SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q (Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
COMMISSION FILE NUMBER 1-12017
CAPSTAR HOTEL COMPANY
(Exact name of Registrant as specified in its Charter)
DELAWARE 52-1979383
(State of Incorporation) (IRS Employer Identification No.)
1010 WISCONSIN AVENUE, N.W.
SUITE 650
WASHINGTON, D.C. 20007
(Address of Principal Executive Offices)(Zip Code)
202-965-4455
(Registrant's Telephone Number, Including Area Code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period for which the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of Common Stock, par value $0.01 per share, outstanding
at November 7, 1997 was 24,865,002.
CAPSTAR HOTEL COMPANY
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996.......................... 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1997 and 1996....................................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996...................... 5
Notes to Condensed Consolidated Financial Statements............... 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 10
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION.................................................. 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K................................... 13
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 14,781 $ 21,784
Accounts receivable, net........................................ 21,600 8,109
Deposits, prepaid expenses, and other........................... 11,972 5,942
------------- ------------
Total current assets.............................................. 48,353 35,835
Property and equipment:
Land............................................................ 114,097 58,127
Building and improvements....................................... 600,815 248,376
Furniture, fixtures, and equipment.............................. 68,167 32,698
Construction in progress........................................ 7,705 3,891
------------- ------------
790,784 343,092
Accumulated depreciation.......................................... (21,152) (8,641)
------------- ------------
Total property and equipment, net................................. 769,632 334,451
Deferred costs, net............................................... 14,190 8,225
Investments in partnerships....................................... 5,887 650
Escrows and restricted funds...................................... 2,755 --
------------- ------------
$ 840,817 $ 379,161
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $ 9,767 $ 4,125
Accrued expenses and other liabilities.......................... 29,754 10,737
Income taxes payable............................................ 2,982 1,436
Long-term debt, current portion................................. 1,040 498
------------- ------------
Total current liabilities......................................... 43,543 16,796
Deferred income taxes............................................. 1,181 1,181
Long-term debt.................................................... 454,087 199,863
------------- ------------
Total liabilities................................................. 498,811 217,840
Minority interests................................................ 22,451 606
Stockholders' Equity:
Common stock, par value $.01 per share:
Authorized -- 49,000 shares
Issued and outstanding -- 18,909 and 12,754 shares........... 189 128
Paid-in capital............................................... 303,679 158,533
Retained earnings............................................. 16,127 2,054
Cumulative foreign currency translation adjustment............ (440) --
------------- ------------
$ 840,817 $ 379,161
------------- ------------
------------- ------------
See accompanying notes to condensed consolidated financial statements.
3
CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
Revenue:
Hotel operations:
Rooms.......................................................... $61,765 $20,839 $141,018 $ 48,960
Food and beverage.............................................. 21,711 7,537 56,387 20,525
Other operating departments.................................... 5,268 1,574 10,933 4,544
Hotel management and other fees.................................. 1,296 922 3,521 3,099
--------- --------- ---------- ---------
Total revenue...................................................... 90,040 30,872 211,859 77,128
--------- --------- ---------- ---------
Hotel operating expenses by department:
Rooms............................................................ 14,593 4,868 33,547 12,232
Food and beverage................................................ 17,927 6,318 45,265 16,620
Other operating expenses......................................... 2,796 709 5,803 1,798
Undistributed operating expenses:
Administrative and general....................................... 13,249 5,440 33,088 14,897
Property operating costs......................................... 11,271 3,539 25,227 8,920
Property taxes, insurance and other.............................. 4,218 1,108 9,283 3,225
Depreciation and amortization.................................... 5,768 2,036 13,988 5,955
--------- --------- ---------- ---------
Total operating expenses........................................... 69,822 24,018 166,201 63,647
Interest expense, net.............................................. 6,819 3,138 15,262 10,428
--------- --------- ---------- ---------
Income before minority interests, income taxes and
extraordinary loss............................................... 13,399 3,716 30,396 3,053
Minority interests................................................. (373) (49) (994) 20
--------- --------- ---------- ---------
Income before income taxes and extraordinary loss.................. 13,026 3,667 29,402 3,073
Income taxes....................................................... 4,949 1,092 11,237 1,092
--------- --------- ---------- ---------
Income before extraordinary loss................................... 8,077 2,575 18,165 1,981
Extraordinary loss from early extinguishment of debt, net of tax
benefit.......................................................... (4,092) (1,956) (4,092) (1,956)
--------- --------- ---------- ---------
Net income......................................................... $ 3,985 $ 619 $ 14,073 $ 25
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Weighted average number of common shares outstanding............... 18,909 12,754 17,062 12,754
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Earnings per share:
Income before extraordinary loss................................. $ 0.43 $ 0.13 $ 1.06 $ 0.13
Extraordinary loss............................................... (0.22) (0.15) (0.24) (0.15)
--------- --------- ---------- ---------
Net income....................................................... $ 0.21 $ (0.02) $ 0.82 $ (0.02)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
See accompanying notes to condensed consolidated financial statements.
4
CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
---------- ----------
OPERATING ACTIVITIES
Net income................................................................................ $ 14,073 $ 25
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 13,988 5,955
Loss on early extinguishment of debt before taxes....................................... 6,600 3,260
Minority interests...................................................................... 994 (20)
Changes in operating assets and liabilities:
Accounts receivable, net................................................................ (13,491) (5,272)
Deposits, prepaid expenses, and other................................................... (6,030) (2,966)
Accounts payable........................................................................ 5,642 2,187
Accrued expenses and other liabilities.................................................. 19,017 3,784
Income taxes payable.................................................................... 1,546 --
---------- ----------
Net cash provided by operating activities................................................. 42,339 6,953
---------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment....................................................... (399,517) (111,328)
Investments in partnerships............................................................... (5,237) --
Purchases of minority interests........................................................... (87) (67)
Change in restricted cash................................................................. (2,755) 6,351
---------- ----------
Net cash used in investing activities..................................................... (407,596) (105,044)
---------- ----------
FINANCING ACTIVITIES
Deferred costs............................................................................ (14,043) (7,818)
Proceeds from long-term debt.............................................................. 603,788 246,995
Principal payments on long-term debt...................................................... (365,368) (248,593)
Proceeds from issuances of common stock, net.............................................. 134,207 110,112
Distributions to limited partners......................................................... -- (172)
Distributions to minority investors....................................................... (325) (104)
---------- ----------
Net cash provided by financing activities................................................. 358,259 100,420
---------- ----------
Effect of exchange rate changes on cash and cash equivalents.............................. (5) --
---------- ----------
Increase (decrease) in cash and cash equivalents.......................................... (7,003) 2,329
Cash and cash equivalents, beginning of period............................................ 21,784 6,832
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 14,781 $ 9,161
---------- ----------
---------- ----------
5
CAPSTAR HOTEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
UNAUDITED (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest of $288 and $325........................ $ 14,202 $ 10,784
Cash paid for income taxes.................................................................. $ 7,183 $ --
Supplemental disclosure of non-cash investing and financing activities:
Additions to equipment through capital leases............................................... $ 22 $ 305
Long-term debt assumed in purchase of property and equipment................................ $ 16,324 $ --
Operating partnership units issued in purchase of property and equipment.................... $ 32,264 $ --
Conversion of operating partnership units to common stock................................... $ 11,000 $ --
See accompanying notes to condensed consolidated financial statements.
6
CAPSTAR HOTEL COMPANY
SEPTEMBER 30, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The principal activity of CapStar Hotel Company and its subsidiaries
(collectively, the "Company") is to own, acquire, renovate, reposition and
manage upscale, full-service hotels throughout North America. As of September
30, 1997, the Company owned, leased or managed 69 hotels with 15,449 rooms.
The Company owned 41 of these hotels with 10,521 rooms, leased 1 hotel with
196 rooms, and managed an additional 27 hotels owned by third parties with
4,732 rooms.
The accompanying condensed consolidated interim financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been omitted pursuant to such rules and regulations.
The condensed consolidated balance sheet data as of December 31, 1996 was
derived from audited financial statements, but does not include all
disclosures required by GAAP. The accompanying unaudited condensed
consolidated interim financial statements reflect, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the financial position and
results of operations and cash flows for the periods presented. The unaudited
condensed consolidated interim financial statements should be read in
conjunction with the financial statements, notes thereto and other
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, filed with the SEC on February 20, 1997.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities, as well as the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Additionally, the results of operations for the interim periods are not
necessarily indicative of the results for the entire year because of seasonal
and short-term variations.
From time to time, the Company enters into swap and collar agreements that
are designated as, and are effective as, hedges against the impact of
interest rate fluctuations on certain of the Company's existing and probable
future long-term debt instruments. Because these agreements qualify for hedge
accounting treatment, any gains or losses are recognized as adjustments to
interest expense over the lives of the underlying debt instruments. For hedge
agreements that are terminated early or that are associated with anticipated
future debt instruments, gains or losses are deferred until those debt
instruments are entered into. If the Company determines it is no longer probable
that the Company will enter into an anticipated debt instrument, any related
deferred gains or losses are recognized in the current period.
During the nine months ended September 30, 1997, the Company purchased four
hotels in Canada. Results of operations for those hotels are maintained in
Canadian dollars and translated using the average exchange rates during the
period. Assets and liabilities are translated to U.S. dollars using the
exchange rate in effect at the balance sheet date. Resulting translation
adjustments are reflected in stockholders' equity as a cumulative foreign
currency translation adjustment.
Certain 1996 amounts have been reclassified to conform to 1997 presentation.
7
2. LONG-TERM DEBT
Long-term debt consisted of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Credit Facility............................................................ $ 235,200 $ --
Subordinated Notes......................................................... 149,810 --
Senior secured revolving credit facility................................... -- 149,000
Senior subordinated credit facility........................................ -- 50,000
Non-Recourse Facility...................................................... 52,750 --
Mortgage debt.............................................................. 15,222 --
Capital leases and other................................................... 2,145 1,361
------------ -----------
455,127 200,361
Less current portion....................................................... (1,040) (498)
------------ -----------
$ 454,087 $ 199,863
------------ -----------
------------ -----------
On July 1, 1997, the Company entered into a $450,000 senior secured credit
facility (the "Credit Facility") structured as a $350,000, 5-year revolving
credit facility and a $100,000, 7-year term loan facility. Borrowings under
the Credit Facility bear interest, at the Company's option, at a rate
equal to the lender's prime rate plus a spread of between 50 and 112.5 basis
points or one, two, three or nine month LIBOR plus a spread of between 150
and 212.5 basis points. The interest rate spread is determined based upon the
Company's compliance with certain financial ratios. 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 repay
indebtedness under certain existing credit facilities. In conjunction with
entering into the Credit Facility, the Company terminated its existing senior
secured revolving credit facility and senior subordinated credit facility. In
connection with the refinancing of these facilities, the Company incurred
$4,092 of extraordinary expenses (net of a tax benefit of $2,508) from the
write-off of unamortized deferred financing costs.
On August 12, 1997, the Company entered into a $100,000 non-recourse credit
facility (the "Non-Recourse Facility") that is secured by certain hotels
owned by the Company. The Non-Recourse Facility bears interest at a rate of
between 175 and 270 basis points over 30-day LIBOR, based upon the Company's
compliance with certain ratios. The facility has an 18-month initial term
that can be extended an additional 12 months, at the Company's option,
subject to payment of additional fees and compliance with certain financial
ratios.
On August 19, 1997, the Company completed the offering of $150,000 aggregate
principal amount (issue price of $149,799, net of discount) of 8 3/4% senior
subordinated notes (the "Subordinated Notes") due in 2007, generating net
proceeds to the Company of approximately $145,000. The proceeds were used to
repay outstanding indebtedness under the Credit Facility. The Subordinated Notes
provide for semi-annual payments of interest in August and February,
commencing in February 1998.
Aggregate maturities of the Company's long-term debt obligations are as
follows:
1997 $ 146
1998 1,120
1999 54,239
2000 1,521
2001 13,091
Thereafter 385,010
----------
$ 455,127
----------
----------
8
3. EARNINGS PER SHARE
Primary earnings per share ("EPS") for the three months and nine months ended
September 30, 1997, has been calculated using actual income before
extraordinary loss, extraordinary loss, and net income amounts divided by the
weighted average number of common shares outstanding during the periods of
18,908,990 and 17,061,644, respectively. Fully diluted EPS after
extraordinary loss was also $0.21 and $0.82 for the respective periods, and
was calculated using the weighted average number of common shares and common
share equivalents outstanding of 20,072,979 and 17,961,499, respectively. For
fully diluted EPS, net income for the periods was adjusted for minority
interests (representing convertible operating partnership units), net of tax,
of $274 and $604, respectively.
Prior to the consummation of the Company's initial public offering on August
20, 1996, the Company conducted its operations through predecessor entities
that were organized as limited partnerships. These limited partnerships were
not subject to the provisions of Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB No. 15"). Accordingly, EPS for the three
months and nine months ended September 30, 1996 has been calculated using
actual income before extraordinary loss, extraordinary loss, and net income
amounts for the period from the initial public offering through September 30,
1996. The weighted average number of common shares used in the calculations
was 12,754,321.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"), supersedes APB No. 15 and specifies computation,
presentation, and disclosure requirements for EPS. SFAS No. 128, which is
effective for financial statements for periods ending after December 15,
1997, replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted
EPS, respectively. Basic EPS excludes all of the dilutive effects of common
share equivalents while Diluted EPS reflects all potential dilution. Had the
Company implemented the requirements of SFAS No. 128, both Basic and Diluted
EPS would have been $0.21 and $0.82 for the three months and nine months
ended September 30, 1997, respectively.
4. PENDING ACQUISITIONS
As of September 30, 1997, the Company had signed agreements to acquire nine
upscale, full-service hotels in four separate transactions, with an aggregate
purchase price, including planned initial renovations, of approximately
$225.6 million. The nine hotels to be acquired consist of the following: a
portfolio of six hotels containing 1,960 rooms owned by affiliates of
Medallion Hotels, Inc. (the "Medallion Portfolio"), for a purchase price of
$167.5 million; the 204-room Embassy Suites Tucson International Airport, for
a purchase price of $14.7 million; the 151-room Detroit Metro Airport Hilton
Suites, for a purchase price of $15.9 million; and the 201-room Governor
Morris Hotel & Conference Center in Morristown, New Jersey, for a purchase
price of $27.5 million. The acquisition of the Embassy Suites Tucson
International Airport was completed in October 1997 (see below). The
remaining transactions are expected to close between November 1997 and
January 1998.
5. SUBSEQUENT EVENTS
In October 1997, the Company completed a follow-on equity offering of
5,953,722 shares of common stock at a price of $34.625 per share and a debt
offering of $172,500 of 4.75% convertible subordinated notes due 2004
(collectively, the "October Offerings"). The notes are convertible into
shares of the Company's common stock by the holders at a rate of $43 per
share. After underwriting discounts, commissions and other offering expenses,
net proceeds to the Company from the October Offerings were $363,798. The
proceeds were used to repay a portion of the Company's outstanding
indebtedness and to fund certain acquisitions.
On October 23, 1997, the Company completed the acquisition of the Embassy
Suites Tucson International Airport in Tucson, Arizona. The acquisition was
funded through existing cash and proceeds from the October Offerings.
In October 1997, the Company entered into an agreement to acquire
substantially all of the assets of Winston Hospitality, Inc. ("Winston") for
$34,000. Winston leases 38 and manages 28 of the operating hotels of Winston
Hotels, Inc., a real estate investment trust. The acquisition is expected to
be completed during November 1997 and the purchase price will consist of
$10,000 in cash and $24,000 in operating partnership units, which are
convertible into shares of the Company's common stock.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
- -------
At December 31, 1995, the Company owned and operated five hotels and acquired
or assumed operations of seven additional hotels during the first nine months
of 1996. At December 31, 1996, the Company owned 19 hotels and acquired 22
additional hotels during the first nine months of 1997. Therefore, the
financial statements for the three months and nine months ended September 30,
1997 and 1996, reflect differing numbers of owned hotels throughout the
periods.
FINANCIAL CONDITION
- -------------------
SEPTEMBER 30, 1997 COMPARED WITH DECEMBER 31, 1996
Total assets increased by $461.6 million to $840.8 million at September 30,
1997 from $379.2 million at December 31, 1996. This growth was primarily due
to the acquisition of additional hotels during the first nine months of 1997.
Deferred costs increased due to the financing fees paid related to the Credit
Facility and the Subordinated Notes, net of the write-offs of financing fees
related to terminated credit facilities. Escrows and restricted funds
increased due to the new loan requirements of the Non-Recourse Facility.
Total liabilities increased by $281.0 million to $498.8 million at September
30, 1997 from $217.8 million at December 31, 1996. This overall increase was
also due primarily to the Company's acquisition of additional hotels during
the first nine months of 1997. Total long-term debt increased to $455.1
million at September 30, 1997, reflecting borrowings to finance 1997 hotel
acquisitions, net of repayments with proceeds from the Company's offering of
common stock in March 1997 (the "March Offering").
The increase in minority interests to $22.5 million at September 30, 1997
reflects the operating partnership units issued in conjunction with the
acquisition of certain hotels. The increase in paid-in capital resulted from
the net proceeds from the March Offering and the partial conversion of the
operating partnership units in May 1997.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the third quarter of 1997 increased to $90.0 million compared to
$30.9 million in the third quarter of 1996. The significant increase is
primarily attributable to the acquisition of additional hotels since the end
of the third quarter of 1996. Operating expenses also increased due to the
increase in the number of hotels owned during the 1997 period.
Interest expense increased from $3.1 million in the third quarter of 1996 to
$6.8 million in 1997. This increase reflects the increased debt associated
with ownership of additional hotels in the third quarter of 1997 compared to
the same period of 1996, offset by repayment of debt with proceeds from the
March Offering and the lower interest rate charged on the Credit Facility.
Minority interests were significantly higher for the third quarter of 1997
compared to the same period of 1996 due to the minority interest in income
related to the outstanding operating partnership units issued in April 1997.
Earnings before interest, income taxes, depreciation and amortization
(EBITDA) for the third quarter of 1997 improved to $25.6 million compared to
$8.8 million for the same period of 1996. The growth in EBITDA reflects the
increase in the number of hotels owned and operated in 1997.
During the three months ended September 30, 1997 and 1996, the Company
recognized extraordinary expenses of $4.1 million and $2.0 million (net of
tax benefits of $2.5 million and $1.3 million), respectively, related to the
write-off of unamortized loan costs in connection with expanding the
Company's credit facilities.
10
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues increased to $211.9 million for the nine months ended September 30,
1997 from $77.1 million for the nine months ended September 30, 1996.
Operating expenses also increased significantly from $63.6 million in 1996 to
$166.2 million in 1997. These increases are a result of the increase in the
number of hotels owned during the respective periods.
Interest expense increased to $15.3 million for the nine months ended
September 30, 1997 from $10.4 million for the same period in 1996, reflecting
the increase in debt incurred relating to the acquisition of hotels in 1997.
This increase in debt levels and the related interest expense was partially
offset by proceeds from the March Offering and the lower interest rate
charged on the Credit Facility.
Minority interests increased to $1.0 million in 1997 due to the outstanding
operating partnership units issued in April 1997. The extraordinary loss
resulted from the write-offs of unamortized loan costs, as discussed above.
EBITDA increased to $58.7 million for the nine months ended September 30,
1997 from $19.5 million for the same period of 1996, reflecting the larger
number of hotels owned in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash on hand, cash generated
from operations, and funds from external borrowings and debt and equity
offerings. The Company's continuing operations are funded through cash
generated from hotel operations. Hotel and management company acquisitions
and joint venture investments are financed through a combination of
internally generated cash, external borrowings and the issuance of operating
partnership units, debt and common stock.
The Company's cash and cash equivalents were $14.8 million at September 30,
1997 compared to $21.8 million at December 31, 1996. Net cash provided by
operations was $42.3 million in the first nine months of 1997 compared to
$7.0 million for the same period of 1996. The Company used cash of $407.6
million in investing activities, primarily for the acquisition of hotels and
capital expenditures at the Company's owned hotels. Net cash provided by
financing activities of $358.3 million resulted from the net proceeds from
long-term debt, net of principal repayments, the March Offering and the
Subordinated Notes offering.
In July 1997, the Company entered into the Credit Facility, consisting of a
$350 million, 5-year revolving credit facility and a $100 million, 7-year
term loan facility. The proceeds of the Credit Facility have been and will be
used to fund new acquisitions, repay outstanding indebtedness and for general
corporate purposes. As of September 30, 1997, $185.2 million was outstanding
on the revolving facility and $50 million was outstanding on the term loan
facility. In August 1997, the Company obtained the Non-Recourse Facility in
the maximum principal amount of $100 million that has been used to fund
certain acquisitions. At September 30, 1997, $52.8 million was outstanding on
the Non-Recourse Facility. Also in August 1997, the Company completed the
offering of the $150 million 8 3/4% Subordinated Notes. The net proceeds to
the Company of approximately $145 million were used to repay outstanding
indebtedness under the Credit Facility.
At September 30, 1997, the Company had available under the Credit Facility
funds of $164.8 million under the revolving facility and $50 million on the
term loan facility. The Company uses interest rate hedge contracts to limit
its interest rate exposure on a portion of its variable-rate, long-term debt.
These hedge contracts effectively reduce the impact of changes in interest
rates on the Company's operating results.
In October 1997, the Company completed the October Offerings. Net proceeds to
the Company of $363.8 million were used to repay all of the outstanding
indebtedness on the revolving facility of the Credit Facility and to fund the
acquisition of the Embassy Suites Tucson International Airport. The remaining
proceeds will be used to fund a portion of the acquisition costs of Winston,
the Medallion Portfolio, the Governor Morris Hotel & Conference Center and
the Detroit Metro Airport Hilton Suites.
11
Capital for renovation work has been and is expected to be provided by a
combination of internally generated cash and external borrowings. Once
initial renovation programs are completed, the Company expects to spend
approximately 4% of hotel revenues on an annual basis for ongoing capital
expenditure programs, including room and facilities refurbishments,
renovations, and furniture and equipment replacements. The Company believes
that these investments will enhance the competitive position of its hotels.
During the year ended December 31, 1996, the Company spent $21.6 million on
initial renovation and ongoing capital expenditure programs. During the three
months and nine months ended September 30, 1997, the Company spent $8.1
million and $20.9 million, respectively, on such programs. The Company
expects to spend an additional $35.4 million to complete the initial
renovation programs on hotels owned as of September 30, 1997. Substantially
all renovation programs for these owned hotels are expected to be completed
within the next 12 months.
The Company believes cash generated by operations, together with existing
borrowing capacity, will be sufficient to fund its existing working capital,
ongoing capital expenditures and debt service requirements. In addition, the
Company expects to continue to make acquisitions of upscale, full-service
hotels and hotel management companies, and to secure additional management
contracts. The Company has invested in two joint ventures during 1997. The
Company expects to form additional joint ventures and strategic alliances
with institutional and private hotel owners to invest in future acquisitions,
and to secure additional fee management arrangements. The Company believes
that there will continue to be additional acquisition opportunities and such
acquisitions may require the Company to increase its borrowing capacity or
consider the issuance of additional debt or equity securities.
SEASONALITY
Demand in the lodging industry 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 and cash flow in the first and fourth quarters and higher revenue,
operating profit and cash flow in the second and third quarters.
12
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
(a) In addition to the acquisitions previously reported on Forms 8-K, during
October 1997 the Company completed the acquisition of the 204-room Embassy
Suites Tucson International Airport for a purchase price, including planned
initial renovations, of $14.7 million. The acquisition was funded through
existing cash and proceeds from the October Offerings.
In October 1997, the Company announced the acquisition of substantially
all of the assets of Winston for $34 million. Winston leases 38 and manages
28 of the operating hotels of Winston Hotels, Inc., a real estate investment
trust. The acquisition is expected to be completed during November 1997 and
the purchase price will consist of $10 million in cash and $24 million in
operating partnership units, which are convertible into shares of the
Company's common stock.
(b) Forward-Looking Statements
Certain statements in this Form 10-Q and in the future filings by the
Company with the SEC, in the Company's press releases, and in oral statements
made by or with the approval of an authorized executive officer constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other 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.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No.
27--Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated and filed on July 30, 1997, as amended,
regarding the consummation of the acquisition of the Chicago Radisson and
the Georgetown Inn. (Item 2)
Current Report on Form 8-K dated and filed on August 13, 1997, regarding
the consummation of the acquisition of the National Airport Hilton. (Items
2 and 7).
Current Report on Form 8-K dated and filed on September 2, 1997, regarding
the consummation of the acquisition of the Radisson Plaza in Lexington,
Kentucky. (Items 2 and 7).
Current Report on Form 8-K dated and filed on September 8, 1997, for
purposes of incorporating by reference into the Company's Registration
Statement on Form S-3 (File No. 333-34253) certain financial statements
of hotels owned or under purchase contract. (Items 5 and 7).
Current Report on Form 8-K dated and filed on September 9, 1997, as amended
for purposes of incorporating by reference into the Company's Registration
Statement on Form S-3 (File No. 333-34253) the financial statements of the
National Airport Hilton and the unaudited pro forma financial statements of
the Company. (Items 5 and 7).
Current Report on Form 8-K dated and filed on September 18, 1997, regarding
the probable acquisition of the Governor Morris Hotel & Conference Center.
(Items 5 and 7).
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Current Report on Form 8-K dated and filed on September 22, 1997, regarding
the probable acquisition of the Medallion Portfolio. (Items 5 and 7).
Current Report on Form 8-K dated and filed on September 22, 1997, for
purposes of incorporating by reference into the Company's Registration
Statement on Form S-3 (File No. 333-34253) certain Accountants' Consents
in respect of financial statements incorporated by reference in the Form
S-3. (Items 5 and 7).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTAR HOTEL COMPANY
Dated: November 10, 1997 /s/ PAUL W. WHETSELL
--------------------
Paul W. Whetsell
President and Chief Executive Officer
Dated: November 10, 1997 /s/ JOHN EMERY
--------------------
John Emery
Chief Financial Officer
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