<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
July 31, 1998 was 16,313,980.
<PAGE 2>
WINSTON HOTELS, INC.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Unaudited Consolidated Statements of Operations
for the three and six months ended June 30,
1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C.
Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 10
Unaudited Statements of Income for the three and
six months ended June 30, 1998 11
Unaudited Statement of Cash Flows for the six
months ended June 30, 1998 12
Notes to Financial Statements 13
WINSTON HOSPITALITY, INC.
Unaudited Statements of Income for the three and
six months ended June 30, 1997 14
Unaudited Statement of Cash Flows for the six months
ended June 30, 1997 15
Notes to Financial Statements 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signature Page 27
<PAGE 3>
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
ASSETS
(See Note 6)
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
Investment in hotel properties:
Land $ 40,464 $ 27,504
Buildings and improvements 331,532 224,535
Furniture and equipment 34,270 22,528
------------- -----------------
Operating properties 406,266 274,567
Less accumulated depreciation (28,632) (21,572)
------------- -----------------
377,634 252,995
Properties under development 11,617 26,490
------------- -----------------
Net investment in hotel
properties 389,251 279,485
Corporate FF&E, net 231 23
Cash and cash equivalents 408 164
Lease revenue receivable 10,457 5,682
Deferred expenses, net 1,338 1,403
Prepaid expenses and other assets 842 1,070
------------- -----------------
Total assets $ 402,527 $ 287,827
============= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 160,776 $ 44,081
Accounts payable and accrued expenses 3,045 3,527
Deferred revenue 12,835 --
Distributions payable 6,609 6,950
Minority interest in Partnership 13,994 15,779
------------- -----------------
Total liabilities 197,259 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,16,314
and 16,194 shares issued and
outstanding 163 162
Additional paid-in capital 224,787 223,427
Unearned compensation (396) (106)
Distributions in excess of earnings (19,316) (6,023)
------------- -----------------
Total shareholders' equity 205,268 217,490
------------- -----------------
Total liabilities and
shareholders' equity $ 402,527 $ 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)
(See Note 6)
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
Revenue:
Percentage lease
revenue $ 7,217 $ 9,622
Interest and other
income 65 24
------------- -------------
Total revenue 7,282 9,646
------------- -------------
Expenses:
Real estate taxes
and property and
casualty insurance 1,283 591
------------- -------------
General and
administrative 1,164 492
Interest 1,954 996
Depreciation 3,916 2,348
Amortization 89 41
------------- -------------
Total expenses 8,406 4,468
------------- -------------
Income (loss)
before allocation
to minority
interest (1,124) 5,178
Income (loss) allocation
to minority interest (277) 381
------------- -------------
Net income (loss) (847) 4,797
Preferred stock
distribution 1,734 --
------------- -------------
Net income (loss)
applicable to
common
shareholders $ (2,581) $ 4,797
============= =============
Earnings per share:
Net income (loss)
per common share $ (0.16) $ 0.30
============= =============
Net income (loss)
per common share
assuming dilution $ (0.16) $ 0.30
============= =============
Weighted average
number of common
shares 16,302 15,820
============= =============
Weighted average
number of common
shares assuming
dilution 16,302 17,145
============= =============
(See Note 6)
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
Revenue:
Percentage lease
revenue $ 12,236 $ 16,770
Interest and other
income 114 54
------------- -------------
Total revenue 12,350 16,824
------------- -------------
Expenses:
Real estate taxes
and property and
casualty insurance 2,262 1,156
------------- -------------
General and
administrative 1,763 862
Interest 2,579 1,811
Depreciation 7,074 4,570
Amortization 176 81
------------- -------------
Total expenses 13,854 8,480
------------- -------------
Income (loss)
before allocation
to minority
interest (1,504) 8,344
Income (loss) allocation
to minority interest (485) 611
------------- -------------
Net income (loss) (1,019) 7,733
Preferred stock
distribution 3,469 --
------------- -------------
Net income (loss)
applicable to
common
shareholders $ (4,488) $ 7,733
============= =============
Earnings per share:
Net income (loss)
per common share $ (0.28) $ 0.49
============= =============
Net income (loss)
per common share
assuming dilution $ (0.28) $ 0.49
============= =============
Weighted average
number of common
shares 16,263 15,817
============= =============
Weighted average
number of common
shares assuming
dilution 16,263 17,149
============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE 5>
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(See Note 6)
Six Months Six Months
Ended Ended
June 30,1998 June 30, 1997
------------ -------------
Cash flows from operating activities:
Net income (loss) $ (1,019) $ 7,733
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Minority interest (485) 611
Depreciatio 7,074 4,570
Amortization of franchise fees 66 44
Amortization recorded as interest
expense 183 219
Unearned compensation amortization 110 37
Changes in assets and liabilities:
Lease revenue receivable (4,775) (2,543)
Prepaid expenses and other assets 191 (909)
Accounts payable and accrued
expenses (482) 427
Deferred revenue 12,835 --
------------ -------------
Net cash provided by operating
activities 13,698 10,189
------------ -------------
Cash flows from investing activities:
Deferred acquisition costs -- (27)
Prepaid acquisition costs (400) (65)
Investment in hotel properties (117,234) (21,426)
Sale of land parcel 445 --
------------ -------------
Net cash used in investing
activities (117,189) (21,518)
------------ -------------
Cash flows from financing activities:
Fees paid to increase and extend
line of credit (5) (81)
Net proceeds from issuance of stock 600 200
Payment of distribitions to shareholders (12,615) (8,300)
Payment of distributions to minority
interest (940) (665)
Net increase in demand notes 73,795 20,281
Increase in demand notes 42,900 --
------------ -------------
Net cash provided by
financing activities 103,735 11,435
------------ -------------
Net increase in cash and cash
equivalents 244 106
Cash and cash equivalents at beginning of
period 164 234
------------ -------------
Cash and cash equivalents at end of
period $ 408 $ 340
============ =============
Supplemental disclosure:
Cash paid for interest $ 2,678 $ 1,299
============ =============
Summary of non-cash investing and
financing activities:
Investment in hotel properties
payable $ -- $ 1,557
Distributions declared but not
paid 6,609 4,613
Conversion of partnership units for
common shares 152 --
Unearned compensation 400 --
Minority interest payable adjustment
due to the exercise of stock options
and conversion of partnership units
for common shares 208 --
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. 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 6), the information for the three and six months
ended June 30, 1998 and the information for the three and six months
ended June 30, 1997 are not necessarily indicative of the results for
a full year.
2. ACQUISITIONS AND DEVELOPMENT
During the second quarter of 1998, the Company invested
approximately $65 million in cash with the purchase of six
hotels. The Tinton Falls Holiday Inn was purchased on April,
21, 1998, the Albany Hilton Garden Inn was purchased on May 8,
1998, the Las Vegas Hampton Inn was purchased on May 20, 1998,
the Secacus Holiday Inn was purchased on May 27, 1998, the
Phoenix Homewood Suites was purchased on June 1, 1998 and the
Raleigh Hilton Garden Inn was purchased on June 4, 1998.
The Company also opened two internally-developed hotels during
the second quarter including the Lake Mary, Florida Homewood
Suites hotel and the Alpharetta, Georgia Homewood Suites hotel.
The Company currently has five projects in various stages of
development including the most recently announced Chapel Hill,
North Carolina Hilton Garden Inn and Charlotte, North Carolina
Embassy Suites hotels. The completion of all five development
projects will represent a total investment of approximately $58
million.
3. 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 49 of the hotels owned as of June 30, 1998 on the
later of January 1, 1997, or the hotel opening date for the
eight hotels which opened in the first six months of 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 6, percentage lease revenue for
the six months ended June 30, 1998 has been calculated under a
different method than percentage lease revenue for the six
months ended June 30, 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, during the six months ended June 30, 1998:
Pro Forma for the
Six Months Ended June 30,
-------------------------
(See Note 6)
1998 1997
---- ----
Percentage lease and other
revenue $ 13,594 $ 24,300
----------- ---------
Expenses:
Real estate taxes and property
and casualty insurance 2,500 1,928
General and administrative 1,772 910
Depreciation 7,417 6,115
Amortization 177 102
Interest expense 3,265 2,186
----------- ---------
Total expense 15,131 11,241
----------- ---------
Income (loss) before
allocation to minority
interest (1,537) 13,059
----------- ---------
<PAGE 7>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
Income (loss) allocation to
minority interest (488) 1,158
Preferred stock distribution 3,469 3,469
----------- ---------
Net income (loss) applicable
to common shareholders $ (4,518) $ 8,432
----------- ---------
Net income (loss) per common share $ (0.28) $ 0.53
=========== =========
Net income (loss) per common share
assuming dilution $ (0.28) $ 0.53
=========== =========
Weighted average number of common
shares 16,263 15,818
=========== =========
Weighted average number of common
shares assuming dilution 16,263 17,964
=========== =========
4. 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 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 and
six months ended June 30, 1998 due to all Common Stock
equivalents being anti-dilutive.
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
Net income $ 4,797 $ 7,733
Less: preferred stock
distribution -- --
------------- -------------
Net income applicable to
common shareholders 4,797 7,733
Plus: income allocation to
minority interest 381 611
------------- -------------
Net income assuming
dilution $ 5,178 $ 8,344
============= =============
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 and six months ended June 30, 1998 due to
all Common Stock equivalents being anti-dilutive.
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
Weighted average number of
common shares 15,820 15,817
Units with redemption rights 1,265 1,265
Stock options 60 67
------------- -------------
Weighted average number of
common shares assuming
dilution 17,145 17,149
============= =============
<PAGE 8>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
5. DEMAND NOTES
During the second quarter of 1998, the Company signed five 90-
day, unsecured demand notes totaling $42,900. These demand
notes bear interest at a rate of LIBOR plus 1.75%. The notes
mature at various dates between August 22, 1998 and September
26, 1998.
6. 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.
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
lessees, 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. These restated balances are included in the
accompanying financial statements as of and for the six months
ended June 30, 1998. As a result of the adoption of EITF 98-9,
substantially all of the percentage lease revenue recognized for
the six month period ended June 30, 1998 consists of base rent.
Consistent with the provisions of EITF 98-9, the accompanying
consolidated financial statements as of and for the three and
six months ended June 30, 1997 have not been restated, however,
the following pro forma amounts reflect the effect on the prior
periods as if EITF 98-9 had been in effect as of the beginning
of these periods:
<PAGE 9>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
Total revenue $ 4,110 $ 7,716
Total expenses 4,468 8,480
------------- -------------
Loss before allocation to
minority interest (358) (764)
Loss allocation to minority
interest (26) (55)
------------- -------------
Net loss (332) (709)
============= =============
Preferred stock distribution -- --
Net loss applicable
to common
shareholders $ (332) $ (709)
============= =============
Earnings per share:
Net loss per common share $ (0.02) $ (0.04)
============= =============
Net loss per common share
assuming dilution $ (0.02) $ (0.04)
============= =============
Weighted average number of
common shares 15,820 15,817
============= =============
Weighted average number of
common shares assuming
dilution 15,820 15,817
============= =============
<PAGE 10>
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
($ in thousands)
ASSETS
June 30, 1998 December 31, 1997
------------- -----------------
Current assets: (unaudited)
Cash and cash equivalents $ 6,975 $ 3,393
Accounts receivable 3,586 1,614
Due from Winston Hospitality, Inc. -- 1,636
Due from CapStar Management Company, L.P. 4,920 385
Deposits and other assets 318 197
------------- -----------------
Total current assets 15,799 7,225
Furniture, fixtures and equipment,
net of accumulated depreciation of
$35 and $5 305 241
Intangible assets, net of accumulated
amortization of $549 and $93 33,674 34,088
Deferred franchise costs, net of
accumulated amortization of $40 and $7 569 601
------------- -----------------
$ 50,347 $ 42,155
============= =================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,843 $ 1,459
Accrued expens 4,866 2,920
Percentage lease payable 10,537 5,682
Advance deposits 218 135
------------- -----------------
Total current liabilities 17,464 10,196
Members' capital 32,883 31,959
------------- -----------------
$ 50,347 $ 42,155
============= =================
See accompanying notes to financial statements.
<PAGE 11>
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF INCOME
($ in thousands)
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
Revenue:
Rooms $ 30,266 $ 52,839
Food and beverage 1,804 2,705
Telephone and other operating
departments 1,487 2,657
------------- -------------
Total revenue 33,557 58,201
------------- -------------
Operating costs and expenses:
Rooms 6,583 11,487
Food and beverage 1,375 2,058
Telephone and other operating
departments 741 1,214
Undistributed expenses:
Lease expense 14,792 24,865
Administrative and general 2,904 5,386
Sales and marketing 1,197 2,023
Franchise fees 2,228 3,836
Repairs and maintenance 1,544 2,766
Energy 1,214 2,109
Other 568 1,014
Depreciation and amortization 262 519
------------- -------------
Total expenses 33,408 57,277
------------- -------------
Net income $ 149 $ 924
============= =============
See accompanying notes to financial statements.
<PAGE 12>
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF CASH FLOWS
($ in thousands)
Six Months
Ended
June 30, 1998
-------------
Cash flows from operating activities:
Net income $ 924
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 519
Loss on sale of fixed assets 2
Increase in accounts receivable (336)
Increase in due from CapStar Management
Company, L.P. (4,535)
Increase in deposits and other assets (121)
Increase in accounts payable and accrued
expenses 2,330
Increase in percentage lease payable 4,855
Increase in advance deposits 83
-------------
Net cash provided by operating activities 3,721
-------------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (112)
Additions to intangible assets (42)
Proceeds from sale of fixed assets 15
-------------
Net cash used in investing activities (139)
-------------
Net increase in cash and cash equivalents 3,582
Cash and cash equivalents at beginning of period 3,393
-------------
Cash and cash equivalents at end of period $ 6,975
=============
See accompanying notes to financial statements.
<PAGE 13>
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, 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.
SUBSEQUENT EVENT
On August 1, 1998, CapStar Hotel Company and American General
Hospitality Corporation merged to form MeriStar Hospitality
Corporation and MeriStar Hotels & Resorts, Inc. As a result of the
merger, MeriStar Hospitality Operating Partnership, L.P. replaced
CapStar Management Company L.P. as the 99% member of CapStar Winston
Company, L.L.C.
<PAGE 14>
WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENTS OF INCOME
($ in thousands)
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
Revenue:
Rooms $ 20,488 $ 36,813
Food and beverage 764 1,388
Telephone and other
operating departments 1,024 1,766
------------- -------------
Total revenue 22,276 39,967
------------- -------------
Operating costs and expenses:
Rooms 4,095 7,526
Food and beverage 503 948
Telephone and other operating
departments 554 958
Undistributed expenses:
Lease 9,622 16,770
Administrative and general 2,369 4,603
Sales and marketing 755 1,417
Franchise fees 1,461 2,579
Repairs and maintenance 1,010 1,925
Energy 725 1,420
Other 418 786
Depreciation and
amortization 26 53
------------- -------------
Total expenses 21,538 38,985
------------- -------------
Net income $ 738 $ 982
============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE 15>
WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF CASH FLOWS
($ in thousands)
Six Months
Ended
June 30, 1997
--------------
Cash flows from operating activities:
Net income $ 982
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 53
Changes in assets and liabilities:
Accounts receivable - trade (681)
Prepaid expenses and other assets 87
Accounts payable - trade 242
Percentage lease payable to Lessor 2,543
Accrued expenses and other
liabilities 623
--------------
Net cash provided by operating
activities 3,849
--------------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment (57)
Advances to lessor, affiliates
and shareholders (63)
--------------
Net cash used in investion
activities (120)
--------------
Cash flows from financing activities:
Distributions to shareholders (392)
--------------
Net increase in cash and cash equivalents 3,337
Cash and cash equivalents at beginning
of period 5,463
--------------
Cash and cash equivalents at end of
period $ 8,800
==============
The accompanying notes are an integral part of the financial statements.
<PAGE 16>
WINSTON HOSPITALITY, INC.
NOTES 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.
Certain reclassifications have been made to the 1997 financial
statements to conform with the 1998 presentation as shown in the
CapStar Winston Company, L.L.C. financial statements. These
reclassifications have no effect on net income or shareholders'
equity previously reported.
<PAGE 17>
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 49 hotels (the "Current Hotels") as of June 30, 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 eight
hotels and opened three internally developed hotels in the first six
months of 1998 (the "1998 Hotels"). It currently leases 47 of the
total 49 Current Hotels to CapStar Winston Company, L.L.C. (the
"Lessee"), on of the Current Hotels to Bristol Hotel Company and
one of the Current Hotels to Prime Hospitality Corporation pursuant
to leases that provide for rent payments based, in part, on revenues
from the Current Hotels (the "Percentage Leases").
RESULTS OF OPERATIONS
The table below outlines the Company's investment in hotel properties
for the six months ended June 30, 1998 and 1997.
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
---------------------- ------------------------
Additions Properties Additions Properties
during owned during owned
the period at June 30 the period at June 30
Type of Hotel
- -------------
Limited-service hotels 1 36 1 29
Extended-stay hotels 5 7 -- 2
Full-service hotels 5 6 -- 1
-- -- -- --
Total 11 49 1 32
== == == ==
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 and six months ended June 30, 1998 versus actual
results for the three and six months ended June 30, 1997, the Company
has also provided an analysis of the pro forma results of the Company
for the three and six months ended June 30, 1998 versus pro forma
results for the three and six months ended June 30, 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 five acquired and three
developed hotels which opened in the first six months of 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 its third party
lessees 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
$12,835 as of June 30, 1998, as shown on the accompanying
Consolidated Balance Sheets and (ii) substantially all of the
percentage lease revenue consisting of base rent. This deferred
revenue balance is expected to be recognized in the third and fourth
quarters of 1998. The originally issued financial statements for the
quarter ended March 31, 1998 have been restated according to the
provisions of EITF 98-9. These restated balances are included in the
accompanying consolidated financial statements, as well as in the pro
forma operating results discussed below, for the three months and six
months ended June 30, 1998. The actual and pro forma operating
results for the three and six months ended June 30, 1997 have not
been restated according to the provisions of EITF 98-9. Accordingly,
the operating results for the three months and six months ended June
30, 1998 and the three months and six months ended June 30, 1997
included in the accompanying discussion are not comparable as the
results for the periods have been accounted for under different
revenue recognition methods.
<PAGE 18>
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
lessees 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 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 June 30, 1998, deferred revenue of $12,835 represents Percentage
Rent collected or due from lessees under the terms of the leases in
excess of one half of base rent but less than the remaining base
rent, which the Company expects to recognize as lease revenue in the
third and fourth 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 JUNE 30, 1998 VS ACTUAL - THREE MONTHS
ENDED JUNE 30, 1997
The Company had revenues of $7,282 in 1998, consisting of $7,217 of
Percentage Lease revenues and $65 of interest and other income.
Percentage Lease revenues decreased by $2,405 to $7,217 in 1998 from
$9,622 in 1997. This decrease was primarily comprised of a decrease
of $7,782 due to the change in accounting principle regarding revenue
recognition under EITF 98-9, offset in part by increases of $3,070
due to the 1998 Hotels and $2,317 due to the 1997 Acquired Hotels
owned for the entire three-month period in 1998.
Real estate taxes and property insurance costs incurred in 1998 were
$1,283, an increase of $692 from $591 in 1997. This increase was
primarily attributable to the 1997 Acquired Hotels and the 1998
Hotels that were not owned in the second quarter of 1997, as well as
increased property tax assessments and tax rates from 1997 to 1998.
General and administrative expenses increased $672 to $1,164 in 1998
from $492 in 1997. The increase was attributable to the increase in
size and activities of the Company in 1998. Interest expense
increased by $958 to $1,954 in 1998 from $996 in 1997. This increase
was primarily attributable to an increase in the weighted average
outstanding debt balance of $61,426 from $56,660 in 1997 to $118,086
in 1998, resulting in an increase in interest expense of $1,133,
offset by an increase of $125 in capitalized interest costs related
to development and renovation projects as well as a decrease in line
of credit fees totaling $50. Interest rates remained constant
between the two quarters. Depreciation increased $1,568 to $3,916 in
1998 from $2,348 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 JUNE 30, 1998 VS PRO FORMA - THREE
MONTHS ENDED JUNE 30, 1997
The Company had revenues of $7,622 for the three months ended June
30, 1998, consisting of $7,557 of Percentage Lease revenues and $65
of interest and other income. Percentage Lease revenues decreased by
$5,755 to $7,557 in 1998 from $13,312 in 1997. This change was
primarily due to a decrease of $7,704 due to the change in accounting
principle regarding revenue recognition under EITF 98-9, offset in
part by an increase of $1,932 attributable to the opening of eight
hotels in 1998.
Real estate taxes and property insurance costs incurred in 1998 were
$1,356, an increase of $390 from $966 in 1997. The increase was due
primarily to increased property tax assessments and tax rates from
1997 to 1998 as well as additional taxes and insurance paid due to
the opening of eight hotels in 1998. General and administrative
expenses increased $653 to $1,168 in 1998 from $515 in 1997. The
increase was primarily attributable to the increase in size and
activities of the Company from 1997 to 1998. Interest expense
increased by $850 to $1,975 in 1998 from $1,125 in 1997. The
increase was attributable to $1,064 of additional interest expense
related primarily to borrowings under the line of credit to fund
acquisitions of the five new hotels which opened in 1998 as well as
the development of three additional hotels which opened in 1998.
This increase was offset by both the capitalization of additional
interest costs totaling $125, in connection with the development and
certain renovation projects during the respective periods, as well as
a reduction in line of credit
<PAGE 19>
fees totaling $89. Depreciation increased $921 to $4,011 in 1998
from $3,090 in 1997 primarily due to the opening of eight hotels
in 1998 and renovations and other capital expenditures during 1997
and 1998.
ACTUAL - SIX MONTHS ENDED JUNE 30, 1998 VS ACTUAL - SIX MONTHS
ENDED JUNE 30, 1997
The Company had revenues of $12,350 in 1998, consisting of $12,236 of
Percentage Lease revenues and $114 of interest and other income.
Percentage Lease revenues decreased by $4,534 to $12,236 in 1998 from
$16,770 in 1997. Of this decrease, $12,835 was due to the change in
accounting principle regarding revenue recognition under EITF 98-9,
offset in part by increases of $3,553 due to the 1998 Hotels and
$4,561 due to the 1997 Acquired Hotels owned for the entire six-month
period in 1998.
Real estate taxes and property insurance costs incurred in 1998 were
$2,262, an increase of $1,106 from $1,156 in 1997. This increase was
primarily attributable to the 1997 Acquired Hotels and 1998 Hotels
that were not owned in the first six months of 1997, as well as
increased property tax assessments and tax rates from 1997 to 1998.
General and administrative expenses increased $901 to $1,763 in 1998
from $862 in 1997. The increase was attributable to the increase in
size and activities of the Company in 1998. Interest expense
increased by $768 to $2,579 in 1998 from $1,811 in 1997. This
increase was primarily attributable to an increase in the weighted
average outstanding debt balance of $38,297 from $50,873 in 1997 to
$89,170 in 1998, resulting in an increase in interest expense of
$1,435, offset by an increase of $592 in capitalized interest costs
related to development and renovation projects, as well as a decrease
in line of credit fees totaling $75. Interest rates remained
constant between the two periods. Depreciation increased $2,504 to
$7,074 in 1998 from $4,570 in 1997, primarily due to depreciation
related to the 1997 Acquired Hotels, the 1998 Hotels and renovations
completed during 1997 and 1998.
PRO FORMA - SIX MONTHS ENDED JUNE 30, 1998 VS PRO FORMA - SIX MONTHS
ENDED JUNE 30, 1997
The Company had revenues of $13,594 for the six months ended June 30,
1998, consisting of $13,480 of Percentage Lease revenues and $114 of
interest and other income. Percentage Lease revenues decreased by
$10,679 to $13,480 in 1998 from $24,159 in 1997. Of this decrease,
$13,361 was due to the change in accounting principle regarding
revenue recognition under EITF 98-9. This decrease was offset in
part by an increase of $2,097 attributable to the opening of eight
hotels in 1998, as well as an increase of $585 primarily due to
higher room rates in 1998 than 1997.
Real estate taxes and property insurance costs incurred in 1998 were
$2,500, an increase of $572 from $1,928 in 1997. The increase was
due primarily to increased property tax assessments and tax rates
from 1997 to 1998 as well as additional taxes and insurance paid due
to the opening of eight hotels in 1998. General and administrative
expenses increased $862 to $1,772 in 1998 from $910 in 1997. The
increase was primarily attributable to the increase in size and
activities of the Company from 1997 to 1998. Interest expense
increased by $1,079 to $3,265 in 1998 from $2,186 in 1997. The
increase was attributable to $1,767 of additional interest expense
related primarily to borrowings under the line of credit to fund
acquisitions of the five new hotels which opened in 1998 as well as
the development of three additional hotels which opened in 1998,
offset by both the capitalization of additional interest costs,
totaling $592, in connection with the development and certain
renovation projects during the respective periods, as well as a
reduction in line of credit fees totaling $96. Depreciation
increased $1,302 to $7,417 in 1998 from $6,115 in 1997 primarily due
to the opening of eight hotels in 1998 and renovations and other
capital expenditures during 1997 and 1998.
THE LESSEE
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 November 1997 Winston
Hospitality, Inc. purchase transaction, no comparative data is
available for the period January 1, 1997 through June 30, 1997.
However, for purposes of this management's discussion and analysis,
the financial information of the Lessee for the three and six months
ended June 30, 1998 will be compared with the financial information
of Winston Hospitality, Inc. for the three and six months ended June
30, 1997. The Winston Hospitality, Inc. financial information for
the three and six months ended June 30, 1997 contained in the tables
below has been reclassified and grouped according to the Lessee
format in order to facilitate a comparison of the data.
<PAGE 20>
ACTUAL - THREE MONTHS ENDED JUNE 30, 1998 VS ACTUAL - THREE MONTHS
ENDED JUNE 30, 1997
The following table sets forth certain historical financial
information for the Current Hotels for the periods indicated:
Three Months Three Months
Ended Ended
June 30, 1998 June 30, 1997
---------------- ----------------
Revenue:
Rooms $ 30,266 90.2% $ 20,488 92.0%
Food and beverage 1,804 5.4% 764 3.4%
Telephone and other
operating departments 1,487 4.4% 1,024 4.6%
---------------- ----------------
Total revenue 33,557 100.0% 22,276 100.0%
Operating costs and expenses:
Rooms 6,583 19.6% 4,095 18.4%
Food and beverage 1,375 4.1% 503 2.3%
Telephone and other
operating departments 741 2.2% 554 2.5%
Undistributed expenses:
Lease 14,792 44.1% 9,622 43.1%
Administrative and general 2,904 8.7% 2,369 10.6%
Sales and marketing 1,197 3.6% 755 3.4%
Franchise fees 2,228 6.6% 1,461 6.6%
Repairs and maintenance 1,544 4.6% 1,010 4.5%
Energy 1,214 3.6% 725 3.3%
Other 568 1.7% 418 1.9%
Depreciation and
amortization 262 0.8% 26 0.1%
---------------- ----------------
Total expenses 33,408 99.6% 21,538 96.7%
---------------- ----------------
Net income $ 149 0.4% $ 738 3.3%
---------------- ----------------
The Lessee had room revenues of $30,266 in 1998, up $9,778 from
$20,488 for Winston Hospitality, Inc. in 1997. The increase in room
revenues was due to an increase in room revenues of (i) $622 for the
1994 Hotels, the 1995 Acquired Hotels and the 1996 Acquired Hotels,
(ii) $4,718 for the 1997 Acquired Hotels, and (iii) $4,438 for the
1998 Hotels. Food and beverage revenue increased $1,040, to $1,804
in 1998 from $764 for Winston Hospitality, Inc. in 1997, primarily
due to the 1997 Acquired Hotels and 1998 Hotels. Telephone and other
operating departments revenue increased $463 to $1,487 in 1998 from
$1,024 for Winston Hospitality, Inc. 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 $33,408, up $11,870 from
$21,538 for Winston Hospitality, Inc. in 1997. The increase, as
shown above, in all expense categories except depreciation and
amortization expense, was primarily attributable to the operation of
a greater number of hotels for the three months ended June 30, 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,
decreasing the incremental cost per hotel. Depreciation and
amortization expense increased due to amortization related to
goodwill and other intangible assets arising out of the purchase of
Winston Hospitality, Inc. by CMC and CapStar Hotel Company.
Net income decreased for the three months ended June 30, 1998 as a
result of the opening of seven new development hotels during the
first and second quarters. These development hotels endured losses
totaling $765 for the second quarter. The 32 hotels acquired prior
to June 30, 1997 generated net income, excluding amortization of
goodwill of $244 not present in 1997, totaling $783 for the second
quarter, a 2.4% increase from the prior year. The eight hotels
acquired subsequent to June 30, 1997 generated net income of $375 for
the second quarter. However, when these amounts are offset by the
losses experienced by the development hotels, the second quarter net
income totaled $149. Until these development properties gain exposure
in their respective markets and are able to surpass the break-even
point, they will negatively impact the Lessee's operating results.
<PAGE 21>
ACTUAL - SIX MONTHS ENDED JUNE 30, 1998 VS ACTUAL - SIX MONTHS ENDED
JUNE 30, 1997
The following table sets forth certain historical financial
information for the Current Hotels for the periods indicated:
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
---------------- ----------------
Revenue:
Rooms $ 52,839 90.8% $ 36,813 92.1%
Food and beverage 2,705 4.6% 1,388 3.5%
Telephone and other
operating departments 2,657 4.6% 1,766 4.4%
---------------- ----------------
Total revenue 58,201 100.0% 39,967 100.0%
---------------- ----------------
Operating costs and expenses:
Rooms 11,487 19.7% 7,526 18.8%
Food and beverage 2,058 3.5% 948 2.4%
Telephone and other
operating departments 1,214 2.1% 958 2.4%
Undistributed expenses:
Lease 24,865 42.7% 16,770 42.0%
Administrative and general 5,386 9.3% 4,603 11.5%
Sales and marketing 2,023 3.5% 1,417 3.5%
Franchise fees 3,836 6.6% 2,579 6.5%
Repairs and maintenance 2,766 4.8% 1,925 4.8%
Energy 2,109 3.6% 1,420 3.6%
Other 1,014 1.7% 786 2.0%
Depreciation and
amortization 519 0.9% 53 0.1%
---------------- ----------------
Total expenses 57,277 98.4% 38,985 97.5%
---------------- ----------------
Net income $ 924 1.6% $ 982 2.5%
================ ================
The Lessee had room revenues of $52,839 in 1998, up $16,026 from
$36,813 for Winston Hospitality, Inc. in 1997. The increase in room
revenues was due to an increase in room revenues of (i) $2,170 for
the 1994 Hotels, the 1995 Acquired Hotels and the 1996 Acquired
Hotels, (ii) $8,762 for the 1997 Acquired Hotels, and (iii) $5,094
for the 1998 Hotels. Food and beverage revenue increased $1,317, to
$2,705 in 1998 from $1,388 for Winston Hospitality, Inc. in 1997,
primarily due to the 1997 Acquired Hotels and 1998 Hotels. Telephone
and other operating departments revenue increased $891 to $2,657 in
1998 from $1,766 for Winston Hospitality, Inc. 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 $57,277, up $18,292 from
$38,985 for Winston Hospitality, Inc. in 1997. The increase, as
shown above, in all expense categories except depreciation and
amortization expense, was primarily attributable to the operation of
a greater number of hotels for the six months ended June 30, 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,
decreasing the incremental cost per hotel. Depreciation and
amortization expense increased due to amortization related to
goodwill and other intangible assets arising out of the purchase of
Winston Hospitality, Inc. by CMC and CapStar Hotel Company.
Net income decreased for the six months ended June 30, 1998 as a
result of the opening of seven new development hotels during the
first and second quarters. These development hotels endured losses
totaling $916 for the six months ended June 30, 1998. The 32 hotels
acquired prior to June 30, 1997 generated net income, excluding
amortization of goodwill of $488 not present in 1997, totaling $1,518
for the six months ended June 30, 1998, a 54.6% increase from the
prior year. The eight hotels acquired subsequent to June 30, 1997
generated net income of $810 for the six months ended June 30, 1998.
However, when these amounts are offset by the losses experienced by
the development hotels, the net income for the six months ended June
30, 1998 totaled $924. Until these development properties gain
exposure in their respective markets and are able to surpass the
break-even point, they will negatively impact the Lessee's operating
results.
<PAGE 22>
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which
is principally derived from Percentage Leases. For the six months
ended June 30, 1998, cash flow provided by operating activities was
$13,698. Adjusted funds from operations, as defined below, was
$8,839 for the quarter ended June 30, 1998 and $14,936 for the six
months ended June 30, 1998. 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. For
the six months ended June 30, 1998, the Company declared
distributions of $13,213 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 six
months ended June 30, 1998 totaled $117,189, including $94,173
related to the acquisition of eight of the 1998 Hotels, $7,964
related to the development of three of the 1998 Hotels, $7,250 for
hotel renovations and $7,847 for the development of one additional
extended-stay hotel, one additional limited-service hotel and three
additional full-service hotels, which are expected to cost
approximately $57,985, of which approximately $11,773 has been
financed. The total cost of the 1998 Hotels was $124,453, including
$30,280 related to the development of three Homewood Suites hotels in
Raleigh, N.C., Lake Mary, FL and Alpharetta, GA.
The Company plans to spend approximately $7,300 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 six
months ended June 30, 1998, the Company set aside $2,829 for such
reserves. These reserves are in addition to amounts spent on normal
repairs and maintenance which have approximated 5.2% of room revenues
for both the six months ended June 30, 1998 and 1997, and are paid by
the Lessee.
The Company's net cash provided by financing activities during the
six months ended June 30, 1998 totaled $103,735, including an
increase of $73,795 in the line of credit borrowings, an increase of
$42,900 in demand note borrowings and $600 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 $12,615 and
the payment of distributions to minority interest holders of $940.
The Company's outstanding bank debt balance as of June 30, 1998 was
$160,776. This amount consisted of $117,876 outstanding under its
$125,000 line of credit as well as $42,900 outstanding under various
90-day demand notes (see Note 5 in the accompanying Notes to
Consolidated Financial Statements). The Company is currently in
negotiations with several lenders to refinance its $125 million line
of credit and also obtain long-term fixed-rate financing to replace
its current amount outstanding under demand notes totaling $42,900.
The Company anticipates finalizing these negotiations by the end of
the current fiscal year, however, there can be no assurances that the
Company will be successful in these efforts.
As of June 30, 1998, the Company has collateralized $123,190 of its
$125,000 line of credit with 28 of its Current Hotels. 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 June 30, 1998 was
$1,810. 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
June 30, 1998, the Company had additional borrowing capacity under
the debt limitation of approximately $55,400 assuming it invests all
borrowings in additional hotels.
The Company is continually evaluating its hotel portfolio and
acquisition opportunities and intends to acquire and develop
additional hotel properties that meet its investment criteria. As
part of this analysis, the Company is also considering selling
certain assets as attractive opportunities present themselves. It is
expected that future hotel acquisitions will be financed, in whole or
in part, from additional follow-on offerings, borrowings under the
line of credit or additional demand notes, joint venture agreements,
proceeds from the disposition of hotels and/or 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 23>
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 implemented EITF 98-9 during the second quarter of 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 Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) before
allocation to minority
interest $ (1,124) $ 5,178 $ (1,504) $ 8,344
Plus: depreciation 3,916 2,348 7,074 4,570
Less: preferred stock
dividends 1,734 -- 3,469 --
-------- -------- -------- --------
FFO 1,058 7,526 2,101 12,914
Deferred percentage
lease revenue 7,781 -- 12,835 --
-------- -------- -------- --------
Adjusted FFO $ 8,839 $ 7,526 $ 14,936 $ 12,914
======== ======== ======== ========
Weighted average number
of common shares
assuming dilution 18,068 17,145 18,055 17,149
-------- -------- -------- --------
FFO per share $ 0.06 $ 0.44 $ 0.12 $ 0.75
======== ======== ======== ========
Adjusted FFO per share $ 0.49 $ 0.44 $ 0.83 $ 0.75
======== ======== ======== ========
YEAR 2000 MANAGEMENT
In order to address the computer industry's "Year 2000" problem, the
Company is in the process of evaluating hardware and software
components in place at its principal offices. Management does not
believe the costs for any needed upgrades to be significant. The
Company is also in the process of determining whether the companies
that manage its hotels are in the process of studying the "Year 2000"
issue. Upon completion, the Company will determine the extent to
which it is
<PAGE 24>
vulnerable to third parties' failure to remediate their
own "Year 2000" issues and the costs associated with resolving this
issue.
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. 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 25>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 5, 1998, the Annual Meeting of Shareholders was held
and the following matters were submitted to the shareholders
for a vote. With respect to the second proposal below,
the Annual Meeting was adjourned and reconvened on July 15,
1998 to obtain additional votes. There were 13,820,229
shares of Common Stock and 3,000,000 shares of Series A
Preferred Stock either present or evidenced by proxy.
Holders of Series A Preferred Stock were entitled to vote
only on Proposal 2. All proposals were approved except
Proposal 2. Set forth below is a brief description of the
matters voted on and the number of votes cast for, against
or withheld, as well as the number of abstentions and
broker non-votes.
Proposal 1: Election of Directors:
Number of
Votes Against Broker
Name Votes For or Withheld Non-votes Totals
Charles M. Winston 13,730,367 89,862 0 13,820,229
Robert W. Winston 13,731,258 88,971 0 13,820,229
James H. Winston 13,727,358 92,871 0 13,820,229
David C. Sullivan 13,716,958 103,271 0 13,280,229
Thomas F. Darden 13,729,058 91,171 0 13,820,229
Richard L. Daugherty 13,717,558 102,671 0 13,820,229
Edwin B. Borden 13,731,158 89,071 0 13,820,229
Proposal 2: Delete Article 7 of the Company's Articles of
Incorporation which limits the Company's level of permitted
indebtedness to 45% of investments in hotel properties:
Common Stock Vote:
Votes for: 8,175,193
Votes against or withheld: 550,721
Votes abstained: 157,052
Broker non-votes: 4,937,263
----------
Total 13,820,229
Preferred Stock Vote:
Votes for: 1,571,370
Votes against or withheld: 346,360
Votes abstained: 86,258
Broker non-votes: 996,012
----------
Total 3,000,000
Proposal 3: Amend Article 15 of the Company's Articles of
Incorporation to provide that nothing contained therein
will prohibit the settlement of any transaction entered
into through the facilities of the New York Stock Exchange:
Votes for: 8,607,320
Votes against or withheld: 131,615
Votes abstained: 144,031
Broker non-votes: 4,937,263
----------
Total 13,820,229
<PAGE 26>
Proposal 4: Amend the Company's Stock Incentive Plan:
Votes for: 6,635,529
Votes against or withheld: 2,078,123
Votes abstained: 169,313
Broker non-votes: 4,937,264
----------
Total 13,820,229
Proposal 5: Ratification of the accounting firm Coopers & Lybrand
L.L.P. as external auditors:
Votes for: 13,442,026
Votes against or withheld: 59,935
Votes abstained: 75,035
Broker non-votes: 243,233
----------
Total 13,820,229
Item 5. Other Information
Shareholder Proposals. As disclosed in more detail in the
Company's proxy statement in connection with its 1998
Annual Meeting of Shareholders, as filed with the
Securities and Exchange Commission on April 1, 1998, any
proposals which shareholders intend to present for a vote
of the shareholders at the Company's 1999 Annual Meeting of
Shareholders and which such shareholders desire to have
included in the Company's Proxy Statement and form of proxy
relating to that meeting must be sent to the Company's
principal executive offices, marked to the attention of the
Secretary of the Company, and received by the Company at
such offices on or before December 11, 1998. Proposals
received after December 11, 1998 will not be considered for
inclusion in the Company's proxy materials for its 1999
Annual Meeting of Shareholders.
In addition, if a shareholder intends to present a matter
for a vote at the 1999 Annual Meeting of Shareholders,
other than by submitting a proposal for inclusion in the
Company's Proxy Statement for that meeting, the shareholder
must give timely notice in accordance with SEC rules. To
be timely, a shareholder's notice must be received by the
Company's Corporate Secretary at its principal office, 2209
Century Drive, Suite 300, Raleigh, North Carolina 27612, on
or before February 15, 1999.
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 June 30, 1998.
<PAGE 27>
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 14, 1998 /s/ James D. Rosenberg
------------------------- --------------------------------
James D. Rosenberg
Chief Financial Officer and
Chief Operating Officer
(Authorized officer and Principal
Financial Officer)
<PAGE 28>
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended June 30, 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 JUNE 30, 1998 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE
30, 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> JUN-30-1998
<CASH> 408
<SECURITIES> 0
<RECEIVABLES> 10,457
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 417,883
<DEPRECIATION> 28,632
<TOTAL-ASSETS> 402,527
<CURRENT-LIABILITIES> 22,489
<BONDS> 0
0
30
<COMMON> 163
<OTHER-SE> 205,075
<TOTAL-LIABILITY-AND-EQUITY> 402,527
<SALES> 7,217
<TOTAL-REVENUES> 7,282
<CGS> 0
<TOTAL-COSTS> 6,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,954
<INCOME-PRETAX> (1,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (847)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
