UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Filed Pursuant to Section 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 1, 1997
CAPSTAR HOTEL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 1-12017 52-1979383
(State or other jurisdiction (Commission File (IRS Employer Identification
of incorporation) Number) Number)
1010 Wisconsin Avenue, N.W.
Suite 650
Washington, D.C. 20007
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 965-4455
ITEM 2. ACQUISITIONS
On August 1, 1997, CapStar Hotel Company's ("CapStar") independent
certified public accountants completed an audit of the National Airport Hilton
hotel (the "Hotel"). The Hotel's audited financial statements demonstrated for
the first time that CapStar's acquisition of the Hotel consitutes an acquisition
of a "significant amount of assets" as such phrase is defined in Item 2 of Form
8-K and Sections 210.11-01(d), 210.11-01(b) and 210.3-05(b)(2)(ii) of Regulation
S-X of the Securities and Exchange Commission.
CapStar acquired the Hotel from US Hotel Associates for an aggregate
purchase price of approximately $36.5 million. To fund the acquisition, CapStar
drew down the purchase price from its senior credit facility. Based on the
financial statements and related information available to CapStar on the date of
its acquisition of the Hotel (July 2, 1997), such acquisition did not constitute
an acquisition of a "significant amount of assets" at such date.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements:
The Board of Directors
Capstar Hotel Company:
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of the National Airport
Hilton (the "Hotel") as of December 31, 1996, and the related statements of
operations, owner's deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Hotel's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 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 audit provides 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 the National Airport Hilton
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Washington, D.C.
July 25, 1997
NATIONAL AIRPORT HILTON
BALANCE SHEETS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
1997 1996
------------ ------------
(unaudited)
Assets
Cash ................................................................. $ 137,122 224,725
Escrow accounts ...................................................... 419,512 349,869
Accounts receivable, net ............................................. 554,649 338,568
Inventory ............................................................ 365,873 366,078
Hotel property:
Land ............................................................... 1,900,000 1,900,000
Building and building improvements, net of accumulated
depreciation of $6,358,829 as of March 31, 1997 and
$6,231,741 as of December 31, 1996 ............................... 14,529,334 14,255,113
------------ ------------
Total hotel property ................................................. 16,429,334 16,155,113
Deferred financing costs, net of accumulated amortization of
$2,333,328 as of March 31, 1997 and $1,895,829 as of December
31, 1996 ........................................................... 1,166,672 1,604,171
Deposits and other assets ............................................ 71,742 75,976
------------ ------------
$ 19,144,904 19,114,500
============ ============
Liabilities and Owner's Deficit
Accounts payable and accrued expenses:
Accounts payable and other accrued expenses ........................ $ 2,066,936 1,216,663
Deferred interest payable (note 3) ................................. 3,500,000 3,500,000
------------ ------------
Total accounts payable and accrued expenses .......................... 5,566,936 4,716,663
Notes payable (note 3) ............................................... 23,557,000 23,557,000
Advanced deposits .................................................... 67,574 67,574
------------ ------------
Total liabilities .................................................... 29,191,510 28,341,237
Owner's deficit ...................................................... (10,046,606) (9,226,737)
------------ ------------
$ 19,144,904 19,114,500
============ ============
See accompanying notes to financial statements.
NATIONAL AIRPORT HILTON
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
THE YEAR ENDED DECEMBER 31, 1996
1997 1996
----------- -----------
(unaudited)
Hotel operating revenue:
Room rental .............................. $ 1,856,553 8,212,957
Food and beverage sales .................. 578,611 2,663,449
Other operating departments .............. 122,269 597,321
----------- -----------
Total hotel operating revenue .............. 2,557,433 11,473,727
----------- -----------
Hotel operating expenses:
Rooms .................................... 434,645 1,931,283
Food and beverage ........................ 490,617 2,217,016
Other operating departments .............. 99,623 406,475
Undistributed operating expenses:
Administrative and general ............... 351,056 1,449,597
Marketing ................................ 196,879 707,010
Utilities ................................ 144,040 568,197
Repairs and maintenance .................. 141,540 440,317
Depreciation ............................. 127,088 508,350
Management fee (note 4) .................. 102,345 457,607
Franchise fee (note 5) ................... 92,827 216,884
Insurance and taxes ...................... 126,358 567,306
Equipment leases ......................... 17,354 51,980
Interest expense (note 3) ................ 1,038,917 4,124,837
Other .................................... 14,013 57,390
----------- -----------
Total expenses ............................. 3,377,302 13,704,249
----------- -----------
Net loss ................................... $ (819,869) (2,230,522)
=========== ===========
See accompanying notes to financial statements.
NATIONAL AIRPORT HILTON
STATEMENTS OF OWNER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
Balance, December 31, 1995 ...................................... $ (7,135,778)
Capital contribution .......................................... 139,563
Net loss ...................................................... (2,230,522)
------------
Balance, December 31, 1996 ...................................... (9,226,737)
------------
Net loss ...................................................... (819,869)
------------
Balance, March 31, 1997 ......................................... $(10,046,606)
============
See accompanying notes to the financial statements.
NATIONAL AIRPORT HILTON
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
THE YEAR ENDED DECEMBER 31, 1996
1997 1996
---------- ----------
(unaudited)
Cash flows from operating activities:
Net loss ...................................................... $ (819,869) (2,230,522)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation expense ........................................ 127,088 508,350
Amortization of deferred financing costs .................... 437,499 1,749,996
(Increase) decrease in accounts receivable .................. (216,081) 248,464
Decrease (increase) in inventory ............................ 205 (334,418)
Increase in escrow accounts ................................. (69,643) (202,577)
Decrease in deposits ........................................ -- 17,671
Decrease (increase) in other assets ......................... 4,234 (45,232)
Increase (decrease) in accounts payable and accrued expenses 850,273 (492,296)
---------- ----------
Net cash provided by (used in) operating activities ............. 313,706 (780,564)
---------- ----------
Cash flows from investing activities-purchases of furniture and
equipment ..................................................... (401,309) (1,843,860)
---------- ----------
Cash flows from financing activities-capital contributions ...... -- 139,563
---------- ----------
Net decrease in cash ............................................ (87,603) (2,484,861)
Cash at beginning of period ..................................... 224,725 2,709,586
---------- ----------
Cash at end of period ........................................... $ 137,122 224,725
========== ==========
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 557,034 2,206,706
========== ==========
See accompanying notes to financial statements.
NATIONAL AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(1) ORGANIZATION
The National Airport Hilton (the "Hotel") is located near National Airport
in Arlington, Virginia. The Hotel has been operated under a franchise agreement
with Hilton Inns, Inc. since 1983. The Hotel has 386 rooms, an indoor pool and
fitness center, a lobby gift shop, and 24 hour security and room service. In
addition, the Hotel has 17,000 square feet of convention and ballroom space.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounts of the Hotel for the periods presented are included in the
financial records of the partnership that owned the Hotel. The accompanying
financial statements include the accounts of the Hotel only, as if they were a
separate legal entity, and have been prepared using the accrual basis of
accounting.
ESCROW ACCOUNTS
Escrow accounts represent amounts paid into a property tax and insurance
escrow account.
HOTEL PROPERTY
Building, building improvements and land are stated at cost. Depreciation
is computed on the building and building improvements using the straight-line
method over their estimated useful lives of 40 years.
Management periodically evaluates potential permanent impairment
of the net carrying value of the Hotel. If the net carrying value of the
Hotel exceeds its fair value, the excess is charged to operations. No
impairment losses were recorded in 1997 or 1996.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized on a basis which approximates
the interest method, over the two year term of the related loan.
INVENTORY
Inventory primarily consists of food and beverage, linens, silverware, and
glassware and is stated at cost using the first-in, first-out method of
inventory valuation.
REVENUES
Revenue is earned primarily through the operations of the Hotel and is
recognized when earned.
INCOME TAXES
The Hotel is owned by a partnership, and therefore, any income taxes are
reported by the individual partners.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets and
NATIONAL AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosures of contingencies at the date of the financial
statements and revenues and expenses recognized during the reporting period.
Actual results could differ from those estimates.
(3) NOTES PAYABLE
Notes Payable consisted of the following at March 31, 1997 and December
31, 1996:
March 31, December 31,
1997 1996
----------- -----------
(unaudited)
LEHMAN BROTHERS HOLDINGS INC.
Mortgage note payable to Lehman Brothers Holdings Inc. secured by a mortgage,
deed of trust and assignment of leases and rents on the Hotel. Interest
payable monthly at LIBOR plus 450 basis points (10.19% at March 31, 1997 and
December 31, 1996) Balance is due November 21, 1997, however may be extended
for one year with interest at LIBOR plus 550 basis points and an extension fee
of two percent of the outstanding principal balance .......................... $22,057,000 22,057,000
HILTON INNS, INC.
Loan payable to Hilton Inns, Inc., secured by a pledge and security agreement of
(i) 95 percent of the partnership interests of the Hotel's owner and (ii) a
security interest in the Hotel. Interest payable semi-annually at twelve
percent with the balance due November 21, 1998 ............................... 1,500,000 1,500,000
----------- -----------
$23,557,000 23,557,000
=========== ==========
The mortgage note payable to Lehman Brothers Holdings, Inc. requires the
Hotel to pay additional interest of $3,500,000. In accordance with the terms of
the note, the additional interest is considered fully earned at inception of the
note, and is payable on the maturity date or upon its earlier repayment. These
deferred interest costs are being amortized into interest expense over the
twenty-four month term of the note.
(4) COMMITMENTS
HOTEL MANAGEMENT AGREEMENT
On November 5, 1995, the Hotel entered a 5-year management agreement with
US Hotel Associates, the owner of the Hotel, for management of the Hotel. The
management agreement provides for payment of a management fee of 4% of Gross
Income, as defined in the agreement, payable monthly. Total management fees
under this agreement were $102,345 (unaudited) for the three months ended March
31, 1997 and $457,607 for the year ended December 31, 1996.
(5) LICENSE AGREEMENT
On November 21, 1995, the Hotel entered into an agreement with Hilton
Inns, Inc. for a license and franchise to operate the Hotel under the Hilton
name. The agreement provides for payment of a monthly fee of 2.5 percent (5
percent effective January 1997) of gross room sales. In addition, the agreement
NATIONAL AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) LICENSE AGREEMENT (CONTINUED)
requires the payment of a monthly advertising fee of 1 percent of gross room
sales. The agreement terminates on November 30, 2005.
(6) SUBSEQUENT EVENTS
On July 1, 1997, the Hotel was purchased by Capstar Hotel Company
(Capstar) for approximately $36.5 million and will thereafter be owned and
managed by Capstar.
(b) Pro Forma Financial Information:
CAPSTAR HOTEL COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
In April 1997, CapStar acquired a portfolio of six upscale, full-service
hotels containing 1,358 rooms ("Highgate") from Highgate Hotels, Inc. and
certain affiliated entities. The acquisition was funded through external
borrowings and the issuance of operating partnership units ("OP Units"). In May
1997, these OP Units were partially converted to CapStar commom stock. In July
1997, CapStar acquired the Hotel. The acquisition was funded through external
borrowings.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet is presented
as if the aforementioned transactions had been consummated on March 31, 1997.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and the year ended December 31, 1996 are
presented as if the aforementioned transactions had been consummated at the
beginning of the respective periods. In management's opinion, all adjustments
necessary to reflect the effects of the aforementioned transactions have been
made.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations are not necessarily indicative of what the Company's actual
financial position or operating results would have been had such events occurred
as of an earlier date, nor does it purport to represent the future financial
position or operating results of the Company.
CapStar Hotel Company
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 1997
(in thousands)
National Pro Forma
Airport After Highgate
Highgate Hilton and National
Pro Forma Pro Forma Airport
Historical (A) Adjustments (B) Adjustments (B) Hilton
Assets
Cash .................................... $ 16,580 $ (1,046) $ 379 $ 15,913
Property and equipment, net
Land .................................. 67,431 10,955 7,372 85,758
Building and improvements ............. 311,463 83,817 28,013 423,293
Furniture, fixtures and equipment ..... 34,418 8,009 1,474 43,901
Construction-in-progress .............. 3,588 -- -- 3,588
--------------- --------------- --------------- ---------------
Total property and equipment, net ....... 416,900 102,781 36,859 556,540
Other assets ............................ 57,488 (26,598) 25 30,915
--------------- --------------- --------------- ---------------
Total assets ............................ $ 490,968 $ 75,137 $ 37,263 $ 603,368
=============== =============== =============== ===============
Liabilities, Minority Interest and Equity
Other liabilities ....................... $ 26,886 $ 873 $ 263 $ 28,022
Long-term debt .......................... 166,764 42,000 37,000 245,764
--------------- --------------- --------------- ---------------
Total liabilities ....................... 193,650 42,873 37,263 273,786
Minority interest ....................... 612 21,264 -- 21,876
Stockholders' equity .................... 296,706 11,000 -- 307,706
--------------- --------------- --------------- ---------------
Total liabilities, minority interest and
stockholders' equity .................. $ 490,968 $ 75,137 $ 37,263 $ 603,368
=============== =============== =============== ===============
(A) Reflects the unaudited historical condensed consolidated balance sheet of
CapStar as of March 31, 1997.
(B) Reflects CapStar's cost basis and financing for Highgate and the Hotel.
Included in these adjustments are the use of deposits recorded at March 31,
1997 and the issuance and partial conversion of OP Units relating to the
acquisition of Highgate.
CapStar Hotel Company
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Three Months Ended March 31, 1997
(in thousands, except per share amounts)
National
Airport Pro Forma
Highgate Hilton After Highgate
Pro Forma Pro Forma and National
Historical (A) Adjustments (B) Adjustments (B) Airport Hilton
Revenue from hotel operations:
Rooms $ 31,260 $ 5,231 $ 1,857 $ 38,348
Food and beverage 13,828 2,600 579 17,007
Other operating departments 2,149 586 122 2,857
Hotel management 871 -- -- 871
--------------- --------------- --------------- ---------------
Total revenue 48,108 8,417 2,558 59,083
--------------- --------------- --------------- ---------------
Hotel operating expenses by department:
Rooms 7,764 1,390 435 9,589
Food and beverage 11,231 2,054 491 13,776
Other operating departments 1,167 344 100 1,611
Undistributed operating expenses:
Administrative and general 8,846 703 548 10,097
Property operating costs 5,874 1,503 379 7,756
Property taxes, insurance and other 2,193 514 158 2,865
Depreciation and amortization 3,499 704 206 4,409
--------------- --------------- --------------- ---------------
Total operating expenses 40,574 7,212 2,317 50,103
--------------- --------------- --------------- ---------------
Net operating income 7,534 1,205 241 8,980
Interest expense, net 4,252 733 238 5,223
--------------- --------------- --------------- ---------------
Income before minority interest and income taxes 3,282 472 3 3,757
Minority interest (48) (237) -- (285)
--------------- --------------- --------------- ---------------
Income before income taxes 3,234 235 3 3,472
Income taxes 1,294 94 1 1,389
--------------- --------------- --------------- ---------------
Net income $ 1,940 $ 141 $ 2 $ 2,083
=============== =============== =============== ===============
Earnings per share (C) $ 0.14 $ 0.15
=============== ===============
(A) Reflects the unaudited historical condensed consolidated statement of
operations of CapStar for the three months ended March 31, 1997.
(B) Reflects the historical operations of Highgate and the Hotel adjusted
for (i) the elimination of management fee expense, (ii) depreciation on the
new cost basis, (iii) interest on the incremental debt individually
attributable to these acquisitions based on the terms of the Company's
credit facilities, (iv) minority interest and (v) Federal and state income
taxes at CapStar's combined effective tax rate of 40%. Historical
operations of the Hotel were obtained from the Hotel's unaudited financial
statements for the three months ended March 31, 1997 included in this
current report on Form 8-K.
(C) In computing pro forma earnings per share, income has been adjusted for
certain minority interests. The weighted average number of common shares
and common share equivalents for historical and pro forma earnings per
share was 13,732,304 and 14,541,827, respectively.
CapStar Hotel Company
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 1996
(in thousands, except per share amounts)
National
Airport Pro Forma
Highgate Hilton After Highgate
Pro Forma Pro Forma and National
Historical (A) Adjustments (B) Adjustments (B) Airport Hilton
Revenue from hotel operations:
Rooms $ 68,498 $ 22,285 8,213 98,996
Food and beverage 30,968 8,194 2,664 41,826
Other operating departments 5,981 3,941 597 10,519
Hotel management 4,345 -- -- 4,345
--------------- --------------- --------------- ---------------
Total revenue 109,792 34,420 11,474 155,686
--------------- --------------- --------------- ---------------
Hotel operating expenses by department:
Rooms 17,509 5,499 1,931 24,939
Food and beverage 24,589 6,672 2,217 33,478
Other operating departments 2,513 2,189 406 5,108
Undistributed operating expenses:
Aministrative and general 20,448 5,538 2,157 28,143
Property operating costs 12,586 2,870 1,225 16,681
Property taxes, insurance and other 4,565 1,974 676 7,215
Depreciation and amortization 8,248 2,815 825 11,888
--------------- --------------- --------------- ---------------
Total operating expenses 90,458 27,557 9,437 127,452
--------------- --------------- --------------- ---------------
Net operating income 19,334 6,863 2,037 28,234
Interest expense, net 12,346 2,931 951 16,228
--------------- --------------- --------------- ---------------
Income before minority interest and income taxes 6,988 3,932 1,086 12,006
Minority interest 39 (888) -- (849)
--------------- --------------- --------------- ---------------
Income before income taxes 7,027 3,044 1,086 11,157
Income taxes 2,674 1,218 434 4,326
--------------- --------------- --------------- ---------------
Net income from continuing operations $ 4,353 $ 1,826 $ 652 $ 6,831
=============== =============== =============== ===============
Earnings per share from continuing operations (C) $ 0.31 $ 0.49
=============== ===============
(A) Reflects the historical condensed consolidated statement of operations of
CapStar for the year ended December 31, 1996.
(B) Reflects the historical operations of Highgate and the Hotel adjusted
for (i) the elimination of management fee expense, (ii) depreciation on the
new cost basis, (iii) interest on the incremental debt individually
attributable to these acquisitions based on the terms of the Company's
credit facilities, (iv) minority interest and (v) Federal and state income
taxes at CapStar's combined effective tax rate of 40%. Historical
operations of the Hotel were obtained from the Hotel's audited financial
statements for the year ended December 31, 1996 included in this current
report on Form 8-K.
(C) In computing historical and pro forma earnings per share, income for the
period from CapStar's initial public offering to December 31, 1996 is
used. In computing pro forma earnings per share, income has also been
adjusted for certain minority interests. The weighted average number of
common shares and common share equivalents for historical and pro forma
earnings per share was 12,754,321 and 13,563,844, respectively.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CAPSTAR HOTEL COMPANY
(Registrant)
By: /S/ John Emery
-------------------------------
John Emery
Chief Financial Officer
Dated: August 13, 1997