<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998 Commission file
number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1624289
(State of incorporation) (I.R.S. Employer
Identification No.)
2209 Century Drive
Raleigh, North Carolina 27612
(Address of principal executive offices)
(Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that 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, $.01 par value, outstanding on
April 30, 1998 was 16,298,980.
<PAGE 2>
WINSTON HOTELS, INC.
Index
The Registrant hereby amends and restates its Quarterly Report on
Form 10-Q for the period ended March 31, 1998, filed with the
Securities and Exchange Commission on May 15, 1998, to reflect a
change in accounting principle effective January 1, 1998. This
change resulted from the Financial Accounting Standards Board's
Emerging Issues Task Force issuance on May 21, 1998 of EITF 98-9
"Accounting for Contingent Rent in Interim Financial Periods."
Page
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of March 31, 1998
(unaudited)and December 31, 1997 3
Unaudited Consolidated Statements of Operations
for the three months ended March 31, 1998 and
1997 4
Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C.
Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 9
Unaudited Statement of Income for the three months
ended March 31, 1998 10
Unaudited Statement of Cash Flows for the three
months ended March 31, 1998 11
Note to Financial Statements 12
WINSTON HOSPITALITY, INC.
Unaudited Statement of Income for the three months
ended March 31, 1997 13
Unaudited Statement of Cash Flows for the three
months ended March 31, 1997 14
Note to Financial Statements 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 23
<PAGE 3>
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
ASSETS
Restated
(See Note 1)
-------------
March 31,1998 December 31, 1997
------------- -----------------
(unaudited)
Investment in hotel properties:
Land $ 31,993 $ 27,504
Buildings and improvements 259,571 224,535
Furniture and equipment 26,658 22,528
------------- -----------------
Operating properties 318,222 274,567
Less accumulated depreciation (24,726) (21,572)
------------- -----------------
293,496 252,995
Properties under development 21,377 26,490
------------- -----------------
Net investment in hotel properties 314,873 279,485
Corporate FF&E, net 139 23
Cash and cash equivalents 1,041 164
Lease revenue receivable 6,910 5,682
Deferred expenses, net 1,596 1,403
Prepaid expenses and other assets 2,505 1,070
------------- -----------------
Total Assets $ 327,064 $ 287,827
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 86,881 $ 44,081
Accounts payable and accrued expenses 1,700 3,527
Deferred revenue 5,054 --
Distributions payable 6,605 6,950
Minority interest in Partnership 14,754 15,779
------------- -----------------
Total liabilities 114,994 70,337
------------- -----------------
Shareholders' equity:
Preferred stock, $.01 par value,
10,000 shares authorized, 3,000 shares
issued and outstanding (liquidation
preference of $76,734 and $77,100) 30 30
Common stock, $.01 par value, 50,000
shares authorized, 16,299 and 16,194
shares issued and outstanding 163 162
Additional paid-in capita l 224,598 223,427
Unearned compensation (391) (106)
Distributions in excess of earnings (12,330) (6,023)
------------- -----------------
Total shareholders' equity 212,070 217,490
------------- -----------------
Total liabilities and shareholders'
equity $ 327,064 $ 287,827
============= =================
The accompanying notes are an integral part of the financial statements.
<PAGE 4>
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Restated
(See Note 1)
Three Months Three Months
Ended Ended
March 31,1998 March 31, 1997
------------- --------------
Revenue:
Percentage lease revenue $ 5,019 $ 7,148
Interest and other income 49 30
------------- --------------
Total revenue 5,068 7,178
------------- --------------
Expenses:
Real estate taxes and property and
casualty insurance 979 565
General and administrative 599 370
Interest 625 815
Depreciation 3,158 2,222
Amortization 87 40
------------- --------------
Total expenses 5,448 4,012
------------- --------------
Income (loss) before
allocation to minority
interest (380) 3,166
Income (loss) before allocation to
minority interest (208) 230
------------- --------------
Net income (loss) (172) 2,936
Preferred stock distribution 1,734 --
------------- --------------
Net income (loss)
applicable to common
shareholders $ (1,906) $ 2,936
============= ==============
Earnings per share:
Net income (loss) per common share $ (0.12) $ 0.19
============= ==============
Net income (loss) per common share
assuming dilution $ (0.12) $ 0.18
============= ==============
Weighted average number of common
shares 16,224 15,815
============= ==============
Weighted average number of common
shares assuming dilution 16,224 17,154
============= ==============
The accompanying notes are an integral part of the financial statements.
<PAGE 5>
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Restated
(See Note 1)
Three Months Three Months
Ended Ended
March 31,1998 March 31, 1997
------------- --------------
Cash flows from operating activities:
Net income (loss) $ (172) $ 2,936
Adjustments to reconcile net income
(loss) to net cash provided by
operating activites:
Minority interest (208) 230
Depreciation 3,158 2,222
Amortization of franchise fees 30 22
Amortization recorded as interest
expense 91 112
Unearned compensation amortization 57 18
Change in assets and liabilities:
Lease revenue receivable (1,228) (153)
Prepaid expenses and other assets 38 (219)
Accounts payable and accrued
expenses (1,827) (337)
Deferred revenue 5,054 --
------------- --------------
Net cash provided by
operating activities 4,993 4,831
------------- --------------
Cash flows from investing activities:
Deferred acquistion costs (100) (32)
Prepaid acquisition costs (1,548) --
Investment in hotel properties (39,250) (3,501)
Sale of land parcel 445 --
------------- --------------
Net cash used in
investing activities (40,453) (3,533)
------------- --------------
Cash flows from financing activites:
Fees paid to increase and extend
line of credit -- (6)
Net proceeds from issuance of stock 485 200
Payment of distributions to
shareholders (6,478) (4,029)
Payment of distributions to
minority interest (470) (323)
Increase in line of credit borrowing 42,800 2,931
------------- --------------
Net cash provided by
(used in) financing
activities 36,337 (1,227)
------------- --------------
Net increase in cash and cash
equivalents 877 71
Cash and cash equivalents at beginning
of period 164 234
------------- --------------
Cash and cash equivalents at end of
period $ 1,041 $ 305
============= ==============
Supplemental disclosure:
Cash paid for interest $ 780 $ 384
============= ==============
Summary of non-cash investing and
financing activities:
Investment in hotel properties
payable $ 8 $ 2,327
Distributions declared but not paid 6,605 4,613
Conversion of partnership units for
common shares 152 --
Unearned compensation 339 --
Minority interest payable adjustment
due to the exercise of stock options
and conversion of partnership units
for common shares 196 --
The accompanying notes are an integral part of the financial statements.
<PAGE 6>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
1. RESTATEMENT FOR ADOPTION OF EITF 98-9
On May 21, 1998, the Financial Accounting Standards Board's
Emerging Issues Task Force issued EITF 98-9 "Accounting for
Contingent Rent in Interim Financial Periods" ("EITF 98-9").
EITF 98-9 addresses the recognition of rental revenue during
interim periods derived from leases which provide for percentage
rent and requires that a lessor defer recognition of contingent
rental income in interim periods until specified targets are
met. The Company has reviewed the terms of its percentage
leases and has determined that the provisions of EITF 98-9
materially impact the Company's revenue recognition on an
interim basis, but will have no impact on the Company's annual
percentage lease revenue, interim cash flow from its third party
lessee, or the Company's ability to pay dividends. The Company
has accounted for EITF 98-9 as a change in accounting principle
effective January 1, 1998 and accordingly, the March 31, 1998
financial statements have been restated from the amounts
previously stated to reflect the adoption. The restatement has
resulted in the following changes to the originally issued March
31, 1998 financial statements: total revenue decreased from
$10,122 to $5,068 resulting in a deferred revenue balance of
$5,054, net income decreased from $4,377 to a net loss of $172,
net income (loss) per common share and net income (loss) per
common share assuming dilution decreased from $0.16 to ($0.12),
and total shareholders' equity decreased from $216,619 to
$212,070. As a result of the adoption of EITF 98-9,
substantially all of the percentage lease revenue recognized for
the three month period ended March 31, 1998 consists of base
rent. Consistent with the provisions of EITF 98-9, the March
31, 1997 financial statements have not been restated, however,
the following pro forma amounts reflect the effect on the prior
period as if EITF 98-9 had been in effect as of the beginning of
that period:
Three Months
Ended
March 31, 1997
--------------
Total revenue $ 3,606
Total expenses 4,012
--------------
Loss before allocation to minority
interest (406)
Loss allocation to minority interest (29)
--------------
Net loss (377)
Preferred stock distribution --
--------------
Net loss applicable to common
shareholders $ (377)
==============
Earnings per share:
Net loss per common share $ (0.02)
==============
Net loss per common share assuming
dilution $ (0.02)
==============
Weighted average number of common
shares 15,815
==============
Weighted average number of common
shares assuming dilution 15,815
==============
2. ORGANIZATION
Winston Hotels, Inc. (the "Company") operates so as to qualify
as a real estate investment trust ("REIT") for federal income
tax purposes. The accompanying unaudited consolidated financial
statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and
recurring nature. Due to the seasonality of the hotel business
and the method by which revenue is recognized (see Note 1), the
information for the three months ended March 31, 1998 and the
information for the three months ended March 31, 1997 are not
necessarily indicative of the results for a full year.
<PAGE 7>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
3. ACQUISITIONS AND DEVELOPMENT
On March 3, 1998, the Company acquired the 168-suite Residence
Inn by Marriott in Phoenix, Arizona for $15,700 in cash. On
March 17, 1998, the Company purchased the newly-built 164-room
Hilton Garden Inn in Alpharetta, Georgia for $13,500 in cash.
In addition, on March 10, 1998, the Company announced the
opening of its first internally-developed hotel, a 137-suite
Homewood Suites hotel in Raleigh, North Carolina. The cost of
the hotel was approximately $12,000.
4. PRO FORMA FINANCIAL INFORMATION
These unaudited pro forma condensed statements of operations of
the Company are presented as if the September 1997 Preferred
Stock offering had occurred January 1, 1997 and the Company had
acquired all 41 of the hotels owned as of March 31, 1998 on the
later of January 1, 1997, or the hotel opening date for the two
hotels which opened in March 1998. These unaudited pro forma
condensed statements of operations are not necessarily indicative
of what actual results of operations of the Company would have
been assuming such transactions had been completed as of the dates
described above, nor do they purport to represent the results of
operations for future periods. As discussed in Note 1, percentage
lease revenue for the quarter ended March 31, 1998 has been
calculated under a different method than percentage lease revenue
for the quarter ended March 31, 1997, resulting in a significant
reduction in the recognition of percentage lease revenue, as well
as substantially all of the percentage lease revenue consisting of
base rent, for the quarter ended March 31, 1998:
Pro Forma for the
Quarter Ended March 31,
-----------------------
(See Note 1)
1998 1997
---- ----
Percentage lease and other
revenue $ 5,310 $ 10,250
---------- ---------
Expenses:
Real estate taxes and property
and casualty insurance 1,001 830
General and administrative 601 390
Depreciation 3,243 2,863
Amortization 87 50
Interest expense 786 729
---------- ---------
Total expense 5,718 4,862
---------- ---------
Income (loss) before
allocation to minority
interest (408) 5,388
Income (loss) allocation to
minority interest (211) 441
Preferred stock distribution 1,734 1,734
---------- ---------
Net income (loss) applicable
to common shareholders $ (1,931) $ 3,213
========== =========
Net income (loss) per common share $ (0.12) $ 0.20
========== =========
Net income (loss) per common share
assuming dilution $ (0.12) $ 0.20
========== =========
Weighted average number of common
shares 16,224 15,815
========== =========
Weighted average number of common
shares assuming dilution 16,224 17,969
========== =========
5. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," on December 31, 1997.
SFAS No. 128 requires the Company to change its method of
computing, presenting and
<PAGE 8>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
disclosing earnings per share information. All prior period data
presented has been restated to conform to the provisions of SFAS
No. 128.
The following is a reconciliation of the net income applicable
to common shareholders used in the net income per common share
calculation to the income before allocation to minority interest
used in the net income per common share - assuming dilution
calculation. A reconciliation is not shown for the quarter
ended March 31, 1998 due to all Common Stock equivalents being
anti-dilutive.
Quarter ended
March 31,1997
-------------
Net income $ 2,936
Less: preferred stock distribution --
-------------
Net income applicable to common
shareholders 2,936
Plus: income allocation to minority
interest 230
-------------
Net income assuming dilution $ 3,166
=============
The following is a reconciliation of the weighted average shares
used in the calculation of net income per common share to the
weighted average shares used in the calculation of net income
per common share - assuming dilution. A reconciliation is not
shown for the quarter ended March 31, 1998 due to all Common
Stock equivalents being anti-dilutive.
Quarter ended
March 31,1997
-------------
Weighted average number of common
shares 15,815
Units with redemption rights 1,265
Stock options 74
-------------
Weighted average number of common
shares assuming dilution 17,154
=============
6. SUBSEQUENT EVENTS:
On April 21, 1998, the Company purchased the 171-room Holiday
Inn in Tinton Falls, New Jersey for approximately $5,700 in
cash. On May 5, 1998, the Company opened the 112-suite Homewood
Suites hotel in Lake Mary, Florida which represents an
investment of approximately $10,000. On May 8, 1998, the
Company purchased the 155-room Hilton Garden Inn hotel in
Albany, New York for approximately $12,800 in cash.
7. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS:
The Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130") effective
January 1, 1998. SFAS 130 requires the Company to display an
amount representing the total comprehensive income for the
period in a financial statement which is displayed with the same
prominence as other financial statements. The Company does not
have any items representing differences between net income
(loss) and comprehensive income (loss) and therefore has not
presented a Statement of Comprehensive Income in the
accompanying financial statements.
The Company will adopt Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131") effective December 31,
1998. SFAS 131 requires the Company to report selected
information about operating segments in its financial reports
issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic
areas and major customers. This statement is not expected to
have a material impact on the Company's financial statements.
<PAGE 9>
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
($ in thousands)
ASSETS
March 31, 1998 December 31, 1997
-------------- -----------------
Current assets: (unaudited)
Cash and cash equivalents $ 6,198 $ 3,393
Accounts receivable 2,527 1,614
Due from Winston Hospitality, Inc. 526 1,636
Due from CapStar Management Company, L.P. 456 385
Deposits and other assets 206 197
-------------- -----------------
Total current assets 9,913 7,225
Furniture, fixtures and equipment, net of
accumulated depreciation of $17 and $5 289 241
Intangible assets, net of accumulated
amortization of $321 and $93 33,915 34,088
Deferred franchise costs, net of accumulated
amortization of $24 and $7 585 601
-------------- -----------------
$ 44,702 $ 42,155
============== =================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,688 $ 1,459
Accrued expenses 3,196 2,920
Percentage lease payable 6,910 5,682
Advance deposits 174 135
-------------- -----------------
Total current liabilities 11,968 10,196
Members' capital 32,734 31,959
-------------- -----------------
$ 44,702 $ 42,155
============== =================
See accompanying notes to financial statements.
<PAGE 10>
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF OPERATIONS
For the quarter ended March 31, 1998
($ in thousands)
Revenue:
Rooms $ 22,573
Food and beverage 901
Telephone and other operating departments 1,170
----------
Total revenue 24,644
----------
Operating costs and expenses:
Rooms 4,904
Food and beverage 683
Telephone and other operating departments 473
Undistributed expenses:
Lease expense 10,073
Administrative and general 2,482
Sales and marketing 826
Franchise fees 1,608
Repairs and maintenance 1,222
Energy 895
Other 446
Depreciation and amortization 257
Total expenses 23,869
----------
Net income $ 775
==========
See accompanying notes to financial statements.
<PAGE 11>
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF CASH FLOWS
For the quarter ended March 31, 1998
($ in thousands)
Cash flows from operating activities:
Net income $ 775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 257
Increase in accounts receivable (913)
Decrease in due from Winston Hospitality, Inc. 1,110
Increase in due from CapStar Management Company, L.P. (71)
Increase in deposits and other assets (9)
Increase in accounts payable and accrued expenses 505
Increase in percentage lease payable to Winston
Hotels, Inc. 1,228
Increase in advance deposits 39
---------
Net cash provided by operating activities 2,921
---------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (76)
Proceeds from sale of fixed assets 16
Additions to intangible assets (56)
---------
Net cash used in investing activities (116)
---------
Net increase in cash and cash equivalents 2,805
Cash and cash equivalents at beginning of period 3,393
---------
Cash and cash equivalents at end of period $ 6,198
=========
See accompanying notes to financial statements.
<PAGE 12>
CAPSTAR WINSTON COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements are prepared by and
are the sole responsibility of CapStar Winston Company, L.L.C. These
financial statements reflect, in the opinion of CapStar Winston Company,
L.L.C. management, all adjustments necessary for a fair presentation of
the interim financial statements. All such adjustments are of a normal
and recurring nature.
During November 1997, CapStar Management Company ("CMC") and CapStar
Hotel Company purchased substantially all of the assets and assumed
certain liabilities of Winston Hospitality, Inc., including 38 hotel
leases, certain operating assets and liabilities, and goodwill and
other intangible assets. Concurrent with the purchase, CMC
contributed/assigned the assets purchased and liabilities assumed in
the transaction to CapStar Winston Company, L.L.C. (the "Lessee").
<PAGE 13>
WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF INCOME
($ in thousands)
Three Months
Ended
March 31, 1997
--------------
Revenue:
Room revenue $ 16,325
Food and beverage revenue 631
Other revenue, net 304
Interest income 22
--------------
Total revenue 17,282
--------------
Expenses:
Property and operating expenses 6,218
Property maintenance and repairs 868
Food and beverage expense 455
General and administrative 594
Franchise costs 1,458
Management fees 297
Percentage lease payments 7,148
--------------
Total expenses 17,038
--------------
Net income $ 244
==============
The accompanying note is an integaral part of the financial statements.
<PAGE 14>
WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF CASH FLOWS
($ in thousands)
Three Months
Ended
March 31, 1997
--------------
Cash flows from operating activities:
Net income $ 244
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 27
Changes in assets and liabilities:
Accounts receivable - trade (194)
Prepaid expenses and other
assets 35
Accounts payable - trade (14)
Percentage lease payable to
Lessor 153
Accrued expenses and other
liabilities 240
--------------
Net cash provided by
operating activities 491
--------------
Cash flows from investing activities:
Purchases of furniture, fixtures and
equipment (38)
Advances to lessor, affiliates and
shareholders (1,068)
--------------
Net cash used in
investing activities (1,106)
--------------
Net decrease in cash and cash equivalents (615)
Cash and cash equivalents at beginning
of the period 5,463
--------------
Cash and cash equivalents at end
of period $ 4,848
==============
The accompanying note is an integral part of the financial statements.
<PAGE 15>
WINSTON HOSPITALITY, INC.
NOTE TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements reflect, in the
opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
During November 1997, CapStar Management Company ("CMC") and
CapStar Hotel Company purchased substantially all of the assets
and assumed certain liabilities of Winston Hospitality, Inc.,
including 38 hotel leases, certain operating assets and
liabilities, and goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets
purchased and liabilities assumed in the transaction to CapStar
Winston Company, L.L.C.
<PAGE 15>
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
($ amounts in thousands)
Overview
Winston Hotels, Inc. (the "Company"), which consummated an
underwritten initial public offering ("IPO") in June 1994, follow-on
Common Stock offerings in May 1995 and in June 1996, and a Preferred
Stock offering in September 1997, operates as a real estate
investment trust ("REIT") to invest in hotel properties. The Company
owned 41 hotels (the "Current Hotels") as of March 31, 1998. The
Company owned 16 hotels as of December 31, 1994 (the "1994 Hotels"),
purchased five hotels in May 1995 (the "1995 Acquired Hotels"),
acquired 10 hotels in 1996 (the "1996 Acquired Hotels"), acquired
seven hotels in 1997 (the "1997 Acquired Hotels") and acquired two
hotels and opened one internally developed hotel in the first quarter
of 1998 (the "1998 Hotels"). It currently leases all 41 Current
Hotels to CapStar Winston Company, L.L.C. (the "Lessee") pursuant to
leases that provide for rent payments based, in part, on revenues
from the Current Hotels (the "Percentage Leases"). The Company
acquired one additional full-service hotel in April 1998, one
additional extended-stay hotel in May 1998 and one additional
full-service hotel in May 1998.
RESULTS OF OPERATIONS
The table below outlines the Company's investment in hotel properties
for the periods ended March 31, 1998 and 1997.
First Quarter 1998 First Quarter 1997
------------------------ ------------------------
Additions Properties Additions Properties
during owned during owned
the quarter at March 31 the quarter at March 31
----------- ----------- ----------- -----------
Type of Hotel
Limited- service hotels -- 35 -- 28
Extended-stay hotels 2 4 -- 2
Full-service hotels 1 2 -- 1
-- -- -- --
Total 3 41 -- 31
== == == ==
In order to present a more meaningful comparison of operations, in
addition to the comparison of actual results of the Company and the
Lessee for the three months ended March 31, 1998 versus actual
results for the three months ended March 31, 1997, the Company has
also provided an analysis of the pro forma results of the Company for
the three months ended March 31, 1998 versus pro forma results for
the three months ended March 31, 1997. These pro forma results are
shown as if the 1997 Preferred Stock offering and the 1997 and 1998
acquisitions had occurred on the later of January 1, 1997, or the
hotel opening date for the two hotels which opened in March 1998.
On May 21, 1998, the Financial Accounting Standards Board's Emerging
Issues Task Force issued EITF 98-9 "Accounting for Contingent Rent in
Interim Financial Periods" ("EITF 98-9"). EITF 98-9 addresses the
recognition of rental revenue during interim periods derived from
leases which provide for percentage rent and requires that a lessor
defer recognition of contingent rental income in interim periods
until specified targets are met. The Company has reviewed the terms
of its Percentage Leases and has determined that the provisions of
EITF 98-9 materially impact the Company's revenue recognition on an
interim basis, but will have no impact on the Company's annual percentage
lease revenue, interim cash flow from Lessee or the Company's ability
to pay dividends. The Company has accounted for EITF 98-9 as a change
in accounting principle effective January 1,1998, resulting in: (i) a
deferred revenue balance of $5,054 as of March 31, 1998, as shown on
the accompanying Consolidated Balance Sheets and (ii) substantially
all of the percentage lease revenue consisting of base rent. Accordingly,
the operating results for the period ended March 31, 1998 and the period
ended March 31, 1997 included in the accompanying discussion are not
comparable as the results for the two periods have been accounted for
under different revenue recognition methods.
The Company's Percentage Leases provide for the greater of (i) annual
fixed base rent or (ii) rent based on the revenue of hotels
("Percentage Rent") to be remitted to the Company annually. The
leases contain annual room revenue thresholds used to calculate two
tiers of Percentage Rent. These annual thresholds have been
allocated equally to each quarter, subject to consumer price index
adjustments, to determine the quarterly lessee Percentage Rent
payments. The provisions of EITF 98-9 call for straight-line
recognition of the annual base rent throughout the year and for the
deferral of any additional lease amounts collected or due from the
Lessee until such amounts exceed the annual fixed base rent. This
will generally result in base rent being recognized in the first and
second quarters and Percentage Rents, if any, collected or due from
the Lessees
<PAGE 17>
during the first and second quarters being deferred and
then recognized in the third and fourth quarters due to the structure
of the Company's Percentage Leases and the seasonality of the hotel
operations. Prior to the adoption of EITF 98-9, the Company has
recorded lease revenue in interim periods on the basis used to
determine quarterly lessee Percentage Rent payments, resulting in the
second and third quarters being the strongest quarters.
At March 31, 1998, deferred revenue of $5,054 represents Percentage
Rent collected or due from lessees under the terms of the leases in
excess of one quarter of base rent but less than the remaining base
rent, which the Company expects to recognize as lease revenue in the
future quarters of 1998. The Company's quarterly distributions are
based on Percentage Rents collected as opposed to percentage lease
revenue recognized.
THE COMPANY
ACTUAL - THREE MONTHS ENDED MARCH 31, 1998 VS ACTUAL - THREE MONTHS
ENDED MARCH 31, 1997
The Company had revenues of $5,068 in 1998, consisting of $5,019 of
Percentage Lease revenues and $49 of interest and other income.
Percentage Lease revenues decreased by $2,129 to $5,019 in 1998 from
$7,148 in 1997. This decrease was comprised of a decrease of $5,054
due to a change in accounting principle regarding revenue recognition
under EITF 98-9 , offset in part by increases of: (i) $483 due to the
1998 Hotels, (ii) $2,245 due to the 1997 Acquired Hotels owned for
the entire three-month period in 1998, and (iii) an increase of $197
in lease revenues generated from hotels acquired prior to 1997.
Real estate taxes and property insurance costs incurred in 1998 were
$979, an increase of $414 from $565 in 1997. This increase was
primarily attributable to the 1997 Acquired Hotels that were not
owned in the first quarter of 1997, the 1998 Hotels, as well as
increased property tax assessments and tax rates from 1997 to 1998.
General and administrative expenses increased $229 to $599 in 1998
from $370 in 1997. The increase was attributable to the increase in
size and activities of the Company in 1998. Interest expense
decreased by $190 to $625 in 1998 from $815 in 1997. Although the
weighted average outstanding debt balance increased from 1997 to
1998, from $45,023 to $58,682, capitalized interest costs related to
development and renovation projects increased from $174 to $640,
resulting in a lower interest expense in 1998. Interest rates
remained constant between the two quarters. Depreciation increased
$936 to $3,158 in 1998 from $2,222 in 1997, primarily due to
depreciation related to the 1997 Acquired Hotels, the 1998 Hotels and
renovations completed during 1997 and 1998.
PRO FORMA - THREE MONTHS ENDED MARCH 31, 1998 VS PRO FORMA - THREE
MONTHS ENDED MARCH 31, 1997
The Company had revenues of $5,310 for the three months ended March
31, 1998, consisting of $5,261 of Percentage Lease revenues and $49
of interest and other income. Percentage Lease revenues decreased
$4,915 to $5,261 in 1998 from $10,176 in 1997. Of this decrease,
$5,385 was due to a change in accounting principle regarding revenue
recognition under EITF 98-9. This decrease was offset in part by an
increase of $305 primarily attributable to an increase in room rates
in 1998 from 1997 and $165 attributable to the opening of two hotels
in 1998.
Real estate taxes and property insurance costs incurred in 1998 were
$1,001, an increase of $171 from $830 in 1997. The increase was due
primarily to increased property tax assessments and tax rates from
1997 to 1998 as well as additional taxes paid due to the opening of
two hotels in 1998. General and administrative expenses increased
$211 to $601 in 1998 from $390 in 1997. The increase was primarily
attributable to payroll costs associated with the increase in
headcount from 1997 to 1998. Interest expense increased by $57 to
$786 in 1998 from $729 in 1997. The increase was attributable to
$561 of additional interest expense related primarily to borrowings
under the line of credit to fund acquisitions of the 1997 Acquired
Hotels and 1998 Hotels, offset by both the capitalization of
additional interest costs, totaling $467, in connection with the
development and certain renovation projects during the respective
periods, as well as a reduction in line of credit fees totaling $37.
Depreciation increased $380 to $3,243 in 1998 from $2,863 in 1997
primarily due to renovations and other capital expenditures during
1997 and 1998.
<PAGE 18>
THE LESSEE
ACTUAL - THREE MONTHS ENDED MARCH 31, 1998 VS ACTUAL - THREE MONTHS
ENDED MARCH 31, 1997
The following table sets forth certain historical financial
information for the Current Hotels for the periods indicated:
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
---------------- ----------------
Revenue:
Rooms $ 22,573 91.6% $ 16,325 92.3%
Food and beverage 901 3.7% 624 3.5%
Telephone and other
operating departments 1,170 4.7% 742 4.2%
---------------- ----------------
Total revenue 24,644 100.0% 17,691 100.0%
---------------- ----------------
Operating costs and expenses:
Rooms 4,904 19.9% 3,431 19.4%
Food and beverage 682 2.8% 445 2.5%
Telephone and other
operating departments 473 1.9% 404 2.3%
Undistributed expenses:
Lease 10,073 40.9% 7,148 40.4%
Administrative and general 2,482 10.1% 2,234 12.6%
Sales and marketing 826 3.4% 662 3.7%
Franchise fees 1,609 6.5% 1,118 6.3%
Repairs and maintenance 1,222 5.0% 915 5.2%
Energy 895 3.6% 695 3.9%
Other 446 1.8% 368 2.1%
Depreciation and
amortization 257 1.0% 27 0.2%
---------------- ----------------
Total expenses 23,869 96.9% 17,447 98.6%
---------------- ----------------
Net income $ 775 3.1% $ 244 1.4%
================ ================
During November 1997, CapStar Management Company ("CMC") and CapStar
Hotel Company purchased substantially all of the assets and assumed
certain liabilities of Winston Hospitality, Inc., including 38 hotel
leases, certain operating assets and liabilities, and goodwill and
other intangible assets. Concurrent with the purchase, CMC
contributed/assigned the assets purchased and liabilities assumed in
the transaction to CapStar Winston Company, L.L.C. (the "Lessee").
Since the Lessee was not operating prior to the purchase transaction,
no comparative data is available for the period January 1, 1997
through March 31, 1997. However, for purposes of this management
discussion and analysis, the financial information of the Lessee for
the three months ended March 31, 1998 will be compared with the
financial information of Winston Hospitality, Inc. for the three
months ended March 31, 1997. The Winston Hospitality financial
information for the three months ended March 31, 1997 contained in
the table above has been reclassified and grouped according to the
Lessee format in order to facilitate an accurate comparison of the
data.
The Lessee had room revenues of $22,573 in 1998, up $6,248 from
$16,325 in 1997. The increase in room revenues was due to an increase
in room revenues of (i) $490 for the 1994 Hotels, the 1995 Acquired
Hotels and the 1996 Acquired Hotels, (ii) $5,102 for the 1997
Acquired Hotels, and (iii) $656 for the 1998 Hotels. Food and
beverage revenue increased $277, to $901 in 1998 from $624 in 1997,
primarily due to the 1997 Acquired Hotels and 1998 Hotels. Telephone
and other operating departments revenue increased $428 to $1,170 in
1998 from $742 in 1997, primarily due to an increase in revenue
associated with long distance phone calls and in-room movies.
The Lessee had total expenses in 1998 of $23,869, up $6,422 from
$17,447 in 1997. The increase, as shown above, in all expense
categories except depreciation and amortization expense, were
primarily attributable to the operation of a greater number of hotels
for the three months ended March 31, 1998 as compared with the same
period of 1997. Although administrative and general expenses
increased in 1998 from 1997, these expenses decreased as a percentage
of total revenue from 1997 to 1998 as a result of efficiencies
developed within the management company, making the incremental cost
per hotel less expensive. Depreciation and amortization expense
increased due to amortization being charged in 1998
<PAGE 19>
as a result of goodwill and other intangible assets arising out of
the purchase of Winston Hospitality, Inc. by CMC and CapStar Hotel
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which
is principally derived from Percentage Leases. For the quarter ended
March 31, 1998, cash flow provided by operating activities was
$4,993. Adjusted funds from operations, as defined below, was
$6,098. Under Federal income tax law provisions applicable to REITs,
the Company is required to distribute at least 95% of its taxable
income to maintain its tax status as a REIT. In the quarter ended
March 31, 1998, the Company declared distributions of $6,605 to its
shareholders. Because the Company's annual cash flow from operating
activities is expected to exceed its annual taxable income due to
depreciation and amortization expenses, the Company expects to be
able to meet its distribution requirements out of cash flow from
operating activities.
The Company's net cash used in investing activities for the three
months ended March 31, 1998 totaled $40,453, including $29,232
related to the acquisition of the 1998 Hotels, $2,877 for hotel
renovations and $7,141 for the development of six new extended-stay
hotels and one limited-service hotel, which are expected to cost
approximately $71,000. The total cost of the 1998 Hotels was
$40,898, including $11,666 related to the development of the Homewood
Suites hotel in Raleigh, N.C.
The Company plans to spend approximately $7,000 to renovate certain
of its Current Hotels during the next twelve months. These
expenditures are in addition to the reserve of 5% of room revenues
for its limited-service hotels and 7% of room revenues and food and
beverage revenues from its full-service hotels which the Company is
required to set aside under its Percentage Leases for periodic
capital improvements and the refurbishment and replacement of
furniture, fixtures and equipment at its Current Hotels. In the
three months ended March 31, 1998, the Company set aside $1,190 for
such reserves. These reserves are in addition to amounts spent on
normal repairs and maintenance which have approximated 5.4% and 5.3%
of room revenues for the three months ended March 31, 1998 and 1997,
respectively, and are paid by the Lessee.
The Company's net cash provided by financing activities during the
quarter ended March 31, 1998 totaled $36,337, including an increase
of $42,800 in the line of credit borrowings and $485 of net proceeds
from the issuance of common stock related to the exercise of stock
options, offset by the payment of distributions to shareholders of
$6,478 and the payment of distributions to minority interest holders
of $470.
The Company has collateralized a portion of its $125,000 line of
credit with 28 of its Current Hotels amounting to $96,401 as of March
31, 1998. This amount is calculated quarterly, and increases if cash
flow attributable to the collateral hotels increases and/or the
Company adds additional hotels as collateral. The total additional,
non-collateralized line availability accessible to the Company as of
March 31, 1998 was $28,599. The Company's Articles of Incorporation
limit its total amount of indebtedness to 45% of the purchase prices
paid by the Company for its investments in hotel properties, as
defined. As of March 31, 1998, the Company had additional borrowing
capacity under the debt limitation of approximately $126,000 assuming
it invests all borrowings in additional hotels.
Under an arrangement with Promus Hotels, Inc. ("Promus") the Company
has an agreement to acquire a 123-suite Homewood Suites hotel being
developed by Promus in Richmond, Virginia. The Company expects to
acquire this hotel upon its completion, which Promus estimates will
occur during the second quarter of 1998, for a purchase price
approximating Promus' development cost, estimated to be $8,600.
Conditions to the Company's obligation to purchase include its
approval of the building specifications and Promus' completion of
construction within certain cost limitations and by a specified
delivery date. Pursuant to the arrangement, Promus has agreed to
invest $1,845 in the Company's Common Stock (at the then-current
market price per share), in connection with the purchase of this
hotel.
The Company intends to acquire and develop additional hotel
properties, including those described above, that meet its investment
criteria and is continually evaluating acquisition opportunities. It
is expected that future hotel acquisitions will be financed, in whole
or in part, from additional follow-on offerings, from borrowings
under the line of credit, from joint venture agreements, and/or from
the issuance of other debt or equity securities. There can be no
assurances that the Company will acquire any additional hotels, or
that any hotel development will be undertaken, or if commenced, that
it will be completed on schedule or on budget. Further, there can be
no assurances that the Company will be able to obtain any additional
financing.
<PAGE 20>
SEASONALITY
The hotels' operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This
seasonality, the structure of the Percentage Leases, which provide
for a higher percentage of room revenues above the minimum equal
quarterly levels to be paid as Percentage Rent, as well as the
recognition of percentage lease revenue under the provisions of EITF
98-9 can be expected to cause significant fluctuations in the
Company's quarterly lease revenue under the Percentage Leases.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely used and
appropriate measure of performance for an equity REIT. FFO, as
defined by the National Association of Real Estate Investment Trusts
("NAREIT"), is income (loss) before minority interest (determined in
accordance with generally accepted accounting principles), excluding
gains (losses) from debt restructuring and sales of property, plus
real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. FFO
is presented to assist investors in analyzing the performance of the
Company. The Company's method of calculating FFO may be different
from methods used by other REITs and accordingly, may not be
comparable to such other REITs. FFO (i) does not represent cash
flows from operating activities as defined by generally accepted
accounting principles, (ii) is not indicative of cash available to
fund all cash flow and liquidity needs, including the Company's
ability to make distributions, and (iii) should not be considered as
an alternative to net income (as determined in accordance with
generally accepted accounting principles) for purposes of evaluating
the Company's operating performance.
The Company adopted EITF 98-9 effective January 1, 1998 and has
further presented "Adjusted FFO." Adjusted FFO is FFO calculated as
described previously with an adjustment for percentage lease revenue
deferred in accordance with EITF 98-9. The Company believes that
Adjusted FFO will enable readers of its financial statements to more
fully understand the cash flow of its business and operations.
The following presents the Company's calculation of FFO, Adjusted
FFO, FFO per share and Adjusted FFO per share (in thousands, except
per share data):
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
Net income (loss) before
allocation to minority
interest $ (380) $ 3,166
Plus: depreciation 3,158 2,222
Less: preferred stock
dividends 1,734 --
------- --------
FFO 1,044 5,388
Deferred percentage
lease revenue 5,054 --
------- --------
Adjusted FFO $ 6,098 $ 5,388
======= ========
Weighted average number
of common shares
assuming dilution 18,042 17,154
------- --------
FFO per share $ 0.06 $ 0.31
======= ========
Adjusted FFO per share $ 0.34 $ 0.31
======= ========
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, including, but not limited to, those paragraphs relating to
development and acquisition of hotels in this section. These
statements represent the Company's judgment and are subject to risks
and uncertainties that could cause actual operating results to differ
materially from those expressed or implied in the forward looking
statements.
<PAGE 21>
Important factors that could cause actual results to
differ include, but are not limited to the following (i) risk
associated with the Company's acquisition of hotels with little or no
operating history, including the risk that such hotels will not
achieve the level of revenue assumed by the Company in calculating
the respective Percentage Rent formula; (ii) development risk,
including risk of construction delay, cost overruns, receipt of
zoning, occupancy and other required governmental permits and
authorizations and the incurrence of development costs in connection
with projects that are not pursued through completion; and (iii)
factors identified in the Company's filings with the Securities and
Exchange Commission, including the factors listed in the Company's
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on August 1, 1997.
<PAGE 22>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended March 31, 1998.
<PAGE 23>
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.
WINSTON HOTELS, INC.
Date August 17, 1998 /s/ James D. Rosenberg
-------------------------- ------------------------
James D. Rosenberg
Chief Financial Officer and
Chief Operating Officer
(Authorized officer and Principal
Financial Officer)
<PAGE 24>
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended March 31, 1998
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
27. Financial Data Schedule (For SEC use only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRITY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,041
<SECURITIES> 0
<RECEIVABLES> 6,910
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 339,599
<DEPRECIATION> 24,726
<TOTAL-ASSETS> 327,064
<CURRENT-LIABILITIES> 13,359
<BONDS> 0
0
30
<COMMON> 163
<OTHER-SE> 211,877
<TOTAL-LIABILITY-AND-EQUITY> 327,064
<SALES> 5,019
<TOTAL-REVENUES> 5,068
<CGS> 0
<TOTAL-COSTS> 4,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 625
<INCOME-PRETAX> (380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (380)
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<NET-INCOME> (172)
<EPS-PRIMARY> (0.12)
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