<PAGE> 1
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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 March 31, 2000 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.)
2626 GLENWOOD AVENUE
RALEIGH, NORTH CAROLINA 27608
(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, $.01 par value, outstanding on
April 30, 2000 was 16,896,068.
================================================================================
<PAGE> 2
WINSTON HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999 3
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C. (1)
Note to Financial Statements 8
Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 9
Unaudited Statements of Operations for the three months ended
March 31, 2000 and 1999 10
Unaudited Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
(1) The financial statements of CapStar Winston Company, L.L.C. ("CapStar
Winston") are included in this report as they contain material
information with respect to Winston Hotels, Inc.'s (the "Company's")
investment in hotel properties. As of March 31, 2000, CapStar Winston
served as the lessee of 48 of the Company's 50 hotels. CapStar Winston
is not affiliated with the Company other than through its lessee
relationship.
2
<PAGE> 3
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
<S> <C> <C>
Land $ 42,362 $ 42,704
Buildings and improvements 362,592 364,481
Furniture and equipment 38,677 38,348
--------- ---------
Operating properties 443,631 445,533
Less accumulated depreciation 63,035 58,366
--------- ---------
380,596 387,167
Properties under development 214 1,703
--------- ---------
Net investment in hotel properties 380,810 388,870
Corporate FF&E, net 1,210 871
Cash 219 28
Lease revenue receivable 8,923 7,611
Investment in joint ventures 1,669 184
Deferred expenses, net 3,834 4,072
Prepaid expenses and other assets 5,120 4,435
--------- ---------
Total assets $ 401,785 $ 406,071
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 69,707 $ 69,975
Due to banks 104,000 104,500
Deferred percentage lease revenue 5,983 --
Accounts payable and accrued expenses 5,772 5,490
Distributions payable 6,829 6,806
Minority interest in Partnership 9,475 10,222
--------- ---------
Total liabilities 201,766 196,993
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding (liquidation preference
of $76,734) 30 30
Common stock, $.01 par value, 50,000,000 shares authorized,
16,896,068 and 16,813,823 shares issued and outstanding 169 168
Additional paid-in capital 229,806 229,106
Unearned compensation (1,017) (524)
Distributions in excess of earnings (28,969) (19,702)
--------- ---------
Total shareholders' equity 200,019 209,078
--------- ---------
Total liabilities and shareholders' equity $ 401,785 $ 406,071
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Revenue: March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Percentage lease revenue (see Note below) $ 9,650 $ 14,689
Interest, joint venture and other income 158 117
---------- ----------
Total revenue 9,808 14,806
Expenses:
Real estate taxes and property and casualty insurance 2,083 1,746
General and administrative 1,136 1,377
Interest 3,270 3,090
Depreciation 5,261 4,977
Amortization 227 165
---------- ----------
Total expenses 11,977 11,355
Income (loss) before loss on sale of property, allocation to
minority interest, and cumulative effect of change in
accounting principle (2,169) 3,451
Loss on sale of property (262) --
---------- ----------
Income (loss) before allocation to minority interest and
cumulative effect of change in accounting principle (2,431) 3,451
Income (loss) allocation to minority interest (297) 165
Income (loss) before cumulative effect of change in accounting
principle (2,134) 3,286
---------- ----------
Cumulative effect of change in accounting principle - gross (720) --
Cumulative effect of change in accounting principle - allocation to
minority interest (52) --
---------- ----------
Cumulative effect of change in accounting principle - net (668) --
---------- ----------
Net income (loss) (2,802) 3,286
Preferred stock distribution (1,734) (1,734)
---------- ----------
Net income (loss) applicable to common shareholders $ (4,536) $ 1,552
========== ==========
Earnings per share:
Income (loss) before cumulative effect of change in accounting
principle per common share $ (0.23) $ 0.10
========== ==========
Income (loss) before cumulative effect of change in accounting
principle per common share assuming dilution $ (0.23) $ 0.10
========== ==========
Net income (loss) per common share $ (0.27) $ 0.10
========== ==========
Net income (loss) per common share assuming dilution $ (0.27) $ 0.10
========== ==========
Weighted average number of common shares 16,869 16,331
Weighted average number of common shares assuming dilution 18,168 18,069
Selected Proforma Financial Data: (see Note below)
Percentage lease revenue $ 9,650 $ 8,850
Net loss $ (2,134) $ (1,991)
Net loss applicable to common shareholders $ (3,868) $ (3,726)
Net loss per common share $ (0.23) $ (0.23)
========== ==========
Net loss per common share assuming dilution $ (0.23) $ (0.23)
========== ==========
Weighted average number of common shares 16,869 16,331
Weighted average number of common shares assuming dilution 18,168 18,069
</TABLE>
Note: The information provided in the Selected Proforma Financial Data is shown
as if the Company had adopted SAB 101 prior to January 1, 1999. Accordingly, the
Selected Proforma Financial Data for the three months ended March 31, 1999 has
been presented as if the Company adopted SAB 101 prior to January 1, 1999 and
the cumulative effect of change in accounting principle has been removed for the
three months ended March 31, 2000. See Note 3.
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,802) $ 3,286
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest (349) 165
Depreciation 5,261 4,977
Amortization 227 165
Loss on sale of hotel properties 262 --
Unearned compensation amortization 206 79
Changes in assets and liabilities:
Lease revenue receivable (1,312) (1,222)
Deferred lease revenue 5,983 --
Prepaid expenses and other assets (562) (539)
Accounts payable and accrued expenses 282 113
----------- -----------
Net cash provided by operating activities 7,196 7,024
----------- -----------
Cash flows from investing activities:
Prepaid acquisition costs -- (5)
Deferred disposition costs (25) (33)
Investment in hotel properties (1,869) (6,654)
Investment in joint ventures/return of capital 32 --
Sale of hotel properties 2,497 --
----------- -----------
Net cash provided by/(used in) investing activities 635 (6,692)
----------- -----------
Cash flows from financing activities:
Fees paid in connection with financing facilities (34) (1,180)
Purchase of interest rate cap agreement -- (57)
Fees paid to register additional shares (32) --
Payment of distributions to shareholders (6,442) (6,302)
Payment of distributions to minority interest (364) (487)
Net increase/(decrease) due to banks (500) 7,915
Decrease in long-term debt (268) (249)
----------- -----------
Net cash used in financing activities (7,640) (360)
----------- -----------
Net increase/(decrease) in cash 191 (28)
Cash at beginning of period 28 33
----------- -----------
Cash at end of period $ 219 $ 5
=========== ===========
Supplemental disclosure:
Cash paid for interest $ 2,048 $ 2,901
=========== ===========
Summary of non-cash investing and financing activities:
Contribution of land parcel to joint venture 1,517 --
Distributions to shareholders declared but not paid 6,465 6,308
Distributions to minority interest declared but not paid 364 487
Deferred equity compensation 699 175
Minority interest payable adjustment due to the issuance of
common shares 34 29
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, the information for the three months ended March 31,
2000 and 1999 is not necessarily indicative of the results for a full
year. This Form 10-Q should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
2. ACCOUNTING POLICIES
Certain reclassifications have been made to the 1999 financial
statements to conform with the 2000 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.
3. ADOPTION AND IMPACT OF SAB 101
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides guidance on
revenue recognition. SAB 101 is effective for fiscal years beginning
after December 15, 1999. SAB 101 requires that a lessor not recognize
contingent rental income until annual specified hurdles have been
achieved by the lessee. During 1999 and prior years, consistent with
industry practice, the Company recognized contingent rentals throughout
the year since it was considered probable that the lessee would exceed
the annual specified hurdles. The Company has reviewed the terms of its
leases and has determined that the provisions of SAB 101 materially
impact the Company's revenue recognition on an interim basis,
effectively deferring the recognition of revenue from its leases from
the first and second quarters of the calendar year to the third and
fourth quarters. SAB 101 will impact the Company's revenue recognition
on an annual basis, although to a much lesser degree, as seven of the
Company's 50 leases have fiscal year ends which differ from the
Company's fiscal year end of December 31. (Had the Company adopted the
provisions of SAB 101 on January 1, 1999, the Company would have
deferred $720 of percentage lease revenue for the year ended December
31, 1999, representing only 1.2% of total percentage lease revenue for
the year.) The Company has accounted for SAB 101 as a change in
accounting principle effective January 1, 2000, and therefore has not
restated the 1999 or prior years' financial statements.
As of March 31, 2000, the Company's deferred revenue resulting from the
adoption of SAB 101 totaled $5,983, the majority of which will be
recognized in the third and fourth quarters of 2000. As noted above,
the Company has seven leases with non-calendar year fiscal years. These
seven leases generated $720 of revenue, that, had SAB 101 been in
effect, would have been deferred as of December 31, 1999, and is shown
as a "cumulative effect of change in accounting principle" on the
accompanying Statement of Operations. During the first quarter of 2000,
the Company recognized $350 of the total cumulative effect of change in
accounting principle, which is included in percentage lease revenue.
The remaining unrealized portion of the cumulative effect of change in
accounting principle will be recognized during the second quarter of
2000.
6
<PAGE> 7
4. PRO FORMA FINANCIAL INFORMATION
The following selected financial data of the Company is presented as if
the Company had not adopted SAB 101 effective January 1, 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---------- --------
(proforma) (actual)
<S> <C> <C>
Percentage lease and other revenue $15,071 $14,806
Net Income $ 2,754 $ 3,286
Net income applicable to common shareholders $ 1,020 $ 1,552
Net income per common share $ 0.06 $ 0.10
======= =======
Net income per common share assuming dilution $ 0.06 $ 0.10
======= =======
Weighted average number of common shares 16,869 16,331
Weighted average number of common shares assuming dilution 18,168 18,069
</TABLE>
5. EARNINGS PER SHARE
The following is a reconciliation of the net income (loss) applicable
to common shareholders used in the net income (loss) per common share
calculation to the net income (loss) assuming dilution used in the net
income (loss) per common share - assuming dilution calculation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------- ------
<S> <C> <C>
Net income (loss) $(2,802) $3,286
Less: preferred stock distribution 1,734 1,734
------- ------
Net income (loss) applicable to common shareholders (4,536) 1,552
Plus: income (loss) allocation to minority interest (297) 165
Plus: cumulative effect of change in accounting principle-
allocation to minority interest (52) --
------- ------
Net income (loss) assuming dilution $(4,885) $1,717
======= ======
</TABLE>
The following is a reconciliation of the weighted average shares used
in the calculation of net income (loss) per common share to the
weighted average shares used in the calculation of net income (loss)
per common share - assuming dilution:
THREE MONTHS ENDED MARCH 31,
2000 1999
------ ------
Weighted average number of common shares 16,869 16,331
Units with redemption rights 1,299 1,738
------ ------
Weighted average number of common shares
assuming dilution 18,168 18,069
====== ======
During the quarter ended March 31, 2000, the Company declared quarterly
cash dividends of $0.28 per common share and $0.578125 per preferred
share.
6. SALE OF LONDON, KENTUCKY COMFORT SUITES HOTEL
On February 15, 2000, the Company sold its Comfort Suites hotel in
London, Kentucky for cash proceeds of $2,497, resulting in a loss of
$262 as shown on the accompanying Statement of Operations. Percentage
lease revenue generated from this hotel was $29 and $83, for the first
quarter of 2000 and 1999, respectively.
7
<PAGE> 8
CAPSTAR WINSTON COMPANY, L.L.C.
NOTE TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements are prepared by and are the sole
responsibility of CapStar Winston Company, L.L.C. CapStar Winston Company,
L.L.C. leased 48 of the Company's 50 hotels as of March 31, 2000 and other than
this lessee relationship, is not affiliated with the Company. 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.
Certain reclassifications have been made to the 1999 financial statements to
conform with the 2000 presentation. These reclassifications have no effect on
net income or members' capital previously reported.
8
<PAGE> 9
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
March 31, 2000 December 31, 1999
-------------- -----------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,851 $ 1,051
Accounts receivable, net of allowance for doubtful accounts of $97
and $98 3,132 2,773
Due from affiliates 10,301 8,667
Deposits and other assets 361 455
---------- ----------
Total current assets 16,645 12,946
---------- ----------
Furniture, fixtures and equipment, net of accumulated depreciation of $153
and $136 223 240
Intangible assets, net of accumulated amortization of $2,173 and $1,942 32,202 32,433
Deferred franchise costs, net of accumulated amortization of $140 and $128 536 559
Restricted cash 43 38
---------- ----------
Total assets $ 49,649 $ 46,216
========== ==========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,188 $ 2,018
Accrued expenses 5,975 3,032
Percentage lease payable to Winston Hotels, Inc. 8,793 7,573
Advance deposits 552 151
---------- ----------
Total current liabilities 16,508 12,774
---------- ----------
Members' capital 33,141 33,442
---------- ----------
Total liabilities and members' capital $ 49,649 $ 46,216
========== ==========
</TABLE>
See accompanying note to financial statements.
9
<PAGE> 10
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Revenue:
Rooms $ 30,797 $30,686
Food and beverage 1,907 1,915
Telephone and other operating departments 1,592 1,555
-------- -------
Total revenue 34,296 34,156
-------- -------
Operating costs and expenses:
Rooms 7,149 6,953
Food and beverage 1,413 1,412
Telephone and other operating departments 892 782
Undistributed expenses:
Lease 13,980 13,904
Administrative and general 3,585 3,562
Sales and marketing 1,764 1,819
Franchise fees 2,182 2,153
Repairs and maintenance 1,595 1,587
Energy 1,429 1,423
Other 348 277
Depreciation and amortization 260 265
-------- -------
Total expenses 34,597 34,137
-------- -------
Net income (loss) $ (301) $ 19
======== =======
</TABLE>
See accompanying note to financial statements.
10
<PAGE> 11
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (301) $ 19
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 260 265
Write-off of deferred franchise costs 11 --
Changes in operating assets and liabilities:
Accounts receivable (359) (571)
Due from affiliates (1,634) (2,380)
Deposits and other assets 94 (68)
Restricted cash (5) 179
Accounts payable and accrued expenses 2,113 2,301
Percentage lease payable to Winston Hotels, Inc. 1,220 1,223
Advance deposits 401 32
------- -------
Net cash provided by operating activities 1,800 1,000
------- -------
Cash flows from investing activities:
Additions to intangible assets -- (28)
------- -------
Net cash used in investing activities -- (28)
------- -------
Net increase in cash and cash equivalents 1,800 972
Cash and cash equivalents at beginning of period 1,051 2,075
------- -------
Cash and cash equivalents at end of period $ 2,851 $ 3,047
======= =======
</TABLE>
See accompanying note to financial statements.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ IN THOUSANDS)
OVERVIEW
Winston Hotels, Inc. (the "Company") operates as a real estate investment trust
("REIT") to invest in hotel properties. The Company owned 50 hotels (the
"Current Hotels") as of March 31, 2000. The Company owned 38 hotels as of
December 31, 1997, and acquired eight hotels and opened five internally
developed hotels in 1998 (the "1998 Hotels"). It currently leases 48 of the
total 50 Current Hotels to CapStar Winston Company, L.L.C. ("CapStar Winston"),
one of the Current Hotels to Bristol Hotels & Resorts, Inc. ("Bristol") and one
of the Current Hotels to Prime Hospitality Corp. ("Prime") under leases that
provide for rent payments based, in part, on revenues from the Current Hotels
("Percentage Leases") through which the Company receives its principal source of
revenue.
RESULTS OF OPERATIONS
For the three months ended March 31, 2000 and March 31, 1999, the difference in
operating results is primarily attributable to the adoption of the SEC Staff
Accounting Bulletin No. 101 ("SAB 101") effective January 1, 2000. SAB 101
requires that a lessor not recognize contingent rental income until annual
specified hurdles have been achieved by the lessee. As a result of SAB 101, the
Company deferred recognition of $5,263 of its Percentage Lease revenue during
the first quarter of 2000. Had the Company not adopted SAB 101, the Company
would have reported percentage lease revenue totaling $14,913 during the first
quarter of 2000, an increase of $224 over percentage lease revenue recognized
during the first quarter of 1999.
SAB 101 will have no impact on the Company's Funds From Operations ("FFO"), or
its interim or annual cash flow from its third party lessees, and therefore, on
its ability to pay dividends.
The Company sold its Comfort Suites in London, Kentucky in February 2000. The
Company made no other dispositions or acquisitions of hotel properties during
the first quarter of 2000. The table below outlines the number of hotels owned
by the Company by service type as of March 31, 2000 and 1999.
March 31, March 31,
Type of Hotel 2000 1999
------------- --------- ---------
Limited-service hotels 28 29
Extended-stay hotels 11 11
Full-service hotels 11 11
--------- ---------
Total 50 51
========= =========
THE COMPANY
ACTUAL - THREE MONTHS ENDED MARCH 31, 2000 VS. ACTUAL - THREE MONTHS ENDED MARCH
31, 1999
The Company had revenue of $9,808 in 2000 consisting of $9,650 of percentage
lease revenue and $158 of interest, joint venture and other income. Percentage
lease revenue decreased $5,039 to $9,650 in 2000 from $14,689 in 1999. This
decrease was attributable to the adoption of SAB 101 effective January 1, 2000,
which resulted in deferring percentage lease revenue totaling $5,263 for the
three months ended March 31, 2000. The Company expects to recognize the majority
of this deferred revenue during the third and fourth quarters of 2000. Had the
Company not adopted SAB 101, percentage lease revenue for the first quarter of
2000 would have been $14,913, an increase of $224 over the percentage lease
reported during the first quarter of 1999. This increase was primarily
attributable to an increase in percentage lease revenue from the 1998 Hotels due
to an increase in occupancy rates and average daily rates at these hotels,
partially offset by a decrease of $474 in percentage lease revenue generated by
the hotels owned prior to 1998 as a result of competitive pressures.
Real estate taxes and property insurance costs incurred in 2000 were $2,083, an
increase of $337 from $1,746 in 1999. This increase was primarily attributable
to an increase in assessed values and rates. General and administrative expenses
decreased $241 to $1,136 in 2000 from $1,377 in 1999. This decrease was
primarily attributable to a decrease in expenses
12
<PAGE> 13
associated with the formation of new joint ventures, partially offset by an
increase in payroll costs. Interest expense increased $180 to $3,270 in 2000
from $3,090 in 1999. This increase was primarily due to an increase of 0.35% in
the Company's weighted average interest rate from 7.09% in 1999 to 7.44% in
2000, and a decrease in capitalized interest of $79. Weighted average
outstanding borrowings decreased slightly from $177,000 in 1999 to $174,000 in
2000. Depreciation expense increased $284 to $5,261 in 2000 from $4,977 in 1999,
primarily due to depreciation related to capital additions to the hotels in
2000. The cumulative effect of change in accounting principle, which resulted
from the adoption of SAB 101 effective January 1, 2000, totaled $720. According
to the provisions of SAB 101, this amount represents deferred percentage lease
revenue as of January 1, 2000 generated by the Company's seven percentage leases
that have non-calendar year fiscal years. During the first quarter of 2000, the
Company recognized $350 of the total cumulative effect of change in accounting
principle, which is included in percentage lease revenue in the accompanying
Statement of Operations. The remaining unrecognized portion of the cumulative
effect of change in accounting principle will be recognized during the second
quarter of 2000.
CAPSTAR WINSTON
ACTUAL - THREE MONTHS ENDED MARCH 31, 2000 VS. ACTUAL - THREE MONTHS ENDED MARCH
31, 1999
The following table sets forth certain historical financial information for the
Current Hotels for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
--------------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 30,797 89.8% $30,686 89.8%
Food and beverage 1,907 5.6% 1,915 5.6%
Telephone and other operating departments 1,592 4.6% 1,555 4.6%
-------- ----- ------- -----
Total revenue 34,296 100.0% 34,156 100.0%
-------- ----- ------- -----
Operating costs and expenses:
Rooms 7,149 20.8% 6,953 20.4%
Food and beverage 1,413 4.1% 1,412 4.1%
Telephone and other operating departments 892 2.6% 782 2.3%
Undistributed expenses:
Lease 13,980 40.7% 13,904 40.7%
Administrative and general 3,585 10.5% 3,562 10.4%
Sales and marketing 1,764 5.1% 1,819 5.3%
Franchise fees 2,182 6.4% 2,153 6.3%
Repairs and maintenance 1,595 4.7% 1,587 4.6%
Energy 1,429 4.2% 1,423 4.2%
Other 348 1.0% 277 0.8%
Depreciation and amortization 260 0.8% 265 0.8%
-------- ----- ------- -----
Total expenses 34,597 100.9% 34,137 99.9%
-------- ----- ------- -----
Net income (loss) $ (301) (0.9%) $ 19 0.1%
======== ===== ======= =====
</TABLE>
CapStar Winston had room revenue of $30,797 in 2000, an increase of $111 from
$30,686 in 1999. The increase in room revenue was due to an increase in the
average daily rate of $2.18 to $75.76 from $73.58, partially offset by a
decrease in occupancy. Food and beverage revenue decreased $8 to $1,907 from
$1,915. Telephone and other operating departments revenue increased $37 to
$1,592 from $1,555 due to an increase in revenue from movies and videos.
CapStar Winston had total expenses in 2000 of $34,597, an increase of $460 from
$34,137 in 1999. The increase was due to increases in rooms expense and
telephone and other operating expense. Rooms expense increased primarily due to
increases in travel agency commissions, contract labor, and payroll. Telephone
and other operating departments expense increased primarily due to an increase
in cost of movies and videos.
13
<PAGE> 14
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,
2000, cash flow provided by operating activities was $7,196 and funds from
operations, which is equal to net income (loss) before allocation to minority
interest and cumulative effect of change in accounting principle (excluding
gains (losses) on sales of property) plus depreciation, plus deferred revenue,
less preferred dividends, was $6,621. 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, 2000, the Company declared distributions of $6,465 to its common stock and
preferred stock shareholders. Because the Company's cash flow from operating
activities is expected to exceed its 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.
On February 15, 2000, the Company sold its Comfort Suites hotel in London,
Kentucky for cash proceeds of $2,497, resulting in a loss of $262 as shown on
the accompanying Statement of Operations. The Company is also considering the
sale of certain other non-core hotels that lie outside the Company's upscale
segment focus and plans to use the proceeds from any sales to reduce debt.
The Company's net cash provided by investing activities for the three months
ended March 31, 2000 totaled $635. This amount was primarily generated by
proceeds received from the sale of the Comfort Suites hotel in London, KY
totaling $2,497, offset by $1,869 in capital additions at the Current Hotels.
The Company plans to spend approximately $6,273 to renovate certain of its
Current Hotels during the next nine months. These expenditures are in excess of
the 5% of room revenues for its hotels (7% of room revenues and food and
beverage revenues for one of its full-service hotels) which the Company is
required to spend under its Percentage Leases for periodic capital improvements
and the refurbishment and replacement of furniture, fixtures and equipment at
its Current Hotels. These capital expenditures are funded from operating cash
flow, and possibly from borrowings under the Company's $140,000 line of credit,
sources which are expected to be adequate to fund such capital requirements.
These capital expenditures are in addition to amounts spent on normal repairs
and maintenance which have approximated 4.7% of room revenues for each of the
three months ended March 31, 2000 and 1999, respectively, and are paid by
CapStar Winston, Prime and Bristol.
During 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc., (the "Regent Joint Venture") to jointly develop hotel
properties. As of March 31, 2000, the Company had invested $145 in the Regent
Joint Venture. The first hotel to be developed by the Regent Joint Venture, a
full service 158-room Hilton Garden Inn in Windsor, CT, is currently under
construction with an expected opening date during the third quarter of 2000. The
second hotel to be developed by the Regent Joint Venture, a full service
177-room Hilton Garden Inn in Evanston, IL, is scheduled to open before the
holiday season in 2001.
In addition, during the first quarter of 2000, the Company entered into a joint
venture agreement with Marsh Landing Investment, L.L.C., (the "Marsh Landing
Joint Venture") to jointly develop hotel properties. As of March 31, 2000, the
Company had invested $1,524 in the Marsh Landing Joint Venture. This is the
Company's first development project under an arms length joint venture agreement
with Marsh Landing Investment, L.L.C., headed by the Company's Chairman, Charles
M. Winston, and Board Member, James H. Winston. The first hotel to be developed
by the Marsh Landing Joint Venture, a 118-room Hampton Inn in Ponte Vedra, FL,
is currently under construction with an expected opening date during the first
quarter of 2001. The Company will hold a 49 percent ownership interest in all
three joint venture projects. Under the terms of each joint venture, the Company
will receive fees for its services which will include development fees,
purchasing fees, and ongoing asset management fees once each hotel opens. The
Company continues to seek additional joint venture opportunities.
The Company's net cash used in financing activities during the quarter ended
March 31, 2000 totaled $7,640. This amount included payment of distributions to
shareholders of $6,442 and the payment of distributions to the Partnership's
minority interest of $364, long-term debt payments of $268, a reduction of $500
in the Company's $140,000 line of credit (the "Line") balance from $104,500 to
$104,000, and payment of fees related to financing facilities of $34.
The Line is collateralized with 29 of the Company's Current Hotels. The Line
bears interest generally at rates from LIBOR plus 1.45% to LIBOR plus 1.70%,
based primarily upon the Company's level of total indebtedness. The Company's
current rate is LIBOR plus 1.45%.
Per the requirements of the Line, which in effect require the Company to have at
least 50% of its total indebtedness subject to a fixed rate of debt, the Company
entered into an interest rate cap agreement. The interest rate cap agreement
eliminates
14
<PAGE> 15
the exposure to increases in 30-day LIBOR over 7.50% on $25,000 of the
outstanding balances under the Line for the period March 25, 1999 through March
25, 2002.
The Company had $69,707 in long-term debt at March 31, 2000 that was subject to
a fixed interest rate and principal payments. This debt is comprised of a
10-year loan with a 25-year amortization period with GE Capital Corporation,
which carries an interest rate of 7.375%. This debt facility is collateralized
with 14 of the Company's Current Hotels.
The Company intends to acquire and develop additional hotel properties 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, from the sale of hotel properties and/or
from the issuance of other debt or equity securities. There can be no assurances
that the Company will make an investment in any additional hotel properties, 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.
SEASONALITY
The hotels' operations historically have been seasonal in nature, reflecting
higher revenue per available room during the second and third quarters. This
seasonality and the structure of the Percentage Leases, which provide for a
higher percentage of room revenues above the minimum quarterly levels to be paid
as Percentage Rent, and the revenue recognition provisions of SAB 101, can be
expected to cause 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 sales of
depreciable operating property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company further adjusts FFO by adding the change in deferred
revenue during the period to eliminate the impact of SAB 101 on revenue
recognition. This is consistent with certain other hotel lodging REITs. 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 following presents the Company's calculation of FFO and FFO per share (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Income (loss) before allocation to minority interest and
cumulative effect of change in accounting principle $ (2,431) $ 3,451
Plus: depreciation 5,261 4,977
Plus: loss on sale of property 262 --
Plus: deferred percentage lease revenue 5,263 --
Less: preferred stock dividends (1,734) (1,734)
-------- --------
FFO $ 6,621 $ 6,694
======== ========
Weighted average number of common shares assuming
dilution 18,168 18,069
-------- --------
FFO per common share $ 0.36 $ 0.37
======== ========
</TABLE>
15
<PAGE> 16
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify these statements
by use of words like "may," "will," "expect," "anticipate," "estimate," or
"continue" or similar expressions. 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, including but not limited to the risk that
properties held for sale will not sell, financing risks, development risks
including risk of construction delay, cost overruns, occupancy rates, average
daily rates, governmental permits, zoning and the increase of development costs
in connection with projects that are not pursued to completion. From time to
time, these and additional risks are discussed in the Company's filings with the
Securities and Exchange Commission, including but not limited to its Form S-3
Registration Statements, including its Form S-3 Registration Statement filed on
September 2, 1999 as amended on September 29, 1999, and its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q and its other periodic reports.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
($ IN THOUSANDS)
As of March 31, 2000, the Company's exposure to market risks for a change in
interest rates related solely to its debt outstanding under its $140,000 Line of
Credit (the "Line"). Total debt outstanding under the Line totaled $104,000 at
March 31, 2000. The Line bears interest at rates from LIBOR plus 1.45% to LIBOR
plus 1.70%, based on the Company's level of total indebtedness. The current
interest rate is LIBOR plus 1.45%. The weighted average interest rate on the
Line for the three months period ended March 31, 2000 was 7.44%. The Line is
used to maintain liquidity and fund the Company's business operations, hotel
acquisitions, development and major renovations. Pursuant to the Company's
operating strategies, it maintains minimal cash balances and is substantially
dependent upon, among other things, the availability of adequate working capital
financing to support hotel acquisitions, development and major renovations. The
definitive extent of the Company's interest rate risk under the Line is not
quantifiable or predictable because of the variability of future interest rates
and business financing requirements.
Per the requirements of the Line, the Company maintains an interest rate cap
agreement to eliminate the exposure to increases in 30-day LIBOR over 7.50%, and
therefore from its exposure to interest rate increases over 8.95% on a principal
balance of $25,000 through March 25, 2002.
The Company had $69,707 in long-term debt at March 31, 2000 that was subject to
a fixed interest rate and principal payments. This debt is comprised of a
10-year loan with a 25-year amortization period with GE Capital Corporation,
which carries an interest rate of 7.375%.
The Company's long-term debt has an expiration date of December 2023. The
following table presents the aggregate maturities and historical cost amounts of
the fixed debt principal and interest rates by maturity dates at March 31, 2000:
Maturity Date Fixed Rate Debt Interest Rate
------------- --------------- -------------
2000 835 7.375%
2001 1,187 7.375%
2002 1,278 7.375%
2003 1,376 7.375%
2004 1,480 7.375%
Thereafter 63,551 7.375%
------- ----------
$69,707 7.375%
======= ==========
16
<PAGE> 17
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, 2000.
17
<PAGE> 18
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 May 12, 2000 /s/ Joseph V. Green
------------ ---------------------------------------------
Joseph V. Green
Executive Vice President and Chief Financial
Officer
(Authorized officer and Principal
Financial Officer)
18
<PAGE> 19
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended March 31, 2000
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
27. Financial Data Schedule (For SEC use only).
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 219
<SECURITIES> 0
<RECEIVABLES> 8,923
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,262
<PP&E> 445,055
<DEPRECIATION> 63,035
<TOTAL-ASSETS> 401,785
<CURRENT-LIABILITIES> 18,584
<BONDS> 0
0
30
<COMMON> 169
<OTHER-SE> 199,820
<TOTAL-LIABILITY-AND-EQUITY> 401,785
<SALES> 9,650
<TOTAL-REVENUES> 9,808
<CGS> 0
<TOTAL-COSTS> 11,977
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 262
<INTEREST-EXPENSE> 3,270
<INCOME-PRETAX> (2,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (668)
<NET-INCOME> (2,802)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
