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 March 31, 1999
Commission file number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1624289
(State of incorporation) (I.R.S. Employer
Identification No.)
2209 Century Drive
Raleigh, North Carolina 27612
(Address of principal executive offices)
(Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of shares of Common Stock, $.01 par value,
outstanding on April 23, 1999 was 16,333,980.
Page 2
WINSTON HOTELS, INC.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and
December 31, 1998 3
Unaudited Consolidated Statements of Income
for the three months ended March 31, 1999
and 1998 4
Unaudited Consolidated Statements of Cash
Flows for the three months ended
March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C. (1)
Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 8
Unaudited Statements of Operations for
the three months ended March 31, 1999
and 1998 9
Unaudited Statements of Cash Flows for
the three months ended March 31, 1999
and 1998 10
Note to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
(1)The financial statements of CapStar Winston Company,
L.L.C. ("CapStar Winston") are included in this report
as they contain material information with respect to the
Company's investment in hotel properties. For the three
months ended March 31, 1999, CapStar Winston served as
the lessee of 49 of Winston Hotels, Inc.'s (the
"Company's") 51 hotels. CapStar Winston is not
affiliated with the Company other than through its
lessee relationship.
Page 3
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
ASSETS
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
Investment in hotel properties:
Land $ 42,508 $ 42,449
Buildings and improvements 359,215 355,807
Furniture and equipment 35,166 32,296
-------------- -----------------
Operating properties 436,889 430,552
Less accumulated depreciation 42,879 37,920
-------------- -----------------
394,010 392,632
Properties under development 5,523 5,229
-------------- -----------------
Net investment in hotel
properties 399,533 397,861
Corporate FF&E, net 299 294
Cash 5 33
Lease revenue receivable 8,875 7,653
Deferred expenses, net 4,486 3,376
Prepaid expenses and other assets 3,478 2,939
-------------- -----------------
Total Assets $ 416,676 $ 412,156
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 70,751 $ 71,000
Due to banks 110,000 102,085
Accounts payable and accrued
expenses 4,082 3,969
Distributions payable 6,795 6,789
Minority interest in Partnership 14,537 14,888
-------------- -----------------
Total liabilities 206,165 198,731
-------------- -----------------
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,
16,333,980 and 16,313,980 shares
issued and outstanding 163 163
Additional paid-in capital 224,961 224,757
Unearned compensation (407) (310)
Distributions in excess of
earnings (14,236) (11,215)
-------------- -----------------
Total shareholders' equity 210,511 213,425
-------------- -----------------
Total liabilities and
shareholders' equity $ 416,676 $ 412,156
============== =================
The accompanying notes are an integral part of the financial statements.
Page 4
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
Revenue:
Percentage lease revenue $ 14,631 $ 10,073
Interest and other income 117 49
-------------- --------------
Total revenue 14,748 10,122
-------------- --------------
Expenses:
Real estate taxes and property
and casualty insurance 1,688 979
General and administrative 1,377 659
Interest 3,090 531
Depreciation 4,977 3,158
Amortization 165 121
-------------- --------------
Total expenses 11,297 5,448
-------------- --------------
Income before allocation to
minority interest 3,451 4,674
Income allocation to minority interest 165 297
-------------- --------------
Net income 3,286 4,377
Preferred stock distribution 1,734 1,734
-------------- --------------
Net income applicable to
common shareholders $ 1,552 $ 2,643
============== ==============
Earnings per share:
Net income per common share $ 0.10 $ 0.16
============== ==============
Net income per common share
assuming dilution $ 0.10 $ 0.16
============== ==============
Weighted average number of
common shares 16,331 16,224
============== ==============
Weighted average number of
common shares assuming dilution 18,069 18,042
============== ==============
The accompanying notes are an integral part of the financial statements.
Page 5
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
Cash flows from operating activities:
Net income $ 3,286 $ 4,377
Adjustments to reconcile net
income to net cash provided by
operating activities:
Minority interest 165 297
Depreciation 4,977 3,158
Amortization 165 121
Unearned compensation amortization 79 57
Changes in assets and liabilities:
Lease revenue receivable (1,222) (1,228)
Prepaid expenses and other assets (539) 38
Accounts payable and accrued expenses 113 (1,827)
-------------- --------------
Net cash provided by operating
activities 7,024 4,993
-------------- --------------
Cash flows from investing activities:
Prepaid acquisition costs (5) (1,548)
Deferred acquisition costs (33) (100)
Investment in hotel properties (6,654) (39,250)
Sale of land parcel - 445
-------------- --------------
Net cash used in investing
activities (6,692) (40,453)
-------------- --------------
Cash flows from financing activities:
Fees paid in connection with new
financing facilities (1,180) -
Purchase of interest rate cap agreement (57) -
Net proceeds from issuance of stock - 485
Payment of distributions to shareholders (6,302) (6,478)
Payment of distributions to minority
interest (487) (470)
Net increase in due to banks 7,915 42,800
Decrease in long-term debt (249) -
-------------- --------------
Net cash (used in)/provided
by financing activities (360) 36,337
-------------- --------------
Net (decrease)/increase in cash (28) 877
Cash at beginning of period 33 164
============== ==============
Cash at end of period $ 5 $ 1,041
============== ==============
Supplemental disclosure:
Cash paid for interest $ 2,901 $ 780
Summary of non-cash investing and
financing activities:
Investment in hotel properties
payable $ - $ 8
Distributions to shareholders
declared but not paid 6,308 6,135
Distributions to minority interest
declared but not paid 487 470
Conversion of partnership units for
common shares - 152
Deferred equity compensation 175 339
Minority interest payable adjustment
due to the issuance of common shares
and the conversion of partnership
units for common shares 29 196
The accompanying notes are an integral part of the financial statements.
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, 1999 and
1998 are not necessarily indicative of the results for a full
year.
2. ACCOUNTING POLICIES
Certain reclassifications have been made to the 1998 financial
statements to conform with the 1999 presentation. These
reclassifications have no effect on net income or shareholders'
equity previously reported.
3. PRO FORMA FINANCIAL INFORMATION
These unaudited pro forma condensed statements of income of the
Company are presented as if the Company had acquired all 51 of
the hotels owned as of March 31, 1999 on the later of January 1,
1998 or the hotel opening date for the ten hotels which opened
during 1998. The Company had no acquisitions during the first
quarter of 1999, therefore, the pro forma condensed statement of
income for the Company for the quarter ended March 31, 1999 is
identical to the actual condensed statement of income for the
same period. The unaudited pro forma condensed statement of
income for the quarter ended March 31, 1998 is 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 does it purport to represent
the results of operations for future periods:
Pro Forma for the
Quarter ended March 31,
-----------------------
1999 1998
---- ----
Percentage lease and other
revenue $ 14,748 $ 11,436
---------- ----------
Expenses:
Real estate taxes and
property and casualty
insurance 1,688 1,150
General and administrative 1,377 666
Interest expense 3,090 976
Depreciation 4,977 3,407
Amortization 165 123
---------- ----------
Total expense 11,297 6,322
---------- ----------
Income before allocation to
minority interest 3,451 5,114
---------- ----------
Income allocation to minority
interest 165 332
Preferred stock distribution 1,734 1,734
---------- ----------
Net income applicable to
common shareholders $ 1,552 $ 3,048
---------- ----------
Net income per common share $ 0.10 $ 0.19
========== ==========
Net income per common share
assuming dilution $ 0.10 $ 0.19
========== ==========
Weighted average number of
common shares 16,331 16,224
========== ==========
Weighted average number of
common shares assuming dilution 18,069 18,042
========== ==========
Page 7
4. EARNINGS PER SHARE
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:
Quarter ended March 31,
-----------------------
1999 1998
---- ----
Net income $ 3,286 $ 4,377
Less: preferred stock
distribution 1,734 1,734
--------- -------
Net income applicable to
common shareholders 1,552 2,643
Plus: income allocation to
minority interest 165 297
--------- -------
Net income assuming dilution $ 1,717 $ 2,940
========= =======
The following is a reconciliation of the weighted average shares
used in the net income per common share calculation to the
weighted average shares used in the net income per common share
- assuming dilution calculation:
Quarter ended March 31,
-----------------------
1999 1998
---- ----
Weighted average number of
common shares 16,331 16,224
Units with redemption rights 1,738 1,769
Stock options - 49
--------- -------
Weighted average number of
common shares assuming dilution 18,069 18,042
========= =======
5. DEBT
On February 1, 1999, the Company entered into a new three-year
$140,000 line of credit agreement (the "New Line") with a group
of banks led by Wachovia Bank, N.A. This New Line replaces the
Company's previous $125,000 line of credit. The New 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
Company's current rate is LIBOR plus 1.45%. A commitment fee of
0.05% is also payable quarterly on the unused portion of the New
Line. The Company used the proceeds from the New Line to pay
off outstanding balances under its previous $125,000 line of
credit as well as under its then existing $45,000 revolving
demand note. The Company has collateralized the New Line with
29 of its Current Hotels, with a carrying value of $225,714 as
of March 31, 1999.
Per the requirements of the New Line, which in effect require
the Company to have at least 50% of its total indebtedness
subject to a fixed rate of debt, on March 23, 1999 the Company
entered into an interest rate cap agreement. The interest rate
cap agreement eliminates the exposure to increases in 30-day
LIBOR over 7.50% on $25,000 of the outstanding balances under
the New Line for the period March 25, 1999 through March 25,
2002. The interest rate cap agreement required a premium
payment to the bank of $57. The premium paid to purchase the
interest rate cap is included in other assets and is amortized
to amortization expense over the shorter of the original term of
the agreement or the life of the financial instruments to which
they are matched. The interest rate cap agreement entitles the
Company to receive from the bank the amount, if any, by which
the selected market interest rate exceeds the strike rate stated
in the agreement. The fair value of the interest rate cap
agreement is estimated by obtaining quotes from brokers and
represents the cash requirement if the existing contracts had
been settled at quarter end. At March 31, 1999, the interest
rate cap agreement approximated fair value.
Page 8
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
(in thousands)
ASSETS
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,047 $ 2,075
Accounts receivable, net of
allowance for doubtful
accounts of $159 and $111 3,801 3,230
Due from affiliates 7,772 5,392
Deposits and other assets 423 355
-------------- -----------------
Total current assets 15,043 11,052
-------------- -----------------
Furniture, fixtures and equipment,
net of accumulated depreciation
of $85 and $68 273 290
Intangible assets, net of
accumulated amortization of $1,247
and $1,015 33,049 33,253
Deferred franchise costs, net of
accumulated amortization of $88
and $72 520 536
Restricted cash 25 204
-------------- -----------------
$ 48,910 $ 45,335
============== =================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,534 $ 1,606
Accrued expenses 5,763 3,390
Percentage lease payable
to Winston Hotels, Inc. 8,824 7,601
Advance deposits 215 183
-------------- -----------------
Total current liabilities 16,336 12,780
-------------- -----------------
Members' capital 32,574 32,555
-------------- -----------------
$ 48,910 $ 45,335
============== =================
See accompanying note to financial statements.
Page 9
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
Revenue:
Rooms $ 30,686 $ 22,573
Food and beverage 2,112 901
Telephone and other operating
departments 1,358 1,170
-------------- --------------
Total revenue 34,156 24,644
-------------- --------------
Operating costs and expenses:
Rooms 6,979 4,904
Food and beverage 1,421 683
Telephone and other operating
departments 740 473
Undistributed expenses:
Lease 13,904 10,073
Administrative and general 3,476 2,482
Sales and marketing 1,724 826
Franchise fees 2,256 1,608
Repairs and maintenance 1,645 1,222
Energy 1,423 895
Other 304 446
Depreciation and amortization 265 257
-------------- --------------
Total expenses 34,137 23,869
-------------- --------------
Net income $ 19 $ 775
============== ==============
See accompanying note to financial statements.
Page 10
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
Cash flows from operating activities:
Net income $ 19 $ 775
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 265 257
Increase in accounts receivable (571) (913)
Decrease in due from Winston
Hospitality, Inc. - 1,110
Increase in due from affiliates (2,380) (71)
Increase in deposits and other assets (68) (9)
Decrease in restricted cash 179 -
Increase in accounts payable and
accrued expenses 2,301 505
Increase in percentage lease payable
to Winston Hotels, Inc. 1,223 1,228
Increase in advance deposits 32 39
-------------- --------------
Net cash provided by operating activities 1,000 2,921
-------------- --------------
Cash flows from investing activities:
Additions of furniture, fixtures and
equipment - (76)
Proceeds from sale of fixed assets - 16
Additions to intangible assets (28) (56)
-------------- --------------
Net cash used in investing activities (28) (116)
-------------- --------------
Net increase in cash and cash equivalents 972 2,805
Cash and cash equivalents at beginning
of period 2,075 3,393
-------------- --------------
Cash and cash equivalents at end of
period $ 3,047 $ 6,198
============== ==============
See accompanying note to financial statements.
Page 11
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 49 of the Company's 51 hotels
as of March 31, 1999 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.
Page 12
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ 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 REIT to invest in
hotel properties. The Company owned 51 hotels (the "Current Hotels")
as of March 31, 1999. The Company owned 31 hotels as of December 31,
1996, acquired seven hotels in 1997, and acquired eight hotels and
opened five internally developed hotels in 1998 (the "1998 Hotels").
It currently leases 49 of the total 51 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, 1999 and the comparable period
for 1998, the differences in operating results are primarily
attributable to the fact that the Company owned more hotels in 1999
than it did in 1998. The table below outlines the number of hotels
owned by the Company by service type as of March 31, 1999 and 1998.
Type of Hotel March 31, 1999 March 31, 1998
------------- -------------- --------------
Limited-service hotels 29 28
Extended-stay hotels 11 7
Full-service hotels 11 6
---- ----
Total 51 41
==== ====
In order to present a more meaningful comparison of operations, in
addition to the comparison of actual results of the Company and
CapStar Winston for the three months ended March 31, 1999 versus
actual results for the three months ended March 31, 1998, below also
is an analysis of the pro forma results of the Company for the three
months ended March 31, 1999 versus pro forma results for the three
months ended March 31, 1998 as if the 1998 acquisitions had occurred
on the later of January 1, 1998 or the hotel opening date for the ten
hotels which opened during 1998.
THE COMPANY
ACTUAL - THREE MONTHS ENDED MARCH 31, 1999 VS ACTUAL - THREE MONTHS
ENDED MARCH 31, 1998
The Company had revenues of $14,748 in 1999 consisting of $14,631 of
Percentage Lease revenues and $117 of interest and other income.
Percentage Lease revenues increased $4,558 to $14,631 in 1999 from
$10,073 in 1998. This increase was primarily attributable to lease
revenues from the 1998 Hotels.
Real estate taxes and property insurance costs incurred in 1999 were
$1,688, an increase of $709 from $979 in 1998 This increase was
primarily attributable to the 1998 Hotels as well as an increase in
assessed values and rates. General and administrative expenses
increased $718 to $1,377 in 1999 from $659 in 1998. The increase was
attributable to the increase in size and activities of the Company in
1999. Interest expense increased $2,559 to $3,090 in 1999 from $531
in 1998. The increase was primarily due to an increase in weighted
average outstanding borrowings of $118,555 to $177,237 in 1999 from
$58,682 in 1998 and a decrease in capitalized interest in 1999 due to
the opening of five internally developed hotels in 1998. Interest
rates remained constant between the two quarters. Depreciation
increased $1,819 to $4,977 in 1999 from $3,158 in 1998, primarily due
to depreciation related to the 1998 Hotels and renovations completed
during 1998 and 1999.
Page 13
PRO FORMA - THREE MONTHS ENDED MARCH 31, 1999 VS PRO FORMA - THREE
MONTHS ENDED MARCH 31, 1998
The Company had revenues of $14,748 for the three months ended March
31, 1999, consisting of $14,631 of Percentage Lease revenues and $117
of interest and other income. Percentage Lease revenues increased
$3,244 to $14,631 in 1999 from $11,387 in 1998. This increase was
primarily attributable to lease revenues from the ten 1998 Hotels
which opened in 1998.
Real estate taxes and property insurance costs incurred in 1999 were
$1,688, an increase of $538 from $1,150 in 1998. The increase was
primarily attributable to the ten 1998 Hotels which opened in 1998,
as well as an increase in assessed values and rates. General and
administrative expenses increased $711 to $1,377 in 1999 from $666 in
1998. The increase was attributable to the increase in size and
activities of the Company in 1999. Interest expenses increased
$2,114 to $3,090 in 1999 from $976 in 1998. The increase was
primarily due to an increase in weighted average outstanding
borrowings of $94,241 to $177,237 in 1999 from $82,996 in 1998 and a
decrease in capitalized interest in 1999 due to the opening of five
internally developed hotels in 1998. Interest rates remained
constant between the two quarters. Depreciation increased $1,570 to
$4,977 in 1999 from $3,407 in 1998, primarily due to depreciation
related to the ten 1998 Hotels which opened in 1998 and renovations
completed during 1998 and 1999.
CAPSTAR WINSTON
ACTUAL - THREE MONTHS ENDED MARCH 31, 1999 VS ACTUAL - THREE MONTHS
EMDED MARCH 31, 1998
The following table sets forth certain historical financial
information for the Current Hotels for the periods indicated:
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
------------------ ----------------
Revenue:
Rooms $ 30,686 89.8% $ 22,573 91.6%
Food and beverage 2,112 6.2% 901 3.7%
Telephone and other
operating departments 1,358 4.0% 1,170 4.7%
------------------ ----------------
Total revenue 34,156 100.0% 24,644 100.0%
------------------ ----------------
Operating costs and expenses:
Rooms 6,979 20.4% 4,904 19.9%
Food and beverage 1,421 4.1% 683 2.8%
Telephone and other
operating departments 740 2.2% 473 1.9%
Undistributed expenses:
Lease 13,904 40.7% 10,073 40.9%
Administrative and general 3,476 10.2% 2,482 10.1%
Sales and marketing 1,724 5.0% 826 3.4%
Franchise fees 2,256 6.6% 1,608 6.5%
Repairs and maintenance 1,645 4.8% 1,222 5.0%
Energy 1,423 4.2% 895 3.6%
Other 304 0.9% 446 1.8%
Depreciation and
amortization 265 0.8% 257 1.0%
------------------ ----------------
Total expenses 34,137 99.9% 23,869 96.9%
------------------ ----------------
Net income $ 19 0.1% $ 775 3.1%
================== ================
CapStar Winston had room revenues of $30,686 in 1999, an increase of
$8,113 from $22,573 in 1998. The increase in room revenues was due to
an increase of $6,255 for the hotels CapStar Winston began operating
in 1998 and $1,858 for the hotels operated prior to 1998. Food and
beverage revenue increased $1,211 to $2,112 in 1999 from $901 in
1998, primarily due to the operation of a greater number of hotels
for the three months ended March 31, 1999 as compared with the same
period in 1998, as well as an overall increase in banquet revenues.
Telephone and other operating departments revenue increased $188 to
$1,358 in 1999 from $1,170 in 1998, primarily due to an increase in
revenue associated with long distance phone calls, in-room movies and
hotel gift shops.
Page 14
CapStar Winston had total expenses in 1999 of $34,137, an increase of
$10,268 from $23,869 in 1998. The increase was primarily
attributable to the operation of a greater number of hotels for the
three months ended March 31, 1999 as compared with the same period of
1998.
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, 1999, cash flow provided by operating activities was $7,024
and funds from operations, which is equal to net income before
minority interest plus depreciation, less preferred dividends, was
$6,694. 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, 1999, the Company declared distributions of $6,795 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.
The Company's net cash used in investing activities for the three
months ended March 31, 1999 totaled $6,692, primarily related to
hotel renovations. The Company plans to spend approximately $1,650
to renovate certain of its Current Hotels during the next nine
months. These expenditures are in addition to the reserve of 5% of
room revenues for its limited-service hotels and 7% of room revenues
and food and beverage revenues from its full-service hotels which the
Company is required to set aside under its Percentage Leases for
periodic capital improvements and the refurbishment and replacement
of furniture, fixtures and equipment at its Current Hotels. In the
three months ended March 31, 1999, the Company set aside $1,680 for
such reserves. These reserves are in addition to amounts spent on
normal repairs and maintenance which have approximated 5.4% of room
revenues for the three months ended March 31, 1999 and 1998 and are
paid by CapStar Winston, Prime and Bristol.
On February 1, 1999, the Company entered into a new three-year,
$140,000 line of credit agreement with a group of four banks led by
Wachovia Bank, N.A. (the "New Line"). The Company has collateralized
the line of credit with 29 of its Current Hotels. The line of
credit 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%. The
Company's Articles of Incorporation (the "Articles") limit its total
amount of indebtedness to 45% of the investments in hotel properties
at cost, as defined in the Articles. In connection with the 1999
Annual Meeting of Shareholders, the Board of Directors has
recommended, and the shareholders will vote with respect to, an
increase in the debt limitation contained in the Articles to 60% of
the investments in hotel properties at cost, as defined in the
Articles.
Per the requirements of the New Line, which in effect require the
Company to have at least 50% of its total indebtedness subject to a
fixed rate of debt, on March 23, 1999 the Company entered into an
interest rate cap agreement. The interest rate cap agreement
eliminates the exposure to increases in 30-day LIBOR over 7.50% on
$25,000 of the outstanding balances under the New Line for the period
March 25, 1999 through March 25, 2002.
The Company's net cash used in financing activities during the
quarter ended March 31, 1999 totaled $360. This amount included
$7,915 of proceeds from additional borrowings under the New Line.
These proceeds were offset by the payment of distributions of $6,789,
payment of fees related to new financing facilities of $1,180, long-
term debt payments of $249 and the purchase of an interest rate cap
for $57.
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
Page 15
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, can be
expected to cause fluctuations in the Company's quarterly lease
revenue under the Percentage Leases.
YEAR 2000 MANAGEMENT
The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four to define the applicable
year. If the computer programs of the Company or one of its service
providers, contractors, franchisees, lessees, or suppliers are not
Year 2000 compliant, they may recognize a date using "00" as the Year
1900 rather than the Year 2000. If not corrected, this could result
in a system failure or miscalculations causing disruptions of
operations.
The Company has identified its Year 2000 risk in three categories:
internal software and embedded chip technology, external
noncompliance by service providers, contractors and suppliers, and
external noncompliance by franchisors and lessees.
Internal Software and Embedded Chip Technology
- ----------------------------------------------
The Company has begun its data gathering and testing phase with
regard to internal software and embedded chip technology, with the
assistance of its systems integration consultants. Virtually all of
the Company's internal software are current versions of off-the-
shelf, name-brand software. The Company's hardware systems, which
include computer hardware, a phone system, copiers and facsimile
machines, also contain embedded chip technology which could pose a
risk of noncompliance. The majority of this hardware has been
installed in the last twelve months. Based on the results of our
data gathering and tests to date, the cost of achieving Year 2000
compliance is not expected to be material. If any of the Company's
current software or hardware is not Year 2000 compliant and is not
repairable, the Company plans to replace the respective software or
hardware with readily available Year 2000 compliant software or
hardware. Full compliance is expected by the third quarter of 1999.
External Noncompliance by Service Providers, Contractors and
- ------------------------------------------------------------
Suppliers
- ---------
The Company has identified and contacted its significant service
providers, contractors and suppliers to determine the extent to which
the Company is vulnerable to those third parties' failure to remedy
their own Year 2000 issues. It is expected that identification of
any Year 2000 exposure with these parties will be completed by April
30, 1999. To the extent that responses to Year 2000 readiness are
unsatisfactory, the Company's contingency plan is to attempt to
change significant service providers, contractors or suppliers to
those who have demonstrated Year 2000 readiness, but cannot be
assured that it will be successful in finding such alternative
service providers, contractors or suppliers. The Company has
received information concerning the Year 2000 compliance status of
several of its significant service providers, contractors or
suppliers. At this time, some of the service providers, contractors
and suppliers have indicated they are already Year 2000 compliant,
however, most have responded that they are in the process of becoming
Year 2000 compliant. None have indicated that they will not be Year
2000 compliant by December 31, 1999. In the event that any of the
Company's significant service providers, contractors or suppliers do
not successfully and timely achieve Year 2000 compliance, and the
Company is unable to replace them with alternate service providers,
contractors or suppliers, the Company's business or operations could
be materially and adversely affected.
External Noncompliance by Franchisors and Lessees
- -------------------------------------------------
The Company has significant relationships with certain nationally
recognized hotel franchisors and lessees. These franchisors have
national reservation systems on which the Company relies to receive a
significant portion of its Percentage Lease revenue. The Company has
contacted these franchisors and lessees to identify the extent to
which the Company is vulnerable to those third parties' failure to
remedy their own Year 2000 issues. The Company has received initial
responses that these franchisors and lessees are working on Year 2000
compliance. The Company intends to follow-up with the franchisors
and lessees during the second quarter of 1999 to determine the extent
of these third parties' Year 2000 readiness and to determine if any
contingency plans of the Company will be necessary. In the event
that any of these franchisors and lessees do not successfully and
timely achieve Year 2000 compliance, the Company's business or
operations could be materially and adversely affected.
Historical costs incurred to address the Year 2000 problem are
approximately $450. The Company has not yet developed a final cost
estimate related to resolving Year 2000 issues.
Page 16
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, including, but not limited to, those paragraphs relating to
development and acquisition of hotels in this section. You can
identify these statements by use of words like "may", "will",
"expect", "estimate", or "continue" or similar expressions. These
statements represent the Company's judgment and are subject to risks
and uncertainties that could cause actual operating results to differ
materially from those expressed or implied in the forward looking
statements. Important factors that could cause actual results to
differ include, but are not limited to the following (i) risk
associated with the Company's acquisition of hotels with little or no
operating history, including the risk that such hotels will not
achieve the level of revenue assumed by the Company in calculating
the respective Percentage Rent formula; (ii) development risk,
including risk of construction delay, cost overruns, receipt of
zoning, occupancy and other required governmental permits and
authorizations and the incurrence of development costs in connection
with projects that are not pursued through completion; and (iii)
factors identified in the Company's filings with the Securities and
Exchange Commission, including the risk factors listed in the
Company's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on August 1, 1997.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
($ in thousands)
As of March 31, 1999, the Company's exposure to market risk for a
change in interest rates related solely to its debt outstanding under
its New Line. Total debt outstanding under the New Line totaled
$110,000 at March 31, 1999 with a maximum capacity of $140,000. The
New 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 New Line for the period February 1, 1999 through
March 31, 1999 was 6.45%. The New 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 New Line is not quantifiable
or predictable because of the variability of future interest rates
and business financing requirements.
Per the requirements of the New Line, on March 23, 1999, the Company
entered into an interest rate cap agreement to limit the impact of
increases in interest rates on its floating rate debt. At March 31,
1999, the interest rate cap agreement approximated fair value.
The Company had $71,000 in long-term debt at March 31, 1999 that was
subject to a fixed interest rate and principal payments. This debt
is comprised of the Company's 25-year loan with GE Capital
Corporation, which carries an interest rate of 7.375% for the first
10 years. The New Line, combined with the $71,000 loan with GE
Capital Corporation, provides the Company with a maximum borrowing
capacity of $211,000.
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, 1999:
Maturity Date Fixed Rate Debt Interest Rate
------------- --------------- -------------
1999 $ 776 7.375%
2000 1,103 7.375%
2001 1,187 7.375%
2002 1,278 7.375%
2003 1,376 7.375%
Thereafter 65,031 7.375%
--------------- -------------
$ 70,751 7.375%
=============== =============
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, 1999.
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 5, 1999 /s/ James D. Rosenberg
------------------------ --------------------------
James D. Rosenberg
President, Chief Financial
Officer and Chief Operating
Officer
(Authorized officer and
Principal Financial Officer)
Page 19
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended March 31, 1999
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
27. Financial Data Schedule (For SEC use only).