton,
Doubletree, Embassy Suites and Holiday Inn-Registered Trademark-. The Company
expects to improve the operating
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performance of these newly acquired hotels by implementing the detailed
management plans that have been created for each property as part of its
operating strategy. The Company believes that all of its post-IPO acquisitions
represent attractive investment opportunities because (i) they are located in
major metropolitan or growing secondary markets and are well-located within
these markets (ii) they were acquired at an average cost of approximately
$74,000 per room, which represents a more than a 30% discount to replacement
cost and (iii) they have attractive current returns and potential for
significant revenue and cash flow growth through implementation of the Company's
operating strategy.
THE HIGHGATE PORTFOLIO
The Company has entered into a contract with Highgate Hotels to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a Total Acquisition Cost of approximately $104.7 million. The
acquisition will be financed with $75.2 million in cash and $29.5 million of
units in the Company's subsidiary operating partnership ("OP Units"). The
Company will issue to the sellers (i) 809,523 common OP Units ("Common OP
Units") which are convertible at the sellers' election into an equal number of
shares of Common Stock (or, at the Company's option, cash in an amount equal to
the market price of such shares) and (ii) 392,157 preferred OP Units ("Preferred
OP Units"), with a 6.5% cumulative annual preferred return and a liquidating
preference of $25.50 per OP Unit. The Preferred OP Units are convertible on or
after August 23, 1997 at the sellers' election into an equal number of shares of
Common Stock (or, at the Company's option, cash in an amount equal to the market
price of such shares) and redeemable after three years at the Company's election
for an amount equal to $25.50 per OP Unit (or, at the Company's option, shares
of Common Stock bearing a market price equal to such amount). See "The Operating
Partnership."
The Highgate Portfolio hotels are operated under nationally recognized brand
names including Sheraton, Doubletree, Radisson-Registered Trademark-,
Ramada-Registered Trademark- and Holiday Inn, and are located in Dallas,
Indianapolis, Calgary and Vancouver. The Highgate Portfolio enhances the
Company's geographic diversity by expanding its portfolio into Canada. In
connection with the acquisition of the Highgate Portfolio, the Company has
entered into agreements to manage two additional hotels owned by Highgate
Hotels: the 414-room Pontchartrain-Crowne Plaza in Detroit, Michigan and the
393-room Four Points Hotel in Suburban Atlanta. The Company believes that the
acquisition of the Highgate Portfolio and the establishment of a strategic
alliance with Highgate Hotels (one of the principals of which the Company has
agreed to nominate to a new seat on its board of directors) will provide
significant benefits to its on-going acquisition and corporate development
activities. A portion of the net proceeds from the Offering will be used to
consummate the acquisition of the Highgate Portfolio. The Company expects to
complete the acquisition of the Highgate Portfolio by April 1997. There can be
no assurance, however, that the closing will occur. See "Special Note Regarding
Forward-Looking Statements."
THE ADDITIONAL ACQUISITIONS
The Company has also entered into contracts to acquire the two Additional
Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a
Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in
Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million.
MANAGEMENT AGREEMENTS/JOINT VENTURES
In January 1997, the Company invested in a joint venture with Hallmark
Investment Corp. which owns the Holiday Inn Riverfront, located in downtown St.
Louis at the base of the Gateway Arch. In connection with the joint venture, the
Company has signed a long-term agreement to manage the 456-room property. Since
August 1996 the Company has entered into significant new long-term management
agreements with three other hotel owners. The Company expects to form joint
ventures and strategic alliances with institutional and private hotel owners to
invest in future acquisitions and sale and leaseback transactions,
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and to secure additional fee management arrangements. See "Special Note
Regarding Forward-Looking Statements."
BUSINESS
The Company seeks to increase shareholder value by (i) continuing to acquire
upscale, full-service hotels at prices below replacement cost in selected
markets throughout the United States, (ii) implementing its operating strategy
to improve hotel operations and increase cash flow and (iii) expanding its
management business.
ACQUISITION STRATEGY
The Company intends to continue acquiring upscale, full-service hotels. In
addition to the direct acquisition of hotels, the Company anticipates that it
may make investments in hotels through joint ventures with strategic partners or
through equity contributions, sale and leasebacks or secured loans. The Company
identifies acquisition candidates located in markets with economic, demographic
and supply dynamics favorable to hotel owners and operators. Through its
extensive due diligence process, the Company chooses those acquisition targets
where it believes selective capital improvements and intensive management will
increase the hotel's ability to attract key demand segments, enhance hotel
operations and increase long-term value. In order to evaluate the relative
merits of each investment opportunity, senior management and individual
operations teams create detailed plans covering all areas of renovation and
operation. These plans serve as the basis for the Company's acquisition
decisions and guide subsequent renovation and operating plans. At the Owned
Hotels, the Company has been able to implement these plans and apply its system
of management to create improvements in revenue and profitability. See "Special
Note Regarding Forward-Looking Statements."
The Company will seek to acquire and invest in hotels that meet the
following criteria:
MARKET CRITERIA
ECONOMIC GROWTH. The Company focuses on metropolitan areas that are
approaching, or have already entered, periods of economic growth. Such areas
generally show above average growth in the business community as measured by (i)
job formation rates, (ii) population growth rates, (iii) tourism and convention
activity, (iv) airport traffic volume, (v) local commercial real estate
occupancy, and (vi) retail sales volume. Markets that exhibit these
characteristics typically have strong demand for hotel facilities and services.
SUPPLY CONSTRAINTS. The Company seeks lodging markets with favorable supply
dynamics for hotel owners and operators, including an absence of current new
hotel development and barriers to future development such as zoning constraints,
the need to undergo lengthy local development approval processes and a limited
number of suitable sites. Other factors limiting the supply of new hotels are
the current lack of financing available for new development and the inability to
generate adequate returns on investment to justify new development.
GEOGRAPHIC DIVERSIFICATION. The Company seeks to maintain a geographically
diverse portfolio of hotels to offset the effects of regional economic cycles.
The Hotels are located in 25 states across the nation, with eight Hotels located
in California, four in Colorado, two in Pennsylvania, three in Texas, three in
Washington, D.C., three in Maryland, two in New Jersey, three in Virginia, two
in Arizona, two in Georgia, two in Louisiana, two in Missouri, two in New York
and one Hotel each in 13 additional states.
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HOTEL CRITERIA
LOCATION AND MARKET APPEAL. The Company seeks to acquire upscale,
full-service hotels that are situated near both business and leisure centers
which generate a broad base of demand for hotel accommodations and facilities.
These demand generators include (i) business parks, (ii) airports, (iii)
shopping centers and other retail areas, (iv) convention centers, (v) sports
arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii)
major universities, and (ix) cultural and entertainment centers with nightlife
and restaurants. The confluence of nearby business and leisure centers enables
the Company to attract both weekday business travelers and weekend leisure
guests. Attracting a balanced mix of business, group and leisure guests to the
Hotels helps to maintain stable occupancy rates and high ADRs.
SIZE AND FACILITIES. The Company seeks to acquire well-constructed hotels
that are less than 20 years old, contain 200 to 500 guest rooms and include
accommodations and facilities that are, or are capable of being made, attractive
to key demand segments such as business, group and leisure travelers. These
facilities typically include large, upscale guest rooms, food and beverage
facilities, extensive meeting and banquet space, and amenities such as health
clubs, swimming pools and adequate parking.
POTENTIAL PERFORMANCE IMPROVEMENTS. The Company seeks to acquire
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. Underperforming hotels
typically serve less than their "fair share" of lodging industry demand (as
measured by RevPAR), achieve lower profit margins than the Company believes it
can maintain and receive inadequate funding to make needed capital improvements.
These hotels represent opportunities where a systematic management approach and
targeted renovations should result in improvements in revenue and cash flow. The
Company's ability to improve operations is demonstrated by the fact that RevPAR
at the Owned Hotels (excluding the ten hotels purchased since September 30,
1996) increased 12.3% from the year ended December 31, 1995 to the year ended
December 31, 1996, as compared to an increase of only 5.4% for the upscale,
full-service hotel segment as reported by Smith Travel Research over the
comparable period. For the year ended December 31, 1996 RevPAR at all of the
Owned Hotels (including the ten hotels purchased since September 30, 1996
increased 10.1%
The Company expects that its relationships throughout the industry and its
acquisition staff located on both coasts of the United States will continue to
provide it with a competitive advantage in identifying, evaluating and
purchasing hotels which meet its acquisition criteria. The Company has a record
of successfully renovating and repositioning hotels, both at the Owned Hotels
and at the Managed Hotels (varying in levels of service, room rates and market
types). As a public company, the Company believes it has improved access to
various debt and equity financing sources to fund acquisitions. In addition, in
consummating acquisitions the Company expects that it will benefit from its
ability to utilize OP Units or Common Stock as an alternative to cash. The
Company currently expects to retain earnings for future acquisitions and the
renovation and maintenance of the hotels it owns.
OPERATING STRATEGY
The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual Hotel rather than by implementing an operating strategy that is
designed to maintain a uniform corporate image or brand. Management believes
that its custom-tailored business plans are the most effective means of
addressing the needs of a given hotel or market. The Company believes that
skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in full-service hotels.
The Company's corporate headquarters carries out financing and acquisition
activities and provides services to support as well as monitor the Company's
on-site hotel operating executives. Each of the
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Company's executive departments, including Sales and Marketing, Human Resources
and Training, Food and Beverage, Technical Services, Development, and Corporate
Finance, is headed by an executive with significant experience in that area.
These departments support decentralized decision-making by the hotel operating
executives by providing accounting and budgeting services, property management
software and other resources which cannot be economically maintained at the
individual Hotels.
Key elements of the Company's management programs include the following:
COMPREHENSIVE BUDGETING AND MONITORING. The Company's operating strategy
begins with an integrated budget planning process that is implemented by
individual on-site managers and monitored by the Company's corporate staff.
Management sets targets for cost and revenue categories at each of the Hotels
based on historical operating performance, planned renovations, operational
efficiencies and local market conditions. On-site managers coordinate with the
central office staff to ensure that such targets are realistic. Through
effective and timely use of its comprehensive financial information and
reporting systems, the Company can monitor actual performance and rapidly adjust
prices, staffing levels and sales efforts to take advantage of changes in the
market and to improve yield.
TARGETED SALES AND MARKETING. The Company employs a systematic approach
toward identifying and targeting segments of demand for each Hotel in order to
maximize market penetration. Executives at the Company's corporate headquarters
and property-based managers divide such segments into smaller subsegments,
typically ten or more for each Hotel, and develop narrowly tailored marketing
plans to suit each such segment. The Company supports each Hotel's local sales
efforts with corporate sales executives who develop new marketing concepts and
monitor and respond to specific market needs and preferences. These executives
are active in implementing on-site marketing programs developed in the central
management office. The Company employs computerized revenue yield management
systems to manage each Hotel's use of the various distribution channels in the
lodging industry. Management control over those channels, which include
franchisor reservation systems and toll-free numbers, travel agent and airline
global distribution systems, corporate travel offices and office managers, and
convention and visitor bureaus, enables the Company to maximize revenue yields
on a day-to-day basis. Sales teams are recruited locally and receive
incentive-based compensation bonuses. All of the Company's sales managers
complete a highly developed sales training program.
STRATEGIC CAPITAL IMPROVEMENTS. The Company plans renovations primarily to
enhance a Hotel's appeal to targeted market segments, thereby attracting new
customers and generating increased revenue and cash flow. During the year ended
December 31, 1996, the Company spent a total of $21.6 million on renovations at
the Owned Hotels and currently intends to spend an additional $21.7 million
completing the renovation programs (including approximately $8.4 million to
renovate and reposition the Highgate Portfolio and the Additional Acquisitions).
For example, at all of the Owned Hotels, the Company has renovated banquet and
meeting spaces and upgraded guest rooms with computer ports and comfortable work
spaces to better accommodate the needs of business travelers and to increase
ADRs. Capital spending decisions are based on both strategic needs and potential
rate of return on a given capital investment.
SELECTIVE USE OF MULTIPLE BRAND NAMES. The Company believes that the
selection of an appropriate franchise brand is essential in positioning a hotel
optimally within its local market. The Company selects brands based on local
market factors such as local presence of the franchisor, brand recognition,
target demographics and efficiencies offered by franchisors. The Company
believes that its relationships with many major hotel franchisors, established
both as a manager and an owner of hotels operated under their respective
franchises, places the Company in a favorable position when dealing with those
franchisors and allows it to negotiate favorable franchise agreements with
franchisors. The Company believes that its growth through acquisition of
additional hotels will further strengthen its relationship with franchisors.
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The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels, the Highgate Portfolio and the
Additional Acquisitions:
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<CAPTION>
OWNED HOTELS, HIGHGATE PORTFOLIO
AND ADDITIONAL ACQUISITIONS MANAGED HOTELS
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NUMBER OF NUMBER OF
GUEST NUMBER OF % OF GUEST NUMBER OF % OF
FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS
- ------------------------------------------ ----------- --------------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Hilton.................................... 2,939 11 38.1% -- -- --
Sheraton.................................. 1,162 4 15.0% -- -- --
Holiday Inn............................... 608 3 7.9% 883 4 18.9%
Radisson.................................. 507 2 6.6% 126 1 2.7%
Westin.................................... 496 1 6.4% -- -- --
Marriott.................................. 434 1 5.6% 288 1 6.2%
Holiday Select-Registered Trademark-...... 348 1 4.5% -- -- --
Doubletree................................ 294 1 3.8% 208 1 4.4%
Embassy Suites............................ 236 1 3.1% -- -- --
Independent............................... 214 2 2.8% 830 6 17.7%
Four Points............................... 213 1 2.8% 196 1 4.2%
Doubletree Guest
Suites-Registered Trademark-............. 137 1 1.8% -- -- --
Ramada.................................... 118 1 1.5% 457 3 9.8%
Best Western-Registered Trademark-........ -- -- -- 562 3 12.0%
Days Inn-Registered Trademark-............ -- -- -- 277 2 5.9%
Comfort Suites-Registered Trademark-...... -- -- -- 244 2 5.2%
Clarion-Registered Trademark-............. -- -- -- 194 1 4.1%
Quality Suites-Registered Trademark-...... -- -- -- 177 1 3.8%
Residence Inn-Registered Trademark-....... -- -- -- 104 1 2.2%
Quality Inn-Registered Trademark-......... -- -- -- 100 1 2.1%
Holiday Inn
Express-Registered Trademark-............ -- -- -- 35 1 0.8%
-- --
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7,706 30 100.0% 4,681 29 100.0%
-- --
-- --
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</TABLE>
EMPHASIS ON FOOD AND BEVERAGE. Management believes popular food and
beverage ideas are a critical component in the overall success of a hotel. The
Company utilizes its food and beverage operations to create local awareness of
its hotel facilities, to improve the profitability of its hotel operations and
to enhance customer satisfaction. The Company is committed to competing for
patrons with restaurants and catering establishments by offering high-quality
restaurants that garner positive reviews and strong local and/or national
reputations. The Company has engaged food and beverage experts to develop
several proprietary restaurant concepts. The Owned Hotels contain restaurants
ranging from Michel Richard's highly acclaimed CITRONELLE-Registered Trademark-,
to Morgan's, a Company- designed concept which offers popular, moderately-priced
American cuisine. The Company has also successfully placed national food
franchises such as Starbuck's Coffee-Registered Trademark- and
"TCBY"-Registered Trademark- Yogurt in casual, delicatessen-style restaurants in
several of the Owned Hotels. Popular food concepts have strengthened the
Company's ability to attract business travelers and group meetings and improved
the name recognition of the Owned Hotels.
COMMITMENT TO REINVESTMENT. The Company is committed to reinvesting
adequate capital on an ongoing basis to maintain the quality of the hotels it
owns. Reinvestment is expected to include room and facilities refurbishments,
renovations and furniture and equipment replacements that are designed to
maintain attractive accommodations, updated restaurants and modern equipment.
The Company believes that these investments will enhance the Company's
competitive position.
COMPUTERIZED REPORTING SYSTEMS. The Company employs computerized reporting
systems at each of the Hotels and at its corporate offices to monitor the
financial and operating performance of the Hotels.
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Management information services have been fully integrated through the
installation of Novell and Unix networks. Management also utilizes programs like
Data Plus-Registered Trademark- and cc:Mail-Registered Trademark- to facilitate
daily communication. Such programs have enabled the Company to create and
implement detailed reporting systems at each of the Hotels and its corporate
headquarters. Corporate executives utilize information systems that track each
Hotel's daily occupancy, ADR, and revenue from rooms, food and beverage. By
having the latest hotel operating information available at all times, management
is better able to respond to changes in the market of each Hotel.
COMMITMENT TO SERVICE AND VALUE. The Company is dedicated to providing
exceptional service and value to its customers on a consistent basis. The
Company conducts extensive employee training programs to ensure personalized
service at the highest levels. Programs such as "Be A Star" have been created
and implemented by the Company to ensure the efficacy and uniformity of its
employee training. The Company's practice of tracking customer comments, through
the recording of guest comment cards and the direct solicitation (during
check-in and check-out) of guest opinions regarding specific items, allows
investment in services and amenities where they are most effective. The
Company's focus on these areas has enabled it to attract lucrative group
business.
DISTINCT MANAGEMENT CULTURE. The Company has a distinct management culture
that stresses creativity, loyalty and entrepreneurship and was developed to
emphasize operations from an owner's perspective. Management believes in
realistic solutions to problems, and innovation is always encouraged. Incentive
programs and awards have been established to encourage individual property
managers to seek new ways of increasing revenues and operating cash flow. This
creative, entrepreneurial spirit is prevalent from the corporate staff and the
general managers down to the operations staff. Individual general managers work
closely with the corporate staff and they and their employees are rewarded for
achieving target operating and financial goals.
THE MANAGED HOTELS
The Company operates 29 Managed Hotels owned by third parties containing
4,681 rooms, pursuant to third party management agreements ("The Management
Agreements"). Of the Managed Hotels, 21 are full-service properties, seven are
limited-service properties and one is an extended stay property. Of the Managed
Hotels, 23 are operated under nationally-recognized brand names and six are
independent properties. The brand names of the Managed Hotels include Sheraton,
Clarion, Holiday Inn and Best Western.
The Management Agreements have remaining terms ranging from one month to
nine years. Substantially all of the Management Agreements permit the owners of
the Managed Hotels to terminate such agreements prior to the stated expiration
dates if the applicable hotel is sold and several of the Management Agreements
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance.
The Company intends to continue its efforts to add to its portfolio of
Managed Hotels by aggressively pursuing new management agreements. The Company
believes that, in addition to adding to the Company's revenues and profits, the
business of operating hotels for third parties benefits the Company by (i)
increasing the Company's operating experience in, and knowledge of, hotel
markets throughout the United States, (ii) broadening the Company's
relationships with hotel owners and thus enhancing the Company's opportunities
to identify, evaluate and negotiate hotel acquisitions prior to the active
marketing of a hotel for sale, and (iii) improving the Company's ability to
attract, train and retain highly-qualified operating employees by offering them
the opportunity to work in a broader variety of hotels and markets.
8
<PAGE>
COMPETITION
The Company competes primarily in the upscale and mid-priced sectors of the
full-service segment of the lodging industry. In each geographic market in which
the Hotels are located, there are other full- and limited-service hotels that
compete with the Hotels. In addition, the Company's food and beverage operations
compete with local free-standing restaurants and bars. Competition in the U.S.
lodging industry is based generally on convenience of location, brand
affiliation, price, range of services and guest amenities offered and quality of
customer service and overall product.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 6,200 persons,
of whom approximately 5,200 were compensated on an hourly basis. Approximately
65 employees work at the corporate headquarters.
Employees at five of the Hotels are represented by labor unions. Management
believes that labor relations with its employees are good.
TRADEMARKS
The Company employs a flexible branding strategy based on a particular
Hotel's market environment and the Hotel's unique characteristics. Accordingly,
the Company uses various national trade names pursuant to licensing arrangements
with national franchisors.
GOVERNMENTAL REGULATION
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. The Company
believes that it is substantially in compliance with these requirements.
Managers of hotels are also subject to laws governing their relationship with
hotel employees, including minimum wage requirements, overtime, working
conditions and work permit requirements. Compliance with, or changes in, these
laws could reduce the revenue and profitability of the Owned Hotels and could
otherwise adversely affect the Company's operations.
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA required
upgrades to the Owned Hotels, a determination that the Company is not in
compliance with the ADA could result in a judicial order requiring compliance,
imposition of fines or an award of damages to private litigants. The Company is
likely to incur additional costs of complying with the ADA; however, such costs
are not expected to have a material adverse effect on the Company's results of
operations or financial condition.
THE OPERATING PARTNERSHIP
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE
PROVISIONS OF CAPSTAR MANAGEMENT'S LIMITED PARTNERSHIP AGREEMENT, A COPY OF
WHICH HAS BEEN FILED AS AN EXHIBIT TO THIS ANNUAL REPORT ON FORM 10-K.
Substantially all of the Company's assets are held indirectly by and
operated through CapStar Management Company, L.P. ("CapStar Management"), the
Company's subsidiary operating partnership. The Company is the sole general
partner of CapStar Management, and the Company and CapStar LP Corporation, a
wholly-owned subsidiary of the Company, are the sole limited partners of CapStar
Management. The partnership agreement of CapStar Management gives the general
partner full control over the business and affairs of CapStar Management. The
general partner is also given the right, in connection with the contribution of
property to CapStar Management or otherwise, to issue additional
9
<PAGE>
partnership interests in CapStar Management in one or more classes or series,
with such designations, preferences and participating or other special rights
and powers (including rights and powers senior to those of the existing
partners) as the general partner may determine.
In connection with the acquisition of the Highgate Portfolio, the Company
has agreed to issue limited partnership interests in CapStar Management to
Highgate Hotels. Upon the closing of the acquisition of the Highgate Portfolio,
the partnership agreement of CapStar Management will be amended to provide for
two classes of partnership interests, Common OP Units and Preferred OP Units,
and the partners of CapStar Management will own the following numbers of such OP
Units: (i) the Company and CapStar LP Corporation--a number of Common OP Units
equal to the number of issued and outstanding shares of Common Stock (including
those issued in the Offering); and (ii) Highgate Hotels--809,523 Common OP Units
and 392,157 Preferred OP Units. The Preferred OP Units will pay a 6.5%
cumulative annual preferred return, compounded quarterly to the extent not paid
on a current basis, and will be entitled to a liquidation preference of $25.50
per Preferred OP Unit. All net income and capital proceeds earned by CapStar
Management, after payment of the annual preferred return and, if applicable, the
liquidation preference, will be shared by the holders of the Common OP Units in
proportion to the number of Common OP Units owned by each such holder.
Each OP Unit held by Highgate Hotels will be redeemable by the holder on or
after August 23, 1997 for one share of Common Stock of the Company (or, at the
Company's option, for cash in an amount equal to the market value of a share of
Common Stock). In addition, the Preferred OP Units will be redeemable by CapStar
Management at a price of $25.50 per Preferred OP Unit (or, at the Company's
option, for a number of shares of Common Stock having a value equal to such
redemption price) at any time after the third anniversary of the acquisition of
the Highgate Portfolio.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Washington, D.C. and
owns hotel properties throughout the United States. As of December 31, 1996, the
Company owned 19 of the Owned Hotels. The Company leases its corporate
headquarters as well as the land for two of its Owned Hotels (the Embassy Row
Hilton in Washington, DC and the Hilton Hotel in San Pedro, CA). Total rental
expense for the twelve months ended December 31, 1996, principally for leasing
the Company's corporate headquarters, was $272,000. No one hotel property is
material to the operation of the Company. A typical CapStar hotel has meeting
and banquet facilities, food and beverage facilities and guest rooms and suites.
The Owned Hotels, the Highgate Portfolio and the Additional Acquisitions
feature, or after the Company's renovation programs have been completed will
feature, comfortable, modern guest rooms, extensive meeting and convention
facilities and full-service restaurant and catering facilities that attract
meeting and convention functions from groups and associations, upscale business
and vacation travelers as well as banquets and receptions from the local
community.
10
<PAGE>
The following table sets forth certain information with respect to the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
PLANNED OR
COMPLETED
NUMBER OF RENOVATION
GUEST YEAR MONTH EXPENDITURE(1)
HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S)
- ----------------------------------- -------------------------- ------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton....... Irvine, CA 290 1976 2/96 $ 2,006
Hilton Hotel....................... Sacramento, CA 326 1983 12/96 750
Santa Barbara Inn.................. Santa Barbara, CA 71 1959 12/96 450
Hilton Hotel....................... San Pedro, CA 226 1989 1/97 1,500
Holiday Inn........................ Colorado Springs, CO 201 1974 12/96 200
Sheraton Hotel..................... Colorado Springs, CO 502 1974 6/95 3,393
Embassy Suites Denver.............. Englewood, CO 236 1986 12/96 500
Embassy Row Hilton................. Washington, DC 195 1969 12/96 2,033
The Latham Hotel................... Washington, DC 143 1981 3/96 802
Westin Atlanta Airport(3).......... Atlanta, GA 496 1982 11/95 7,100
Radisson Hotel..................... Schaumburg, IL 202 1979 6/95 1,652
Hilton Hotel & Towers.............. Lafayette, LA 328 1981 12/96 249
Marriott Hotel..................... Somerset, NJ 434 1978 10/95 3,311
Doubletree Hotel................... Albuquerque, NM 294 1974 1/97 1,500
Sheraton Airport Plaza............. Charlotte, NC 226 1985 2/96 1,529
Holiday Inn........................ Cleveland, OH 237 1978 2/96 2,900
Hilton Hotel....................... Arlington, TX 310 1983 4/96 2,700
Southwest Hilton................... Houston, TX 293 1979 10/96 1,072
Westchase Hilton................... Houston, TX 295 1980 1/97 415
Salt Lake Airport Hilton........... Salt Lake City, UT 287 1980 3/95 1,823
Hilton Hotel....................... Arlington, VA 209 1990 8/96 1,500
Hilton Hotel....................... Bellevue, WA 180 1979 8/95 1,063
----- -------
Total/Weighted Average--Owned Hotels....................... 5,981 $ 38,448
HIGHGATE PORTFOLIO
Doubletree Guest Suites............ Indianapolis, IN 137 1987 4/97 $ 1,000
Holiday Inn Select................. Dallas, TX 348 1974 4/97 300
Radisson Hotel..................... Dallas, TX 305 1972 4/97 1,500
Holiday Inn Calgary Airport........ Calgary, Alberta 170 1981 4/97 350
Sheraton Hotel..................... Guildford, B.C. 280 1992 4/97 700
Ramada Vancouver Centre............ Vancouver, B.C. 118 1968 4/97 500
----- -------
Total/Weighted Average--Highgate Portfolio................. 1,358 $ 4,350
ADDITIONAL ACQUISITIONS
Four Points Hotel.................. Cherry Hill, NJ 213 1991 3/97 $ 850
Great Valley Sheraton.............. Frazer, PA 154 1971 5/97 3,244
----- -------
Total/Weighted Average--Additional Acquisitions............ 367 $ 4,094
Total/Weighted Average..................................... 7,706 $ 46,892
----- -------
----- -------
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-------------------------------------
AVERAGE
HOTEL OCCUPANCY ADR REVPAR(2)
- ----------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton....... 66.0% $ 78.48 $ 51.80
Hilton Hotel....................... 71.7 75.89 54.41
Santa Barbara Inn.................. 85.1 129.86 110.51
Hilton Hotel....................... 62.3 67.23 41.88
Holiday Inn........................ 72.6 60.57 43.97
Sheraton Hotel..................... 70.1 65.95 46.23
Embassy Suites Denver.............. 74.1 102.57 76.00
Embassy Row Hilton................. 60.8 111.24 67.63
The Latham Hotel................... 72.0 108.17 77.88
Westin Atlanta Airport(3).......... 79.3 79.44 63.00
Radisson Hotel..................... 66.1 75.54 49.93
Hilton Hotel & Towers.............. 74.1 70.05 51.91
Marriott Hotel..................... 72.4 104.36 75.56
Doubletree Hotel................... 66.6 77.12 51.36
Sheraton Airport Plaza............. 70.8 83.97 59.45
Holiday Inn........................ 73.1 70.11 51.25
Hilton Hotel....................... 73.3 81.03 59.39
Southwest Hilton................... 53.9 72.17 38.90
Westchase Hilton................... 77.9 89.87 70.01
Salt Lake Airport Hilton........... 75.5 79.18 59.78
Hilton Hotel....................... 74.5 109.21 81.36
Hilton Hotel....................... 80.8 91.70 74.09
--- --------- -----------
Total/Weighted Average--Owned H 71.3% $ 83.02 $ 59.19
HIGHGATE PORTFOLIO
Doubletree Guest Suites............ 73.5% $ 79.53 $ 58.45
Holiday Inn Select................. 61.7 59.04 36.43
Radisson Hotel..................... 74.6 60.69 45.27
Holiday Inn Calgary Airport........ 59.3 53.09 31.48
Sheraton Hotel..................... 75.2 69.17 52.02
Ramada Vancouver Centre............ 79.4 70.40 55.90
--- --------- -----------
Total/Weighted Average--Highgat 69.8% $ 64.35 $ 44.92
ADDITIONAL ACQUISITIONS
Four Points Hotel.................. 61.8% $ 73.40 $ 45.36
Great Valley Sheraton.............. 72.0 88.80 63.94
--- --------- -----------
Total/Weighted Average--Additio 66.1% $ 80.43 $ 53.16
Total/Weighted Average......... 70.8% $ 79.64 $ 56.39
--- --------- -----------
--- --------- -----------
</TABLE>
- ------------------------------
(1) Represents the total planned or completed capital expenditures at each
hotel. For the year ended December 31, 1996, $21.6 million had been spent
and an additional $21.7 million was planned.
(2) Represents total room revenue divided by total available rooms, net of rooms
out of service due to significant renovations.
(3) The Westin Atlanta Airport is majority-owned by the Company through a
partnership in which the Company holds an 85.2% limited partner interest, 1%
general partner interest and a mortgage which together provide the Company a
92% economic interest in the hotel.
11
<PAGE>
POST-IPO ACQUISITIONS
HILTON HOTEL, SACRAMENTO, CA. Built in 1983, the 326-room hotel is located
in suburban Sacramento, near the interchange of Interstate 80 and Route 160 in
an area which is well developed with commercial office space, upscale retail and
residential uses. The hotel's facilities and amenities feature over 17,000
square feet of banquet and meeting space, an indoor-outdoor pool, volleyball
courts, a health and fitness center, a business center, valet services, a gift
shop and two restaurants. The greater Sacramento market has experienced strong
economic growth during the 1990s.
SANTA BARBARA INN, SANTA BARBARA, CA. Built in 1959, the 71-room hotel is
located on the Pacific Coast Highway directly across from the Pacific Ocean and
a wide, publicly maintained beach. The hotel's facilities and amenities feature
the renowned CITRONELLE restaurant, two meeting rooms, an outdoor pool and deck,
tennis courts and valet services. The Santa Barbara market is a popular
residential and resort area.
HILTON HOTEL, SAN PEDRO, CA. Built in 1989, the 226-room hotel is located
in Los Angeles County between Long Beach and Palos Verdes, approximately 12
miles south of Los Angeles International Airport. The hotel's facilities and
amenities feature over 14,000 square feet of banquet and meeting space, a
swimming pool, a spa, two tennis courts and a grill restaurant. San Pedro is
located within five miles of the Port of Long Beach and within two miles of the
Port of Los Angeles, which together handle nearly two-thirds of the Western
United States' cargo. Los Angeles County is currently experiencing increased
economic growth as it emerges from the recession of the early- and mid-1990s.
Upon acquisition in February 1997, the hotel was reflagged as a Hilton.
HOLIDAY INN, COLORADO SPRINGS, CO. Built in 1974 and renovated in 1990, the
201-room hotel is located on Interstate 25, approximately five miles north of
downtown Colorado Springs and approximately eight miles north of another Owned
Hotel, the Sheraton Hotel, Colorado Springs. The hotel's facilities and
amenities feature more than 8,700 square feet of banquet and meeting space, a
health club and jogging track, an outdoor pool, tennis courts, a restaurant, a
gift shop and valet services. Colorado Springs has experienced strong economic
growth in recent years which has led to a major airport expansion program
completed in 1995. Such growth is attributable to a number of factors, including
the region's low average cost of living and a rapidly expanding, young
population.
EMBASSY SUITES DENVER, DENVER, CO. Built in 1986, the 236-room hotel is
located in South Denver within a concentration of office and industrial parks
known as the Denver Tech Center. The hotel's facilities and amenities feature
over 5,000 square feet of banquet and meeting space, an indoor pool, an upgraded
fitness center, a business center, valet services, a gift shop and a restaurant.
Denver has experienced significant development and growth during the 1990s as
the economic and cultural center of the rapidly expanding Mountain region.
THE EMBASSY ROW HILTON, WASHINGTON, D.C. Built in 1969 and renovated in
1994, the 195-room hotel is located in downtown Washington, D.C. on
Massachusetts Avenue, which is known as "Embassy Row" because of the many
embassies, chanceries and offices of foreign governments located in the area.
The hotel's facilities and amenities feature over 7,500 square feet of banquet
and meeting space, a rooftop pool and deck, a health and fitness center, a
business center, valet services and a restaurant. A major new convention center
is expected to open in downtown within four years. The Company assumed
management of the hotel in July 1996. Upon acquisition in December 1996, the
hotel was reflagged as a Hilton.
HILTON HOTEL & TOWERS, LAFAYETTE, LA. Built in 1981, the 328-room hotel is
centrally located on Pinhook Road, a major business artery linking downtown
Lafayette with the local airport. The hotel's facilities and amenities feature
over 17,000 square feet of banquet and meeting space, an outdoor pool, an
exercise room, a business center, valet services, a gift shop and a restaurant.
Lafayette serves as a major center for offshore oil drilling and production, and
has experienced strong job growth during the 1990s.
12
<PAGE>
DOUBLETREE HOTEL, ALBUQUERQUE, NM. Built in 1975, the 294-room hotel is
located in downtown Albuquerque, adjacent to the Convention Center and the
subterranean Galleria Shopping Center. The hotel's facilities and amenities
feature over 10,000 square feet of meeting and banquet space, an outdoor heated
pool, an exercise room, a gift shop, an airline desk, two restaurants, two
lobbies and a garden foyer. The region has experienced consistent growth
throughout the 1990s, in part because of the increased presence of high
technology businesses in Albuquerque. The Company plans to spend $1.5 million on
renovations at the hotel.
SOUTHWEST HILTON, HOUSTON, TX. Built in 1981, the 293-room hotel is located
in the Southwest area of Houston on the Southwest Freeway, one of the city's
busiest roads. The hotel's facilities and amenities feature over 15,000 square
feet of banquet and meeting space, an outdoor pool, a fitness center, a business
center, valet services a gift shop and a restaurant. Houston is the nation's
fourth largest metro area with a population over 3.8 million and the region is a
national leader in economic growth and job growth. The Company plans to spend
$1.1 on renovations at the hotel.
WESTCHASE HILTON, HOUSTON, TX. Built in 1981, the 295-room hotel is located
within blocks of the freeway to the Houston International Airport and convenient
to the commercial and retail concentration known as the Galleria area. The
hotel's facilities and amenities feature over 13,000 square feet of banquet and
meeting space, a landscaped outdoor pool with a deck and hot tub, a fitness
center, a beauty salon, a gift shop and a restaurant. Houston is the nation's
fourth largest metro area with a population over 3.8 million and the region is a
national leader in economic growth and job growth.
THE HIGHGATE PORTFOLIO
DOUBLETREE GUEST SUITES, INDIANAPOLIS, IN. Built in 1987, the 137-room
hotel is located on busy North Meridian Street on the north side of the suburb
of Carmel. The hotel is located within a commercial concentration of insurance
companies and national companies such as Lucent Technologies, Thompson Consumer
Electronics, GTE, Eli Lilly and Hewlett Packard. The hotel's facilities and
amenities feature over 1,000 square feet of banquet and meeting space, an
indoor/outdoor pool, a fitness center, a whirlpool, a gift shop and a
restaurant.
HOLIDAY INN SELECT, DALLAS, TX. Built in 1974 and renovated in 1988 and
1995, the 348-room hotel is located at the intersection of Interstate 35 and
Mockingbird Lane, within easy access to the market areas of Las Colinas,
Stemmons Corridor/Market Center, Love Field and Central Business
District/Convention Center. The hotel's facilities and amenities feature over
13,560 square feet of banquet and meeting space, an outdoor pool and sundeck, a
health club, a business center, a gift shop and a restaurant.
RADISSON HOTEL, DALLAS, TX. Built in 1972, the 305-room hotel is located on
West Mockingbird Lane, within easy access to Interstate 35 and the market areas
of Love Field, Stemmons Corridor/Market Center, Parkland/Medical Center and the
Central Business District/Convention Center. The hotel's facilities and
amenities feature over 16,000 square feet of banquet and meeting space, and
outdoor pool, a health club, two racquetball courts, a jogging track, sand
volleyball courts, a whirlpool, a sauna, a gift shop and two restaurants.
HOLIDAY INN CALGARY AIRPORT, CALGARY, ALBERTA. Built in 1981, the 170-room
hotel is located between Calgary's International Airport and central business
district, near such tourist attractions as the Calgary Zoo and Prehistoric Park,
Devonian Garden, the Saddledome (home of the NHL Calgary Flames), Stampede Park,
Canada Olympic Park, the Olympic Hall of fame, Heritage Park, Eau Clair Market
and the IMAX theatre. The hotel's facilities and amenities feature over 2,040
square feet of banquet and meeting space, an indoor pool, two saunas, guest
privileges at a nearby health club and a restaurant.
SHERATON HOTEL, GUILDFORD, B.C. Built in 1992, the 280-room hotel is
located in the Guildford Area of the City of Surrey, the geographic center of
the Greater Vancouver region. The hotel's facilities and
13
<PAGE>
amenities feature over 18,000 square feet of banquet and meeting space, an
outdoor pool, an exercise room, a sauna, a gift shop and a restaurant. Surrey
has experienced significant expansion in recent years and is a leader in
economic growth and job growth within the Province of British Columbia.
RAMADA VANCOUVER CENTRE, VANCOUVER, B.C. Built in 1968 and renovated in
1989 and 1994, the 118-room hotel is located on West Broadway, one block from
the Vancouver Hospital & Health Science Centre and minutes from downtown
Vancouver. Nearby tourist attractions include the Queen Elizabeth Theatre and
the Ford Centre for the Performing Arts, Vancouver International Airport, Canada
Place/ Convention Centre, B.C. Place, General Motors Place, Granville Island
Market, the University of British Columbia, Chinatown and Japantown.
THE ADDITIONAL ACQUISITIONS
FOUR POINTS HOTEL, CHERRY HILL, NEW JERSEY. Built in 1971, the 213-room
hotel is located on Route 70 East, off I-295, nine miles from the Philadelphia
Convention Center and near several major corporate office parks in the Cherry
Hill/Mount Laurel area. The hotel's facilities and amenities feature 16,288
square feet of banquet and meeting space, a large outdoor courtyard with pool,
exercise room, two tennis courts, gift shop, a Morgan's restaurant and a lobby
bar.
GREAT VALLEY SHERATON, FRAZER, PENNSYLVANIA. Built in 1991, the 154-room
hotel is located at the intersection of Route 202 and Lancaster Pike in historic
Chester County, Pennsylvania. The hotel's facilities and amenities include 7,852
square feet of meeting and banquet space, an indoor pool, the White Horse Tavern
and Chesterfield's Piano Lounge. The "202 Corridor" has experienced significant
growth in recent years.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been listed on the NYSE since August 20, 1996 under the
symbol "CHO." The following table sets forth for the periods indicated the high
and low closing sale prices for the Common Stock on the NYSE.
<TABLE>
<CAPTION>
PRICE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1997:
First Quarter (through February 19, 1997)................................ $ 24 3/4 $ 19 3/8
1996:
Fourth Quarter (ended December 31, 1996)................................. 19 5/8 16 7/8
Third Quarter (ended September 30, 1996)................................. 18 3/8 16 1/2
</TABLE>
The last reported sale price of the Common Stock on the NYSE on February 19,
1997 was $24 1/2. As of February 19, 1997, there were approximately 49 holders
of record of the Common Stock.
The Company has not paid any cash dividends on the Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company intends to
retain earnings to provide funds for the continued growth and development of the
Company's business. Certain of the Company's credit facilities restrict the
ability to pay dividends on the Common Stock. Any determination to pay cash
dividends in the future will be at the discretion of the Board and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
On May 29, 1996, the Company issued 100 shares of Common Stock to Cherwell
Investors, Inc., a wholly-owned subsidiary of Acadia Partners, L.P. for nominal
consideration. The shares were issued without registration under the Securities
Act pursuant to the exemption from registration afforded by Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder.
On June 20, 1996, the Company entered into a Formation Agreement pursuant to
which it became obligated to issue 3,504,221 shares of Common Stock to the
beneficial owners of EquiStar Hotel Investors, L.P. ("EquiStar") and CapStar
Management. In August 1996, in connection with the IPO, the Company issued
3,504,221 shares of Common Stock to such beneficial owners. Such issuances were
made without registration under the Securities Act pursuant to exemptions from
registration afforded by Section 4(2) of the Securities Act.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information for
the Company. The Balance Sheet Data of the Company as of December 31, 1996,
1995, and 1994, and the Operating Results and Other Financial Data for the years
ended December 31, 1996, 1995, 1994, and 1993, have been derived from the
audited financial statements which are included elsewhere in this Annual Report
on Form 10-K. The other comparable data as of, and for the years ended, December
31, 1993 and 1992 have been derived from financial statements that are not
required to be included in this Annual Report on Form 10-K. The following
information should be read in conjunction with the historical consolidated
financial statements and notes thereto for the Company, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and notes
thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- ----------- ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING
DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms.................................................... $ 0 $ 0 $ 0 $ 14,456 $ 68,498
Food, beverage and other................................. 0 0 0 7,471 36,949
Management services and other revenues................... 3,479 4,234 4,418 4,436 4,345
--------- --------- --------- ----------- ------------
Total revenues....................................... 3,479 4,234 4,418 26,363 109,792
--------- --------- --------- ----------- ------------
Operating expenses:
Departmental expenses:
Rooms.................................................... 0 0 0 4,190 17,509
Food, beverage and other................................. 0 0 0 5,437 27,102
Undistributed operating expenses:
Selling, general and administrative...................... 2,836 4,065 4,508 8,078 20,448
Property operating costs................................. 0 0 0 3,934 17,151
Depreciation and amortization............................ 12 14 23 2,098 8,248
--------- --------- --------- ----------- ------------
Total operating expenses............................. 2,848 4,079 4,531 23,737 90,458
--------- --------- --------- ----------- ------------
Operating income/(loss).................................... 631 155 (113) 2,626 19,334
Interest expense, net...................................... 0 0 0 2,413 12,346
Minority interest.......................................... 0 0 0 17 39
Provision for income taxes(A).............................. 0 0 0 0 2,674
Income/(loss) before extraordinary item.................... 631 155 (113) 230 4,353
Extraordinary item(B)...................................... 0 0 0 (887) (1,956)
--------- --------- --------- ----------- ------------
Net income/(loss).................................... 631 155 (113) (657) 2,397
--------- --------- --------- ----------- ------------
--------- --------- --------- ----------- ------------
Earnings per share before extraordinary item (C)........... $ -- $ -- $ -- $ -- $ 0.31
Number of shares of common stock........................... -- -- -- -- 12,754,321
OTHER FINANCIAL DATA:
EBITDA(D).................................................. $ 643 $ 169 $ (90) $ 4,741 $ 27,621
Net cash provided by (used in) operating activities........ 87 (101) 66 4,357 13,373
Net cash used in investing activities...................... (65) (24) (41) (116,573) (225,251)
Net cash provided by (used in) financing activities........ (219) 244 0 119,048 226,830
BALANCE SHEET DATA:
Property and equipment, gross.............................. $ 110 $ 134 $ 176 $ 110,883 343,092
Total assets............................................... 586 1,458 1,232 132,650 379,161
Long term obligations...................................... 0 0 0 73,574 200,361
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Owned Hotels:
Number of hotels................................... -- -- -- 6 19
Number of guest rooms.............................. -- -- -- 2,101 5,166
Total revenues (in thousands)...................... -- -- -- $ 21,927 $ 105,447
Average occupancy.................................. -- -- -- 72.3% 71.6%
ADR(E)............................................. -- -- -- $ 71.58 $ 82.84
RevPAR(F).......................................... -- -- -- $ 51.75 $ 59.31
All Hotels(G):
Number of hotels(H)................................ 34 34 39 46 47
Number of guest rooms(H)........................... 5,918 5,971 5,847 7,895 9,785
Total revenues (in thousands)...................... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092
</TABLE>
- ------------------------
(A) No provision for federal income taxes is included other than for 1996
because CapStar Management and EquiStar were partnerships and all federal
income tax liabilities were passed through to the individual partners.
(B) During 1995 and 1996, certain loan facilities were refinanced and the
write-offs of deferred costs associated with the prior facilities were
recorded as extraordinary losses.
(C) Earnings per share before extraordinary item for the year ended December 31,
1996 is based on earnings for the period from August 20, 1996 through
December 31, 1996.
(D) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a useful
measure of operating performance because it is industry practice to evaluate
hotel properties based on operating income before interest, depreciation and
amortization, which is generally equivalent to EBITDA, and EBITDA is
unaffected by the debt and equity structure of the property owner. EBITDA
does not represent cash flow from operations as defined by GAAP, is not
necessarily indicative of cash available to fund all cash flow needs and
should not be considered as an alternative to net income under GAAP for
purposes of evaluating the Company's results of operations.
(E) Represents total room revenues divided by total number of rooms occupied by
hotel guests on a paid basis.
(F) Represents total room revenues divided by total available rooms, net of
rooms out of service due to significant renovations.
(G) Represents operating data for all hotels managed by the Company during all
or a portion of the periods presented.
(H) As of December 31 for the periods presented.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED HEREIN AND ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES REFERENCED ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
GENERAL
Prior to the IPO, the business of the Company was conducted through
EquiStar, which owned the Owned Hotels, and CapStar Management, which managed
the Hotels. CapStar Management has been in the hotel management business since
1987. EquiStar, however, was not formed until January 12, 1995 and the Company
did not own any hotels in any prior periods. Therefore, the Company's financial
statements prior to 1995 reflect only the management business of CapStar
Management. The economics of the management business are based on fees paid to
the Company for management services and the costs related to the performance of
these services. The fee management business is labor intensive and requires
relatively little capital.
Beginning in 1994, the Company began to invest in additional professional
staff and incurred related costs in order to position itself to acquire hotel
properties. From January 12, 1995 through December 31, 1996, the Company
acquired 19 hotels. Thus, the historical financial statements for the year ended
December 31, 1996 and 1995 reflect differing numbers of Owned Hotels throughout
the periods. The economics associated with the acquisition and ownership of
hotels is significantly different from the fee management business in that
capital is required to both acquire and maintain hotels. Due to the timing and
magnitude of the acquisitions made in 1995 and 1996, it is difficult to compare
results of these periods either to each other or to prior years.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Total revenues increased to $109.8 million in 1996 from $26.4 million in
1995. The Company purchased its first hotel in March 1995 and owned five hotels
as of the end of 1995. During 1996, the Company purchased an additional 14
hotels. The growth in revenues between 1995 and 1996 reflects this significant
growth in the number of hotels owned.
Operating costs and expenses increased to $90.5 million in 1996 from $23.7
million in 1995. Departmental expenses, property operating costs, selling,
general and administrative costs and depreciation and amortization increased in
1996 over 1995. All of these increases reflect the growth in the number of owned
hotels from five to nineteen. The costs related to management of the Managed
Hotels remained stable between the periods.
Operating income increased to $19.3 million in 1996 from $2.6 million in
1995. The increase from 1995 is due to the operating income generated by
additional hotels and to increased efficiencies in the management of the Managed
Hotels.
Net interest expense of $12.3 million for 1996 increased from $2.4 million
in 1995 due to the additional debt incurred related to the hotels acquired in
1996.
The extraordinary loss of $2.0 million in 1996 reflects the write-off of
deferred financing fees of $3.3 million, net of a deferred tax benefit of $1.3
million. The financing fees written-off were unamortized fees associated with a
credit facility which was refinanced prior to maturity. The Company also
incurred an extraordinary loss on extinguishment of debt during 1995 from the
write-off of deferred financing fees in connection with a refinancing
transaction.
18
<PAGE>
Net income increased to $2.4 million for 1996 from a net loss of $0.7
million for 1995. The primary reason for the increase is due to increased
operating income generated by hotels acquired during 1996 and improvements in
operating income from hotels acquired in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
Total revenues increased to $26.4 million in 1995 from $4.4 million in 1994.
Room revenues and food, beverage and other hotel department revenues for 1995
reflect the operating revenues of five Owned Hotels acquired during the period.
There were no Owned Hotels acquired during 1994.
Operating costs and expenses increased to $23.7 million in 1995 from $4.5
million in 1994. Departmental expenses and property operating costs for 1995
reflect the operations of five Owned Hotels acquired during the period. Selling,
general and administrative costs and depreciation expense reflect increases due
to the acquisition of five Owned Hotels and the interest in the Westin Atlanta
Airport during 1995. The costs related to management of the Managed Hotels
remained relatively constant between the periods.
Operating income increased to $2.6 million in 1995 from a loss of $0.1
million in 1994. The increase from 1994 is due to the operating income of the
Owned Hotels and to increased efficiencies in the management of the Managed
Hotels.
Net interest expense of $2.4 million for 1995 results from the debt incurred
related to the acquisition of the Owned Hotels.
The Company incurred an extraordinary loss on extinguishment of debt during
1995 from the write-off of deferred financing fees in connection with a
refinancing transaction.
The net loss increased to $0.7 million for 1995 from $0.1 million for 1994.
The primary reason for the loss was the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash
generated from operations and borrowings under credit facilities as well as the
proceeds from the Offering. 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 OP Units and/or Common Stock.
At December 31, 1996, the Company had $21.8 million in cash and cash
equivalents, an increase of $15.0 million from the balance of $6.8 million on
December 31, 1995. During the year ended December 31, 1996, the Company invested
$21.6 million in capital improvements in connection with renovations of the
Owned Hotels. The Company expects to spend an additional $13.3 million to
complete the renovation of the Owned Hotels. Renovations for the Highgate
Portfolio and the Additional Acquisitions will commence after consummation of
their acquisitions and are projected to total $8.4 million. Capital for
renovation work has been and will be provided by a combination of internally
generated cash and external borrowings. The Company is committed to reinvesting
adequate capital on an ongoing basis to maintain the quality of the hotels it
owns. Once existing planned renovation programs are complete, the Company
expects to spend approximately 4% of revenues on an annual basis for ongoing
capital expenditures, including room and facilities refurbishments, renovations
and furniture and equipment replacements. The Company believes that these
investments will enhance the Company's competitive position.
On September 24, 1996, the Company entered into a $225 million revolving
credit facility (the "Credit Facility") which provides for a maximum borrowing
capacity of $225 million bearing interest at a rate of LIBOR plus 2% per annum.
Borrowings under this Credit Facility have been used by the Company to repay
previously existing indebtedness, to acquire and renovate upscale, full service
hotels and for general
19
<PAGE>
corporate purposes. The Company's ability to borrow under the Credit Facility is
subject, among other things, to a borrowing base test calculated with reference
to the cash flow from hotel properties, the relative contribution to the
borrowing base of the values attributable to the different hotel properties, the
appraised values of such hotel properties and certain other factors. As of
December 31, 1996 approximately $177 million was available for borrowing under
the Credit Facility, of which $149 million had been borrowed. Under the Credit
Facility, the Company is permitted to incur an additional $50 million of
subordinated indebtedness as of December 31, 1996.
The term of the Credit Facility is three years, subject to two one-year
extensions upon the satisfaction of certain conditions. Under the Credit
Facility, the Company is entitled to borrow additional advances or reborrow
during the extension period. The Company was required to pay customary fees in
connection with the structuring of the Credit Facility, a commitment fee on the
unused portion of the Credit Facility and a fee on outstanding letters of credit
under the Credit Facility.
The Credit Facility is a direct obligation of CapStar Management and is
fully and unconditionally guaranteed by the Company and certain subsidiaries of
CapStar Management, including the subsidiaries which own the hotel properties.
The Credit Facility is secured by substantially all the real and personal
property of CapStar Management and its subsidiaries.
The Credit Facility contains convenants that impose certain limitations on
the Company in respect of, among other things, (i) the payment of dividends and
other distributions, (ii) acquisitions of additional hotel properties, (iii) the
creation or incurrence of liens, (iv) the incurrence of indebtedness, lease
obligations or contingent liabilities, (v) the acquisition of investments in and
securities issued by joint ventures and other entities, (vi) transactions with
affiliates, (vii) management or similar agreements delegating to another person
substantial authority over the operation or maintenance of its hotel properties,
(viii) mergers, acquisitions, divestitures or reorganizations, (ix) the issuance
of preferred stock and (x) sale leaseback transactions involving any of its
hotel properties. The Credit Facility and the Subordinated Debt also contain
covenants that will subject the Company to certain operating requirements and
that require the maintenance of certain financial levels, such as consolidated
net worth, and certain financial ratios, such as consolidated hotel indebtedness
to market equity capitalization and shareholders' equity, consolidated cash flow
to interest and consolidated total indebtedness to consolidated cash flow. In
February 1997, in accordance with certain of these covenants, the Company
entered into interest rate protection agreements.
On December 13, 1996, the Company modified the terms of the Credit Facility
to increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed $50 million of subordinated
indebtedness (the "Subordinated Debt"). The Subordinated Debt was used to
finance the acquisition of the five hotels purchased from MBL Life Assurance
Corporation and for general corporate purposes. The Subordinated Debt bears
interest at a rate of LIBOR plus 4% per annum. The term of the Subordinated Debt
is three years, subject to two one year extensions upon satisfaction of certain
covenants. The Company was required to pay customary fees in connection with the
structuring of this debt. The Subordinated Debt is a direct obligation of
CapStar Management and its subsidiaries which own the hotel properties. The
Subordinated Debt contains covenants similar to those contained in the Credit
Facility.
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 hotel properties.
SEASONALITY
Demand at many of the Hotels is affected by recurring seasonal patterns.
Demand is 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
20
<PAGE>
and cash flow in the first and fourth quarters and higher revenue, operating
profit and cash flow in the second and third quarters.
INFLATION
The rate of inflation has not had a material effect on the revenues or
operating results of the Company during the three most recent fiscal years.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including information
appearing under the captions "Business", "Legal Proceedings", and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
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
actual results, performances or achievements of the Company to be materially
different from any future results, performances or achievements expressed or
implied by such forward-looking statements. Such factors include, among others
things, the following: the ability of the Company to successfully 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 government regulations applicable to the
Company.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, Supplementary Data and
Financial Statement Schedules are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
CAPSTAR HOTEL COMPANY
<S> <C>
Independent Auditors' Report......................................................... 23
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... 24
Consolidated Statements of Operations for the years ended December 31, 1996 and
1995............................................................................... 25
Consolidated Statements of Stockholders' Equity and Partners' Capital for the years
ended December 31, 1996 and 1995................................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and
1995............................................................................... 27
Notes to the Consolidated Financial Statements....................................... 28
Schedule III. Real Estate and Accumulated Depreciation...............................
CAPSTAR MANAGEMENT COMPANY
Independent Auditors' Report......................................................... 38
Balance Sheet as of December 31, 1994................................................ 39
Statements of Operations and Changes in Management Operations' Equity for the years
ended December 31, 1994 and 1993................................................... 40
Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. 41
Notes to Financial Statements........................................................ 42
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
Notes thereto.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CapStar Hotel Company:
We have audited the accompanying consolidated balance sheets of CapStar
Hotel Company and subsidiaries (formerly EquiStar Hotel Investors, L.P. and
CapStar Management Company, L.P., the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of operations, stockholders' equity
and partners' capital, and cash flows for the years then ended, and the
supplementary schedule. These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CapStar Hotel Company and subsidiaries as of December 31, 1996 and 1995, and the
results of their consolidated operations and their consolidated cash flows for
the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles, and the supplementary schedule, in our opinion,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Washington, D.C.
February 14, 1997
23
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 21,784 6,832
Accounts receivable, net of allowance for doubtful accounts of $189 in 1996 and $91 in
1995.................................................................................... 8,109 2,749
Deposits, including restricted deposits of $2,023 in 1995................................. 3,167 3,515
Prepaid expenses and other................................................................ 1,454 265
Inventory................................................................................. 1,321 174
---------- ----------
Total current assets...................................................................... 35,835 13,535
Property and equipment:
Land.................................................................................... 58,127 12,768
Buildings............................................................................... 248,376 84,545
Furniture, fixtures and equipment....................................................... 32,698 11,354
Construction-in-progress................................................................ 3,891 2,216
---------- ----------
343,092 110,883
Accumulated depreciation................................................................ (8,641) (1,757)
---------- ----------
Total property and equipment, net......................................................... 334,451 109,126
Deferred costs, net of accumulated amortization of $802 in 1996 and $271 in 1995.......... 8,225 2,638
Investments in partnerships............................................................... 650 --
Restricted cash........................................................................... -- 7,351
---------- ----------
$ 379,161 $ 132,650
---------- ----------
---------- ----------
LIABILITIES, MINORITY INTEREST, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Accounts payable.......................................................................... $ 4,125 $ 2,329
Accrued expenses and other liabilities.................................................... 10,737 4,626
Income tax payable........................................................................ 1,436 --
Long-term debt, current portion........................................................... 498 2,668
---------- ----------
Total current liabilities................................................................. 16,796 9,623
Deferred tax liability.................................................................... 1,181 --
Long-term debt............................................................................ 199,863 73,574
---------- ----------
Total liabilities......................................................................... 217,840 83,197
Minority interest......................................................................... 606 815
Partners' capital......................................................................... -- 48,638
Common stock (49,000,000 shares authorized, at $.01 par value, 12,754,321 issued and
outstanding at December 31, 1996)....................................................... 128 --
Paid in capital........................................................................... 158,533 --
Retained earnings......................................................................... 2,054 --
---------- ----------
$ 379,161 $ 132,650
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Revenue from hotel operations:
Rooms.................................................................................... $ 68,498 14,456
Food and beverage........................................................................ 30,968 5,900
Other operating departments.............................................................. 5,981 1,571
Hotel management and other fees............................................................ 4,345 4,436
---------- ---------
Total revenue.............................................................................. 109,792 26,363
---------- ---------
Hotel operating expenses by department:
Rooms.................................................................................... 17,509 4,190
Food and beverage........................................................................ 24,589 4,924
Other operating departments.............................................................. 2,513 513
Undistributed operating expenses:
Administrative and general............................................................... 20,448 8,078
Property operating costs................................................................. 12,586 2,624
Property taxes, insurance and other...................................................... 4,565 1,310
Depreciation and amortization............................................................ 8,248 2,097
---------- ---------
Total operating expenses................................................................... 90,458 23,736
---------- ---------
Net operating income....................................................................... 19,334 2,627
Interest expense........................................................................... 12,784 2,673
Interest income............................................................................ (438) (259)
---------- ---------
Income before minority interest, income taxes, and extraordinary loss...................... 6,988 213
Minority interest.......................................................................... 39 18
---------- ---------
Income before income taxes and extraordinary loss.......................................... 7,027 231
Income taxes............................................................................... 2,674 --
---------- ---------
Income before extraordinary loss........................................................... 4,353 231
Extraordinary loss on early extinguishment of debt, net of tax benefit of $1,304 for
1996..................................................................................... (1,956) (888)
---------- ---------
Net income (loss).......................................................................... $ 2,397 (657)
---------- ---------
---------- ---------
Earnings per share:
Primary
Income before extraordinary loss....................................................... $ 0.31 $ --
Extraordinary loss..................................................................... (0.15) --
---------- ---------
Net income............................................................................. 0.16 --
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED GENERAL LIMITED
SHARES AMOUNT CAPITAL EARNINGS PARTNERS PARTNERS TOTAL
------------ ----------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK
$.01 PAR VALUE
Initial capital contributions
on January 12, 1995.......... -- $ -- -- -- 89 1,684 $ 1,773
Capital contributions.......... -- -- -- -- 2,431 46,194 48,625
Capital distributions.......... -- -- -- -- (1) (115) (116)
Net loss for the year ended
December 31, 1995............ -- -- -- -- (87) (570) (657)
------------ ----- ---------- ----------- --------- ---------- ----------
-- -- -- -- 2,432 47,193 49,625
Less--notes receivable from
management for capital
contributions................ -- -- -- -- -- (987) (987)
------------ ----- ---------- ----------- --------- ---------- ----------
Partners' capital at December
31, 1995..................... -- -- -- -- 2,432 46,206 $ 48,638
------------ ----- ---------- ----------- --------- ---------- ----------
Capital distributions.......... -- -- -- -- (2) (170) (172)
Repayment of notes receivable
from management.............. -- -- -- -- -- 987 987
Net income for period from
January 1, 1996 through
August 19, 1996.............. -- -- -- -- 45 298 343
------------ ----- ---------- ----------- --------- ---------- ----------
Partners' capital at August 19,
1996......................... -- -- -- -- 2,475 47,321 49,796
Shares sold on August 20,
1996......................... 6,750,000 68 110,044 -- -- -- 110,112
Shares issued for partners'
capital on August 20, 1996... 6,004,321 60 49,736 -- (2,475) (47,321) --
Deferred tax liability assumed
from partners on August 20,
1996......................... -- -- (1,247) -- -- -- (1,247)
Net income for period from
August 20, 1996 through
December 31, 1996............ -- -- -- 2,054 -- -- 2,054
------------ ----- ---------- ----------- --------- ---------- ----------
Stockholders' equity at
December 31, 1996............ 12,754,321 $ 128 158,533 2,054 -- -- $ 160,715
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................................... $ 2,397 $ (657)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization......................................................... 8,248 2,097
Loss on early extinguishment of debt.................................................. 3,260 618
Minority interest in consolidated subsidiary.......................................... (39) (18)
Changes in working capital:
Accounts receivable, net............................................................ (5,360) (2,749)
Deposits, prepaid expenses and other, and inventory................................. (4,011) (1,889)
Accounts payable.................................................................... 1,797 2,329
Accrued expenses and other liabilities.............................................. 5,711 4,626
Income taxes payable................................................................ 1,436 --
Deferred tax liability.............................................................. (66) --
---------- ----------
Net cash provided by operating activities................................................. 13,373 4,357
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment..................................................... (231,885) (109,223)
Purchase of investment in partnerships.................................................. (650) --
Purchase of minority interest........................................................... (67) --
Release of (additions to) restricted cash for capital improvements and other, net....... 7,351 (7,351)
---------- ----------
Net cash used by investing activities..................................................... (225,251) (116,574)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt............................................................ 372,778 98,058
Payments on long-term debt, line of credit, and capital leases.......................... (248,387) (23,133)
Release of (additions to) restricted deposits for hedge agreement....................... 2,559 (2,023)
Deferred costs.......................................................................... (10,943) (3,000)
Capital contributions................................................................... -- 50,250
Repayments from (loans to) management................................................... 987 (987)
Net proceeds from issuance of common stock.............................................. 110,112 --
Capital distributions................................................................... (172) (116)
Distributions to minority interests..................................................... (104) --
---------- ----------
Net cash provided by financing activities................................................. 226,830 119,049
---------- ----------
Net increase in cash and cash equivalents................................................. 14,952 6,832
Cash and cash equivalents at beginning of period.......................................... 6,832 --
---------- ----------
Cash and cash equivalents at end of period................................................ $ 21,784 6,832
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid........................................................................... $ 12,105 2,383
Income taxes paid....................................................................... 807 --
Capitalized interest costs.............................................................. 461 67
Capital lease additions................................................................. 324 721
Deferred financing fees not yet paid.................................................... -- 596
Prepaid expenses and property contributed by limited partner............................ -- 148
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(DOLLARS 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 "Formation Agreement"). As a result of the transactions
discussed in Note 3, the consolidated financial statements of the Company as of
December 31, 1996 and 1995, include the historical results of the Company's
predecessor entities, EquiStar Hotel Investors, L.P. and subsidiaries
(collectively, "EquiStar") and CapStar Management Company, L.P. ("CapStar
Management").
The principal activity of the Company is to acquire, renovate, reposition
and manage upscale, full-service hotels. At December 31, 1996, the Company owned
nineteen hotels and managed 27 other hotels on the behalf of third party and
affiliate owners. At December 31, 1996, the owned hotels consisted of:
<TABLE>
<CAPTION>
ACQUISITION DATE NAME ROOMS
- --------------------------------- ------------------------------------------------- -----------
<S> <C> <C>
March 3, 1995.................... Salt Lake Airport Hilton, UT 287
June 30, 1995.................... Radisson Hotel, Schaumburg, IL 202
June 30, 1995.................... Sheraton Hotel, Colorado Springs, CO 502
August 4, 1995................... Hilton Hotel, Bellevue, WA 180
October 3, 1995.................. Marriott Hotel, Somerset, NJ 434
November 15, 1995................ Westin Atlanta Airport, GA 496
February 2, 1996................. Sheraton Airport Plaza, Charlotte, NC 226
February 16, 1996................ Holiday Inn, Cleveland, OH 237
February 22, 1996................ Orange County Airport Hilton, Irvine, CA 290
March 8, 1996.................... The Latham Hotel, Washington, DC 143
April 17, 1996................... Hilton Hotel, Arlington, TX 310
August 23, 1996.................. Hilton Hotel, Arlington, VA 209
October 31, 1996................. Southwest Hilton, Houston, TX 293
December 12, 1996................ Embassy Suites, Denver, CO 236
December 17, 1996................ Hilton Hotel, Sacramento, CA 326
December 17, 1996................ Santa Barbara Inn, CA 71
December 17, 1996................ Holiday Inn, Colorado Springs, CO 201
December 17, 1996................ Embassy Row Hilton, Washington, DC 195
December 17, 1996................ Hilton Hotel & Towers, Lafayette, LA 328
</TABLE>
Separate wholly-owned limited liability companies ("LLCs") or limited
partnerships were established to directly own the above hotels. However, for the
Westin Atlanta Airport, LLCs were established to purchase and hold the Company's
general and limited partner interest in the partnership that owns the hotel (the
"Atlanta Partnership"). At December 31, 1996 and 1995, the Company had a 1%
general partner interest and an 85.2% and 84.6% limited partner interest in the
Atlanta Partnership, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All material intercompany transactions and
balances have been eliminated in the consolidation of the Company for 1996. The
accounts of EquiStar and CapStar Management have been combined in the 1995
financial statements as the Partnerships were under common ownership. All
material intercompany transactions and balances are eliminated in the
combination for 1995.
28
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
DEPOSITS--Deposits primarily represent refundable amounts escrowed during
the negotiation of potential hotel acquisitions. Additionally, certain amounts
held for future hotel renovations and the amount held in escrow related to a
hedge agreement (see Note 5) were recorded as deposits at December 31, 1995.
INVENTORY--Inventories, which consist primarily of hotel food and beverage
stock, are recorded at the lower of cost or market using the first-in, first-out
("FIFO") valuation method.
PROPERTY AND EQUIPMENT--Buildings and building improvements are stated at
cost and depreciated over 40 years. Furniture, fixtures and equipment purchases
are stated at cost and depreciated over estimated useful lives of five to seven
years or, for capital leases, the related lease terms. Furniture and equipment
contributed is stated at its fair value at the time it was contributed. All
property and equipment balances are depreciated using the straight-line method.
Management plans to hold all hotel assets long-term. Management evaluates
potential permanent impairment of the net carrying value of its hotel assets on
a quarterly basis. For each hotel asset, the expected undiscounted future cash
flows for the asset are compared to its net carrying value. If the net carrying
value of the hotel exceeds the undiscounted cash flows, management estimates the
fair value of the assets based on recent appraisals, if available, or by
discounting expected future cash flows using prevailing market discount rates.
If the net carrying value of the hotel exceeds its fair value, the excess is
charged to operations. No impairment losses were recorded during 1996 or 1995.
DEFERRED COSTS--Organizational costs incurred in the formation of the
Company and its predecessor entities are amortized over five years using the
straight-line method. Costs associated with the acquisition of debt are
amortized over the lives of the related debt instruments using a method that
approximates the interest method.
INVESTMENTS IN PARTNERSHIPS--Based on ownership percentages and a lack of
significant influence, the Company records its interests in partnerships under
the cost method of accounting for investments.
RESTRICTED CASH--Prior to the September 30, 1996 debt refinancing (see Note
6), the Company was required to maintain certain levels of restricted cash to
comply with the terms of its debt agreements. Restricted cash reserved primarily
for future hotel capital improvements was $7,351 at December 31, 1995.
INCOME TAXES--Prior to the Formation Transactions (see Note 3), no provision
for income taxes was made since the Company's predecessor entities were
partnerships, and, therefore, all income, losses, and credits for tax purposes
were passed through to the individual partners. Concurrent with the Formation
Transactions the Company implemented Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts.
MINORITY INTEREST--Minority interest represents the limited partner
interests in the Atlanta Partnership which are not owned by the Company.
REVENUES--Revenue is earned primarily through the operations and management
of the hotel properties and is recognized when earned. During the period from
its acquisition until February 29, 1996, the Westin Atlanta Airport hotel was
leased to a third-party operator. Related lease revenue is recorded as other
operating departments revenue. On February 29, 1996, the Company assumed the
operations of the hotel upon termination of the lease.
USE OF ESTIMATES--Management has made a number of estimates and assumptions
related to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these
29
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
3. FORMATION TRANSACTIONS AND INITIAL PUBLIC OFFERING
The following transactions (the "Formation Transactions") occurred prior to
or on August 20, 1996, the date of the Company's initial public offering (the
"IPO"):
- a limited partner of CapStar Management contributed its partnership
interest in CapStar Management to the Company in exchange for shares of
Common Stock;
- the Company contributed such partnership interest to CapStar LP
Corporation, a wholly-owned subsidiary of the Company ("CapStar Sub");
- the remaining partners of CapStar Management (including its general
partner but not including CapStar Sub) and the partners of EquiStar
contributed their respective partnership interest in CapStar Management
and EquiStar to the Company in exchange for shares of Common Stock;
- the Company contributed all the assets of EquiStar to CapStar Management
and CapStar Management assumed all of the liabilities of EquiStar; and
- the Agreement of Limited Partnership of CapStar Management was amended and
restated to reflect the fact that CapStar Management has succeeded the
business of EquiStar and the Company became the general partner of CapStar
Management.
In connection with the Formation Transactions, the Company issued 6,004,321
shares of Common Stock to the partners of EquiStar and CapStar Management.
On August 20, 1996, the Company completed its IPO of 9,250,000 shares of
common stock at a price of $18 per share. The Company sold 6,750,000 of the
initial shares which, after underwriting discounts, commissions and other IPO
expenses, produced net proceeds to the Company of $110,112. The remaining
2,500,000 shares were sold by Acadia Partners, L.P. and certain related entities
("Acadia Partners"), which received 100% of the net proceeds from the sale of
their shares. The Company used the proceeds of the IPO to repay a portion of the
Company's outstanding indebtedness.
4. NOTES RECEIVABLE FROM MANAGEMENT
Pursuant to the terms of an agreement dated January 4, 1995, certain members
of management borrowed $987 from CapStar Management to fund capital
contributions to EquiStar. The notes were secured by the borrowers' interests in
EquiStar and were personally guaranteed by the individual note holders. These
notes earned interest at the prime rate throughout 1995 and at prime plus 1.5%
during 1996 until their repayment on September 13, 1996.
5. HEDGE AGREEMENT
In August 1995, the Company entered into an agreement with Salomon Brothers
Holding Company Inc. ("Salomon") to hedge against the impact that interest rate
fluctuations may have on the Company's various floating rate debt instruments.
Gains and losses resulting from this agreement were not recorded in the
financial statements until realized.
The hedge agreement was a two-year forward swap that was effective June 30,
1997 and was to mature on June 30, 2007. The agreement required the Company to
pay a fixed rate of 7.1% and receive a floating interest rate based on the
three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of
$25,000. The agreement required the Company to make an initial collateral
deposit of $1,000 and
30
<PAGE>
5. HEDGE AGREEMENT (CONTINUED)
provided for required additions or reductions to the collateral escrow account
by the Company and Salomon in $500 increments based on changes in the market
value of this agreement.
At December 31, 1995, the Company had made required deposits totaling $1,000
to the collateral escrow account which were recorded as restricted deposits. The
unrealized loss on this agreement at December 31, 1995 was $1,546.
On May 6, 1996, the Company sold its interest in the swap agreement and
received a cash payment of $536. This gain on sale has been deferred for
financial statement purposes.
6. LONG-TERM DEBT
BANKERS TRUST DEBT--On September 30, 1996, the Company entered into a
$225,000 Senior Secured Revolving Credit Facility (the "Credit Facility") with a
group of lenders led by Bankers Trust Company ("Bankers Trust"). The Credit
Facility provides for acquisition loans, working and renovation capital, and
letters of credit. The initial proceeds from the Credit Facility were used to
refinance virtually all existing indebtedness and to fund hotel renovations. 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. At December 31, 1996, no letters of credit were
outstanding.
Interest on the Credit Facility is payable monthly at the Company's election
of the Base Rate (lenders' prime rate) plus 1.0% or Eurodollar Option (LIBOR for
periods of one, two, three or six months) plus 2.0%. The interest rate for the
Credit Facility was 7.6% at December 31, 1996.
A commitment fee, which is calculated using an annual rate of 0.25% times
the average unutilized balance on the Credit Facility, is due quarterly. Letter
of credit fees of 2.0% per annum times the average outstanding balances on
letters of credit, if any, are also payable quarterly. The Company incurred $108
in commitment fees, which are recorded as interest expense, and no letter of
credit fees during 1996.
On December 13, 1996, the Company also entered into a $50,000 unsecured
senior subordinated credit facility (the "Subordinated Debt") with Bankers Trust
as agent and arranger. The net proceeds from the Subordinated Debt borrowing
were used to acquire certain of the hotels and for general corporate purposes.
In connection with the closing of the Subordinated Debt, the Credit Facility was
amended to, among other things, permit the Company to incur up to $100,000 of
subordinated indebtedness.
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 the Company's election of the one, two, three, or six month
LIBOR plus 4.0%. At December 31, 1996, the interest rate for the Subordinated
Debt was 9.6%.
Both the Credit Facility and Subordinated Debt agreements contain certain
covenants, including maintenance of certain financial ratios, restrictions on
payments of dividends, certain reporting requirements and other customary
restrictions. The Company's ability to borrow under the Credit Facility is also
subject to a borrowing base test calculated with reference to the cash flow from
hotel properties, the relative contribution to the borrowing base of the values
attributable to the different hotel properties, the appraised value of such
hotel properties and certain other factors. As of December 31, 1996,
approximately $177,000 was available for borrowing under the Credit Facilities,
of which $149,000 has been borrowed. Under the Credit Facility the Company is
permitted to incur an additional $50,000 of subordinated indebtedness as of
December 31, 1996.
LEHMAN DEBT--On December 21, 1995, the Company entered into a $202,500
Master Mortgage Loan Facility Agreement (the "Master Agreement") with Lehman
Brothers Holding, Inc. ("Lehman") to facilitate the repayment of the existing
$22,690 in debt (see "Salomon Debt" below) and to fund hotel
31
<PAGE>
6. LONG-TERM DEBT (CONTINUED)
acquisitions. Under the Master Agreement, 50% of total acquisition capital, not
to exceed $125,000, could be funded through a senior loan facility. An
additional 27.5% of acquisition capital, not to exceed $75,000, could be
borrowed through a mezzanine loan facility. Certain fees incurred by the Company
related to these borrowings could also be financed through the Master Agreement,
up to a maximum of $2,500. Separate loans were obtained under the Master
Agreement for each hotel acquired. The loans were cross-collateralized and
cross-defaulted and were secured by first and second liens on the Company's real
and personal property.
Loans obtained under the senior loan facility bore interest at variable
rates that were based on the one-month LIBOR. For the nine months ended
September 30, 1996 (the date of refinancing) and the year ended December 31,
1995, interest rates on the loans under the senior facility were between 9.6%
and 10%, respectively. Loans obtained under the mezzanine loan facility bore
interest at a fixed rate of 16.0%, with monthly interest payments of 10% with
the remaining 6% accruing to principal.
Under the Master Agreement, the Company was required to pay financing fees
upon the repayment of each loan. These deferred financing fees payable, which
were included in long-term debt, totaled $596 at December 31, 1995.
At December 31, 1995, total borrowings under the Master Agreement were
$59,976, of which $55,841 were made from the senior loan facility and $4,135
were made from the mezzanine loan facility. On August 21, 1996, the majority of
the outstanding Lehman debt was repaid with a portion of the Company's IPO
proceeds. All remaining Lehman indebtedness was repaid with proceeds from the
Credit Facility on September 30, 1996.
SALOMON DEBT--During 1995, the Company entered into a loan facility with
Salomon to fund hotel acquisitions. Interest-only payments were required under
this loan facility at a floating rate based on LIBOR. On December 21, 1995, the
$22,690 outstanding balance was repaid with proceeds from the Lehman debt
facility.
WELLS FARGO DEBT--On March 2, 1995, the Company borrowed $9,960 from Wells
Fargo Bank, National Association ("Wells Fargo") to finance the purchase of the
Salt Lake Airport Hilton. Interest, which was payable monthly, was based on the
one-month LIBOR plus 4.25%, as adjusted for certain provisions in the loan
agreement. At December 31, 1995, the outstanding balance on this amortizing note
was $9,890. The note was repaid in 1996.
The Company also entered into an unsecured $5,000 revolving credit facility
with Wells Fargo that was used for general corporate purposes. Interest accrued
at either LIBOR plus 2.25% or the Prime Rate plus 1%, depending on the nature of
the advance. At December 31, 1995, there was $4,181 outstanding under this line.
The outstanding balance was repaid in 1996.
NOTES PAYABLE--In September 1996, the Company entered into a note agreement
to finance a three-year insurance policy. Principal and interest payments are
due monthly. The outstanding balance on the note, which bears interest at 6.0%,
was $665 at December 31, 1996.
During 1995, in order to fund certain loans to management (see Note 4), the
Company borrowed $950 from Acadia Partners. In January 1996, the Company
borrowed an additional $150 under this note agreement. The note, which bore
fixed interest at the Prime Rate plus 1.5%, was repaid on September 13, 1996.
To help finance the March 1996 purchase of The Latham Hotel, the Company
entered into an unsecured $1,000 note agreement with LCP Hotel Ventures, L.P.
("LCP"), the seller of the hotel and an affiliated entity of the Company (see
Note 10). The note, which bore interest at a rate of 10%, was repaid on August
23, 1996.
32
<PAGE>
6. LONG-TERM DEBT (CONTINUED)
CAPITAL LEASES--The Company has entered into several capital leases for
hotel and office equipment that expire between 1997 and 2001. The total capital
lease obligations at December 31, 1996 and 1995, were $696 and $648,
respectively, and are included in long-term debt.
At December 31, 1996, long-term debt outstanding under the above facilities
and agreements consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
<S> <C> <C>
1996 1995
---------- -------------
Senior Secured Revolving Credit Facility........................... $ 149,000 $ --
Senior Subordinated Credit Facility................................ 50,000 --
Mortgage Debt...................................................... -- 74,048
Notes Payable...................................................... 665 950
Capital Leases..................................................... 696 648
Other.............................................................. 0 596
---------- -------------
200,361 76,242
Less Current Portion............................................... (498) (2,668)
---------- -------------
$ 199,863 $ 73,574
---------- -------------
---------- -------------
</TABLE>
Aggregate maturities of the above obligations are as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 498
1998.......................................................... 483
1999.......................................................... 199,285
2000.......................................................... 84
2001.......................................................... 11
Thereafter.................................................... --
-----------
$ 200,361
-----------
-----------
</TABLE>
Management has determined that the outstanding balance of the Company's
long- term debt approximates its fair value by discounting the future cash flows
under the debt arrangements using rates currently available for debt with
similar terms and maturities.
7. INCOME TAXES
Income taxes of the Company are based on pretax income since the Formation
Transactions and the associated change in the Company's tax status to a C
Corporation on August 20, 1996. Pretax income of the Company from August 20
through December 31, 1996 is $3,424. The Company's effective income tax rate is
40%.
Income taxes were allocated as follows for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Income before income taxes and extraordinary loss................... $ 2,674
<S> <C>
Extraordinary loss.................................................. (1,304)
---------
$ 1,370
---------
---------
</TABLE>
33
<PAGE>
7. INCOME TAXES (CONTINUED)
Income tax expense attributable to income before income taxes and
extraordinary loss consists of the following for the year ended December 31,
1996:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ------------- ---------
<S> <C> <C> <C>
U.S. federal..................................................... $ 2,118 (51) 2,067
State and local.................................................. 622 (15) 607
--
----------- ---------
$ 2,740 (66) 2,674
--
--
----------- ---------
----------- ---------
</TABLE>
The "expected" tax expense, based on the U.S. federal statutory rate of 34%,
differs from the actual tax expense, calculated at the effective rate of 40%,
due to state and local taxes, net of federal tax benefit.
Upon formation of the Company, the Company assumed certain deferred tax
assets and liabilities from its predecessor entities. The tax effects of
temporary differences that give rise to deferred tax assets and liabilites of
August 20, 1996, and December 31, 1996, are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 20,
1996 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts, recorded for financial statement
purposes only.................................................... $ 75 $ 41
Accrued vacation, recorded for financial statement purposes only... 252 199
Other.............................................................. 7 27
------------ -----------
Total gross deferred tax assets.................................... 334 267
Deferred tax liability--Difference in accumulated depreciation and
amortization for tax purposes and financial statement purposes... (1,515) (1,514)
------------ -----------
Net deferred tax liability......................................... $ (1,181) $ (1,247)
------------ -----------
</TABLE>
There is no valuation allowance for deferred tax assets as of August 20,
1996 or as of December 31, 1996, as management believes that it is more likely
than not that these deferred tax assets will be fully realized.
8. EXTRAORDINARY LOSS
On September 30, 1996, the Company recognized an extraordinary loss from the
write-off of deferred financing fees in connection with the refinancing of the
Lehman debt. The recorded loss of $1,956 net of a tax benefit of $1,304 reflects
the write-off of the unamortized balance of deferred financing fees at the time
of the refinancing.
On December 21, 1995, an extraordinary loss was recorded to write-off the
unamortized deferred financing fees related to the Salomon debt. There is no tax
effect on the recorded loss of $888 because the Company's predecessor entities
were not subject to income tax.
9. EARNINGS PER SHARE
The earnings per share have been calculated using actual income before
extraordinary loss, extraordinary loss, and net income amounts for the period
from the IPO on August 20, 1996 through December 31, 1996. Earnings per share is
not presented for periods prior to the IPO because the Company's predecessor
entities were partnerships and were not subject to the provisions of Accounting
Principles Board Opinion No. 15. The weighted average number of common shares
and common share equivalents used in the calculations is 12,754,321.
34
<PAGE>
10. RELATED-PARTY TRANSACTIONS
The Company manages hotels that are owned in part by affiliates or officers
of the Company. Revenue associated with the management of these hotels was $824
and $1,104 during 1996 and 1995, respectively. At December 31, 1996 and 1995,
the amount due from these properties was $304 and $237, respectively. Management
believes these contracts are at prevailing market rates.
Upon formation of CapStar Management, certain receivables of CapStar Equity
Associates, G.P. ("CEA"), a limited partner, were assigned to CapStar
Management. Amounts collected under this agreement, which are recorded as a
current liability, amounted to $305,077 at December 31, 1995. During 1996, all
amounts collected under these receivables were repaid to CEA.
On March 8, 1996, the Company acquired The Latham Hotel for a purchase price
of $12,000 from LCP (see Note 6). At the time of the acquisition, the general
partner of LCP, Latham Hotels, Inc., was wholly-owned by certain members of the
Company's management. Directly or indirectly, these members of management owned
a 9.7% beneficial interest in LCP and received $806 of the net proceeds of the
purchase price paid to LCP. Management believes that the purchase price was
determined through arm's-length negotiations between the Company and
representatives of the holders of the majority of the beneficial interests in
LCP.
On November 15, 1995, the Company acquired its 1% general partner interest
in the Atlanta Partnership from LHP, a corporation in which an individual who,
at the time, was a principal of the Company's predecessor entities, owned an
equity interest. LHP was paid a fee of $893 in connection with the Company's
acquisition of the general and limited partner interests and is entitled to an
additional $161 upon the ultimate disposition of the Atlanta Partnership.
Another affiliate of the former principal, LCP Group, L.P., is entitled to an
annual fee of $30 to provide certain administrative services related to the
outside limited partners. Management believes that these fees were negotiated at
arm's-length between the former principal and the other principals of EquiStar.
11. STOCK OPTION PLANS
On August 20, 1996, the Company adopted an equity incentive plan (the
"Equity Incentive Plan"). Pursuant to the terms of its Equity Incentive Plan,
the Company is authorized to issue and award 1,740,000 shares of common stock as
options to purchase shares, stock appreciation rights, or restricted shares.
Awards may be granted to directors, officers or other key employees of the
Company or an affiliate.
On August 20, 1996, in connection with the IPO, the Company granted certain
executive officers and other members of management 745,254 options to purchase
shares of the Company's common stock at the initial public offering price of $18
per share. Of such options, 54,254 were exercisable immediately upon their
grant, although no options were exercised during 1996. The remaining options
will become exercisable in three annual installments. All shares granted lapse
ten years from the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company applies Accounting Principles Board
Opinion No. 25 in accounting for the Equity Incentive Plan and therefore no
compensation cost has been recognized for the Equity Incentive Plan. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for the grants in 1996: risk free interest rate of 5.96%; no
expected dividend yields; expected lives of 3.11 years; expected volatility of
25%. The Company's 1996 pro forma net income and earnings per share as if the
fair value method had been applied, were $2,111 and $0.14, respectively. The
effects of applying SFAS No. 123 for disclosing compensation costs may not be
representative of the effects on reported net income and earnings per share for
future years.
35
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into three operating leases for office space which
expire in October 1998. Lease payments will approximate $265 annually through
expiration.
The Company is involved in various litigation through the normal course of
business which management believes will not have a material adverse effect on
the consolidated financial statements.
13. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma summary presents information as if all
hotels owned at December 31, 1996 had been acquired on January 1, 1995 and does
not reflect the repayment of outstanding debt with the proceeds from the IPO.
The pro forma information is provided for informational purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the Company.
PRO FORMA INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total revenue......................................................... $ 172,653 $ 160,961
---------- ----------
---------- ----------
Net income (loss) before extraordinary loss........................... $ 1,958 $ (10,861)
---------- ----------
---------- ----------
Net income (loss)..................................................... $ 2 $ (11,749)
---------- ----------
---------- ----------
</TABLE>
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Company's quarterly results of operations:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- ----------- ----------- ----------- ----------- -----------
Total revenue................................ $ 18,033 28,223 30,872 32,664 1,782 3,029
Total operating expenses..................... 15,887 23,742 24,018 26,811 1,605 2,705
Net operating income......................... 2,146 4,481 6,854 5,853 177 324
Income (loss) before extraordinary loss...... (642) 48 2,575 2,372 95 71
Net income (loss)............................ (642) 48 619 2,372 94 71
Earnings (loss) per share.................... $ -- -- (0.03) 0.19 -- --
--------- ----------- ----------- ----------- ----- -----
--------- ----------- ----------- ----------- ----- -----
<CAPTION>
<S> <C> <C>
THIRD FOURTH
QUARTER QUARTER
----------- -----------
Total revenue................................ 9,400 12,152
Total operating expenses..................... 7,799 11,627
Net operating income......................... 1,601 525
Income (loss) before extraordinary loss...... 805 (740)
Net income (loss)............................ 805 (1,627)
Earnings (loss) per share.................... -- --
----- -----------
----- -----------
</TABLE>
15. SUBSEQUENT EVENTS
On January 28, 1997, the Company acquired long-term leasehold rights to the
226-room San Pedro Hilton at Cabrillo Marina in San Pedro, California, from U.S.
Bancorp for a purchase price of $7,000. Additionally, the 295 room Westchase
Hilton in Houston, Texas, was purchased from Redstone Group on January 31, 1997
for $28,500. In a separate transaction, the Company also purchased the 294 room
Doubletree Hotel in Albuquerque, New Mexico, on January 31, 1997 from Merv
Griffin Hotels for $19,000. All of these hotel acquisitions were funded through
the Credit Facility and existing working capital.
In February 1997, the Company entered into a contract to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a purchase price of $95,000.
In February 1997, the Company also entered into contracts to purchase the
213-room Four Points Hotel Sheraton in Cherry Hill, New Jersey, for $6,900 and
the 154-room Great Valley Sheraton in Frazer, Pennsylvania, for $14,355.
36
<PAGE>
CAPSTAR HOTEL COMPANY
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS
AMOUNT AT
WHICH CAR-
COSTS SUBSEQUENT TO RIED AT
CLOSE OF
INITIAL COST TO COMPANY ACQUISITION PERIOD
--------------------------- ------------------------- -----------
BUILDING AND BUILDING AND
DESCRIPTION ENCUMBRANCES(1) LAND IMPROVEMENTS LAND IMPROVEMENTS LAND(2)
- -------------------------------------- ----------------- ----------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton, UT......... -- 770 12,828 1 797 771
Radisson Hotel, Schaumburg, IL....... -- 1,080 5,131 26 1,090 1,106
Sheraton Hotel, Colorado Springs,
CO.................................. -- 1,071 14,592 1 1,953 1,072
Hilton Hotel, Bellevue, WA........... -- 5,211 6,766 4 478 5,215
Marriott Hotel, Somerset, NJ......... -- 1,978 23,001 9 1,643 1,987
Westin Atlanta Airport, Atlanta,
GA.................................. 23,609 2,650 15,926 (300) 6,461 2,350
Sheraton Hotel, Charlotte, NC........ -- 4,700 11,057 -- 2,179 4,700
Holiday Inn, Cleveland, OH........... -- 1,330 6,353 2 1,545 1,332
Orange County Airport Hilton, Irvine,
CA.................................. -- 9,990 7,993 14 575 10,004
The Latham Hotel, Washington, DC..... 12,000 6,500 5,320 -- 480 6,500
Hilton Hotel, Arlington, TX.......... -- 1,836 14,689 354 1,218 2,190
Hilton Hotel, Arlington, VA.......... 16,210 4,000 15,069 -- 147 4,000
Southwest Hilton, Houston, TX........ -- 2,300 15,665 -- (75) 2,300
Embassy Suites, Englewood, CO........ -- 2,500 20,700 -- 27 2,500
Holiday Inn, Colorado Springs, CO.... -- 1,600 4,232 -- 6 1,600
Embassy Row Hilton, Washington DC.... -- 2,200 13,247 -- 17 2,200
Hilton Hotel, Sacramento, CA......... -- 4,000 16,013 -- 22 4,000
Santa Barbara Inn, Santa Barbara, CA -- 2,600 5,141 -- 9 2,600
Hilton Hotel & Towers, Lafayette,
LA.................................. -- 1,700 16,062 -- 19 1,700
----------------- ----------- -------------- --------- -------------- -----------
51,819 58,016 229,785 111 18,591 58,127
----------------- ----------- -------------- --------- -------------- -----------
----------------- ----------- -------------- --------- -------------- -----------
(1) Listed above are encumbrances incurred by the Company or its subsidiaries under loan facilities which
require the collateralization of certain Hotel Assets. At December 31, 1996, the Company also had other
borrowings that are secured by the general assets of the Company instead of specific Hotel Assets and that
are not included in this schedule.
(2) As of December 31, 1996, hotel property and equipment have a cost of
$342,366 for federal income tax purposes.
Land
Hotel furniture and equipment.........
Construction in progress..............
Total hotel property and equipment....
Office furniture and equipment........
Total property and equipment..........
<CAPTION>
BUILDING AND ACCUMULATED YEAR OF DATE
DESCRIPTION IMPROVEMENTS(2) DEPRECIATION CONSTRUCTION ACQUIRED LIFE
- -------------------------------------- ----------------- ------------- --------------- ----------- ---
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton, UT......... 13,625 591 1980 03/03/95 40
Radisson Hotel, Schaumburg, IL....... 6,221 195 1974 06/30/95 40
Sheraton Hotel, Colorado Springs,
CO.................................. 16,545 562 1979 06/30/95 40
Hilton Hotel, Bellevue, WA........... 7,244 233 1979 08/04/95 40
Marriott Hotel, Somerset, NJ......... 24,644 701 1978 10/03/95 40
Westin Atlanta Airport, Atlanta,
GA.................................. 22,387 545 1982 11/15/95 40
Sheraton Hotel, Charlotte, NC........ 13,236 277 1985 02/02/96 40
Holiday Inn, Cleveland, OH........... 7,898 154 1975 02/16/96 40
Orange County Airport Hilton, Irvine,
CA.................................. 8,568 176 1976 02/22/96 40
The Latham Hotel, Washington, DC..... 5,800 114 1978 03/08/96 40
Hilton Hotel, Arlington, TX.......... 15,907 231 1983 04/17/96 40
Hilton Hotel, Arlington, VA.......... 15,216 141 1990 8/23/96 40
Southwest Hilton, Houston, TX........ 15,590 68 1979 10/31/96 40
Embassy Suites, Englewood, CO........ 20,727 21 1986 12/12/96 40
Holiday Inn, Colorado Springs, CO.... 4,238 -- 1974 12/17/96 40
Embassy Row Hilton, Washington DC.... 13,264 -- 1969 12/17/96 40
Hilton Hotel, Sacramento, CA......... 16,035 -- 1983 12/17/96 40
Santa Barbara Inn, Santa Barbara, CA 5,150 -- 1959 12/17/96 40
Hilton Hotel & Towers, Lafayette,
LA.................................. 16,081 -- 1981 12/17/96 40
----------------- -------------
248,376 4,009
----------------- -------------
----------------- -------------
(1) Listed above are encumbrances inc
require the collateralization of
borrowings that are secured by th
are not included in this schedule
(2) As of December 31, 1996, hotel pr
$342,366 for federal income tax pu
58,127 --
31,972 4,423
3,891 --
----------------- -------------
342,366 8,432
726 209
----------------- -------------
$ 343,092 $ 8,641
----------------- -------------
----------------- -------------
</TABLE>
A reconciliation of the Partnerships' investment in hotel property and
equipment and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Hotel property and equipment:
Balance at beginning of period............................................................................... $ 110,455
Additions during period:
Acquisitions............................................................................................... 204,740
Improvements and construction-in-progress.................................................................. 27,171
--------------
Balance at end of period..................................................................................... 342,366
--------------
Accumulated depreciation:
Balance at beginning of period............................................................................... 1,743
Additons--depreciation expense............................................................................... 6,689
--------------
8,432
--------------
Net hotel property and equipment at end of period.............................................................. 333,934
--------------
--------------
<CAPTION>
1995
--------------
<S> <C>
Hotel property and equipment:
Balance at beginning of period............................................................................... --
Additions during period:
Acquisitions............................................................................................... 104,239
Improvements and construction-in-progress.................................................................. 6,216
--------------
Balance at end of period..................................................................................... 110,455
--------------
Accumulated depreciation:
Balance at beginning of period............................................................................... --
Additons--depreciation expense............................................................................... 1,743
--------------
1,743
--------------
Net hotel property and equipment at end of period.............................................................. 108,712
--------------
--------------
</TABLE>
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
CapStar Management Company, L.P.:
We have audited the accompanying balance sheet of CapStar Management
Company, L.P. ("CapStar Management") as of December 31, 1994, and the related
statements of operations and changes in management operations' equity and cash
flows for the years ended December 31, 1994 and 1993. These financial statements
are the responsibility of the management of CapStar Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Management Company,
L.P. as of December 31, 1994, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
May 7, 1996
38
<PAGE>
CAPSTAR MANAGEMENT
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 157,151
Accounts receivable........................................................... 946,717
Prepaid expenses.............................................................. 22,157
---------
Total current assets............................................................ 1,126,025
Furniture and equipment, net of accumulated depreciation of $69,804............. 105,772
---------
$1,231,797
---------
---------
LIABILITIES AND MANAGEMENT OPERATIONS' EQUITY
Accounts payable and accrued expenses........................................... $ 823,637
Due to affiliates............................................................... 203,140
Management operations' equity................................................... 205,020
---------
$1,231,797
---------
---------
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
CAPSTAR MANAGEMENT
STATEMENTS OF OPERATIONS AND CHANGES IN MANAGEMENT OPERATIONS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------ ----------
<S> <C> <C>
Revenue:
Management fees...................................................................... $ 3,823,166 3,918,576
Accounting fees and other income..................................................... 594,756 315,566
------------ ----------
Total revenue.......................................................................... 4,417,922 4,234,142
------------ ----------
Expenses:
Salaries, wages and benefits......................................................... 2,311,569 1,988,282
Other overhead, general and administrative........................................... 2,196,251 2,076,385
Depreciation......................................................................... 22,639 14,349
------------ ----------
Total expenses......................................................................... 4,530,459 4,079,016
------------ ----------
Net income (loss)...................................................................... (112,537) 155,126
Management operations' equity (deficit), beginning of year............................. 317,557 (81,820)
Capital contributions.................................................................. -- 244,251
------------ ----------
Management operations' equity, end of year............................................. $ 205,020 317,557
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
CAPSTAR MANAGEMENT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Net income (loss)........................................................................ $ (112,537) 155,126
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Depreciation......................................................................... 22,639 14,349
Changes in working capital:
Accounts receivable................................................................ 249,284 (738,337)
Prepaid expenses................................................................... 20,339 (4,463)
Accounts payable................................................................... (114,628) 361,377
Accrued expenses................................................................... 1,213 110,624
----------- ----------
Cash provided (used) by operating activities............................................. 66,310 (101,324)
----------- ----------
Cash flows from investing activities--purchases of furniture and equipment............... (41,257) (24,475)
----------- ----------
Cash flows from financing activities--capital contributions.............................. -- 244,251
----------- ----------
Net increase in cash..................................................................... 25,053 118,452
Cash at beginning of year................................................................ 132,098 13,646
----------- ----------
Cash at end of year...................................................................... $ 157,151 132,098
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
CAPSTAR MANAGEMENT
Notes to Financial Statements
December 31, 1994
(1) ORGANIZATION
For the period from January 1, 1993 through December 31, 1994, CapStar
Hotels, Inc. and subsidiaries ("CHI") provided hotel management services to
hotels throughout the continental United States on behalf of third-party and
affiliate owners. At December 31, 1994, CHI had contracts to manage 41 hotels.
On January 4, 1995, CHI assigned the hotel management contracts and certain
assets and liabilities related to its hotel management operations to CapStar
Equity Associates, G.P. ("CEA"). On January 12, 1995, CEA, in turn, assigned the
same to CapStar Management Company, L.P.
For purposes of these financial statements, the hotel management operations
accounts are presented as if they were a separate and distinct legal entity
(CapStar Management).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared on the accrual basis of
accounting and in accordance with generally accepted accounting principles.
REVENUES AND ACCOUNTS RECEIVABLE
CapStar Management receives fees for the performance of management,
accounting and other services in accordance with the agreements entered into
with individual hotels. All revenues are recognized as the related services are
performed.
Generally, management fees are equal to 2% to 4% of the gross monthly
revenue of each hotel. Additional incentive management fees are earned when a
hotel's operating performance exceeds levels specified in the management
contract.
The collectibility of accounts receivable is evaluated periodically during
the year. CapStar Management uses the direct write-off method to record bad debt
expense for amounts deemed uncollectible.
FURNITURE AND EQUIPMENT
Furniture and equipment purchases are stated at cost. These assets are
depreciated using the straight-line method over an estimated useful life of
seven years.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements. Actual results could differ
from those estimates.
INCOME TAXES
No provision has been made for income taxes in the financial statements, as
any taxable income or loss of CapStar Management is included in the income tax
returns of CHI for the years ended December 31, 1994 and 1993.
42
<PAGE>
CAPSTAR MANAGEMENT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) RELATED-PARTY TRANSACTIONS
Certain of the hotels managed are owned by affiliates of CHI. Revenue earned
by CapStar Management from these hotels was approximately $2,830,177 in 1994 and
$2,812,653 in 1993. Accounts receivable associated with hotels owned by
affiliates was $481,561 at December 31, 1994.
Due to affiliates primarily represents amounts collected by CapStar
Management on behalf of the hotels it manages which have not yet been disbursed
to the hotels.
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 405 of Regulation S-K with respect to
Directors and Executive Officers of the Company is incorporated herein by
reference to the sections entitled "Management" and "Principal Stockholders" in
the Company's definitive proxy for its 1997 Annual Meeting of Shareholders (the
"1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the sections entitled "Executive Compensation," "Compensation of Directors" and
"Stock Option Grants" in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the section entitled "Principal Stockholders" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Index to Financial Statements and Financial Statement Schedules
1. FINANCIAL STATEMENTS
The Financial Statements included in the Annual Report on Form 10-K are
listed in Item 8.
2. FINANCIAL STATEMENT SCHEDULES
The Financial Statement Schedules included in the Annual Report on Form 10-K
are listed in Item 8.
3. EXHIBITS
All Exhibits listed below are filed with this Annual Report on Form 10-K
unless specifically stated to be incorporated by reference to other documents
previously filed with the Commission.
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
- ----------- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1*** -- Form of U.S. Underwriting Agreement
3.1.1* -- Amended and Restated Certificate of Incorporation of the Company
3.1.2* -- Amendment to Amended and Restated Certificate of Incorporation
3.1.3* -- Second Amendment to Amended and Restated Certificate of Incorporation
3.2* -- By-laws of the Company
4.1* -- Specimen Common Stock certificate
4.2.1** -- Senior Secured Revolving Credit Agreement, dated as of September 24, 1996, among CapStar
Management, the Company, the lenders party thereto and Bankers Trust
4.2.2*** -- Amendment to Senior Secured Revolving Credit Agreement, dated as of December 13, 1996, among
CapStar Management, the Company, the lenders party thereto and Bankers Trust
4.3*** -- Senior Subordinated Credit Agreement, dated December 13, 1996, among CapStar Management, the
Company, the lenders party thereto and Bankers Trust
10.1* -- Form of Registration Rights Agreement
10.2** -- Acquisition Agreement, dated as of February 13, 1997, among the Company, CapStar Management,
Highgate Hotels and the several other parties thereto
10.3* -- Form of Employment Agreement between the Company and Paul W. Whetsell
10.4* -- Form of Employment Agreement between the Company and David E. McCaslin
10.5* -- Form of Employment Agreement between the Company and William M. Karnes
10.6* -- Form of Employment Agreement between the Company and John E. Plunket
10.7* -- Form of Amended and Restated Agreement of Limited Partnership of CapStar Management
10.8*** -- First Amendment to Amended and Restated Agreement of Limited Partnership of CapStar Management
10.9* -- Form of Equity Incentive Plan of the Company
10.10* -- Form of Employee Stock Purchase Plan of the Company
21*** -- List of Subsidiaries of the Company
24 -- Power of Attorney (see signature pages)
27*** -- Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-6583), filed with the Securities and Exchange Commission
on June 21, 1996, as amended
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996
*** Incorporated by reference to the Company's Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on February 20, 1996
B. Reports on Form 8-K:
A current report on Form 8-K was filed with the Securities and Exchange
Commission on December 31, 1996, reporting events required to be reported
pursuant to Items 2 and 7 of the current report on Form 8-K.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CapStar Hotel Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CAPSTAR HOTEL COMPANY
By: /s/ PAUL W. WHETSELL
-----------------------------------------
Paul W. Whetsell
President, Chief Executive Officer
and Chairman of the Board
Dated: February 20, 1997
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and -appoints Paul W. Whetsell and William M. Karnes, such
person's true and lawful attorneys-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this report filed pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same
with all exhibits thereto, and the other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and things requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and the foregoing Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ PAUL W. WHETSELL Officer and Chairman of
- ------------------------------ the Board (Principal February 20, 1997
Paul W. Whetsell Executive Officer)
/s/ DAVID E. MCCASLIN Chief Operating Officer and
- ------------------------------ Director February 20, 1997
David E. McCaslin
Senior Executive Vice
/s/ WILLIAM M. KARNES President, Finance and
- ------------------------------ Chief Financial Officer February 20, 1997
William M. Karnes (Principal Financial and
Accounting Officer)
/s/ DANIEL L. DOCTOROFF Director
- ------------------------------ February 20, 1997
Daniel L. Doctoroff
46
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ BRADFORD E. BERNSTEIN Director
- ------------------------------ February 20, 1997
Bradford E. Bernstein
/s/ JOSEPH MCCARTHY Director
- ------------------------------ February 20, 1997
Joseph McCarthy
/s/ WILLIAM S. JANES Director
- ------------------------------ February 20, 1997
William S. Janes
/s/ EDWARD L. COHEN Director
- ------------------------------ February 20, 1997
Edward L. Cohen
/s/ EDWIN T. BURTON, III Director
- ------------------------------ February 20, 1997
Edwin T. Burton, III
/s/ EDWARD P. DOWD Director
- ------------------------------ February 20, 1997
Edward P. Dowd
47
