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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 Number)
2626 GLENWOOD AVENUE, SUITE 200 27608
RALEIGH, NORTH CAROLINA (Zip Code)
(Address of principal executive offices)
(919) 510-6010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange
Preferred Stock, $0.01 par value per share New York Stock Exchange
(Title of Class) (Name of Exchange upon Which Registered)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock, $0.01 par
value per share, at March 15, 2000, held by those persons deemed by the
registrant to be non-affiliates was approximately $123,626,000.
As of March 15, 2000, there were 16,896,188 shares of the registrant's
Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
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1. Proxy Statement for Annual Meeting of Shareholders to be held on May 9, 2000 Part III
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WINSTON HOTELS, INC.
FORM 10-K ANNUAL REPORT
INDEX
Page
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PART I.
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 21
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
ITEM 11. EXECUTIVE COMPENSATION 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 23
SIGNATURES 27
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PART I.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of $0.01 par value common stock
("Common Stock"), utilizing the majority of the proceeds to acquire one hotel
and a general partnership interest (as the sole general partner) in WINN
Limited Partnership (the "Partnership"). The Partnership used a substantial
portion of the proceeds to acquire nine hotel properties (collectively the ten
hotels are the "Initial Hotels"). WHI and the Partnership (collectively the
"Company") began operations as a REIT on June 2, 1994.
During 1995 and 1996, WHI completed follow-on Common Stock offerings, as
well as a Preferred Stock offering in September 1997, and invested the net
proceeds from these offerings in the Partnership. The Partnership utilized the
proceeds to acquire 28 additional hotel properties. During 1998, the Company
added 13 additional properties to its portfolio, five of which were internally
developed. As of December 31, 1999, WHI's ownership in the Partnership was
92.83%. As of December 31, 1999, the Company owned 51 hotel properties (the
"Current Hotels"), having an aggregate of 6,904 rooms.
Under the REIT qualification requirements of the Internal Revenue Code,
REITs generally must lease their hotels to third party operators. Therefore, as
of December 31, 1999, the Company leased 49 of the 51 Current Hotels to CapStar
Winston Company, L.L.C. ("CapStar Winston"), a wholly owned subsidiary of
MeriStar Hotels and Resorts, Inc. ("MeriStar"), one of the Current Hotels to
Bristol Hotels & Resorts, Inc. ("Bristol") and one of the Current Hotels to
Prime Hospitality Corp. ("Prime"). All 51 of the Current Hotels were leased
pursuant to leases that provide for rent payments based, in part, on revenues
from the Current Hotels (the "Percentage Leases"). Under the terms of the
Percentage Leases, the lessees are obligated to pay the Company the greater of
base rent or percentage rent ("Percentage Rent"). The Percentage Leases are
designed to allow the Company to participate in the growth in revenues at the
Current Hotels by providing that a portion of each Current Hotel's room
revenues in excess of specified amounts will be paid to the Company as
Percentage Rent.
NARRATIVE DESCRIPTION OF BUSINESS
Growth Strategy
The Company's growth strategy is to enhance shareholder value by increasing
cash available for distribution per share of Common Stock through: (i)
participating in any increased room revenue from the Current Hotels and any
subsequently acquired or developed hotels through Percentage Leases; (ii)
acquiring additional hotels, or ownership interests in hotels, that meet the
Company's investment criteria; (iii) selectively developing hotels and hotel
additions as market conditions warrant; and (iv) leveraging off of its
management team's expertise.
Internal Growth Strategy
The Company participates in any increased room revenue from the Current
Hotels through Percentage Leases. The Company believes that internal growth,
through increases in Percentage Rent has and, in the future, may result from:
(i) continued sales and marketing programs by the lessees and operators; (ii)
completion of refurbishment projects as needed at the Current Hotels; (iii)
maintaining hotel franchises with demonstrated market acceptance and national
reservation systems; and (iv) continuation of the industry-wide trend of
increasing average daily room rate ("ADR") and revenue per available room
("REVPAR").
The Percentage Leases provide that a percentage of room revenues in
specified ranges is paid as Percentage Rent. For most leases, the percentage of
room revenues paid as Percentage Rent increases as a higher specified level of
room revenues is achieved. Pursuant to each Percentage Lease, base rent and the
ranges of room revenues specified for purposes of calculating Percentage Rent
are adjusted on a quarterly or annual basis for inflation beginning on the
first day after the first full fiscal year of the Percentage Lease, based on
changes in the United States Consumer Price Index ("CPI").
Acquisition Strategy
The Company intends to acquire additional hotel properties with strong
national franchise affiliations in the mid-scale and upscale market segments,
or hotel properties with the potential to obtain such franchise affiliations.
In particular, the Company will consider acquiring limited-service hotels such
as Hampton Inn and Fairfield Inn by Marriott hotels; full-service hotels such
as Hilton Garden Inn, Courtyard by Marriott and Holiday Inn hotels; and
extended-stay hotel properties such as Homewood Suites by Hilton, Hampton
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Inn and Suites, Residence Inn by Marriott and Staybridge by Holiday Inn (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward Looking Statements").
The Company intends to consider investments in hotel properties that meet
one or more of the following criteria: (i) properties in locations with
relatively high demand for rooms, a relatively low supply of hotel properties
and barriers to easy entry into the hotel business, such as a scarcity of
suitable sites or zoning restrictions; (ii) successful hotels available at
favorable prices; and (iii) newly developed hotels that the developer does not
intend to own. The Company believes its relationship with each lessee and
franchisor will provide additional potential investment opportunities.
Additional investments in hotel properties may be made through the
Partnership, directly by WHI or with entities affiliated with the Company. The
Company's ability to acquire additional hotel properties and develop hotels
depends primarily on its ability to obtain additional debt financing, proceeds
from subsequent issuances of Common Stock or other securities, proceeds from
the sale of hotel properties or co-investments from other investors.
Development Strategy
The Company intends to pursue hotel development as suitable opportunities
arise. The Company may finance 100% of such development or seek partners who
would co-invest in development or rehabilitation joint ventures. The Company
intends to consider development of hotels with strong national franchise
affiliations in markets where the Company believes that carefully timed and
managed development will yield returns to the Company that exceed returns from
any available hotels in those markets that meet the Company's acquisition
criteria (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Forward Looking Statements"). The Company earns certain
fees from its joint venture development activity and also is exploring other
opportunities to use management's expertise to earn additional fees through
third party development.
In June 1999, the Company entered into a joint venture agreement to develop
upscale hotels with Regent Partners, Inc., a leading real estate development,
investment and services firm and a wholly owned subsidiary of J.A. Jones, Inc.
("Regent"). By combining Regent's expertise in hotel development with the
Company's, this approach offers each organization the potential for attractive
financial returns. Under the terms of the joint venture (the "Joint Venture"),
Regent and the Company will co-develop the hotels and receive fees for their
respective services including development, asset management and purchasing. The
Company is expected to have an ownership level of up to 49 percent in each
project. The Company also has the right to acquire Regent's interests subject
to the provisions of the joint venture agreement.
The Joint Venture's initial project is a $16.5 million, full-service
158-room Hilton Garden Inn in Windsor, Connecticut, which is scheduled to open
in the second half of 2000. Construction also is scheduled to begin this spring
on the Joint Venture's second project: a $20 million, 177-room Hilton Garden
Inn in the Chicago suburb of Evanston, which is scheduled to open before the
holiday season in 2001. The Company is considering other possible joint
ventures and also is investigating providing hotel development financing
services as well. In addition to generating development, asset management, and
purchasing fee income and thus enhancing the Company's revenues and cash flow;
other benefits include expanding our affiliations with leading upscale brands
and the potential addition of new hotels to our portfolio, despite the external
capital constraints prevalent in today's real estate market.
Operations and Property Management
As of December 31, 1999, CapStar Winston leased 49 of the Current Hotels, 39
of which they also operated. Interstate Management and Investment Corporation
("IMIC") managed nine of the Current Hotels and Promus Hotels, Inc. ("Promus")
managed one of the Current Hotels (collectively the "Property Managers")
pursuant to management agreements with CapStar Winston with respect to each of
such hotels. Bristol and Prime each leased and operated one of the Current
Hotels. The lessees and the Property Managers seek to increase revenues at the
Current Hotels by using established systems to manage the Current Hotels for
marketing, rate achievement, expense management, physical facility maintenance,
human resources, accounting and internal auditing. They are trained in all
aspects of hotel operations, including negotiation of prices with corporate and
other clients and responsiveness to marketing requirements in their particular
markets, with particular emphasis placed on customer service. The lessees and
the Property Managers employ a mix of marketing techniques designed for each
specific Current Hotel, which include individual toll-free lines,
cross-marketing of the Current Hotels' billboards and direct marketing, as well
as taking advantage of national advertising by the franchisors of the Current
Hotels.
The lessees lease the Current Hotels pursuant to the Percentage Leases.
Under the Percentage Leases, the lessees, or the Property Managers, generally
are required to perform all operational and management functions necessary to
operate the Current Hotels. The lessees are entitled to all profits and cash
flow from the Current Hotels after payment of rent under the Percentage Leases
and other operating expenses, including, in the case of the ten Current Hotels
managed by the Property Managers, the management fee payable to the Property
Managers. The lessees, their affiliates and the Property Managers may manage
other hotel properties in addition to hotels owned by the Company, however, the
lessees and their affiliates may not build or develop a hotel or motel within
five miles of a hotel owned by the Company and leased by the lessee.
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CapStar Winston is a wholly owned subsidiary of MeriStar, a New York Stock
Exchange company. As of December 31, 1999, MeriStar, the nation's largest
independent hotel management company, leased or managed 225 hotels with 47,046
rooms in 35 states, the District of Columbia, Canada and the U.S. Virgin
Islands.
IMIC, a hotel development and management company, operates nine of the
Current Hotels under separate management agreements with CapStar Winston. Each
year, CapStar Winston pays IMIC a base management fee for each Current Hotel
managed by IMIC based on a percentage of the budgeted gross operating profit
for that year with incentive amounts based on actual gross operating profits if
they exceed budgeted amounts. IMIC has agreed that each year it will spend a
specified percentage of the gross revenues of each Current Hotel managed by
IMIC on repairs and maintenance of the hotel. CapStar Winston and the Company
have retained the right to control the expenditure of funds budgeted for
capital and non-routine items, including, at their discretion, approving plans
and selecting and overseeing contractors and other vendors. IMIC currently
operates 28 hotels in six states, including 24 limited-service hotels and four
full-service, convention or resort hotels.
Promus manages one of the Current Hotels under a management agreement with
CapStar Winston. Each year, CapStar Winston pays Promus a management fee based
on a percentage of the gross operating profit for the hotel managed by Promus
with certain incentive amounts.
Bristol, a New York Stock Exchange company, is one of the leading
independent hotel operating companies in the United States. As of December 31,
1999, Bristol operated 110 primarily full-service hotels in the upscale and
midscale segments of the hotel industry containing more than 30,000 rooms.
Bristol is the largest franchisee of Bass Hotels & Resorts (formerly Holiday
Hospitality) branded hotels including Crowne Plaza, Holiday Inn, Holiday Inn
Select and Holiday Inn Express hotels.
Prime, a New York Stock Exchange company, is one of the nation's premier
lodging companies. Prime operates three proprietary brands, AmeriSuites
(all-suites), HomeGate Studios & Suites (extended-stay) and Wellesley Inns
(limited-service). It also owns and/or manages hotels operated under franchise
agreements with national hotel chains. As of December 31, 1999, Prime
Hospitality Corporation owned 172 hotels, operated 28 hotels under lease
agreements with REITs and managed 10 hotels from third parties.
Franchise Agreements
The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise licenses. Franchisors provide
a variety of benefits for franchisees which include national advertising,
publicity and other marketing programs designed to increase brand awareness,
training of personnel, continuous review of quality standards and centralized
reservation systems.
The hotel franchise licenses generally specify certain management,
operational recordkeeping, accounting, reporting and marketing standards and
procedures with which the lessees must comply. The franchise licenses obligate
the lessees to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided, display of signs, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.
Of the Current Hotels' franchise licenses, one expires in 2003, two expire
in 2006, two expire in 2007, three expire in 2008, three expire in 2009, two
expire in 2010, three expire in 2011, two expire in 2014, one expires in 2015,
three expire in 2016, 19 expire in 2017 and 10 expire in 2018. The franchise
agreements provide for termination at the franchisor's option upon the
occurrence of certain events, including the lessees' failure to pay royalties
and fees or perform its other covenants under the franchise agreement,
bankruptcy, abandonment of the franchise, commission of a felony, assignment of
the franchise without the consent of the franchisor, or failure to comply with
applicable law in the operation of the relevant Current Hotel. The lessees are
entitled to terminate the franchise license only by giving at least 12 months'
notice and paying a specified amount of liquidated damages. The franchise
agreements will not renew automatically upon expiration. The lessees are
responsible for making all payments under the franchise agreements to the
franchisors. Under the franchise agreements, the lessees pay a franchise fee of
an aggregate of between 3% and 5% of room revenues, plus additional fees that
amount to between 3% and 4% of room revenues from the Current Hotels.
Although CapStar Winston entered into new 10-year franchise agreements for
the operation of three Holiday Inn hotels, the Company remains obligated to
Holiday Inn for certain liquidated damages in the event of a termination of the
Holiday Inn franchise agreements prior to the expiration of the 10-year term.
CapStar Winston and its affiliates shall indemnify the Company for certain
obligations arising from CapStar Winston or its affiliates' failure to satisfy
certain conditions in its franchise agreements with Holiday Inn.
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Competition
The hotel industry is highly competitive with various participants competing
on the bases of price, level of service and geographic location. The Current
Hotels compete with other hotel properties in their geographic markets. Some of
the Company's competitors may have greater marketing and financial resources
than the Company, the lessees, and the Property Managers. Several of the
Current Hotels are located in areas in which they may compete with other
Current Hotels for business. The Company competes for acquisition opportunities
with entities that may have greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator.
Employees
The Company had 27 employees as of February 28, 2000.
Environmental Matters
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
of a hazardous substance at another property may be liable for the costs of
removal or remediation of hazardous substances released into the environment at
that property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to use or
sell such real estate or to borrow using such real estate as collateral.
Certain environmental laws and common law principles could be used to impose
liability for the release of and exposure to hazardous substances, including
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous substances,
including ACMs. In connection with the ownership and operation of the Current
Hotels, the Company, the lessees, or the Property Managers, as the case may be,
may be potentially liable for such costs.
Phase I environmental site assessments ("ESAs") were obtained on all of the
Current Hotels. The Phase I ESAs were intended to identify potential sources of
contamination for which the Current Hotels may be responsible and to assess the
status of environmental regulatory compliance. The Phase I ESAs included
historical reviews of the Current Hotels, reviews of certain public records,
preliminary investigations of the sites and surrounding properties, screening
for the presence of asbestos, PCBs and underground storage tanks, and the
preparation and issuance of a written report. The Phase I ESAs did not include
invasive procedures, such as soil sampling or ground water analysis. The Phase
I ESA reports have not revealed any environmental condition, liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such condition, liability or compliance concern.
Nevertheless, it is possible that these reports do not reveal all environmental
conditions, liabilities or compliance concerns or that there are material
environmental conditions, liabilities or compliance concerns that arose at a
Current Hotel after the related Phase I ESA report was completed of which the
Company is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the Current Hotels will not be
affected by the condition of the properties in the vicinity of the Current
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Company.
The Company believes that the Current Hotels are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters. The Company has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substance or other environmental substances in connection with any of its
properties.
Tax Status
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended, effective for its short taxable year
ended December 31, 1994. The Company believes that it qualifies for taxation as
a REIT, and with certain exceptions, the Company will not be subject to tax at
the corporate level on its taxable income that is distributed to the
shareholders of the Company. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its annual taxable income. For taxable years
beginning after December 31, 2000, the annual taxable income
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distribution requirement has been lowered to 90%. Failure to qualify as a REIT
will render the Company subject to federal income tax (including any applicable
minimum tax) on its taxable income at regular corporate rates and distributions
to the shareholders in any such year will not be deductible by the Company.
Although the Company does not intend to request a ruling from the Internal
Revenue Service (the "Service") as to its REIT status, the Company has obtained
the opinion of its legal counsel that the Company qualifies as a REIT, which
opinion is based on certain assumptions and representations and is not binding
on the Service or any court. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and properties.
Seasonality
The Current Hotels' operations historically have been seasonal in nature,
reflecting higher REVPAR 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 stated equal 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.
Investments by Executive Management and Board of Directors
On October 29, 1999, the Company's Chief Executive Officer, Robert W.
Winston, III, and several members of WHI's Board of Directors, purchased an
aggregate of 594,950 shares of WHI's Common Stock, or approximately 3.5% of the
total shares outstanding as of December 31, 1999.
Executive Officers of the Registrant
The following table lists the executive officers of the Company:
NAME AGE POSITION
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Charles M. Winston 70 Chairman of the Board of Directors
Robert W. Winston, III 38 Chief Executive Officer
James D. Rosenberg 46 President, Chief Operating Officer and Secretary
Joseph V. Green 49 Executive Vice President, Chief Financial Officer
Kenneth R. Crockett 43 Executive Vice President of Development
CHARLES M. WINSTON. Charles Winston has served as Chairman of the Board of
Directors since March 15, 1994. Mr. Winston is a native of North Carolina and a
graduate of the University of North Carolina at Chapel Hill with an A.B.
degree. Mr. Winston has more than 36 years of experience in developing and
operating full service restaurants. Mr. Winston is Robert Winston's father and
brother of James Winston, a director.
ROBERT W. WINSTON, III. Robert Winston has served as Chief Executive
Officer and Director of the Company since March 15, 1994. Mr. Winston served as
the Company's President from March 15, 1994 through January 14, 1999 and as
Secretary for the periods from March 1994 through May 1995 and from October
1997 until May 5, 1998. Mr. Winston is a native of North Carolina and a
graduate of the University of North Carolina at Chapel Hill with a B.A. degree
in economics. Mr. Winston is Charles Winston's son and James Winston's nephew.
JAMES D. ROSENBERG. Mr. Rosenberg assumed the title of President on January
14, 1999. Mr. Rosenberg has also served as Chief Operating Officer since
January 5, 1998, Secretary since May 5, 1998, and served as Chief Financial
Officer from January 5, 1998 through May 18, 1999. Mr. Rosenberg is a CPA and a
graduate of Presbyterian College and received an MBA from the University of
South Carolina. Prior to joining the Company, Mr. Rosenberg held the position
of Senior Vice President with Holiday Inn Worldwide since 1994 where he was
responsible for managing 85 hotels in seven countries. Prior to joining the
Holiday Inn organization, Mr. Rosenberg was a partner in Sage Hospitality
Resources and served as Executive Vice President and Chief Financial Officer of
the Denver-based hospitality firm.
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JOSEPH V. GREEN. Mr. Green assumed the title of Executive Vice President,
Chief Financial Officer on May 18, 1999. Mr. Green has also served as Executive
Vice President - Acquisitions and Finance from January 1, 1998 through May 18,
1999, after having advised Winston Hospitality, Inc. on matters regarding hotel
acquisitions and finance since 1993, including the initial public offering of
WHI. Mr. Green is a graduate of East Carolina University, was awarded his J.D.
degree from Wake Forest University School of Law and received a Master of Laws
in Taxation from Georgetown University.
KENNETH R. CROCKETT. Mr. Crockett was appointed Senior Vice President of
Development of the Company in September 1995 and Executive Vice President of
Development in January 1998. Mr. Crockett is a graduate of the University of
North Carolina at Chapel Hill with a B.S. degree in Business Administration.
Prior to joining the Company, Mr. Crockett was an Associate Partner for project
development in commercial real estate at Capital Associates, a real estate
development firm located in the Raleigh, North Carolina area.
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ITEM 2. PROPERTIES
The following table sets forth certain unaudited pro forma information
with respect to the Current Hotels:
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1999
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Number Room Lease Number Room
of Revenues Revenues of Revenues
Rooms ($000) ADR Occupancy % ($000) Rooms ($000)
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Hampton Inns
Boone, NC 95 $ 1,896 $ 72.31 75.64% $ 787 95 $ 1,842
Brunswick, GA 128 2,022 58.32 74.22% 785 128 2,265
Cary, NC 130 2,081 67.21 65.24% 859 130 2,455
Charlotte, NC 125 2,780 79.08 77.06% 1,327 125 2,831
Chester, VA 66 1,334 71.66 77.29% 582 66 1,396
Duncanville, TX 119 1,221 49.83 56.39% 403 119 1,425
Durham, NC 137 2,582 68.19 75.72% 1,120 137 2,858
Gwinnett, GA (Hampton Inn & Suites) 136 2,799 78.57 71.77% 1,428 136 2,728
Hilton Head, SC 124 2,380 76.72 68.21% 975 124 2,285
Jacksonville, NC 120 1,872 58.62 72.90% 741 120 2,033
Las Vegas, NV* 128 1,872 58.63 68.35% 926 128 1,010
Perimeter, GA 131 2,391 80.13 62.40% 1,173 131 2,641
Raleigh, NC 141 2,930 73.07 77.91% 1,391 141 2,966
Southern Pines, NC 126 2,065 63.90 70.28% 850 126 1,968
Southlake, GA 124 2,235 64.46 76.01% 921 124 2,097
W. Springfield, MA 126 2,850 80.14 77.69% 1,365 126 2,484
White Plains, NY 156 4,902 105.16 81.87% 2,510 156 4,482
Wilmington, NC 118 2,242 68.55 75.95% 946 118 2,275
Comfort Inns
Augusta, GA 123 1,413 57.39 54.85% 468 123 1,471
Charleston, SC 128 2,534 75.24 72.10% 1,194 128 2,548
Chester, VA 122 2,115 64.58 73.53% 958 122 2,105
Clearwater/St. Petersburg, FL 120 1,659 53.40 71.40% 576 120 1,850
Durham, NC 138 2,536 72.68 69.28% 1,176 138 2,797
Fayetteville, NC 176 2,198 54.08 63.28% 962 176 2,358
Greenville, SC 190 1,552 46.96 47.65% 423 190 1,758
London, KY (Comfort Suites) 62 941 54.50 76.29% 394 62 955
Orlando, FL (Comfort Suites) 214 3,865 61.13 80.94% 1,705 214 4,027
Raleigh, NC 149 1,812 48.52 68.68% 657 149 1,636
Wilmington, NC 146 2,297 56.98 75.66% 949 146 2,423
Homewood Suites
Alpharetta, GA* 112 2,611 90.44 70.61% 1,242 112 1,229
Cary, NC 120 3,252 89.63 82.85% 1,986 120 3,363
Clear Lake, TX 92 2,294 94.80 72.06% 987 92 2,636
Durham, NC* 96 1,916 81.21 67.32% 890 96 171
Lake Mary, FL* 112 2,999 91.82 79.89% 1,153 112 1,398
Phoenix, AZ* 126 2,422 70.95 74.23% 1,285 126 997
Raleigh, NC* 137 3,318 86.38 76.82% 1,589 137 1,720
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1998
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Lease
Revenues
ADR Occupancy % ($000)
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Hampton Inns
Boone, NC $ 71.16 74.65% $ 758
Brunswick, GA 55.67 87.08% 954
Cary, NC 65.89 78.52% 1,126
Charlotte, NC 76.11 81.52% 1,368
Chester, VA 69.47 83.42% 626
Duncanville, TX 49.40 66.41% 519
Durham, NC 69.64 82.08% 1,308
Gwinnett, GA (Hampton Inn & Suites) 77.28 71.11% 1,386
Hilton Head, SC 71.08 71.03% 923
Jacksonville, NC 57.83 80.26% 860
Las Vegas, NV* 60.72 57.50% 500
Perimeter, GA 78.03 70.78% 1,356
Raleigh, NC 70.46 81.79% 1,423
Southern Pines, NC 57.09 74.95% 793
Southlake, GA 63.03 73.51% 838
W. Springfield, MA 74.99 72.03% 1,122
White Plains, NY 97.34 80.86% 2,235
Wilmington, NC 66.93 78.93% 974
Comfort Inns
Augusta, GA 52.76 62.10% 514
Charleston, SC 70.40 77.47% 1,211
Chester, VA 65.95 71.61% 960
Clearwater/St. Petersburg, FL 53.18 79.42% 708
Durham, NC 70.39 78.89% 1,359
Fayetteville, NC 54.45 67.41% 1,081
Greenville, SC 47.09 53.83% 569
London, KY (Comfort Suites) 55.83 75.59% 408
Orlando, FL (Comfort Suites) 59.35 86.70% 1,840
Raleigh, NC 48.52 61.99% 556
Wilmington, NC 57.13 79.59% 1,040
Homewood Suites
Alpharetta, GA* 91.51 53.53% 577
Cary, NC 91.92 83.53% 2,060
Clear Lake, TX 96.37 81.46% 1,237
Durham, NC* 72.95 42.10% 135
Lake Mary, FL* 87.40 59.26% 650
Phoenix, AZ* 69.87 52.92% 617
Raleigh, NC* 82.55 51.21% 954
- ------------------------------------------------------------------------------------
9
10
- -------------------------------------------------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------------------------------------------------
Number Room Lease Number
of Revenues Revenues of
Rooms ($000) ADR Occupancy % ($000) Rooms
- -------------------------------------------------------------------------------------------------------------------------
Holiday Inns
Abingdon, VA (Holiday Inn Express) 81 1,394 63.16 74.63% 667 81
Clearwater, FL (Holiday Inn Express) 127 2,496 68.49 78.61% 1,137 127
Dallas, TX (Holiday Inn Select) 244 4,179 72.80 64.45% 1,891 244
Secaucus, NJ# 160 5,442 115.70 80.53% 2,405 160
Tinton Falls, NJ# 171 4,414 91.67 77.15% 1,548 171
Courtyard by Marriott
Ann Arbor, MI 160 4,277 90.84 80.62% 2,055 160
Houston, TX 198 3,475 77.02 62.43% 1,565 198
Wilmington, NC 128 2,551 74.39 73.83% 1,082 128
Winston-Salem, NC* 122 2,289 76.39 67.29% 1,121 122
Hilton Garden Inns
Albany, NY* 155 3,286 92.12 63.05% 1,813 155
Alpharetta, GA* 164 3,827 98.74 64.75% 2,071 164
Raleigh/Durham, NC* 155 3,635 98.33 65.34% 2,030 155
Quality Suites - Charleston, SC 168 3,955 86.96 74.17% 1,789 168
Residence Inn - Phoenix, AZ# 168 3,459 82.12 68.68% 1,799 168
Fairfield Inn - Ann Arbor, MI 110 2,019 69.71 72.14% 821 110
- -------------------------------------------------------------------------------------------------------------------------
TOTAL 6,904 $134,886 $ 75.24 71.15% $61,877 6,904
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------
Room Lease
Revenues Revenues
($000) ADR Occupancy % ($000)
- -------------------------------------------------------------------------------------------------------
Holiday Inns
Abingdon, VA (Holiday Inn Express) 1,397 62.55 75.55% 675
Clearwater, FL (Holiday Inn Express) 2,196 63.48 74.62% 937
Dallas, TX (Holiday Inn Select) 4,503 74.66 67.73% 2,126
Secaucus, NJ# 5,305 109.79 82.74% 2,748
Tinton Falls, NJ# 3,946 86.75 72.88% 1,286
Courtyard by Marriott
Ann Arbor, MI 3,855 87.16 75.73% 1,780
Houston, TX 3,300 75.08 60.56% 1,456
Wilmington, NC 2,517 71.87 74.97% 1,069
Winston-Salem, NC* 395 73.50 48.94% 186
Hilton Garden Inns
Albany, NY* 2,086 91.56 53.45% 1,341
Alpharetta, GA* 2,593 95.32 54.21% 1,594
Raleigh/Durham, NC* 1,923 87.29 58.01% 1,113
Quality Suites - Charleston, SC 4,113 81.80 82.00% 1,910
Residence Inn - Phoenix, AZ# 4,200 90.74 75.48% 2,251
Fairfield Inn - Ann Arbor, MI 1,901 66.38 71.33% 748
- -------------------------------------------------------------------------------------------------------
TOTAL $121,713 $ 72.14 72.11% $ 56,765
- -------------------------------------------------------------------------------------------------------
* Hotel opened during 1998.
# Hotel acquired during 1998.
10
11
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, the Partnership cannot
operate hotels. Therefore, the Partnership leases the Current Hotels for terms
of 10 or 15 years pursuant to Percentage Leases, which provide for rent equal
to the greater of Base Rent or Percentage Rent. The Percentage Leases for the
Current Hotels contain the provisions described below. The Company intends that
future leases with respect to its hotel property investments will contain
substantially similar provisions, although the Company may, in its discretion,
alter any of these provisions with respect to any particular lease, depending
on the purchase price paid, economic conditions and other factors deemed
relevant at the time.
Percentage Lease Terms
Each Percentage Lease for the Current Hotels has a non-cancelable term of 10
or 15 years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Lease.
Amounts Payable under the Percentage Leases
During the term of each Percentage Lease, the lessees are or will be
obligated to pay (i) the greater of Base Rent or Percentage Rent and (ii)
certain other additional charges. Base Rent accrues and is required to be paid
monthly. Percentage Rent consists of minimum percentage rent and excess
percentage rent, if any. Minimum percentage rent is calculated based primarily
on the amount of room revenue up to a predetermined threshold per the lease.
The percentage, which differs by hotel, is multiplied by this amount to
calculate minimum percentage rent. These percentages range from 23% to 81%.
Excess percentage rent is calculated based primarily on the amount of any room
revenue in excess of the predetermined threshold mentioned above. The
percentage, which differs by hotel, is multiplied by this amount to calculate
excess percentage rent. These percentages range from 5% to 80%. For most
leases, the percentage used to calculate excess percentage rent exceeds the
percentage used to calculate the minimum percentage rent. Percentage Rent is
due either monthly or quarterly.
Beginning in the fiscal year following the year in which most Percentage
Leases commence, and for each fiscal year thereafter, (i) the annual Base Rent
and (ii) the Percentage Rent formulas will be adjusted on a quarterly or annual
basis for inflation, based on changes in the CPI. The adjustment in any quarter
may not exceed 2%, which may be less than the change in CPI for the quarter.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Company, the Percentage Leases require
the lessees to pay rent, insurance, all costs and expenses and all utility and
other charges incurred in the operation of the Current Hotels. The Percentage
Leases also provide for rent reductions and abatements in the event of damage
to, destruction of or a partial taking of any Current Hotel.
Maintenance and Modifications
Under the Percentage Leases, the Company is required to maintain the
underground utilities and the structural elements of the improvements,
including exterior walls (excluding plate glass) and the roof of such Current
Hotel. In addition, the Percentage Leases obligate the Company to fund periodic
capital improvements (in addition to maintenance of underground utilities and
structural elements) to the buildings and grounds comprising their respective
Current Hotels, and the periodic repair, replacement and refurbishment of
furniture, fixtures and equipment in their respective Current Hotels, up to an
amount equal to 5% of room revenues (7% of room revenues and food and beverage
revenue for one of its full-service hotels). These obligations will be carried
forward to the extent that the lessees have not expended such amounts, and any
unexpended amounts will remain the property of the Company upon termination of
the Percentage Leases. Except for capital improvements and maintenance of
structural elements and underground utilities, the lessees are required, at
their expense, to maintain the Current Hotels in good order and repair, except
for ordinary wear and tear, and to make non-structural, foreseen and
unforeseen, and ordinary and extraordinary repairs which may be necessary and
appropriate to keep the Current Hotels in good order and repair.
The lessees are not obligated to bear the cost of capital improvements to
the Current Hotels. With the consent of the Company, however, the lessees, at
their expense, may make non-capital and capital additions, modifications or
improvements to the Current Hotels, provided that such action does not
significantly alter the character or purposes of the Current Hotels or
significantly detract from the value or operating efficiencies of the Current
Hotels. All such alterations, replacements and improvements shall be subject to
all the terms and provisions of the Percentage Leases and will become the
property of the Company upon termination of the Percentage Leases. The Company
owns or will own substantially all personal property not affixed to, or deemed
a part of, the real estate or improvements thereon comprising the Current
Hotels, except to the extent that ownership of such personal property would
cause the rents under the Percentage Leases not to qualify as "rents from real
property" for REIT income test purposes.
11
12
ITEM 3. LEGAL PROCEEDINGS
Other than the matter described below, the Company currently is not involved
in any pending legal proceedings, other than ordinary routine litigation
incidental to the business, nor are any such proceedings known to be
contemplated by governmental authorities. The lessees have advised the Company
that they currently are not involved in any material pending litigation, other
than routine litigation arising in the ordinary course of business,
substantially all of which is expected to be covered by liability insurance.
On July 16, 1999, Walton Construction Company, Inc. ("Walton") filed a civil
lawsuit in the State Court of Fulton County Georgia naming the Partnership as
defendant. The Partnership removed the action to the United States District
Court for the Northern District of Georgia on August 30, 1999. The complaint
alleges that the Partnership has not paid approximately $2,500,000 due under a
contract entered into by the parties in connection with the construction of the
Partnership's Alpharetta, Georgia Homewood Suites Hotel. The Partnership
disputes that such monies are due to Walton based upon Walton's alleged
inability to complete construction on the hotel within the time set out in the
construction contract. The Partnership has also filed counterclaims against
Walton arising out of the construction delays and construction deficiencies
allegedly caused by Walton. On August 2, 1999, Walton initiated a virtually
identical action in the United States District Court for the Eastern District
of North Carolina. On February 29, 2000, the Partnership answered Walton's
complaint and counterclaimed for recovery of damages due to the construction
delays and construction deficiencies allegedly caused by Walton.
Simultaneously, the Partnership also filed a third party action against
Walton's surety for recovery on a performance bond.
The Partnership believes that it has substantial and meritorious defenses
against the claims alleged against it, and the Partnership intends to
vigorously defend against these claims and pursue its own claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
12
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
WHI's Common Stock trades on the New York Stock Exchange ("NYSE") under the
symbol "WXH." As of March 15, 2000, WHI had approximately 11,700 common
shareholders based on the number of shareholders of record and an estimate of
the number of participants represented by security position listings. The
following table sets forth, for the indicated periods, the high and low closing
prices for the Common Stock and the cash distributions declared per share:
PRICE RANGE CASH DISTRIBUTIONS DECLARED
----------- ---------------------------
HIGH LOW PER SHARE
---- --- ---------
1999
First Quarter $ 9.75 $ 8.063 $ 0.28
Second Quarter 10.50 8.188 0.28
Third Quarter 10.313 8.375 0.28
Fourth Quarter 8.688 7.75 0.28
1998
First Quarter $ 13.875 $ 12.813 $ 0.27
Second Quarter 13.50 11.25 0.27
Third Quarter 12.125 8.563 0.27
Fourth Quarter 9.50 6.938 0.28
Although the declaration of distributions is within the discretion of the
Board of Directors and depends on the Company's results of operations, cash
available for distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Directors, the Company's policy is to make regular
quarterly distributions to its shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
On October 2, 1999, WHI issued 440,100 shares of WHI Common Stock to Quantum
Realty Partners, II, L.P. in exchange for 440,100 units of limited partnership
in the Partnership. The WHI Common Stock was issued in reliance on a claim of
exemption pursuant to Section 4(2) of the Securities Act of 1933, as amended.
13
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company
for the years ended December 31, 1999, 1998, 1997, 1996, and 1995 and selected
historical balance sheet data as of December 31, 1999, 1998, 1997, 1996, and
1995. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and notes thereto included elsewhere in
this report.
WINSTON HOTELS, INC.
SELECTED HISTORICAL FINANCIAL AND OTHER DATA FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENTS OF INCOME:
Revenue:
Percentage lease revenue $ 61,877 $ 54,700 $ 35,868 $ 26,611 $ 17,148
Interest and other income 433 249 234 97 442
---------- ---------- ---------- ---------- ----------
Total revenue 62,310 54,949 36,102 26,708 17,590
---------- ---------- ---------- ---------- ----------
Expenses:
Real estate taxes and property and casualty
insurance 5,996 5,017 2,702 1,647 1,054
General and administrative 4,236 3,889 2,095 2,061 1,208
Interest 12,513 8,314 2,648 2,368 2,555
Depreciation 20,565 16,389 10,064 6,476 3,854
Amortization 834 465 520 368 117
---------- ---------- ---------- ---------- ----------
Total expenses 44,144 34,074 18,029 12,920 8,788
---------- ---------- ---------- ---------- ----------
Income before loss on sale of property and
allocation to minority interest 18,166 20,875 18,073 13,788 8,802
Loss on sale of property 239 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income before allocation to minority interest 17,927 20,875 18,073 13,788 8,802
Income allocation to minority interest 1,026 1,349 1,329 786 417
---------- ---------- ---------- ---------- ----------
Net income 16,901 19,526 16,744 13,002 8,385
Preferred stock distribution 6,938 6,938 2,100 -- --
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders $ 9,963 $ 12,588 $ 14,644 $ 13,002 $ 8,385
========== ========== ========== ========== ==========
Earnings per share:
Net income per common share $ 0.61 $ 0.77 $ 0.92 $ 1.01 $ 0.96
========== ========== ========== ========== ==========
Net income per common share assuming dilution $ 0.61 $ 0.77 $ 0.91 $ 1.00 $ 0.96
========== ========== ========== ========== ==========
Weighted average number of common shares 16,467 16,286 15,990 12,922 8,715
Weighted average number of common shares
assuming dilution 18,108 18,040 17,555 13,768 9,167
Distributions per common share $ 1.12 $ 1.09 $ 1.08 $ 1.005 $ 0.93
BALANCE SHEET DATA:
Cash and cash equivalents $ 28 $ 33 $ 164 $ 234 $ 2,496
Investment in hotel properties 388,870 397,861 279,485 196,682 121,886
Total assets 406,071 412,156 287,827 203,502 123,969
Total debt 174,475 173,085 44,081 42,800 34,000
Shareholders' equity 209,078 213,425 217,490 141,813 80,872
OTHER DATA:
Lessees' room revenue $ 134,885 $ 117,752 $ 79,526 $ 58,956 $ 39,677
Funds from operations(1) 31,793 30,326 26,037 20,581 12,656
Cash available for distribution 24,735 24,093 21,809 17,557 11,185
14
15
Cash provided by (used in):
Operating activities 39,952 34,605 27,811 18,729 12,628
Investing activities (12,658) (135,398) (82,349) (74,614) (36,059)
Financing activities (27,299) 100,662 54,468 53,623 24,813
(1) Funds from operations, as defined by the National Association of Real
Estate Investment Trusts, is income (loss) before minority interest (determined
in accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of properties, plus real
estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures.
The following table sets forth selected financial information for CapStar
Winston for the years ended December 31, 1999 and 1998 and the period October
15, 1997 (date of inception) through December 31, 1997. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and notes
thereto included elsewhere in this report.
CAPSTAR WINSTON COMPANY, L.L.C.
SELECTED HISTORICAL FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD OCTOBER 15, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997
(IN THOUSANDS)
PERIOD OCTOBER 15,
YEAR ENDED YEAR ENDED 1997 THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
Room revenue $ 127,571 $ 113,451 $ 8,197
Other revenue 14,144 12,182 846
------------- -------------- ------------
Total revenue 141,715 125,633 9,043
------------- -------------- ------------
Rooms expense 29,190 25,664 2,158
Percentage lease expense 58,551 52,720 3,242
Other expenses 53,087 46,653 3,704
------------- -------------- ------------
Total expenses 140,828 125,037 9,104
------------- -------------- ------------
Net income (loss) $ 887 $ 596 $ (61)
============= ============== ============
The following table sets forth selected financial information for Winston
Hospitality, Inc. for the ten months ended October 31, 1997 and 1996 and the
years ended December 31, 1996 and 1995. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements and notes thereto
included elsewhere in this report.
WINSTON HOSPITALITY, INC.
SELECTED HISTORICAL FINANCIAL DATA
FOR THE TEN-MONTHS ENDED OCTOBER 31, 1997 AND 1996
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
TEN MONTHS ENDED OCTOBER 31, YEARS ENDED DECEMBER 31,
---------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(unaudited)
Room revenue $ 67,145 $ 49,633 $ 58,956 $ 39,677
Other revenue 3,944 2,390 2,969 1,100
----------- ----------- ------------ -----------
Total revenue 71,089 52,023 61,925 40,777
----------- ----------- ------------ -----------
Property and operating expenses 38,292 27,965 34,549 22,097
Percentage lease payments 30,980 22,800 26,611 17,148
----------- ----------- ------------ -----------
Total expenses 69,272 50,765 61,160 39,245
----------- ----------- ------------ -----------
Net income $ 1,817 $ 1,258 $ 765 $ 1,532
=========== =========== ============ ===========
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering of $0.01 par value common stock ("Common
Stock"), utilizing the majority of the proceeds to acquire one hotel and a
general partnership interest (as the sole general partner) in WINN Limited
Partnership (the "Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine hotel properties (collectively the ten hotels are
the "Initial Hotels"). The Initial Hotels were acquired from affiliates of WHI.
WHI and the Partnership (collectively the "Company") began operations as a REIT
on June 2, 1994.
During 1995 and 1996, WHI completed follow-on Common Stock offerings, as
well as a Preferred Stock offering in September 1997, and invested the net
proceeds from these offerings in the Partnership. The Partnership utilized the
proceeds to acquire 28 additional hotel properties. The Company owned 31 hotels
as of December 31, 1996 and acquired seven hotels in 1997 (the "1997 Hotels").
During 1998, the Company added 13 additional properties to its portfolio, five
of which were internally developed (the "1998 Hotels") (see Note 4 to the
consolidated financial statements). As of December 31, 1999, WHI's ownership in
the Partnership was 92.83% (see Note 7 to the consolidated financial
statements). As of December 31, 1999, the Company owned 51 hotel properties
(the "Current Hotels"), in 13 states, having an aggregate of 6,904 rooms.
Forty-nine of the Current Hotels were leased, pursuant to separate percentage
operating lease agreements (the "Percentage Leases"), to CapStar Winston
Company, L.L.C. ("CapStar Winston"), one was leased to Bristol Hotels and
Resorts, Inc. and one was leased to Prime Hospitality Corp.
Prior to November 17, 1997, the Current Hotels were leased pursuant to the
Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and
November 24, 1997, CapStar Management Company, L.P. purchased substantially all
of the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including all 38 of the then existing Current Hotels' leases. Concurrent with
this transaction, the leases were assigned to CapStar Winston, an affiliate of
CapStar Management Company, L.P., and the terms of the leases were extended to
15 years from the date of the transaction.
CapStar Winston is a wholly owned subsidiary of MeriStar Hotels and Resorts,
Inc. ("MeriStar"). As of December 31, 1999, MeriStar, the nation's largest
independent hotel management company, leased or managed 225 hotels with 47,046
rooms in 35 states, the District of Columbia, Canada and the U.S. Virgin
Islands.
RESULTS OF OPERATIONS
For the periods ended December 31, 1999, 1998, and 1997, the differences in
operating results are primarily attributable to the stabilization of the 1998
Hotels and the full year of operations of those hotels in 1999 versus the
partial year of operations in 1998. The table below outlines the Company's
hotel properties owned as of December 31, 1999, 1998 and 1997:
December 31, 1999 December 31, 1998 December 31, 1997
--------------------------- ----------------------------- ---------------------------
Acquisitions Properties Acquisitions* Properties Acquisitions Properties
during owned at during owned at during owned at
Type of Hotel the year year end the year year end the year year end
------------- -------- -------- -------- -------- -------- --------
Limited-service hotels -- 29 1 29 4 28
Extended-stay hotels -- 11 6 11 1 5
Full-service hotels -- 11 6 11 2 5
-- -- -- -- - --
Total -- 51 13 51 7 38
== == == == = ==
* Five of the total 13 hotels added in 1998 were internally developed
properties.
16
17
In order to present a more meaningful comparison of operations, the
following comparisons are presented:
THE COMPANY:
- actual operating results for the year ended December 31, 1999 versus
actual operating results for the year ended December 31, 1998;
- actual operating results for the year ended December 31, 1998 versus
actual operating results for the year ended December 31, 1997;
- actual operating results for the year ended December 31, 1999 versus
pro forma operating results for the year ended December 31, 1998, as
if the addition of the 1998 Hotels occurred on the later of January
1, 1998 or the hotel opening date (the Company made no acquisitions
in 1999, therefore the pro forma 1999 results of operations would be
identical to the actual 1999 results of operations);
- pro forma operating results for the year ended December 31, 1998
versus pro forma operating results for the year ended December 31,
1997, as if the Preferred Stock offering and the addition of the 1998
Hotels and 1997 Hotels occurred on the later of January 1, 1997 or
the hotel opening date.
CAPSTAR WINSTON COMPANY, L.L.C.:
- actual operating results for the year ended December 31, 1999 versus
actual operating results for the year ended December 31, 1998;
- Since CapStar Winston operated for a partial year in 1997 (November
and December) and for a full year in 1998, the operating results of
these two periods are very different and difficult to compare. Thus,
no management discussion and analysis will be included herein. (See
Item 14 for CapStar Winston's financial statement disclosure.)
THE COMPANY
ACTUAL - YEAR ENDED DECEMBER 31, 1999 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1998
The Company had revenues of $62,310 in 1999, consisting of $61,877 of
Percentage Lease revenues and $433 of interest and other income. Percentage
Lease revenues increased $7,177, or 13%, in 1999 from $54,700 in 1998. This
increase was primarily attributable to an increase in lease revenues from the
1998 Hotels due to a full year of operations in 1999 versus a partial year of
operations in 1998, partially offset by a decrease of $1,160 in lease revenue
generated from the hotels owned as of December 31, 1997, which decrease was
primarily attributable to competitive pressures.
Real estate taxes and property and casualty insurance expenses incurred in
1999 were $5,996, an increase of $979 from $5,017 in 1998. The increase was
primarily attributable to a full year of operations for the 1998 Hotels in 1999
versus a partial year in 1998. General and administrative expenses increased
$347 to $4,236 in 1999 from $3,889 in 1998. The increase was primarily
attributable to an increase in the number of employees and related compensation
expense throughout the year, costs associated with efforts to form joint
ventures and costs associated with efforts to sell certain hotels. Interest
expense increased $4,199 to $12,513 in 1999 from $8,314 in 1998, primarily due
to an increase in weighted-average outstanding borrowings from $127,776 in 1998
to $178,038 in 1999, and a decrease of capitalized interest of $1,350 from
$1,513 in 1998 to $163 in 1999. Annual weighted-average interest rates
decreased 0.58% from 7.63% in 1998 to 7.05% in 1999. Depreciation expense
increased $4,176 to $20,565 in 1999 from $16,389 in 1998, primarily due to
depreciation related to the 1998 Hotels and renovations completed during 1999
and 1998. Amortization expense increased $369 to $834 in 1999 from $465 in
1998. The increase is primarily attributable to an increase in amortization of
deferred financing costs associated with the Company's new $140,000 line of
credit, which originated in February 1999, and the Company's $71,000 GE Capital
Corporation loan which originated in November 1998.
ACTUAL - YEAR ENDED DECEMBER 31, 1998 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1997
The Company had revenues of $54,949 in 1998, consisting of $54,700 of
Percentage Lease revenues and $249 of interest and other income. Percentage
Lease revenues increased $18,832, or 53%, in 1998 from $35,868 in 1997. This
increase was attributable to (i) $12,132 related to the 1998 Hotels; (ii)
$6,479 related to the 1997 Hotels owned for the entire 12-month period in 1998;
and (iii) $221 in lease revenues generated from the hotels owned as of December
31, 1996.
17
18
Real estate taxes and property and casualty insurance expenses incurred in
1998 were $5,017, an increase of $2,315 from $2,702 in 1997. $940 of this
increase was attributable to the 1998 Hotels and $813 was due to the 1997
Hotels that were owned for the entire 12-month period in 1998. The remaining
increase was due to an increase in assessed values and rates. General and
administrative expenses increased $1,794 to $3,889 in 1998 from $2,095 in 1997.
The increase was primarily attributable to (i) an increase in the number of
employees and related compensation expense throughout the year; (ii) costs
related to the increase in size and activities of the Company in 1998 over
1997; as well as (iii) advertising costs associated with the opening of five
internally developed hotels during 1998. Interest expense increased $5,666 to
$8,314 in 1998 from $2,648 in 1997, primarily due to an increase in
weighted-average outstanding borrowings from $48,842 in 1997 to $127,776 in
1998. This increase was due to the borrowings necessary to acquire and develop
the 1998 Hotels as well as an increase in renovation activity in 1998. Interest
rates remained relatively flat from 1997 to 1998. Depreciation expense
increased $6,325 to $16,389 in 1998 from $10,064 in 1997, primarily due to
depreciation related to the 1998 Hotels, the 1997 Hotels and renovations
completed during 1998 and 1997.
ACTUAL - YEAR ENDED DECEMBER 31, 1999 VERSUS PRO FORMA - YEAR ENDED DECEMBER
31, 1998
The Company had revenues of $62,310 for the year ended December 31, 1999,
consisting of $61,877 of Percentage Lease revenues and $433 of interest and
other income. Percentage Lease revenues increased $5,476, or 10%, to $61,877 in
1999 from $56,401 in 1998. This increase was primarily attributable to the
opening of 10 hotel properties in 1998 (the "1998 New Hotels"), partially
offset by a decrease of $935 in lease revenue generated from the hotels owned
as of December 31, 1997, which decrease was primarily attributable to
competitive pressures.
Real estate taxes and property and casualty insurance expenses incurred in
1999 were $5,996, an increase of $739 from $5,257 in 1998. The increase was
primarily attributable to the 1998 New Hotels and an increase in tax rates and
assessed values in 1999. General and administrative expenses increased $338 to
$4,236 in 1999 from $3,898 in 1998. The increase was primarily attributable to
an increase in the number of employees and related compensation expense
throughout the year, costs associated with efforts to form joint ventures and
costs associated with efforts to sell certain hotels. Interest expense
increased $3,602 to $12,513 in 1999 from $8,911 in 1998. The increase was
primarily due to an increase in weighted-average borrowings from $137,932 in
1998 to $178,038 in 1999, offset by a decrease of capitalized interest of
$1,350 from $1,513 in 1998 to $163 in 1999. Interest rates decreased 0.58% from
7.63% in 1998 to 7.05% in 1999. Depreciation expense increased $3,845 to
$20,565 in 1999 from $16,720 in 1998, primarily due to additional depreciation
related to the 1998 New Hotels and renovations completed during 1999 and 1998.
Amortization expense increased $372 to $834 in 1999 from $462 in 1998. The
increase is primarily attributable to an increase in amortization of deferred
financing costs associated with the Company's new $140,000 line of credit,
which originated in February 1999, and the Company's $71,000 GE Capital
Corporation loan, which originated in November 1998.
PRO FORMA - YEAR ENDED DECEMBER 31, 1998 VERSUS PRO FORMA - YEAR ENDED DECEMBER
31, 1997
The Company had pro forma revenues of $56,650 for the year ended December
31, 1998, consisting of $56,401 of pro forma Percentage Lease revenues and $249
of pro forma interest and other income. Pro forma Percentage Lease revenues
increased $8,781, or 18%, to $56,401 in 1998 from $47,620 in 1997. Of this
increase, $7,667 was attributable to the 1998 New Hotels and the remaining
increase of $1,114 was primarily due to an increase in room rates in 1998 from
1997.
Pro forma real estate taxes and property and casualty insurance expenses
incurred in 1998 were $5,257, an increase of $1,163 from $4,094 in 1997. This
increase was primarily attributable to the 1998 New Hotels and an increase in
tax rates and assessed values in 1998. Pro forma general and administrative
expenses increased $1,730 to $3,898 in 1998 from $2,168 in 1997. The increase
was primarily attributable to (i) an increase in the number of employees and
related compensation expense throughout the year; (ii) costs related to the
increase in size and activities of the Company in 1998 over 1997; as well as
(iii) pre-opening advertising costs associated with the opening of five
internally developed hotels during 1998. Pro forma interest expense increased
$5,269 to $8,911 in 1998 from $3,642 in 1997. The increase was primarily due to
an increase in weighted average borrowings from $68,957 in 1997 to $137,932 in
1998, which resulted from borrowings made to acquire and develop the 1998 New
Hotels. Interest rates remained flat from 1997 to 1998. Pro forma depreciation
expense increased $4,262 to $16,720 in 1998 from $12,458 in 1997, primarily due
to additional depreciation related to the 1998 New Hotels and renovations
completed during 1998 and 1997.
18
19
CAPSTAR WINSTON COMPANY, L.L.C.
ACTUAL - YEAR ENDED DECEMBER 31, 1999 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1998
Total revenue increased $16,082 or 12.8%, to $141,715 from $125,633. This
increase was primarily related to an increase in room revenues of $14,120 or
12.4%, to $127,571 from $113,451. The increase in room revenues was due to an
increase of $14,058 for the 1998 Hotels and an increase of $62 for all other
hotels. Food and beverage revenue increased $1,939 to $8,732 in 1999 from
$6,793 in 1998, primarily due to increased revenue from the 1998 Hotels.
Total expenses increased $15,791 or 12.6%, to $140,828 from $125,037. This
increase was primarily related to increased expenses generated by the 1998
Hotels.
Net income increased $291, to $887 from $596, primarily driven by the
operating results of the 1998 Hotels.
REVENUE RECOGNITION AND IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS TO BE
ADOPTED IN 2000
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, the Company has 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 Percentage 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 Percentage 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 Percentage Leases have fiscal year
ends which differ from the Company's calendar year end. SAB 101 will have no
impact on the Company's interim or annual cash flow from its third party
lessees, and therefore on its ability to pay dividends. The Company will
account for SAB 101 as a change in accounting principle effective January 1,
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the year ended December 31,
1999, cash flow provided by operating activities was $39,952 and funds from
operations, which is equal to net income before allocation to minority interest
(excluding gains/losses on sales of property), plus depreciation, less
preferred share distributions, was $31,793. 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 taxable
years beginning after December 31, 2000, the taxable income distribution
requirement has been lowered to 90%. In 1999, the Company declared
distributions of $25,388 to its 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 during the year ended
December 31, 1999 totaled $12,658, primarily relating to capital expenditures
and renovation of hotels. During 1999, the Company spent $16,179 or 12.0% of
the lessees' room revenue, in connection with the renovation of its Current
Hotels. These capital expenditures were well 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 5.5% and 5.3% of room revenues in 1999 and 1998,
respectively, and are paid by the lessees.
During 1999, the Company sold two land parcels previously held for
development. Total proceeds received were $3,789, resulting in a loss of $239.
Also during 1999, the Company entered into a joint venture agreement with
Regent Partners, Inc. (the "Joint Venture") to jointly develop hotel
properties. As of December 31, 1999, the Company had invested $183 in the Joint
Venture. The first hotel to be developed by the Joint Venture, a full service
158-room Hilton Garden Inn at Windsor, CT, is scheduled to open during the
third quarter of 2000. The second hotel to be developed by the Joint Venture, a
full-service 177-room Hilton Garden Inn in the Chicago suburb of Evanston, is
scheduled to open before the holiday season in 2001. The Company continues to
seek additional joint venture opportunities with other business partners.
19
20
On February 15, 2000, the Company sold its Comfort Suites hotel in London,
KY. Sales proceeds received by the Company totaled $2,497, resulting in a net
loss of $265. The Company also is considering the sale of certain other
non-core hotels that lie outside the Company's upscale segment focus and plans
to use the proceeds to reduce debt.
The Company's net cash used in financing activities during the year ended
December 31, 1999 totaled $27,299. This net use of cash was primarily due to
the payment of distributions to shareholders of $25,248 and the payment of
distributions to the Partnership's minority interest of $1,947. This amount
also includes payments for financing fees totaling $1,445 primarily related to
the Company's $140,000 line of credit, principal payments totaling $1,025
related to the Company's $71,000 fixed rate note, and $49 to register
additional common shares. These payments were offset by a net increase in
amounts outstanding under the $140,000 line of credit of $2,415.
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 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%. As of December
31, 1999, total outstanding debt under the line of credit was $104,500.
The Line is used primarily to fund the Company's 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 financing to support
hotel acquisitions, development and major renovations.
The Company had $69,975 in debt at December 31, 1999 that was subject to a
fixed interest rate and fixed monthly payments. This debt, a ten-year loan with
a 25-year amortization period, with GE Capital Corporation, carries an interest
rate of 7.375% for the first 10 years. All unpaid principal and interest are
due on December 1, 2008. The GE Capital loan is collateralized with 14 of the
Company's Current Hotels.
On May 18, 1999, at the Annual Meeting of Shareholders, the Company's
shareholders approved an amendment to the Company's Articles of Incorporation
to increase the limit of its level of permitted indebtedness from 45% to 60% of
investments in hotel properties, at cost. This change should provide the
Company with greater financial flexibility and should allow the Company to be
better positioned to acquire or develop hotel properties when attractive
opportunities are available.
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 that meet its investment criteria.
SEASONALITY
The Company's operations historically have been seasonal in nature,
reflecting higher REVPAR 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 equal 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.
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, the increase of development costs in
connection with projects that are not pursued to completion, and the other risk
factors described in Exhibit 99.1 attached to this report.
20
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, the Company's exposure to market risk for a change
in interest rates related solely to debt outstanding under its $140,000 line of
credit (the "Line"). Debt outstanding under the Line totaled $104,500 at
December 31, 1999. The Line, which expires in February 2002, bears interest
generally at rates from LIBOR plus 1.45% to LIBOR plus 1.70%, based, in part,
on the Company's level of total indebtedness. The Company's current interest
rate is LIBOR plus 1.45%. During 1999, the Company entered into 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%
under the Line on a principal balance of $25,000 for the period of March 23,
1999 through March 25, 2002. The weighted average interest rate on the Line for
1999 was 6.84%. (See Note 6 to the consolidated financial statements.) 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. The Line, combined with the fixed-rate
$71,000 loan with GE Capital Corporation, provides the Company with a maximum
borrowing capacity of $211,000. The Company does not enter into derivative or
interest rate transactions for speculative purposes.
The following table presents the aggregate maturities and historical cost
amounts of the fixed debt principal and interest rates by maturity dates at
December 31, 1999:
MATURITY DATE FIXED RATE DEBT INTEREST RATE
2000 $ 1,103 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%
--------- ------
$ 69,975 7.375%
========= ======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are filed with this report
on Form 10-K immediately following the signature page and are listed in Item 14
of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the Company's directors is incorporated by reference from
pages 5 and 6, "Proposal 1 - Election of Directors", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 9, 2000. Information on the Company's executive officers is included
under the caption "Executive Officers of the Registrant" on pages 7 and 8 of
this report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from pages 8 through 12,
"Executive Compensation", in the Company's Proxy Statement to be filed with
respect to the Annual Meeting of Shareholders to be held May 9, 2000.
21
22
ITEM 12. SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
This information is incorporated by reference from pages 2 through 4, "Share
Ownership of Management and Certain Beneficial Owners", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 9, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from page 14, "Certain
Relationships and Related Transactions", in the Company's Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held May 9,
2000.
22
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) FINANCIAL STATEMENTS AND SCHEDULES. The financial statements and
schedules listed below are included in this report.
Financial Statements and Schedules Form 10-K Page
- ---------------------------------- --------------
WINSTON HOTELS, INC.:
- ---------------------
Report of Independent Accountants 28
Consolidated Balance Sheets as of December 31, 1999 and 1998 29
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 30
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997 31
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 32
Notes to Consolidated Financial Statements 33
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1999 42
Notes to Schedule III 44
CAPSTAR WINSTON COMPANY, L.L.C.:
- --------------------------------
Independent Auditors' Report 45
Balance Sheets as of December 31, 1999 and 1998 46
Statements of Operations for the years ended December 31, 1999 and 1998 and the period
from October 15, 1997 (date of inception) through December 31, 1997 47
Statements of Members' Capital for the years ended December 31, 1999 and 1998
and the period from October 15, 1997 (date of inception) through December 31, 1997 48
Statements of Cash Flows for the years ended December 31, 1999 and
1998 and the period from October 15, 1997 (date of inception) through December 31, 1997 49
Notes to Financial Statements 50
WINSTON HOSPITALITY, INC.:
- --------------------------
Report of Independent Accountants 53
Statement of Income for the ten months ended October 31, 1997 54
Statement of Shareholders' Equity for the ten months ended October 31, 1997 54
Statement of Cash Flows for the ten months ended October 31, 1997 55
Notes to Financial Statements 56
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1999.
23
24
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
listed below. Management contracts or compensatory plans are filed as
Exhibits 10.9, 10.12, 10.13 and 10.16.
Exhibit Description
------- -----------
3.1(10) Restated Articles of Incorporation
3.2(1) Amended and Restated Bylaws
4.1(1) Specimen certificate for Common Stock, $0.01 par
value per share
4.2(4) Specimen certificate for 9.25% Series A Cumulative
Preferred Stock
4.3(10) Restated Articles of Incorporation
4.4(1) Amended and Restated Bylaws
10.1(3) Second Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.2(4) Amendment No. 1 dated September 11, 1997 to Second
Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.3(6) Amendment No. 2 dated December 31, 1997 to Second
Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.4 Amendment No. 3 dated September 14, 1998 to Second
Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.5(11) Amendment No. 4 dated October 1, 1999 to Second
Amended and Restated Agreement of Limited Partnership
of WINN Limited Partnership
10.6(2) Form of Percentage Leases
10.7(5) First Amendment to Lease dated November 17, 1997
between WINN Limited Partnership and CapStar
Winston Company, L.L.C.
10.8(5) First Amendment to Lease dated November 24, 1997
between WINN Limited Partnership and CapStar
Winston Company, L.L.C.
10.9(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.10(2) Limitation of Future Hotel Ownership and Development
Agreement
10.11(5) Guaranty dated November 17, 1997 between CapStar Hotel
Company, WINN Limited Partnership and Winston Hotels,
Inc.
10.12(6) Employment Agreement, dated July 31, 1997, by and
between Kenneth R. Crockett and Winston Hotels, Inc.
10.13(7) Winston Hotels, Inc. Stock Incentive Plan as amended
May 1998
10.14(8) Loan Agreement by and between Winston SPE LLC and CMF
Capital Company LLC dated November 3, 1998
10.15(8) Promissory note dated November 3, 1998 by and between
Winston SPE LLC and CMF Capital Company, LLC
24
25
10.16(9) Winston Hotels, Inc. Executive Deferred Compensation Plan
10.17(9) Credit Agreement, dated as of January 15, 1999, among
Wachovia Bank, N.A., Branch Banking and Trust
Company, SouthTrust Bank, N.A., Centura Bank, Winston
Hotels, Inc., WINN Limited Partnership and Wachovia
Bank, N.A. as Agent (the "Credit Agreement")
10.18(9) Promissory Note, dated as of January 15, 1999, from
Winston Hotels, Inc. and WINN Limited Partnership to
Wachovia Bank, N.A. for the principal sum of
$60,000,000 pursuant to the Credit Agreement
10.19(9) Promissory Note, dated as of January 15, 1999, from
Winston Hotels, Inc. and WINN Limited Partnership to
Branch Banking and Trust Company for the principal
sum of $40,000,000 pursuant to the Credit Agreement
10.20(9) Promissory Note, dated as of January 15, 1999, from
Winston Hotels, Inc. and WINN Limited Partnership to
SouthTrust Bank, N.A. for the principal sum of
$25,000,000 pursuant to the Credit Agreement
10.21(9) Promissory Note, dated as of January 15, 1999, from
Winston Hotels, Inc. and WINN Limited Partnership to
Centura Bank for the principal sum of $15,000,000
pursuant to the Credit Agreement
10.22(9) Form of Deed of Trust, Assignment of Rents, Security
Agreement and Financing Statement used to secure
certain obligations under the Credit Agreement (not
including certain variations existing in the
different states where the properties are located)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
(PricewaterhouseCoopers LLP)
23.2 Accountants' Consent (KPMG LLP)
24.1 Powers of Attorney
27.1 Financial Data Schedule (for SEC use only)
99.1 Risk Factors
(1) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-76602)
effective May 25, 1994 and incorporated herein by reference.
(2) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-91230)
effective May 11, 1995 and incorporated herein by reference.
(3) Exhibit to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on July 24, 1997 and incorporated
herein by reference.
(4) Exhibits to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on September 15, 1997 and
incorporated herein by reference.
(5) Exhibits to the Company's report on Form 8-K as filed with the
Securities and Exchange Commission on December 10, 1997 and
incorporated herein by reference.
(6) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1998 and as amended by
Form 10-K/A filed with the Securities and Exchange Commission on April
1, 1998.
25
26
(7) Exhibit to the Company's Registration Statement on Form S-8 as filed
with the Securities and Exchange Commission on July 29, 1998
(Registration No. 333-60079) and incorporated herein by reference.
(8) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on November 16, 1998 and as
amended on Form 10-Q/A filed with the Securities and Exchange
Commission on February 23, 1999 and incorporated herein by reference.
(9) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 25, 1999 and incorporated
herein by reference.
(10) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on August 4, 1999 and
incorporated herein by reference.
(11) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on November 13, 1999 and
incorporated herein by reference.
26
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Robert W. Winston, III
---------------------------
Robert W. Winston, III
Chief Executive Officer
Date: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
* Chairman of the Board of Directors March 17, 2000
- --------------------------------------------
Charles M. Winston
/s/ Robert W. Winston, III Chief Executive Officer and Director March 17, 2000
- -------------------------------------------- (Principal Executive Officer)
Robert W. Winston, III
/s/ James D. Rosenberg President, Chief Operating Officer and March 17, 2000
- -------------------------------------------- Secretary
James D. Rosenberg
/s/ Joseph V. Green Executive Vice President and Chief March 17, 2000
- -------------------------------------------- Financial Officer
Joseph V. Green
/s/ Brent V. West Vice President of Finance and Controller March 17, 2000
- --------------------------------------------
Brent V. West
* Director March 17, 2000
- --------------------------------------------
Edwin B. Borden
* Director March 17, 2000
- --------------------------------------------
Thomas F. Darden, II
* Director March 17, 2000
- --------------------------------------------
Richard L. Daugherty
* Director March 17, 2000
- --------------------------------------------
James H. Winston
* Director March 17, 2000
- --------------------------------------------
David C. Sullivan
*By /s/ Robert W. Winston, III
-----------------------------------------
Robert W. Winston, III, Attorney-in-Fact
*By /s/ James D. Rosenberg
-----------------------------------------
James D. Rosenberg, Attorney-in-Fact
27
28
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Winston Hotels, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
Winston Hotels, Inc. as of December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule of Winston Hotels, Inc. as listed on the index and
included in this Form 10-K, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
January 21, 2000
28
29
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1999 1998
--------- ---------
Investment in hotel properties:
Land $ 42,704 $ 42,449
Buildings and improvements 364,481 355,807
Furniture and equipment 38,348 32,296
--------- ---------
Operating properties 445,533 430,552
Less accumulated depreciation 58,366 37,920
--------- ---------
387,167 392,632
Properties under development 1,703 5,229
--------- ---------
Net investment in hotel properties 388,870 397,861
Corporate FF&E, net 871 294
Cash and cash equivalents 28 33
Lease revenue receivable 7,611 7,653
Deferred expenses, net 4,072 3,376
Prepaid expenses and other assets 4,619 2,939
--------- ---------
Total assets $ 406,071 $ 412,156
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 69,975 $ 71,000
Due to banks 104,500 102,085
Accounts payable and accrued expenses 5,490 3,969
Distributions payable 6,806 6,789
Minority interest in Partnership 10,222 14,888
--------- ---------
Total liabilities 196,993 198,731
--------- ---------
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, 16,813,823
and 16,313,980 shares issued and outstanding 168 163
Additional paid-in capital 229,106 224,757
Unearned compensation (524) (310)
Distributions in excess of earnings (19,702) (11,215)
--------- ---------
Total shareholders' equity 209,078 213,425
--------- ---------
Total liabilities and shareholders' equity $ 406,071 $ 412,156
========= =========
The accompanying notes are an integral part of the financial statements.
29
30
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
------- ------- -------
Revenue:
Percentage lease revenue $61,877 $54,700 $35,868
Interest and other income 433 249 234
------- ------- -------
Total revenue 62,310 54,949 36,102
------- ------- -------
Expenses:
Real estate taxes and property and casualty
insurance 5,996 5,017 2,702
General and administrative 4,236 3,889 2,095
Interest 12,513 8,314 2,648
Depreciation 20,565 16,389 10,064
Amortization 834 465 520
------- ------- -------
Total expenses 44,144 34,074 18,029
------- ------- -------
Income before loss on sale of property and
allocation to minority interest 18,166 20,875 18,073
Loss on sale of property 239 -- --
------- ------- -------
Income before allocation to minority interest 17,927 20,875 18,073
Income allocation to minority interest 1,026 1,349 1,329
------- ------- -------
Net income 16,901 19,526 16,744
Preferred stock distribution 6,938 6,938 2,100
------- ------- -------
Net income applicable to common shareholders $ 9,963 $12,588 $14,644
======= ======= =======
Earnings per share:
Net income per common share $ 0.61 $ 0.77 $ 0.92
======= ======= =======
Net income per common share assuming dilution $ 0.61 $ 0.77 $ 0.91
======= ======= =======
Weighted average number of common shares 16,467 16,286 15,990
======= ======= =======
Weighted average number of common shares assuming
dilution 18,108 18,040 17,555
======= ======= =======
The accompanying notes are an integral part of the financial statements.
30
31
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK PREFERRED STOCK ADDITIONAL DISTRIBUTIONS TOTAL
---------------- ---------------- PAID-IN UNEARNED IN EXCESS OF SHAREHOLDERS'
SHARES DOLLARS SHARES DOLLARS CAPITAL COMPENSATION EARNINGS EQUITY
------ ------- ------ ------- ---------- ------------ ------------- -------------
Balances at December 31, 1996 15,799 $158 -- $-- $145,216 $ (181) $ (3,380) $ 141,813
Issuance of shares 395 4 3,000 30 76,451 -- -- 76,485
Adjustment to minority interest -- -- -- -- 1,760 -- -- 1,760
Distributions ($1.08 per common share) -- -- -- -- -- -- (17,287) (17,287)
Distributions ($0.70 per preferred share) -- -- -- -- -- -- (2,100) (2,100)
Unearned compensation amortization -- -- -- -- -- 75 -- 75
Net income -- -- -- -- -- -- 16,744 16,744
------ ---- ----- --- -------- -------- --------- ---------
Balances at December 31, 1997 16,194 162 3,000 30 223,427 (106) (6,023) 217,490
Issuance of shares 120 1 -- -- 1,137 (401) -- 737
Adjustment to minority interest -- -- -- -- 193 -- -- 193
Distributions ($1.09 per common share) -- -- -- -- -- -- (17,780) (17,780)
Distributions ($2.31 per preferred share) -- -- -- -- -- -- (6,938) (6,938)
Unearned compensation amortization -- -- -- -- -- 197 -- 197
Net income -- -- -- -- -- -- 19,526 19,526
------ ---- ----- --- -------- -------- --------- ---------
Balances at December 31, 1998 16,314 163 3,000 30 224,757 (310) (11,215) 213,425
Issuance of shares primarily for
redemption of partnership units 500 5 -- -- 4,398 (535) -- 3,868
Stock Registration fees -- -- -- -- (49) -- -- (49)
Distributions ($1.12 per common share) -- -- -- -- -- -- (18,450) (18,450)
Distributions ($2.31 per preferred share) -- -- -- -- -- -- (6,938) (6,938)
Unearned compensation amortization -- -- -- -- -- 321 -- 321
Net income -- -- -- -- -- -- 16,901 16,901
------ ---- ----- --- -------- -------- --------- ---------
Balances at December 31, 1999 16,814 $168 3,000 $30 $229,106 $ (524) $ (19,702) $ 209,078
====== ==== ===== === ======== ======== ========= =========
The accompanying notes are an integral part of the financial statements.
31
32
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ IN THOUSANDS)
1999 1998 1997
--------- -------- --------
Cash flows from operating activities:
Net income $ 16,901 $ 19,526 $ 16,744
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 1,026 1,349 1,329
Depreciation 20,565 16,389 10,064
Amortization 834 465 520
Unearned compensation amortization 321 197 75
Loss of sale on property 239 -- --
Changes in assets and liabilities:
Lease revenue receivable 42 (1,971) (1,071)
Prepaid expenses and other assets (1,497) (1,792) (461)
Accounts payable and accrued expenses 1,521 442 611
--------- -------- --------
Net cash provided by operating activities 39,952 34,605 27,811
--------- -------- --------
Cash flows from investing activities:
Prepaid acquisition costs and other assets (183) (448) (408)
Deferred acquisition costs (85) -- (64)
Sale of land parcel 3,789 445 --
Investment in hotel properties (16,179) (135,395) (81,877)
--------- -------- --------
Net cash used in investing activities (12,658) (135,398) (82,349)
--------- -------- --------
Cash flows from financing activities:
Purchase of interest rate protection agreements (57) -- (69)
Fees paid to register additional common shares (49) (45) --
Fees paid in connection with new financing facilities (1,388) (2,125) (16)
Proceeds from GE Capital Corporation loan -- 71,000 --
Proceeds from various demand notes -- 34,385 --
Net proceeds from issuance of common stock -- 600 200
Net proceeds from issuance of preferred stock -- -- 71,506
Payment of distributions to shareholders (25,248) (24,886) (16,789)
Payment of distributions to minority interest (1,947) (1,886) (1,645)
Long Term Debt payments (1,025) -- --
Net increase in line of credit borrowing 2,415 23,619 1,281
--------- -------- --------
Net cash provided by (used in) financing activities (27,299) 100,662 54,468
--------- -------- --------
Net decrease in cash and cash equivalents (5) (131) (70)
33 164 234
--------- -------- --------
Cash and cash equivalents at end of period $ 28 $ 33 $ 164
========= ======== ========
Supplemental disclosure:
Cash paid for interest $ 12,339 $ 9,575 $ 4,044
========= ======== ========
Summary of non-cash investing and financing activities:
Distributions declared but not paid $ 6,806 $ 6,789 $ 6,950
Investment in hotel properties payable -- -- 1,134
Issuance of shares in exchange for partnership units 3,868 151 4,799
Issuance of units in exchange for hotel properties -- -- 11,287
Adjustment to minority interest due to follow-on offerings and
issuance of partnership units in connection with the acquisition
of hotel properties -- 193 1,760
The accompanying notes are an integral part of the financial statements.
32
33
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION:
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of $0.01 par value common stock
("Common Stock"), utilizing the majority of the proceeds to acquire one hotel
and a general partnership interest (as the sole general partner) in WINN Limited
Partnership (the "Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine hotel properties (collectively the ten hotels are
the "Initial Hotels"). The Initial Hotels were acquired from affiliates of WHI.
WHI and the Partnership (collectively the "Company") began operations as a REIT
on June 2, 1994.
During 1995 and 1996, WHI completed follow-on Common Stock offerings, as well
as a Preferred Stock offering in September 1997, and invested the net proceeds
from these offerings in the Partnership. The Partnership utilized the proceeds
to acquire 28 additional hotel properties. During 1998, the Company added 13
additional properties to its portfolio, five of which were internally developed
(see Note 4). As of December 31, 1999, WHI's ownership in the Partnership was
92.83% (see Note 7). As of December 31, 1999, the Company owned 51 hotel
properties (the "Current Hotels"), in 13 states, having an aggregate of 6,904
rooms. 49 of the Current Hotels were leased, pursuant to separate percentage
operating lease agreements (the "Percentage Leases"), to CapStar Winston
Company, L.L.C. ("CapStar Winston"), one was leased to Bristol Hotels and
Resorts, Inc. and one was leased to Prime Hospitality Corp.
Prior to November 17, 1997, 38 of the Current Hotels were leased pursuant to
the Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and
November 24, 1997, CapStar Management Company, L.P. purchased substantially all
of the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including the 38 then existing leases. Concurrent with this transaction, the
leases were assigned to CapStar Winston, an affiliate of CapStar Management
Company, L.P., and the terms of the leases were extended to 15 years from the
date of the transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include
the accounts of WHI and the Partnership. All significant inter-company balances
and transactions have been eliminated.
Investment in Hotel Properties. Hotel properties are recorded at cost and are
depreciated using the straight-line method over estimated useful lives of the
assets of 5 and 30 years for furniture, fixtures and equipment, and buildings
and improvements, respectively. Upon disposition, both the assets and
accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to the income statement. Repairs and maintenance of hotel
properties are paid by the lessees.
The Company evaluates long-lived assets for potential impairment by analyzing
the operating results, trends and prospects for the Company and considering any
other events and circumstances which might indicate potential impairment.
Cash and Cash Equivalents. All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Revenue Recognition and Impact of Recently Issued Accounting Standards to be
Adopted in 2000. 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, the Company has 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 Percentage 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 Percentage 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 Percentage Leases have fiscal year ends
which differ from the Company's calendar year end. SAB 101 will have no impact
on the Company's interim or annual cash flow from its third party lessees, and
therefore on its ability to pay dividends. The Company will account for SAB 101
as a change in accounting principle effective January 1, 2000.
Deferred Expenses. Included in deferred expenses are franchise fees, loan costs,
acquisition costs and disposition costs which are
33
34
recorded at cost. Amortization of franchise fees is computed using the
straight-line method over ten years. Amortization of loan costs is computed
using the straight-line method over the period of the related debt facility.
Acquisition costs are either capitalized to properties when purchased, or
expensed. Disposition costs are netted against the proceeds from the sale of
properties to determine gain or loss on the sale.
Minority Interest in Partnership. Certain hotel properties have been
acquired, in part, by the Partnership, through the issuance of limited
partnership units of the Partnership. The equity interest in the Partnership
created by these transactions represents the Company's minority interest
liability. The Company's minority interest liability is: (i) increased or
decreased by its pro-rata share of the net income or net loss, respectively, of
the Partnership; (ii) decreased by distributions; (iii) decreased by redemption
of partnership units for WHI's Common Stock; and (iv) adjusted to equal the net
equity of the Partnership multiplied by the limited partners' ownership
percentage immediately after each issuance of units of the Partnership and/or
Common Stock of the Company through an adjustment to additional paid-in capital.
Earnings Per Share. Net income per common share is computed by dividing net
income applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Net income per common share
assuming dilution is computed by dividing net income applicable to common
shareholders plus income allocated to minority interest by the weighted-average
number of common shares assuming dilution during the period. Weighted average
number of common shares assuming dilution includes common shares and dilutive
common share equivalents, primarily redeemable limited partnership units and
stock options (see Notes 7 and 9).
Distributions. WHI's ability to pay regular quarterly distributions is
dependent upon receipt of distributions from the Partnership, which in turn is
dependent upon the results of operations of the Company's properties.
Distributions declared on WHI's Common Stock in 1999, 1998 and 1997 are
considered to be approximately 10%, 2%, and 4% return of capital, respectively,
for federal income tax purposes.
Income Taxes. The Company qualifies as a REIT under Sections 856 to 860 of
the Internal Revenue Code and therefore no provision for federal income taxes
has been reflected in the financial statements.
Earnings and profits, which determine the taxability of distributions to
shareholders, differ from net income reported for financial reporting purposes
due to the differences for federal tax purposes in the estimated useful lives
used to compute depreciation and the carrying value (basis) of the investment in
hotel properties. Additionally, certain costs associated with the Company's
equity offerings are treated differently for federal tax purposes than for
financial reporting purposes. At December 31, 1999, the net tax basis of the
Company's assets and liabilities was approximately $11,196 less than the amounts
reported in the accompanying consolidated financial statements.
For federal income tax purposes, 1999 distributions amounted to $1.12 per
common share, ten percent of which is considered a return of capital.
Concentration of Credit Risk. The Company places cash deposits at federally
insured depository institutions. At December 31, 1999, bank account balances
exceeded federal depository insurance limits by approximately $1,139.
Reclassifications. Certain reclassifications have been made to the 1998 and
1997 financial statements to conform with the 1999 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.
Estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the balance sheet
dates and the reported amounts of revenues and expenses during the periods
reported. Actual results could differ from those estimates.
3. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: the carrying amount approximates fair value.
Interest rate cap agreement: the fair value is estimated by obtaining
quotes from brokers.
Long-term debt: the fair value is estimated based on current
rates offered to the Company for debt of
the same remaining maturities.
34
35
The estimated fair values of the Company's financial instruments are as follows:
1999 1998
-------------------------- ---------------------------
Carrying Fair Carrying Fair Value
Amount Value Amount
-------- -------- -------- ----------
Assets:
Cash and cash equivalents $ 28 $ 28 $ 33 $ 33
Interest rate Cap
In a net receivable position -- 112 -- --
Liabilities:
Long-term debt 69,975 64,433 71,000 71,000
Due to banks 104,500 104,500 102,085 102,085
4. HOTEL PROPERTIES:
The Company owned 51 hotels, consisting of 6,904 rooms, as of December 31,
1999. The Company's acquisition of hotel properties for the years 1999, 1998,
and 1997 are summarized as follows:
NUMBER OF NUMBER OF
YEAR PURCHASE COST HOTEL PROPERTIES ROOMS/SUITES
---- ------------- ---------------- ------------
1997 62,625 7 1,096
1998 140,794 13* 1,803
1999 -- -- --
-------- ----- -----
Total $203,419 20 2,899
======== ===== =====
* Five of the total 13 hotels added in 1998 were internally developed
properties.
All acquisitions were accounted for by the purchase method of accounting and
results of operations for these hotels are included in the Consolidated
Statements of Income for the period in which they were owned by the Company. The
Company made no acquisitions in 1999; therefore the pro forma 1999 results of
operations are identical to the actual 1999 results of operations. The following
unaudited pro forma 1998 financial information assumes the hotels were acquired
as of the later of January 1, 1998 or their date of opening:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
ACTUAL PRO FORMA
1999 1998
------- ---------
Percentage lease and other revenue $62,310 $56,650
------- -------
Expenses:
Real estate taxes and property and
casualty insurance 5,996 5,257
General and administrative 4,236 3,898
Interest 12,513 8,911
Depreciation 20,565 16,720
Amortization 834 462
------- -------
Total expenses 44,144 35,248
------- -------
Income before loss on sale of property and allocation
to minority interest 18,166 21,402
Loss on sale of property 239 --
------- -------
Income before allocation to minority interest 17,927 21,402
Income allocation to minority interest 1,026 1,400
Preferred stock distribution 6,938 6,938
------- -------
Net income applicable to common shareholders $ 9,963 $13,064
======= =======
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Net income per common share $ 0.61 $ 0.80
======= =======
Net income per common share assuming dilution $ 0.61 $ 0.80
======= =======
Weighted average number of common shares 16,467 16,286
======= =======
Weighted average number of common shares assuming
dilution 18,108 18,040
======= =======
5. DEFERRED EXPENSES:
At December 31, 1999 and 1998 deferred expenses consisted of:
1999 1998
------ ------
Franchise fees $1,679 $1,617
Debt facility fees 3,513 2,125
Interest rate caps 58 --
Registration costs -- 30
Acquisition costs 27 --
Disposition costs 25 --
5,302 3,772
Less accumulated amortization 1,230 396
------ ------
Deferred expenses, net $4,072 $3,376
====== ======
6. DEBT:
The Company's outstanding debt balance as of December 31, 1999 consisted of
amounts due under two separate debt facilities.
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
"Previous Line"). The New Line bears interest at rates from LIBOR plus 1.45% to
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 the outstanding balances under the Previous Line and under the
$45,000 revolving demand note discussed below. The Company has collateralized
the New Line with 29 of its Current Hotels, with a carrying value of $219,512 as
of December 31, 1999. The New Line requires the Company to maintain certain
financial ratios including maximum leverage, minimum interest coverage and
minimum fixed charge coverage, as well as certain levels of unsecured and
secured debt and tangible net worth.
On November 3, 1998, the Company closed a $71,000 loan with GE Capital
Corporation. The ten-year loan with a 25-year amortization period, bears
interest at a fixed rate of 7.375%. Fourteen of the Company's Current Hotels,
with a carrying value of $124,407 as of December 31, 1999, serve as collateral
for the loan. The Company used the net proceeds from the loan to pay down the
then existing line of credit balance. As of December 31, 1999, $69,975 was
outstanding. All unpaid principal and interest are due on December 1, 2008. The
loan agreement with GE Capital Corporation requires the Company to establish
escrow reserves for the purposes of debt service, capital improvements and
property taxes and insurance. These reserves, which are held by GE Capital
Corporation, totaled $2,523 as of December 31, 1999 and are included in prepaid
expenses and other assets on the accompanying consolidated balance sheets.
On October 30, 1998, the Company signed a $45,000 revolving demand note with
Wachovia Bank, N.A. Interest accrued on the note at the prime rate (7.75% as of
December 31, 1998). As of December 31, 1998, the Company's outstanding debt
balance under its $45,000 revolving demand note totaled $34,385. Six of the
Company's Current Hotels served as collateral for the note. The note was paid
off in February 1999 with the proceeds from the above mentioned New Line.
As of December 31, 1999 and 1998 the Company's outstanding debt balance under
its New Line and Previous Line totaled $104,500 and $67,700, respectively.
Interest on borrowings was generally at LIBOR plus 1.45% and LIBOR plus 1.75%
for the two
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37
years respectively, and were payable monthly in arrears. As of December 31, 1999
and 1998 the weighted average interest rate on the outstanding balance under the
New Line and the Previous Line was 6.84% and 7.56%, respectively. A commitment
fee of 0.05% was also paid quarterly on the unused portion of the New Line, and
0.0625% on the unused portion of the Previous Line. During the years ended
December 31, 1999, 1998 and 1997, the Company capitalized interest of $163,
$1,513 and $1,284 respectively, related to hotels under development or major
renovation.
During 1999, the Company entered into 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% under its $140,000 line
of credit on a principal balance of $25,000 for the period of March 23, 1999
through March 25, 2002. During 1997, the Company entered into an interest rate
cap agreement to eliminate the exposure to increases in 90-day LIBOR over 6.25%,
and therefore from its exposure to interest rate increases over 8.00% under its
previous $125,000 line of credit, on a principal balance of $40,000 for the
period June 4, 1997 through June 4, 1998.
7. CAPITAL STOCK:
On September 11, 1997, WHI issued 3,000,000 shares of 9.25% Series A
Cumulative Preferred Stock. Except in the event of certain occurrences, the
preferred shares are not redeemable prior to September 28, 2001. On and after
such date, the preferred shares will be redeemable for cash at the option of the
Company, in whole or in part, at a redemption price of $25 per share, plus
unpaid cumulative distributions.
Pursuant to the Partnership Agreement of the Partnership, the holders of
limited partnership units have certain redemption rights (the "Redemption
Rights") which enable them to cause the Partnership to redeem their units in the
Partnership in exchange for shares of Common Stock on a one-for-one basis or, in
certain circumstances, for cash. The number of shares issuable upon exercise of
the Redemption Rights will be adjusted upon the occurrence of stock splits,
mergers, consolidations or similar pro-rata share transactions, which otherwise
would have the effect of diluting the ownership interests of the limited
partners or the shareholders of WHI. During 1999, the Partnership redeemed
440,100 units in exchange for 440,100 shares of WHI's Common Stock. As of
December 31, 1999, the Partnership had 18,112,303 units outstanding, of which
16,813,823 units were held by WHI.
On October 29, 1999, the Company's Chief Executive Officer, Robert W.
Winston, III, and several members of the Company's Board of Directors purchased
an aggregate of 594,950 shares of WHI's Common Stock, or approximately 3.5% of
the total shares outstanding as of December 31, 1999.
8. 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 net
income assuming dilution used in the net income per common share assuming
dilution calculation:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------- ------- -------
Net income $16,901 $19,526 $16,744
Less: preferred shares distribution 6,938 6,938 2,100
------- ------- -------
Net income applicable to common shareholders 9,963 12,588 14,644
Plus: income allocation to minority interest 1,026 1,349 1,329
------- ------- -------
Net income assuming dilution $10,989 $13,937 $15,973
======= ======= =======
The following is a reconciliation of the weighted average shares used in net
income per common share to the weighted average shares used in net income per
common share - assuming dilution:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------ ------ ------
Weighted average number of common shares 16,467 16,286 15,990
Weighted average units with redemption rights 1,629 1,747 1,494
Stock options 12 7 71
------ ------ ------
Weighted average number of common shares
assuming dilution 18,108 18,040 17,555
====== ====== ======
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9. STOCK INCENTIVE PLAN:
During 1998, the Company amended the Winston Hotels, Inc. Stock Incentive
Plan (the "Plan"). The amendment increased the number of shares of Common Stock
that may be issued under the Plan to 1,600,000 shares plus an annual increase to
be added as of January 1 of each year, beginning January 1, 1999, equal to the
lesser of (i) 500,000 shares; (ii) 8.5% of any increase in the number of
authorized and issued shares (on a fully diluted basis) since the immediately
preceding January 1; or (iii) a lesser number determined by the Board of
Directors. The Plan permits the grant of incentive or nonqualified stock
options, stock appreciation rights, stock awards and performance shares to
participants. Under the Plan, the exercise price of an option is determined by
the Compensation Committee of the Company. In the case of incentive stock
options, the exercise price is no less than the market price of the Company's
Common Stock on the date of grant and the maximum term of an incentive stock
option is ten years. Stock options and stock awards are granted upon approval of
the Compensation Committee and generally are subject to vesting over a period of
years.
During 1999 and 1998, the Company granted awards of Common Stock to certain
executive officers. The total numbers of shares granted were 20,000 and 25,000,
respectively. These shares vest either (i) 25% on the anniversary date over each
of the next four years, or (ii) 20% immediately and 20% on the anniversary date
over each of the next four years.
On May 18, 1999, WHI issued 42,000 shares, 7,000 shares each, to six of its
Directors. These shares vested 20% immediately and will vest 20% on the
anniversary date over each of the next four years. Upon issuing these shares,
WHI terminated 3,412 unvested shares previously granted to a then new
independent director on January 2, 1998. On May 18, 1999, WHI also issued
options to purchase 2,000 shares of WHI Common Stock to six of its Directors.
These options were 100% vested on May 18, 1999.
On June 2, 1994, WHI issued 7,500 shares to each of its five initial
independent directors which shares vested at a rate of 1,500 shares per year
beginning on June 2, 1994. These shares became fully vested on May 5, 1998. WHI
also issued 5,687 shares to a new independent director on January 2, 1998. As
noted above, 3,412 unvested shares were terminated on May 18, 1999. Any unvested
shares are subject to forfeiture if the director does not remain a director of
WHI. Each director is entitled to vote and receive distributions paid on such
shares prior to vesting.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, no compensation cost has been recognized for options
granted under the Plan. Had the fair value method been used to determine
compensation cost, the impact on the Company's 1999, 1998 and 1997 net income
would have been a decrease of $181, $171, and $57, and a corresponding decrease
in net income per Common Share of $0.01, $0.01 and $0.01, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1999, 1998 and 1997: dividend of $1.12, $1.09 and $1.08; expected
volatility of 27.8%, 26.2% and 20.8%; risk-free interest rate of 6.5%, 5.5% and
5.5%, respectively, and an expected life of five years for all options. The
estimated weighted average fair value per share of the options granted in 1999,
1998 and 1997 were $0.93, $1.21 and $0.31, respectively.
A summary of the status of stock options granted under the Plan as of
December 31, 1999, 1998 and 1997, and changes during the years ended on those
dates, is presented below:
1999 1998 1997
------------------------------- ----------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- -------- -------------- -------- --------------
Outstanding at beginning of
year 798,000 $12.40 436,000 $11.34 401,000 $10.93
Granted 402,000 8.77 450,000 13.10 55,000 13.88
Exercised -- -- (58,000) 10.33 (20,000) 10.00
Forfeited (100,000) 10.50 (30,000) 11.38 -- --
---------- ------ -------- ------ -------- ------
Outstanding at end of year 1,100,000 $11.25 798,000 $12.40 436,000 $11.34
========== ====== ======== ====== ======== ======
Options exercisable at year-end 439,250 309,250 254,750
========== ======== ========
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The following table summarizes information about the Plan at December 31,
1999:
OPTIONS OPTIONS
EXERCISE OUTSTANDING EXERCISABLE AVERAGE REMAINING
PRICE AT 12/31/99 AT 12/31/99 CONTRACTUAL LIFE (YEARS)
-------- ------------ ------------ ------------------------
$ 8.75 390,000 78,000 9.0
$ 9.38 12,000 12,000 9.4
$10.00 28,000 28,000 4.4
$11.31 50,000 50,000 5.8
$11.38 90,000 67,500 6.0
$12.38 50,000 20,000 8.4
$12.88 25,000 18,750 6.8
$13.19 400,000 137,500 8.0
$13.88 55,000 27,500 7.8
10. COMMITMENTS:
The Company leases its corporate office under a non-cancellable lease. Under
the terms of the lease, the Company makes lease payments through February 2005.
Commitments for minimum rental payments are as follows:
AMOUNT
------
Year ended December 31:
2000 $ 93
2001 218
2002 215
2003 220
2004 225
2005 28
-----
Total $ 999
=====
Rental expense for the years ended December 31, 1999, 1998 and 1997 was
$177, $102 and $51, respectively.
The Company has future lease commitments from the lessees through 2013.
Minimum future rental payments contractually due to the Company under these
non-cancelable operating leases are as follows:
AMOUNT
--------
Year ended December 31:
2000 $ 33,824
2001 33,802
2002 33,802
2003 33,802
2004 33,802
2005 and thereafter 276,637
--------
Total $445,669
========
Under the terms of the Percentage Leases, the lessees are obligated to pay
the Company the greater of base rents or percentage rents. The Company earned
minimum base rents of $32,353, $28,033 and $16,114 for the years ended December
31, 1999, 1998, and 1997, respectively, and percentage rents of $29,882, $26,667
and $19,754 for the years ended December 31, 1999, 1998, and 1997, respectively.
The percentage rents are based on percentages of gross room revenue and certain
food and beverage revenues of the lessees. MeriStar Hospitality Corporation, an
affiliate of CapStar Winston, has guaranteed amounts due and payable to the
Company under the 49 properties leased by CapStar Winston up to $20,000. The
lessees operate the hotel properties pursuant to franchise agreements, which
require the payment of fees based on a percentage of hotel revenue. These fees
are paid by the lessees.
39
40
Pursuant to the Percentage Leases, the Company reserves 5% of room revenues
(7% of gross room, food and beverage revenues from one of its full-service
hotels) to fund periodic improvements to the buildings and grounds, and the
periodic replacement and refurbishment of furniture, fixtures and equipment.
For one of the Current Hotels, the Company leases the land under an
operating lease which expires on December 31, 2062. Expenses incurred in 1999
related to this land lease totaled $358. Minimum future rental payments
contractually due by the Company under this lease are as follows: 2000 - $110,
2001 - $110, 2002 - $110, 2003 - $110, 2004 - $110, 2005 and thereafter -
$6,930.
In June 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc. to jointly develop and own hotel properties. The first hotel to
be developed by the joint venture, a full-service 158-room Hilton Garden Inn in
Windsor, CT, is scheduled to open during the third quarter of 2000. The Company
will own a 49% interest in this joint venture. On June 25, 1999, the Company
purchased an irrevocable standby letter of credit from Wachovia Bank, N.A.
totaling $3,298, which approximates the Company's future equity investment in
the joint venture. The letter of credit is for the benefit of Compass Bank, the
construction lender, and can be drawn upon after the earliest to occur of either
January 24, 2001 or 30 days after the date of issuance of the certificate of
occupancy. The Company paid $73 to obtain the letter of credit, which expires on
March 25, 2001. The Company's total investment in this joint venture as of
December 31, 1999 was $183, which is included in prepaid expenses and other
assets in the accompanying consolidated balance sheets.
11. SUBSEQUENT EVENT:
On February 15, 2000, the Company sold its Comfort Suites hotel in London,
KY. Sales proceeds received by the Company totaled $2,497, resulting in a net
loss of $265.
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly results of operations for the years ended
December 31, 1999 and 1998 are as follows:
1999
- ---- FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Total revenue $14,748 $17,323 $16,475 $13,764
Total expenses 11,297 11,425 10,851 10,810
------- ------- ------- -------
Income before minority interest 3,451 5,898 5,624 2,954
Income allocation to minority interest 165 400 373 88
------- ------- ------- -------
Income after minority interest 3,286 5,498 5,251 2,866
Preferred share distribution 1,734 1,734 1,734 1,736
======= ======= ======= =======
Net income applicable to common shareholders
$ 1,552 $ 3,764 $ 3,517 $ 1,130
======= ======= ======= =======
Earnings per share:
Net income per common share $ 0.10 $ 0.23 $ 0.21 $ 0.07
======= ======= ======= =======
Net income per common share assuming
dilution $ 0.10 $ 0.23 $ 0.21 $ 0.07
======= ======= ======= =======
40
41
1998
- ---- FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Total revenue $10,122 $15,064 $16,305 $13,458
Total expenses 5,448 8,406 10,204 10,016
------- ------- ------- -------
Income before minority interest 4,674 6,658 6,101 3,442
Income allocation to minority interest 297 469 420 163
------- ------- ------- -------
Income after minority interest 4,377 6,189 5,681 3,279
Preferred share distribution 1,734 1,734 1,735 1,735
------- ------- ------- -------
Net income applicable to common shareholders
$ 2,643 $ 4,455 $ 3,946 $ 1,544
======= ======= ======= =======
Earnings per share:
Net income per common share $ 0.16 $ 0.27 $ 0.24 $ 0.09
======= ======= ======= =======
Net income per common share assuming
dilution $ 0.16 $ 0.27 $ 0.24 $ 0.09
======= ======= ======= =======
41
42
WINSTON HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
($ IN THOUSANDS)
--------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
------------------------ -------------------- ---------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------- -------------- --------- -------------- ---- ------------- ------- ------------- ---------
Hampton Inn
Boone, NC * $ 264 $ 2,750 $ 7 $ 471 $ 271 $ 3,221 $ 3,492
Hampton Inn
Brunswick, GA * 716 3,887 -- 549 716 4,436 5,152
Hampton Inn
Cary, NC * 613 4,596 -- 619 613 5,215 5,828
Hampton Inn
Charlotte, NC # 833 3,609 32 206 865 3,815 4,680
Hampton Inn
Chester, VA * 461 2,238 -- 117 461 2,355 2,816
Hampton Inn
Duncanville, TX * 480 2,689 25 562 505 3,251 3,756
Hampton Inn
Durham, NC 634 4,582 -- 667 634 5,249 5,883
Hampton Inn & Suites
Gwinnett, GA # 557 6,959 16 5 573 6,964 7,537
Hampton inn
Hilton Head, SC * 310 3,969 -- 713 310 4,682 4,992
Hampton Inn
Jacksonville, NC * 473 4,140 -- 347 473 4,487 4,960
Hampton Inn
Las Vegas, NV * 856 7,945 -- 19 856 7,964 8,820
Hampton Inn
Perimeter , GA # 914 6,293 -- 118 914 6,411 7,325
Hampton Inn
Raleigh, NC # 697 5,955 -- 1082 697 7,037 7,734
Hampton Inn
Southern Pines * 614 4,280 -- 780 614 5,060 5,674
Hampton Inn
Southlake, GA * 680 4,065 14 498 694 4,563 5,257
Hampton Inn
W. Springfield, MA # 916 5,253 5 554 921 5,807 6,728
Hampton Inn
White Plains, NY # 1,382 10,763 -- 231 1,382 10,994 12,376
Hampton Inn
Wilmington, NC * 460 3,208 2 428 462 3,636 4,098
Comfort Inn
Augusta, GA 404 3,541 -- 329 404 3,870 4,274
Comfort Inn
Charleston, SC # 438 5,853 11 869 449 6,722 7,171
Comfort Inn
Chester, VA * 661 6,447 -- 306 661 6,753 7,414
Comfort Inn
Clearwater, FL * 532 3,436 3 789 535 4,225 4,760
----------------------------------------------------------
Life Upon
Which
Accumulated Net Book Value Depreciation in
Depreciation Land, Building Latest Income
Buildings and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------------------- ------------- -------------- ----------- ---------------
Hampton Inn
Boone, NC $ 748 $ 2,744 6/2/94 30
Hampton Inn
Brunswick, GA 888 4,264 6/2/94 30
Hampton Inn
Cary, NC 1,100 4,728 6/2/94 30
Hampton Inn
Charlotte, NC 758 3,922 6/2/94 30
Hampton Inn
Chester, VA 392 2,424 11/29/94 30
Hampton Inn
Duncanville, TX 440 3,316 5/7/96 30
Hampton Inn
Durham, NC 1,110 4,773 6/2/94 30
Hampton Inn & Suites
Gwinnett, GA 794 6,743 7/18/96 30
Hampton inn
Hilton Head, SC 888 4,104 11/29/94 30
Hampton Inn
Jacksonville, NC 942 4,018 6/2/94 30
Hampton Inn
Las Vegas, NV 420 8,400 5/20/98 30
Hampton Inn
Perimeter , GA 721 6,604 7/19/96 30
Hampton Inn
Raleigh, NC 1,248 6,486 5/18/95 30
Hampton Inn
Southern Pines 1,051 4,623 6/2/94 30
Hampton Inn
Southlake, GA 964 4,293 6/2/94 30
Hampton Inn
W. Springfield, MA 496 6,232 7/14/97 30
Hampton Inn
White Plains, NY 795 11,581 10/29/97 30
Hampton Inn
Wilmington, NC 818 3,280 6/2/94 30
Comfort Inn
Augusta, GA 681 3,593 5/18/95 30
Comfort Inn
Charleston, SC 1,123 6,048 5/18/95 30
Comfort Inn
Chester, VA 1,218 6,196 11/29/94 30
Comfort Inn
Clearwater, FL 735 4,025 5/18/95 30
42
43
--------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
------------------------ -------------------- ---------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------- -------------- --------- -------------- ---- ------------- ------- ------------- ---------
Comfort Inn
Durham, NC * 947 6,208 35 408 982 6,616 7,598
Comfort Inn
Fayetteville, NC 1,223 8,047 4 701 1,227 8,748 9,975
Comfort Inn
Greenville, SC 871 3,551 15 1,306 886 4,857 5,743
Comfort Suites
London, KY 345 2,170 -- 432 345 2,602 2,947
Comfort Inn
Raleigh, NC 459 4,075 8 659 467 4,734 5,201
Comfort Inn
Wilmington, NC 532 5,889 9 734 541 6,623 7,164
Comfort Suites
Orlando, FL # 1,357 10,180 -- 402 1,357 10,582 11,939
Homewood Suites
Alpharetta, GA * 985 6,621 1 457 986 7,078 8,064
Homewood Suites
Cary, NC # 1,010 12,367 9 191 1,019 12,558 13,577
Homewood Suites
Clear Lake, TX # 879 5,978 -- 44 879 6,022 6,901
Homewood Suites
Durham, NC * 1,074 6,136 12 583 1,086 6,719 7,805
Homewood Suites
Lake Mary, FL * 871 6,987 4 253 875 7,240 8,115
Homewood Suites
Phoenix, AZ * 1,402 9,763 21 23 1,423 9,786 11,209
Homewood Suites
Raleigh, NC * 1,008 10,076 1 413 1,009 10,489 11,498
Holiday Inn Express
Abingdon, VA 918 2,263 -- 391 918 2,654 3,572
Holiday Inn Express
Clearwater, FL * 510 5,854 -- 851 510 6,705 7,215
Holiday Inn Select
Dallas, TX * 1,060 13,615 3 2,826 1,063 16,441 17,504
Holiday Inn
Secaucus, NJ * -- 13,699 -- 1,025 -- 14,724 14,724
Holiday Inn
Tinton Falls, NJ * 1,261 4,337 3 2,791 1,264 7,128 8,392
Courtyard by Marriott
Ann Arbor, MI # 902 9,850 6 979 908 10,829 11,737
Courtyard by Marriott
Houston, TX * 1,211 9,154 22 1,895 1,233 11,049 12,282
Courtyard by Marriott
Wilmington, NC # 742 5,907 -- 39 742 5,946 6,688
Courtyard by Marriott
----------------------------------------------------------
Life Upon
Which
Accumulated Net Book Value Depreciation in
Depreciation Land, Building Latest Income
Buildings and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------------------- ------------ ------------ ----------- ---------------
Comfort Inn
Durham, NC 1,182 6,416 11/29/94 30
Comfort Inn
Fayetteville, NC 1,673 8,302 11/29/94 30
Comfort Inn
Greenville, SC 708 5,035 5/6/96 30
Comfort Suites
London, KY 389 2,558 5/7/96 30
Comfort Inn
Raleigh, NC 909 4,292 8/16/94 30
Comfort Inn
Wilmington, NC 1,372 5,792 6/2/94 30
Comfort Suites
Orlando, FL 938 11,001 5/1/97 30
Homewood Suites
Alpharetta, GA 418 7,646 5/22/98 30
Homewood Suites
Cary, NC 1,465 12,112 7/9/96 30
Homewood Suites
Clear Lake, TX 668 6,233 9/13/96 30
Homewood Suites
Durham, NC 258 7,547 11/14/98 30
Homewood Suites
Lake Mary, FL 386 7,729 11/4/98 30
Homewood Suites
Phoenix, AZ 520 10,689 6/1/98 30
Homewood Suites
Raleigh, NC 621 10,877 3/9/98 30
Holiday Inn Express
Abingdon, VA 291 3,281 5/7/96 30
Holiday Inn Express
Clearwater, FL 538 6,677 8/6/97 30
Holiday Inn Select
Dallas, TX 2,040 15,464 5/7/96 30
Holiday Inn
Secaucus, NJ 785 13,939 5/27/98 30
Holiday Inn
Tinton Falls, NJ 395 7,997 4/21/98 30
Courtyard by Marriott
Ann Arbor, MI 842 10,895 9/30/97 30
Courtyard by Marriott
Houston, TX 941 11,341 7/14/97 30
Courtyard by Marriott
Wilmington, NC 592 6,096 12/19/96 30
Courtyard by Marriott
43
44
---------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
------------------------ -------------------- ---------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------- -------------- --------- -------------- ---- ------------- ------- ------------- ---------
Winston-Salem, NC * 915 5,202 -- 498 915 5,700 6,615
Hilton Garden Inn
Albany, NY * 1,168 11,236 -- 5 1,168 11,241 12,409
Hilton Garden Inn
Alpharetta, GA * 1,425 11,719 -- 3 1,425 11,722 13,147
Hilton Garden Inn
Raleigh, NC * 1,901 9,209 1 3 1,902 9,212 11,114
Quality Suites
Charleston, SC # 912 11,224 -- 728 912 11,952 12,864
Residence Inn
Phoenix, AZ # 2,076 13,311 33 231 2,109 13,542 15,651
Fairfield Inn
Ann Arbor, MI * 542 3,743 1 522 543 4,265 4,808
-------- ----------- ---- ----------- ------ ----------- --------
$ 42,401 $ 334,829 $303 $ 29,652 $42,704 $ 364,481 $407,185
======== =========== ==== =========== ======= =========== ========
----------------------------------------------------------
Life Upon
Which
Accumulated Net Book Value Depreciation in
Depreciation Land, Building Latest Income
Buildings and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------------------- ------------ ------------ ----------- ---------------
Winston-Salem, NC 191 6,424 10/3/98 30
Hilton Garden Inn
Albany, NY 624 11,785 5/8/98 30
Hilton Garden Inn
Alpharetta, GA 716 12,431 3/17/98 30
Hilton Garden Inn
Raleigh, NC 486 10,628 5/8/98 30
Quality Suites
Charleston, SC 1,990 10,874 5/18/95 30
Residence Inn
Phoenix, AZ 831 14,820 3/3/98 30
Fairfield Inn
Ann Arbor, MI 330 4,478 9/30/97 30
------------ ------------
$ 41,429 $ 365,756
============ ============
*Property serves as collateral for the $140,000 line of credit which
closed on February 1, 1999 (see Note 6). # Property serves as collateral
for the $71,000 note through GE Capital Corporation (see Note 6).
WINSTON HOTELS, INC.
NOTES TO SCHEDULE III
1999 1998
---- ----
(a) Reconciliation of Real Estate:
Balance at beginning of period $ 398,256 $ 256,973
Acquisitions during period -- 131,183
Additions during period 8,929 10,100
--------- ---------
Balance at end of period $ 407,185 $ 398,256
========= =========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of period 27,774 16,281
Depreciation for period 13,655 11,493
--------- ---------
Balance at end of period $ 41,429 $ 27,774
========= =========
(c) The aggregate cost of land, buildings and improvements for federal income
tax purposes is approximately $391,658.
(d) Refer to Note 1 to the consolidated financial statements of Winston
Hotels, Inc. for transactions with affiliates
44
45
INDEPENDENT AUDITORS' REPORT
The Members
CapStar Winston Company, L.L.C.:
We have audited the accompanying balance sheets of CapStar Winston Company,
L.L.C. (the "Company") as of December 31, 1999 and 1998 and the related
statements of operations, members' capital, and cash flows for the years ended
December 31, 1999 and 1998 and the period from October 15, 1997 (date of
inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Winston Company,
L.L.C. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years ended December 31, 1999 and 1998 and the period
from October 15, 1997 (date of inception) through December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Washington, D.C.
January 28, 2000, except for note 8
which is as of February 14, 2000
45
46
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
($ IN THOUSANDS)
ASSETS
1999 1998
---------- ----------
Current assets:
Cash and cash equivalents $ 1,051 $ 2,075
Accounts receivable, net of allowance for doubtful accounts of
$98 and $111 2,773 3,230
Due from affiliates 8,667 5,392
Deposits and other assets 455 355
---------- ----------
Total current assets 12,946 11,052
---------- ----------
Furniture, fixtures and equipment, net of accumulated depreciation of
$136 and $68 240 290
Intangible assets, net of accumulated amortization of $1,942 and $1,015 32,433 33,253
Deferred franchise costs, net of accumulated amortization of $128 and $72 559 536
Restricted cash 38 204
---------- ----------
$ 46,216 $ 45,335
========== ==========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 2,018 $ 1,606
Accrued expenses 3,032 3,390
Percentage lease payable to Winston Hotels, Inc. 7,573 7,601
Advance deposits 151 183
---------- ----------
Total current liabilities 12,774 12,780
---------- ----------
Commitments
Members' capital 33,442 32,555
---------- ----------
$ 46,216 $ 45,335
========== ==========
See accompanying notes to financial statements.
46
47
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
($ IN THOUSANDS)
1999 1998 1997
---------- ---------- ----------
Revenue:
Rooms $ 127,571 $ 113,451 $ 8,197
Food and beverage 8,732 6,793 462
Telephone and other operating departments 5,412 5,389 384
---------- ---------- ----------
Total revenue 141,715 125,633 9,043
---------- ---------- ----------
Operating costs and expenses:
Rooms 29,190 25,664 2,158
Food and beverage 6,137 5,027 308
Telephone and other operating departments 3,115 2,636 211
Undistributed expenses:
Lease expense 58,551 52,720 3,242
Administrative and general 13,483 12,020 1,069
Sales and marketing 5,954 4,859 415
Franchise fees 9,588 8,311 595
Repairs and maintenance 6,685 6,051 515
Energy 5,686 5,069 431
Other 1,388 1,630 55
Depreciation and amortization 1,051 1,050 105
---------- ---------- ----------
Total expenses 140,828 125,037 9,104
---------- ---------- ----------
Net income (loss) $ 887 $ 596 $ (61)
========== ========== ==========
See accompanying notes to financial statements.
47
48
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENTS OF MEMBERS' CAPITAL
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
($ IN THOUSANDS)
MeriStar
CapStar H&R
Management EquiStar Operating MeriStar
Company, Acquisition Company, Hotels and
L.P. Corporation L.P. Resorts, Inc. Total
------------- ----------- ---------- ------------- ----------
Member contributions made since
October 15, 1997 (date of $ 32,020 $ -- $ -- $ -- $ 32,020
inception)
Net loss (60) (1) -- -- (61)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 31,960 (1) -- -- 31,959
Net income through August 2, 1998 696 7 -- -- 703
Transfer of members' capital (32,656) (6) 32,656 6 --
Net loss from August 3, 1998
through December 31, 1998 -- -- (106) (1) (107)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 -- -- 32,550 5 32,555
Net income -- -- 878 9 887
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 $ -- $ -- $ 33,428 $ 14 $ 33,442
========== ========== ========== ========== ==========
See accompanying notes to financial statements.
48
49
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
($ IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 887 $ 596 (61)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,051 1,050 105
Loss on sale of fixed assets -- 3 --
Change in operating assets and liabilities:
Accounts receivable, net 457 (1,616) 235
Due from Winston Hospitality, Inc. -- 1,636 (1,636)
Due from affiliates (3,275) (5,007) (635)
Deposits and other assets (100) (158) (135)
Restricted cash 166 (204) --
Accounts payable and accrued expenses 54 617 4,063
Percentage lease payable to Winston Hotels, Inc. (28) 1,919 1,463
Advance deposits (32) 48 26
--------- --------- ---------
Net cash (used in) provided by operating activities (820) (1,116) 3,425
--------- --------- ---------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (21) (131) (3)
Proceeds from sale of fixed assets 3 16 --
Additions to intangible assets (107) (87) (100)
Additions to deferred franchise costs (79) -- --
--------- --------- ---------
Net cash used in investing activities (204) (202) (103)
--------- --------- ---------
Cash flows from financing activities - contributions by members -- -- 71
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (1,024) (1,318) 3,393
Cash and cash equivalents, beginning of period 2,075 3,393 --
--------- --------- ---------
Cash and cash equivalents, end of period $ 1,051 $ 2,075 $ 3,393
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Assets contributed (liabilities assigned) to the Company by
CapStar Management Company, L.P.:
Accounts receivable $ -- $ -- $ 1,849
Deposits and other assets -- -- 62
Furniture, fixtures and equipment -- -- 243
Intangible assets -- -- 34,081
Deferred franchise costs -- -- 608
Accounts payable and accrued expenses -- -- (316)
Percentage lease payable to Winston Hotels, Inc. -- -- (4,219)
Advance deposits -- -- (109)
Due to CapStar Management Company, L.P. -- -- (250)
--------- --------- ---------
Non-cash financing activity - contribution by member -- -- 31,949
========= ========= =========
See accompanying notes to financial statements.
49
50
CAPSTAR WINSTON COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION:
CapStar Winston Company, L.L.C. (the "Company") was formed on October 15,
1997, pursuant to a limited liability company agreement ("Agreement"), subject
to the Limited Liability Act of the State of Delaware, between CapStar
Management Company, L.P. ("CMC") and EquiStar Acquisition Corporation
("EquiStar"), both wholly owned subsidiaries of CapStar Hotel Company
("CapStar"), to lease and operate certain hotels owned by WINN Limited
Partnership and Winston Hotels, Inc. (collectively, "Winston"). Generally,
members of a limited liability company are not personally responsible for
debts, obligations and other liabilities of the Company. The Agreement
provides for the termination of the Company as upon the consent of the
members.
In November 1997, CMC purchased substantially all of the assets and
assumed certain liabilities of Winston Hospitality, Inc. ("WHI"), including 38
hotel leases, certain operating assets and liabilities, and goodwill and other
intangible assets. Concurrent with the purchase, CMC contributed the assets
purchased and liabilities assumed in the transaction to the Company.
On August 3, 1998, MeriStar Hotels & Resorts, Inc. ("MeriStar") was spun
off from CapStar (the "Spin-Off") to become the lessee, manager and operator
of various hotel assets, including those previously owned, leased and managed
by CapStar and certain of its affiliates. Pursuant to the Spin-Off, CMC and
Equistar transferred their capital and interests in the Company to MeriStar
H&R Operating Company, L.P. ("MHOC") and MeriStar, respectively. The transfer
was recorded at its net book value.
As of December 31, 1999, the Company leased 49 Winston-owned hotels,
which included 28 limited-service hotels, 11 extended-stay hotels and ten
full-service hotels. The hotels have 6,616 rooms, are operated under various
franchise agreements, and are located in Arizona, Florida, Georgia, Kentucky,
Massachusetts, Michigan, North Carolina, New Jersey, New York, South Carolina,
Texas and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents. The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
Restricted Cash. Restricted cash represents amounts required to be
maintained in escrow to comply with terms of certain state beverage licensing
agreements.
Furniture, Fixtures and Equipment. Furniture, fixtures and equipment are
recorded at cost and are depreciated using the straight-line method over
estimated useful lives ranging from five to seven years.
Intangible Assets. Intangible assets consist of goodwill and hotel lease
contracts purchased and beverage licensing costs incurred.
Hotel lease contracts represent the estimated present value of net cash
flows expected to be received from the hotel leases originally acquired. Hotel
lease contracts are amortized on a straight-line basis over 30 years.
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets originally acquired. Goodwill is amortized on a
straight-line basis over 40 years.
Licensing costs represent the cost of beverage licenses mandated by state
statutes. Licensing costs are amortized on a straight-line basis over five
years.
The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability is measured by comparing the carrying amount of
the intangible assets to the projected future cash flows of the Company. If
such assets are considered to be impaired, the impairment to be recognized is
the amount by which the carrying amounts of the intangible assets exceed their
fair value. No impairment loss was recorded in 1999, 1998 or 1997.
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Deferred Franchise Costs. Franchise costs are deferred and amortized on a
straight-line basis over the terms of the franchise agreements, which range
from 18 months to 20 years.
Members' Capital and Allocation of Profits and Losses. Prior to the
Spin-Off, CMC had a 99% ownership interest and EquiStar had a 1% ownership
interest in the Company. Subsequent to the Spin-Off, MHOC has a 99% ownership
interest and MeriStar has a 1% ownership interest in the Company. In general,
the allocation of income and losses and contributions and distributions were
made to the members in proportion to their respective ownership interest.
Income Taxes. No provision has been made for income taxes since any such
amount is the liability of the individual members.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
recognized during the reporting period. Actual results could differ from those
estimates.
3. INTANGIBLE ASSETS:
Intangible assets consist of the following:
1999 1998
---------- ----------
Lease contract $ 6,576 $ 6,576
Goodwill 27,712 27,605
Organization costs 87 87
---------- ----------
34,375 34,268
Less: accumulated amortization (1,942) (1,015)
---------- ----------
$ 32,433 $ 33,253
========== ==========
4. MANAGEMENT AGREEMENTS:
As of December 31, 1999, the Company managed 39 of the 49 leased hotels
and had separate management agreements with third parties to manage the
remaining 10 hotels. The terms of these third-party management agreements
provide for management fees to be paid on a monthly basis based on budgeted
gross operating profit, as defined in the agreements, with year-end
adjustments, for actual operating results. The term of nine of the management
agreements extends to 2006 and one extends to 2012. The agreements are
cancelable before expiration under certain circumstances. Management fees
incurred during 1999, 1998 and 1997 were $886, $1,001 and $17, respectively
and are included in other expenses.
5. TRANSACTIONS WITH RELATED PARTIES:
The Company and MHOC advanced amounts to each other in the normal course
of business. At December 31, 1999 and 1998, MHOC owed the Company $8,667 and
$5,392, respectively.
6. COMMITMENTS:
Each of the Company's hotels is leased under a separate participating
lease agreement. The leases in existence at the date CMC purchased the initial
38 hotel leases expire on November 30, 2012; subsequent leases extend through
December 31, 2013. The leases require monthly minimum base rental payments to
Winston and additional quarterly payments of percentage rent, based on
revenues generated by the hotels in excess of specified amounts. The leases
are non-cancelable except upon sale of a hotel. Winston is
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required to make a termination payment to the Company, as defined in the lease
agreements, upon cancellation of a lease. MeriStar Hospitality Corporation, an
affiliate of the Company, has guaranteed amounts due and payable by the
Company under the leases up to $20,000. Future minimum base rental payments
under these non-cancelable operating leases as of December 31, 1999 are as
follows:
2000 $ 31,120
2001 31,120
2002 31,120
2003 31,120
2004 31,120
Thereafter 252,316
------------
Total $ 407,916
============
The Company incurred minimum base rents of $30,676, $26,378 and $2,731,
and additional percentage rents of $27,875, $26,342 and $511 during 1999, 1998
and 1997, respectively.
7. BUSINESS CONCENTRATION:
Winston owns all of the Company's leased hotels. Therefore, the Company's
financial position and results of operations would be adversely and materially
impacted if Winston sells the hotels and terminates the leases. Management
believes that Winston has no intention of selling hotels which would,
individually or in the aggregate, have a material impact on the operations of
the Company.
8. SUBSEQUENT EVENT:
On February 14, 2000, Winston sold the Comfort Suites hotel in London,
Kentucky. As a result, the Company's lease for that hotel was terminated.
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REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Winston Hospitality, Inc.
We have audited the accompanying statements of income, shareholders'
equity and cash flows for the ten months ended October 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Winston Hospitality, Inc. for the ten months ended October 31, 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 6, 1998
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WINSTON HOSPITALITY, INC.
STATEMENT OF INCOME
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
($ IN THOUSANDS)
TEN MONTHS ENDED
OCTOBER 31, 1997
----------------
Revenue:
Room $ 67,145
Food and beverage 2,419
Other operating, net 1,373
Interest income 152
----------
Total revenue 71,089
----------
Expenses:
Property and operating 24,112
Property repairs and maintenance 3,193
Food and beverage 1,715
General and administrative 2,090
Franchise costs 6,167
Management fees 1,015
Percentage lease payments 30,980
----------
Total expenses 69,272
----------
Net income $ 1,817
==========
WINSTON HOSPITALITY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
($ IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS EQUITY
------ ------- ------- -------- ------
Balances at December 31, 1996 100 1 49 644 694
Net income -- -- -- 1,817 1,817
Distributions -- -- -- (600) (600)
--------- --------- --------- --------- ---------
Balances at October 31, 1997 100 $ 1 $ 49 $ 1,861 $ 1,911
========= ========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
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WINSTON HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
($ IN THOUSANDS)
TEN MONTHS
ENDED
OCTOBER 31, 1997
----------------
Cash flows from operating activities:
Net income $ 1,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67
Changes in assets and liabilities:
Accounts receivable - trade (1,137)
Prepaid expenses and other assets 38
Accounts payable - trade 659
Percentage lease payable to Lessor (729)
Accrued expenses and other liabilities 906
------------
Net cash provided by operating
activities
1,621
------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (76)
Repayments from (advances to) Lessor, affiliates and
shareholders, net 518
------------
Net cash provided by investing
activities
442
------------
Cash flows from financing activities:
Distributions to shareholders (600)
------------
Net cash used in financing activities (600)
------------
Net increase in cash and cash equivalents 1,463
Cash and cash equivalents at beginning of the period 5,463
------------
Cash and cash equivalents at end of the period $ 6,926
============
The accompanying notes are an integral part of the financial statements.
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WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION:
Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston
Hotels, Inc. ("WHI") (collectively, the "Company). The two shareholders of
Hospitality (Robert W. Winston, III and John B. Harris, Jr.) are also
shareholders of WHI and/or partners in the Partnership. The Company owned 38
hotels as of October 31, 1997.
Each hotel was separately leased by the Company to Hospitality under a
Percentage Lease Agreement. These leases required minimum base rental payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue and certain food and
beverage revenues.
Twenty-eight of the 38 hotels are limited-service hotels, five are
extended-stay hotels and five are full-service hotels. All 38 hotels are
operated under franchise agreements with Promus Hotels, Inc., Choice Hotels
International, Inc., Holiday Inns Franchising, Inc. and Marriott
International, Inc. The cost of obtaining the franchise licenses was paid by
the Company and the on-going franchise fees were paid by Hospitality.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Cash Equivalents. All highly liquid investments with a maturity date of
three months or less when purchased are considered to be cash equivalents. At
October 31, 1997, bank account balances exceeded federal depository insurance
limits by approximately $6,252.
Fair Value of Financial Instruments. Hospitality's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity.
Furniture, Fixtures and Equipment. Furniture and equipment are recorded
at cost and are depreciated using the straight-line method over estimated
useful lives of the assets of five and seven years. Leasehold improvements are
being amortized using the straight-line method over the terms of the related
leases. Upon disposition, both the asset and accumulated depreciation accounts
are relieved and the related gain or loss is credited or charged to the income
statement. Repairs and maintenance of hotel properties owned by the Company
are paid by Hospitality and are charged to expense as incurred.
Income Taxes. Hospitality has made an election under Subchapter S of the
Internal Revenue Code of 1986, as amended. Any taxable income or loss is
recognized by the shareholders and, therefore, no provision for income taxes
has been provided in the accompanying financial statements.
3. COMMITMENTS:
Under the terms of the Percentage Lease Agreements, Hospitality had
future lease commitments to the Company through 2006. As disclosed in Note 6
below, all Percentage Leases were sold as of November 24, 1997.
Hospitality incurred minimum base rents of $13,535 as well as percentage
rents of $17,445 for the ten months ended October 31, 1997.
Hospitality had entered into separate contracts with unrelated parties
for the management of 10 of the hotels. The terms of these agreements provided
for management fees to be paid based on predetermined formulas for a period of
ten years through 2006. The contracts were cancelable under certain
circumstances as outlined in the agreements. As disclosed in Note 6 below, all
such contracts were sold as of November 24, 1997.
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Various legal proceedings against Hospitality have arisen from time to
time in the normal course of business. Management believes liabilities arising
from these proceedings, if any, will have no material adverse effect on the
financial positions or results of operations of Hospitality.
4. DISTRIBUTIONS:
Beginning with the year ended December 31, 1996, the shareholders agreed
to limit distributions by Hospitality to amounts necessary to pay their income
taxes on the net income derived from Hospitality until such time as the
tangible net worth of Hospitality reached $4,000. Thereafter, they agreed to
invest at least 75% of their after-tax distributions of net income from
Hospitality in Common Stock of the Company. These agreements terminated
effective November 24, 1997, due to the sale of the leases to CapStar.
5. PROFIT SHARING PLAN:
On January 1, 1996, Hospitality adopted the Winston 401(k) Plan (the
"Plan") for substantially all employees, (except any highly compensated
employee, as defined in the Plan), who had attained the age of 21 and
completed one year of service. Under the Plan, employees were able to
contribute from 1% to 15% of compensation, subject to an annual maximum as
determined under the Internal Revenue Code. Hospitality made matching
contributions of a specified percentage of the employee's contribution.
Hospitality contributed $54 during the 10-month period ended October 31, 1997.
6. SUBSEQUENT EVENT:
On November 24, 1997, Hospitality completed the sale of substantially all
of its assets and all 38 existing Percentage Leases to CapStar Management
Company, L.P. ("CMC") for total consideration of $34,000. The $34,000 sale
price consisted of $10,000 in cash and 674,236 CMC Partnership Units.
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INDEX TO EXHIBITS
Exhibit Description
------- -----------
3.1(10) Restated Articles of Incorporation
3.2(1) Amended and Restated Bylaws
4.1(1) Specimen certificate for Common Stock, $0.01 par value per share
4.2(4) Specimen certificate for 9.25% Series A Cumulative Preferred Stock
4.3(10) Restated Articles of Incorporation
4.4(1) Amended and Restated Bylaws
10.1(3) Second Amended and Restated Agreement of Limited Partnership of WINN Limited Partnership
10.2(4) Amendment No. 1 dated September 11, 1997 to Second Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.3(6) Amendment No. 2 dated December 31, 1997 to Second Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.4 Amendment No. 3 dated September 14, 1998 to Second Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.5(11) Amendment No. 4 dated October 1, 1999 to Second Amended and Restated Agreement of Limited
Partnership of WINN Limited Partnership
10.6(2) Form of Percentage Leases
10.7(5) First Amendment to Lease dated November 17, 1997 between WINN Limited Partnership and CapStar
Winston Company, L.L.C.
10.8(5) First Amendment to Lease dated November 24, 1997 between WINN Limited Partnership and CapStar
Winston Company, L.L.C.
10.9(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.10(2) Limitation of Future Hotel Ownership and Development Agreement
10.11(5) Guaranty dated November 17, 1997 between CapStar Hotel Company, WINN Limited Partnership and
Winston Hotels, Inc.
10.12(6) Employment Agreement, dated July 31, 1997, by and between Kenneth R. Crockett and Winston Hotels,
Inc.
10.13(7) Winston Hotels, Inc. Stock Incentive Plan as amended May 1998
10.14(8) Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated November 3, 1998
10.15(8) Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital Company, LLC
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10.16(9) Winston Hotels, Inc. Executive Deferred Compensation Plan
10.17(9) Credit Agreement, dated as of January 15, 1999, among Wachovia Bank, N.A., Branch Banking and
Trust Company, SouthTrust Bank, N.A., Centura Bank, Winston Hotels, Inc., WINN Limited
Partnership and Wachovia Bank, N.A. as Agent (the "Credit Agreement")
10.18(9) Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Wachovia Bank, N.A. for the principal sum of $60,000,000 pursuant to the Credit
Agreement
10.19(9) Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Branch Banking and Trust Company for the principal sum of $40,000,000 pursuant to
the Credit Agreement
10.20(9) Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to SouthTrust Bank, N.A. for the principal sum of $25,000,000 pursuant to the Credit
Agreement
10.21(9) Promissory Note, dated as of January 15, 1999,
from Winston Hotels, Inc. and WINN Limited
Partnership to Centura Bank for the principal sum
of $15,000,000 pursuant to the Credit Agreement
10.22(9) Form of Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement used to
secure certain obligations under the Credit Agreement (not including certain variations existing
in the different states where the properties are located)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants (PricewaterhouseCoopers LLP)
23.2 Accountants' Consent (KPMG LLP)
24.1 Powers of Attorney
27.1 Financial Data Schedule (for SEC use only)
99.1 Risk Factors
(1) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-76602)
effective May 25, 1994 and incorporated herein by reference.
(2) Exhibits to the Company's Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No. 33-91230)
effective May 11, 1995 and incorporated herein by reference.
(3) Exhibit to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on July 24, 1997 and incorporated herein by
reference.
(4) Exhibits to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on September 15, 1997 and incorporated herein by
reference.
(5) Exhibits to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on December 10, 1997 and incorporated herein by
reference.
(6) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1998 and as amended by
Form 10-K/A filed with the Securities and Exchange Commission on April 1,
1998.
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(7) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission on July 29, 1998. (Registration
No. 333-60079) and incorporated herein by reference.
(8) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 16, 1998 and as amended on
Form 10-Q/A filed with the Securities and Exchange Commission on February
23, 1999 and incorporated herein by reference.
(9) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 25, 1999 and incorporated
herein by reference.
(10) Exhibit to the Company's Quarterly Report on Form 10-Q or filed with the
Securities and Exchange Commission on August 4, 1999 and incorporated
herein by reference.
(11) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 12, 1999 and incorporated
herein by reference.
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