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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, 1996
Commission file number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1872141
(State of incorporation) (I.R.S. Employer Identification Number)
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices) (Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
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. [ ]
The aggregate market value of the registrant's Common Stock at March 3,
1997 held by those persons deemed by the registrant to be non-affiliates was
approximately $206,718,000.
As of March 3, 1997, there were 15,819,580 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 13, 1997 Part III
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WINSTON HOTELS, INC.
FORM 10-K ANNUAL REPORT
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS 16
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 26
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 27
SIGNATURES
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PART I.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Winston Hotels, Inc. ("WHI") is an equity real estate investment trust
("REIT") organized on June 2, 1994, that either directly or through WINN Limited
Partnership (the "Partnership") owns 31 hotels (the "Current Hotels") having an
aggregate of 4,026 rooms as of December 31, 1996. WHI currently owns a 92.28%
partnership interest in the Partnership and is its sole general partner.
References to the "Company" herein refer to WHI and the Partnership, unless
otherwise indicated or unless the context requires otherwise.
In 1994, the Company completed an initial public offering of Common Stock
(the "Common Stock") and used the majority of the offering proceeds to acquire
one hotel property and a 93.96% general partnership interest in the Partnership.
The Partnership used a substantial portion of the proceeds from the Company to
acquire nine hotel properties (together with the hotel acquired by the Company,
the "Initial Hotels"). During 1994, the Company acquired six additional hotels
(the "1994 Acquired Hotels") utilizing proceeds from the initial public offering
and borrowings under its line of credit. In 1995, the Company completed a second
public offering (the "Follow-on Offering") and used the proceeds to purchase
five additional hotels on May 18, 1995 (the "1995 Acquired Hotels").
In 1996, the Company completed an additional follow-on offering of 5,750,000
shares of Common Stock. The Company used the proceeds of this offering to: (i)
fund a portion of the purchase price of five of the ten hotel properties
acquired in 1996 (collectively the ten hotels are the "1996 Acquired Hotels");
(ii) repay certain indebtedness of the Company; (iii) pay franchise fees,
financing costs and closing costs related to the 1996 Acquired Hotels; and (iv)
pay certain costs of capital improvements to the 1996 Acquired Hotels.
Under the REIT qualification requirements of the Internal Revenue Code, REITs
generally must lease their hotels to third party operators. Therefore, the
Company and the Partnership lease the Current Hotels to Winston Hospitality,
Inc. (the "Lessee") pursuant to leases that provide for rent payments based, in
part, on revenues from the Current Hotels (the "Percentage Leases"). 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 (ranging from 62%
to 70%) of each Current Hotel's room revenues in excess of specified amounts
will be paid to the Partnership or the Company as percentage rent ("Percentage
Rent"). The Lessee operates 21 of the Current Hotels and Interstate Management
and Investment Corporation ("IMIC"), who operates nine of the Current Hotels and
Promus Hotels, Inc. ("Promus"),who operates one of the Current Hotels, do so
under management agreements with the Lessee.
FINANCIAL INFORMATION ABOUT THE INDUSTRY SEGMENT
The Company is in the business of acquiring equity interests in hotel
properties. See the Consolidated Financial Statements and notes thereto included
in Item 8 of this Annual Report on Form 10-K.
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 that meet the Company's investment criteria; and
(iii) selectively developing hotels and hotel additions as market conditions
warrant.
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
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future, may result from: (i) continued sales and marketing programs by the
Lessee; (ii) completion of a refurbishment plan for certain of 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 occupancy and average daily room rate ("ADR").
The Percentage Leases provide that a percentage of room revenues in specified
ranges is paid as Percentage Rent. 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
quarterly for inflation beginning January 1, after the first full year of the
Percentage Lease, based on quarterly 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 upper economy,
mid-scale and lower 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, Comfort Inn,
Fairfield Inn and Courtyard by Marriott hotels, all-suite, limited-service
hotels such as Quality Suites and limited-service extended-stay hotel properties
such as Homewood Suites, Hampton Inn and Suites, Comfort Suites and Residence
Inn hotels (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) poorly managed properties in a deteriorated physical
condition with the potential to increase performance after renovations and under
quality management; (iii) properties in attractive locations that the Company
believes could benefit significantly by changing franchises to a brand the
Company believes will strengthen the acquired hotel's competitive position,
including properties that would require complete renovation to qualify for a new
franchise; and (iv) successful hotels available at favorable prices.
Additional investments in hotel properties may be made through the
Partnership or directly by the Company or other entities controlled by the
Company. The Company's ability to acquire additional hotel properties and
develop hotels depends primarily on its ability to obtain additional equity
financing, proceeds from subsequent issuances of Common Stock or other
securities, or co-investments from other investors in hotel development or
rehabilitation joint ventures. Such investments may be financed, in whole or in
part, from the exchange of Common Stock or Partnership Units for hotels, with
borrowings under lines of credit or other credit facilities, or with cash not
required to be distributed to maintain the Company's status as a REIT.
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").
In considering development opportunities, the Board of Directors will review
the availability and pricing of existing hotels for sale in the area that meet
its acquisition criteria, the availability of sites suitable for development,
the costs and risks of developing and the availability of financing, as well as
any other factors the Board of Directors deems relevant. The Company's current
policy is to limit the aggregate cost of all hotel development undertaken by the
Company to not greater than 20% of the Company's investment in hotel properties,
at cost. The Board of Directors, however, can change the limitation on
development as it deems appropriate. Each Winston Affiliate (Charles Winston,
Robert W. Winston, III, his wife Tracy Winston and trusts for the benefit of
their minor children, John B. Harris, Jr., Winston Hospitality, Inc., and any
other affiliate of Charles Winston or Robert W. Winston, III are collectively
referred to herein as the
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"Winston Affiliates") serving on the Company's or the Lessee's Board of
Directors has agreed that so long as he is on the board or is an officer of the
Company or the Lessee, neither he nor his affiliates will develop or own
interests in hotel properties except through the Company, or own more than five
percent of any publicly held hotel company.
The Company has commenced development of a 137-suite Homewood Suites hotel
near the Crabtree Valley Mall in Raleigh, North Carolina and a 112-suite
Homewood Suites hotel in Alpharetta, Georgia. Total development costs are
expected to approximate $13 million and $10 million, respectively, for these
projects with completion scheduled for late 1997. In addition, the Company
plans to develop a 96-suite Homewood Suites hotel on a 3.9 acre site owned in
Durham, North Carolina, and a 112-suite Homewood Suites hotel on a 2.8 acre
site in Lake Mary (north of Orlando), Florida. Total development costs are
expected to approximate $9 million and $10 million, respectively, for these
projects, which are tentatively expected to open during the first quarter of
1998 (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward Looking Statements").
Operations and Property Management. The Lessee currently operates 21 of the
Current Hotels, IMIC manages nine of the Current Hotels and Promus manages one
of the Current Hotels (collectively the "Property Managers") pursuant to
management agreements with the Lessee with respect to each of such hotels. The
Lessee 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. Managers are trained in all aspects of hotel
operations, with particular emphasis placed on customer service. Managers are
trained in negotiation of prices with corporate and other clients and to be
responsive to marketing requirements in their particular markets. The Lessee 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 Lessee leases the Current Hotels pursuant to the Percentage Leases.
Affiliates of the Lessee have managed hotel properties, including the Initial
Hotels, since 1985. Under the Percentage Leases, the Lessee generally is
required to perform all operational and management functions necessary to
operate the Current Hotels. Such functions include accounting, periodic
reporting, ordering supplies, advertising and marketing, maid service, laundry
and maintenance. The Lessee is 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
Lessee, its affiliates and the Property Managers may manage other hotel
properties in addition to hotels owned by the Company. The Lessee and its
affiliates have agreed not to lease or manage any hotel property (other than
properties owned by the Company) located within a 20 mile radius of any hotel
property in which the Company has invested.
IMIC is a hotel development and management company founded in 1981. IMIC
employs approximately 52 employees at its central office. These employees
provide management support to IMIC's on-site hotel managers in the areas of risk
management, human resources, accounting and finance, purchasing, cash
management, sales and marketing, including graphic design and advertising,
facilities management and construction and lounge and restaurant operations.
IMIC currently operates 18 hotels in five states, including 12
limited-service hotels and six full-service, convention or resort hotels. Of the
18 hotels that it operates currently (which include nine of the Current Hotels),
IMIC or its affiliates developed 14 of the hotels. IMIC or its affiliates
developed nine of the Current Hotels.
IMIC operates nine of the Current Hotels under separate management agreements
with the Lessee. Each year, the Lessee 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. The Lessee has retained the right to control the expenditure
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of funds budgeted for capital and non-routine items, including, at its
discretion, approving plans and selecting and overseeing contractors and other
vendors.
The Lessee pays or reimburses IMIC for all property operating expenses at
the hotels. Each IMIC management agreement is coterminous with the applicable
Percentage Lease. Each IMIC management agreement may be terminated earlier upon
the occurrence of one or more events of default, as described in the management
agreements.
Promus manages one of the Current Hotels under a management agreement with
the Lessee. Each year, the Lessee pays Promus a management fee based on a
percentage of the Lessee's gross operating profit for the hotel managed by
Promus with certain incentive amounts.
Investments by Lessee Shareholders
The Lessee is owned by Robert W. Winston, III and John B. Harris, Jr.
Messrs. Winston and Harris have agreed that the Lessee will make no further
distributions other than amounts required to pay their income tax liability
associated with the Lessee's net income unless and until the Lessee has tangible
net worth of at least $4 million. Thereafter, they have agreed to invest at
least 75% of the Lessee's net income (after distributions to pay taxes) in
Common Stock. The Common Stock will be acquired either directly from the Company
at approximately then-current market prices or in the open market, at the
election of the Company's independent directors (the "Independent Directors").
Messrs. Winston and Harris have agreed to hold any such shares for at least one
year after the date of purchase. The obligations to use distributions from the
Lessee to purchase Common Stock cease (i) if the Company no longer qualifies as
a REIT; or (ii) with respect to that Shareholder, if Mr. Winston or Mr. Harris
ceases to be an officer or director of the Company or an officer or director of
the Lessee.
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. See schedule of properties by franchisor under Item 2.
The hotel franchise licenses generally specify certain management,
operational recordkeeping, accounting, reporting and marketing standards and
procedures with which the Lessee must comply. The franchise licenses obligate
the Lessee 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, four of the franchise licenses expire in 2006,
four expire in 2008, one expires in 2009, one expires in 2010, two expire in
2011, three expire in 2014, 11 expire in 2015 and five expire in 2016. The
franchise agreements provide for termination at the franchisor's option upon
the occurrence of certain events, including the Lessee's failure to pay
royalties and fees or perform its other covenants under the license agreement,
bankruptcy, abandonment of the franchise, commission of a felony, assignment of
the license without the consent of the franchisor, or failure to comply with
applicable law in the operation of the relevant Current Hotel. The Lessee is
entitled to terminate the franchise license only by giving at least 12 months'
notice and paying a specified amount of liquidated damages. The license
agreements will not renew automatically upon expiration. The Lessee is
responsible for making all payments under the franchise agreements to the
franchisors. Under the franchise agreements, the Lessee pays 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. The
Company has agreed to guarantee the Lessee's obligations to make franchise fee
payments to franchisors under the franchise agreements.
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Promus, Choice, Holiday Inn and Marriott have agreed that in the event of a
default by the Lessee under a franchise agreement with respect to a Current
Hotel (or the Company's termination of a Percentage Lease), upon request by the
Company and the curing of any event of default, the franchisor will allow that
Current Hotel to be operated by a designee of the Company acceptable to the
franchisor for a reasonable period of time, not to exceed 12 months, and to
allow the designee of the Company to apply for a new franchise license. The
Company will be obligated to pay the franchisor's actual costs of investigating
the suitability of the designee. Normal change of ownership commitment fees will
be due when a designee applies for a new franchise license.
Competition
The hotel industry is highly competitive. The Current Hotels compete with
other hotel properties in their geographic markets. Many of the Company's
competitors have substantially greater marketing and financial resources than
the Company, the Lessee, 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 have substantially 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 currently has four employees. The Lessee employs approximately
823 people in operating the 21 Current Hotels it manages. The Company and the
Lessee believe that their relationships with their employees are good.
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 Lessee, IMIC or Promus, as the case may be, may be
potentially liable for such costs.
Phase I environmental site assessments ("ESAs") were obtained on all of the
Initial Hotels prior to the initial public offering and on the Acquired Hotels
prior to their acquisitions. 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
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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 (the "Code"), 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
operation requirements, including a requirement that it currently distribute at
least 95% of its annual taxable income. 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 revenues per available room ("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.
Executive Officers
The following table lists the executive officers of the Company:
NAME AGE POSITION
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Charles M. Winston 67 Chairman of the Board of Directors
Robert W. Winston, III 35 Chief Executive Officer and President
Philip R. Alfano 47 Senior Vice President, Chief Financial
Officer and Secretary
Kenneth Crockett 40 Senior Vice President of Development
Charles M. Winston. Charles Winston has been Chairman of the Board of
Directors of the Company 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. He was Chairman of the Board of WJS Management, Inc., the former
operator of nine of the Initial Hotels, and President of several corporations,
which developed ten of the Current Hotels, positions he had held since 1987. Mr.
Winston also serves on the board of directors of United Carolina Bancshares
Corporation.
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Robert W. Winston, III. Robert Winston has served as Chief Executive Officer,
President and director of the Company since March 15, 1994. Mr. Winston is the
son of Charles Winston, Chariman of the Board of Directors. 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. From 1988 to 1991 he was employed
by Hampton Inns Corporation where he was involved in the management of several
hotels. In 1991, Mr. Winston founded a hotel management company and purchased
the Hampton Inn Initial Hotel in Wilmington, North Carolina. He managed that
hotel from 1991 until the closing of the Company's initial public offering in
June 1994. Mr. Winston developed three of the Current Hotels.
Philip R. Alfano. Mr. Alfano was appointed Senior Vice President and Chief
Financial Officer of the Company in October 1994 and Secretary in May, 1995. Mr.
Alfano is a graduate of St. Bonaventure University with a B.B.A. degree in
accounting. Prior to joining the Company, from 1983 until August 1993, Mr.
Alfano was employed by the Ashforth Company, a privately-held real estate
development and service organization which is not affiliated with the Company,
and served on its Executive Committee. In this position, Mr. Alfano was
responsible for all finance and administrative activities and acted as business
advisor to six operating units. Mr. Alfano is a certified public accountant.
From August 1993 through October 1994, Mr. Alfano was self-employed as a
financial consultant.
Kenneth Crockett. Mr. Crockett was appointed Senior Vice President of the
Company in September, 1995. 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. From 1984 to 1986,
Mr. Crockett worked for the Oberlin Company where he was responsible for the
development and operation of nine limited-service hotels. Prior to 1984, Mr.
Crockett worked for several different financial institutions.
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ITEM 2. PROPERTIES
The following table sets forth certain unaudited pro forma information with
respect to the Current Hotels:
Room Revenues & Lease Revenues
for the years ended December 31, 1996 and 1995
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1996 1995
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Room Lease Room Lease
# Revenues Revenues Revenues Revenues
Rooms ($000) ADR Occupancy % ($000) ($000) ADR Occupancy % ($000)
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Hampton Inns
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Boone, NC 95 $ 1,662 $58.70 81.4% $ 660 $ 1,557 $54.16 82.9% $ 602
Brunswick, GA 127 2,090 54.77 82.1% 862 2,033 48.46 90.5% 839
Cary, NC 130 2,453 60.22 85.6% 1,149 2,175 55.20 83.0% 973
Charlotte, NC 125 2,542 65.13 85.3% 1,201 2,286 56.00 89.5% 1,047
Chester, VA 66 1,369 64.78 87.5% 620 1,259 57.46 91.0% 554
Duncanville, TX 119 1,305 46.13 64.7% 443 1,370 37.78 82.8% 497
Durham, NC 137 2,868 63.09 90.7% 1,350 2,594 56.70 91.6% 1,175
Gwinnett (Hampton Inn & Suites)(1), GA 135 1,039 80.83 50.7% 468
Hilton Head, SC 124 1,965 59.53 72.7% 743 1,737 53.82 70.8% 596
Jacksonville, NC 120 2,029 50.89 90.8% 881 1,831 48.51 86.2% 759
Perimeter(2), GA 131 2,173 76.75 70.4% 1,123
Raleigh, NC 141 2,731 62.60 84.5% 1,292 2,287 55.06 80.7% 1,011
Southern Pines, NC 126 1,919 55.66 74.7% 783 1,955 50.85 83.6% 820
Southlake, GA 124 2,465 67.15 80.9% 1,105 2,205 57.79 84.3% 948
Wilmington, NC 118 2,376 63.67 86.4% 1,060 2,126 60.25 81.9% 912
Comfort Inns
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Augusta, GA 123 1,447 48.06 66.9% 519 1,418 44.57 70.9% 507
Charleston, SC 128 2,084 60.48 73.5% 925 2,190 59.00 79.5% 1,003
Chester, VA 123 2,335 64.40 80.5% 1,136 2,210 58.52 84.1% 1,059
Clearwater/St. Petersburg, FL 120 1,439 48.64 67.4% 462 1,382 44.84 70.3% 433
Durham, NC 138 2,717 65.52 82.1% 1,337 2,518 59.94 83.4% 1,203
Fayetteville, NC 176 2,641 52.43 78.2% 1,300 2,432 50.36 75.2% 1,164
Greenville, SC 191 1,987 48.70 58.4% 644 1,989 44.47 64.2% 656
London (Comfort Suites), KY 62 983 53.65 80.7% 432 1,050 50.75 91.4% 483
Raleigh, NC 149 1,985 50.75 71.7% 792 1,908 47.13 74.4% 755
Wilmington, NC 146 2,561 58.15 82.4% 1,156 2,322 54.60 79.8% 1,013
Holiday Inns
- ------------
Abingdon (Holiday Inn Express), VA 80 1,246 52.92 80.4% 577 1,181 47.98 84.3% 535
Dallas (Holiday Inn Select), TX 244 4,794 68.99 77.8% 2,350 4,405 62.09 79.7% 2,084
Homewood Suites
- ---------------
Cary, NC 140 3,347 76.89 85.0% 2,159 3,164 71.90 86.1% 1,995
Clear Lake(3), TX 92 2,250 90.47 73.9% 979 320 82.57 41.7% 195
Quality Suites - Charleston, SC 168 3,918 76.69 83.1% 1,817 3,706 73.33 82.4% 1,686
Courtyard by Marriott(4) - Wilmington, NC 128 188 56.01 48.5% 79
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 4,026 $66,908 61.51 77.6% $30,404 $57,610 $54.94 80.5% $25,504
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Opened June 27, 1996;
(2) Opened February 29, 1996;
(3) Opened September 22, 1995;
(4) Opened November 8, 1996.
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THE CURRENT HOTELS
1. Hampton Inn -- 208 Linville Road, Boone, North Carolina. This five-story,
interior corridor hotel is located on an approximately 2.1 acre site near the
Blue Ridge Parkway in the northwestern part of North Carolina's Appalachian
Mountains and is within 15 minutes from snow skiing slopes. Appalachian State
University, a part of the University of North Carolina system, is located in
Boone. In addition to other amenities, the hotel has an indoor pool and jacuzzi.
The hotel was acquired from a Winston Affiliate contemporaneously with the IPO.
2. Hampton Inn -- 112 Tourist Drive, Brunswick, Georgia. This three-story,
interior- and exterior-corridor hotel is located on an approximately 2.9 acre
site just off Interstate 95. Brunswick and the nearby Golden Isles feature
beaches on the Atlantic Ocean as well as historic areas. The hotel attracts a
substantial number of guests traveling from the northeastern U.S. to Florida.
The property also is near an outlet shopping center and several restaurants. In
addition to other amenities, the hotel has a fitness center and outdoor swimming
pool. The hotel was acquired from a Winston Affiliate contemporaneously with the
IPO.
3. Hampton Inn -- 201 Asheville Avenue, Cary, North Carolina. This five-story,
interior corridor hotel is located on an approximately 2.2 acre site at the
interchange of US-1 and US-64, major area thoroughfares. In addition to other
amenities, the hotel has an outdoor pool and a fitness center. Cary is located
between Raleigh and Durham, adjacent to North Carolina's Research Triangle Park
and the Raleigh-Durham International Airport. Raleigh is one of three cities,
along with Durham and Chapel Hill, that comprise the Research Triangle. The
hotel was acquired from a Winston Affiliate contemporaneously with the IPO.
4. Hampton Inn -- U.S. Highway 29, Charlotte, North Carolina. This six-story,
interior corridor hotel is located on an approximately 2.1 acre site off
Interstate 85. The hotel is located in Charlotte, the largest metropolitan area
in the Carolinas. The hotel also is close to the Charlotte Motor Speedway.
University Park, which is near the University of North Carolina at Charlotte,
and the University Hospital are also close to the hotel. The hotel has an
outdoor pool and two hospitality suites. The hotel was acquired from a Winston
Affiliate contemporaneously with the IPO.
5. Hampton Inn -- 12610 Chestnut Hill Road, Chester (Richmond), Virginia. This
two-story interior corridor hotel was opened on April 15, 1994 and is located on
an approximately 5.1 acre site near Interstate 95 and Route 10 (approximately 15
miles south of Richmond). The hotel is located near major components of the
tobacco operations of Phillip Morris USA and major industrial and technical
centers for DuPont and Allied. Amenities include a daily complimentary
continental breakfast, on site guest laundry facilities and a jogging path. In
connection with the acquisition of this hotel, the Company also acquired a
free-standing restaurant, which is on an adjacent parcel of land and which is
subject to a pre-existing lease. The property was acquired from an entity that
is affiliated with IMIC in November, 1994.
6. Hampton Inn -- 4154 Preferred Place, Duncanville (Dallas), Texas. This
two-story, exterior corridor hotel is located on an approximately 2.5 acre site
near Interstate 20 and LBJ Freeway, the Texas Rangers Baseball Stadium and Six
Flags Over Texas. The property offers a complimentary continental breakfast,
outdoor pool and a meeting room. The property was acquired in May 1996 from
Impac Hotel Group, Inc.
7. Hampton Inn -- 1816 Hillandale Road, Durham, North Carolina. This five-story,
interior corridor hotel is located on an approximately 2.0 acre site near Duke
University, Duke University Medical Center and downtown Durham. The economy in
the Raleigh-Durham area includes a mix of industry, education and government.
The Research Triangle Park, a regional research and development center just
south of Durham, is a major area employer. The property was substantially
renovated and changed from a Comfort Inn to a Hampton Inn in 1991. The hotel has
an outdoor pool and a conference room. The hotel was acquired from a Winston
Affiliate contemporaneously with the IPO.
8. Hampton Inn & Suites -- 1725 Pineland Road, Duluth, Georgia. This four-story
interior corridor hotel is located on an approximately 2.5 acre site near
Interstate 85 in suburban Atlanta. Located nearby are Gwinnett Mall, Lake
Lanier, Stone Mountain and Chateau Elan. The property offers a complimentary
full-service breakfast and social hour. Other amenities
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include a meeting room, fully equipped business center and outdoor swimming
pool. The property was acquired in July 1996 from Winston Affiliates.
9. Hampton Inn -- One Airport Road, Hilton Head, South Carolina. This two-story
interior corridor hotel is located on an approximately 5.0 acre site near
Highway 278, the airport and several golf and tennis facilities. The Hilton Head
area is home for several major sporting events, including the MCI Heritage Golf
Tournament and the Family Circle Tennis Tournament. Among other amenities, the
hotel has an outdoor pool and a health spa, and a complimentary continental
breakfast is served daily. The property was acquired from an entity that is
affiliated with IMIC in November, 1994.
10. Hampton Inn -- 474 Western Boulevard, Jacksonville, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 3.1 acre site
near Camp Lejeune Marine Corps Base. Camp Lejeune, a major U.S. Marine base,
accounts for a substantial amount of its business. Among other amenities, the
property has an outdoor pool. The hotel was acquired from a Winston Affiliate
contemporaneously with the IPO.
11. Hampton Inn -- 769 Hammond Drive, Atlanta, Georgia. This four-story interior
corridor hotel is located on an approximately 1.6 acre site near Interstate 285
and Georgia 400 in the Perimeter Center Area. The property offers a
complimentary continental breakfast, a meeting room and an exercise room. Other
amenities include an outdoor swimming pool and 25-inch televisions in every
room. The property was acquired in July 1996 from Winston Affiliates.
12. Hampton Inn -- 6209 Glenwood Avenue, Raleigh, North Carolina. This
four-story, interior corridor hotel is located on an approximately 1.8 acre site
near the Beltline, Interstate 40, the Crabtree Valley Mall and the
Raleigh-Durham International Airport, to which the hotel offers free airport
transportation. Amenities at the hotel include three meeting rooms,
complimentary continental breakfast, manager's cocktail reception, and a health
spa that is equipped with an outdoor pool, sauna and workout room. The property
was acquired contemporaneously with the closing of the Follow-on Offering from
an entity that is affiliated with IMIC.
13. Hampton Inn -- 1675 U.S. Highway 1, Southern Pines, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 4.2 acre site
near Pinehurst and other golfing attractions, including the World Golf Hall of
Fame. In addition to its agriculture and manufacturing industries, the Southern
Pines area attracts tourists because of the approximately 30 golf courses in the
area. Tourism, which is primarily golf related, is an important part of the
area's economy. The hotel seeks to capitalize on area golfing attractions by
organizing golf tours for large numbers of visitors. The hotel has two small
conference rooms. The hotel was acquired from a Winston Affiliate
contemporaneously with the IPO.
14. Hampton Inn -- 1533 Southlake Parkway, Morrow, Georgia. This five-story,
interior corridor hotel is located on an approximately 2.5 acre site off of
Interstate 75 near South Lake Mall in suburban Atlanta. The hotel features
southern garden landscaping, a fountain lobby and an outdoor pool. The hotel was
acquired from a Winston Affiliate contemporaneously with the IPO.
15. Hampton Inn -- 567 Market Street, Wilmington, North Carolina. This
two-story, exterior corridor hotel is located on an approximately 2.9 acre site
approximately six miles from Wrightsville Beach, North Carolina. Wilmington is a
resort area with light manufacturing and distribution businesses. The hotel
offers a complimentary continental breakfast daily and provides an outdoor pool,
hospitality suite, and access to an offsite health club. The hotel was acquired
from a Winston Affiliate contemporaneously with the IPO.
16. Comfort Inn -- 629 Frontage Road, Augusta, Georgia. This five-story,
interior corridor hotel is located on an approximately 2.3 acre site near
Interstate 20, the Bobby Jones Expressway, Fort Gordon and The Augusta National
Golf Course, home of the Masters Tournament. The property offers complimentary
continental breakfast daily and other amenities including an outdoor pool and
whirlpool, a meeting room and a fully equipped fitness center. The property was
acquired in May 1995 from an entity that is affiliated with IMIC.
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17. Comfort Inn -- 144 Bee Street, Charleston, South Carolina. This seven-story,
interior corridor hotel is located on an approximately 1.0 acre site, which
overlooks the Ashley River, and is near US 17 and Charleston's historic
district, several full-service marinas and a medical complex, which consists of
several area hospitals. Amenities include an outdoor swimming pool and a meeting
room. The property was acquired in May, 1995 from an entity that is affiliated
with IMIC.
18. Comfort Inn -- 2100 West Hundred Street, Chester (Richmond), Virginia. This
five-story, interior corridor hotel is located on an approximately 3.0 acre site
near Interstate 95 and Route 10 (approximately 15 miles south of Richmond),
several major industrial corporations and several historic attractions,
including the Confederate White House and Civil War battlefields. Amenities
include an outdoor pool, health spa, meeting room and a complimentary
continental breakfast. The property was acquired from an entity that is
affiliated with IMIC in November, 1994.
19. Comfort Inn -- 3580 Ulmerton Road, Clearwater/St. Petersburg, Florida. This
three-story, interior corridor hotel is located on an approximately 2.8 acre
site near Interstate 75, Busch Gardens amusement park, golf courses,
restaurants, shopping, and many gulf coast beaches and is on Tampa Bay. Among
other amenities, the hotel has an outdoor pool and a whirlpool, which are in a
central courtyard surrounded on all sides by the hotel, and a complimentary
continental breakfast is served each day. The Company also owns a free-standing
restaurant, which is on an adjacent parcel of land and which is subject to a
pre-existing lease. The property was acquired in May, 1995 from an entity that
is affiliated with IMIC.
20. Comfort Inn -- 3508 Mount Moriah Road, Durham/Chapel Hill, North Carolina.
This four-story interior corridor hotel is located on an approximately 4.5 acre
site near the intersection of Interstate 40 and US 15-501 between Durham and
Chapel Hill, which puts it in close proximity to Duke University, the University
of North Carolina at Chapel Hill and a number of restaurants and shopping
opportunities. The hotel received the Choice Hotels "Gold Award" in 1992, 1993
and 1994. Amenities include an outdoor pool and an exercise room with a sauna
and whirlpool. The property was acquired from an entity that is affiliated with
IMIC in November, 1994.
21. Comfort Inn -- 1922 Skibbo Road, Fayetteville, North Carolina. This
four-story interior-corridor hotel is located on an approximately 3.3 acre site
near Interstate 95 and in the heart of a large trade center in North Carolina.
Both Fort Bragg and Pope Air Force Base are nearby. Amenities include an outdoor
pool, health spa, 25-inch televisions and a complimentary continental breakfast.
The property was acquired from an entity that is affiliated with IMIC in
November, 1994.
22. Comfort Inn -- 540 North Pleasantburg Drive, Greenville, South Carolina.
This two-story exterior corridor hotel is located on an approximately 3.0 acre
site near Interstate 385, the BMW assembly plant, and Michelin's North American
headquarters in the Greenville-Spartanburg Metropolitan area. The property
offers a complimentary full-service breakfast and meeting room. Other amenities
include an outdoor swimming pool, game room and sports bar. The property was
acquired in May 1996 from Life Insurance Group of Georgia.
23. Comfort Suites -- 1918 West 192 Bypass, London, Kentucky. This three-story
interior corridor hotel is located on an approximately 1.0 acre site near
Interstate 75, Daniel Boone National Forest and Rockcastle River with whitewater
sports attractions and bass fishing. The property offers a complimentary
continental breakfast, meeting room and indoor swimming pool. The property was
acquired in May 1996 from Impac Hotel Group, Inc.
24. Comfort Inn -- 2910 Capital Boulevard, Raleigh, North Carolina. This
four-story interior corridor hotel is located on an approximately 2.7 acre site
and is located near the Raleigh Beltline Highway, the State Capitol, Governor's
mansion and North Carolina State University. Amenities include an outdoor pool
and exercise area. The property was acquired from Raleigh Seventy West Hotel
Associates Limited partnership in August 1994.
25. Comfort Inn -- 151 South College Road, Wilmington, North Carolina. This
six-story, interior corridor hotel is located on an approximately 2.6 acre site
near the end of Interstate 40. The hotel is near the University of North
Carolina
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at Wilmington. The hotel features a complimentary continental breakfast, outdoor
pool, social hour and access to a nearby fitness center. The hotel was acquired
from a Winston Affiliate contemporaneously with the IPO.
26. Holiday Inn Express -- 940 East Main Street, Abingdon, Virginia. This
three-story, interior corridor hotel is located on an approximately 1.2 acre
site near Interstate 81 near Abingdon's Historic District and the Barter Theater
(State Theater of Virginia). The property offers a complimentary continental
breakfast and other amenities including an outdoor pool and meeting room. The
property was acquired in May 1996 from Impac Hotel Group, Inc.
27. Holiday Inn Select -- 11350 LBJ Freeway, Garland, Texas. This property
consists of one five-story building and two three-story buildings, all with
interior corridors located on an approximately 6.5 acre site in suburban Dallas.
The property offers an approximate 9,800 square foot conference center, four
other meeting rooms and a 50-person auditorium. Other amenities include a
full-service restaurant, nightclub, outdoor swimming pool and executive fitness
club. The property was acquired in May 1996 from Impac Hotel Group, Inc.
28. Homewood Suites -- 100 MacAlyson Court, Cary, North Carolina. This
four-story, interior corridor hotel is located on an approximately 9.1 acre
site with a covered bridge entrance and a wooded setting near Research Triangle
Park. The property offers a complimentary full-service breakfast, a business
center, and a 1200 square foot meeting room. Other amenities include
fully-equipped kitchens, fitness room, outdoor swimming pool and sport court.
The property was acquired in July 1996 from Winston Affiliates.
29. Homewood Suites -- 401 Bay Area Boulevard, Clearlake, Texas. This
three-story, interior corridor hotel is located on an approximately 2.6 acre
site near NASA's Johnson Space Center and Rockwell's Space Operations Center.
The property offers a complimentary full service breakfast, an executive
business center and a fitness facility. Other amenities include fully-equipped
in room kitchens, outdoor swimming pool and sport court. The property was
acquired in September 1996 from Promus Hotels, Inc.
30. Quality Suites -- 5225 North Arco Lane, Charleston, South Carolina. This
five-story, interior corridor hotel is located on an approximately 3.8 acre site
just off Interstate 26 near Charleston's International Airport and only a few
miles away from Charleston's Historic District. The hotel has 168 two room
suites designed around a five-story atrium. The property offers a complimentary
cooked-to-order breakfast, manager's cocktail reception, meeting room and
outdoor pool and health spa. The property was acquired in May 1995 from an
entity that is affiliated with IMIC.
31. Courtyard by Marriott -- 151 Van Campen Boulevard, Wilmington, North
Carolina. This two-story interior corridor hotel is located on an approximately
3.5 acre site near Wrightsville Beach and the Revolutionary and Civil War
historical sites. The property offers two large meeting rooms, full service
breakfast and a lobby lounge. Other amenities include an outdoor swimming pool
and a jacuzzi. The property was acquired in December 1996 from Winston
Affiliates.
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate hotels. Therefore, the Company and the Partnership lease
the Current Hotels for terms of ten years pursuant to Percentage Leases, which
provide for rent equal to the greater of Base Rent or Percentage Rent. Other
than the franchise licenses for the Current Hotels and working capital
sufficient to operate the Current Hotels, the Lessee has only nominal assets in
addition to its rights and benefits under the Percentage Leases. 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's Board of Directors 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.
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Percentage Lease Terms. Each Percentage Lease for the Current Hotels has a
non-cancelable term of 10 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 Lessee is or will be obligated to pay (i) the greater of
Base Rent or Percentage Rent (collectively, the "Rent") and (ii) certain other
additional charges. Base Rent accrues and is required to be paid monthly.
Percentage Rent is calculated by multiplying fixed percentages by gross room
revenues for each of the hotels. Percentage Rent is due quarterly. However, with
respect to eleven of the Current Hotels, the Lessee will not be in default for
non-payment of Percentage Rent due in any calendar year if the Lessee pays,
within 90 days of the end of the calendar year, the excess of Percentage Rent
due and unpaid over the Base Rent paid by the Lessee with respect to such year.
With respect to the other Current Hotels, the Lessee will not be in default for
the non-payment of Percentage Rent if it pays, within 30 days of the end of each
calendar quarter, the excess of Percentage Rent due and unpaid over the Base
Rent paid year-to-date with respect to such quarter.
Beginning in the calendar year following the year in which most Percentage
Leases commence, and for each year thereafter, (i) the annual Base Rent and (ii)
the Percentage Rent formulas will be adjusted for inflation, based on quarterly
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 Lessee 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
or destruction 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, when and as deemed necessary by the Lessee, up to an
amount equal to 5% of room revenues for limited-service, and 7% of room
revenues and food and beverage revenue for full-service hotels. These
obligations will be carried forward to the extent that the Lessee has 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 Lessee will be required, at its 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 Lessee is not obligated to bear the cost of capital improvements to the
Current Hotels. With the consent of the Company, however, the Lessee, at its
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 (other than inventory,
liens and other nondepreciable personal property) not affixed to, or deemed a
part of, the real estate or improvements thereon comprising their respective
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.
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ITEM 3. LEGAL PROCEEDINGS
The Company currently is not involved in any material litigation nor, to
the Company's knowledge, is any material litigation currently threatened against
the Company. The Lessee has advised the Company that they currently are not
involved in any material litigation, other than routine litigation arising in
the ordinary course of business, substantially all of which is expected to be
covered by liability insurance.
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, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock trades on The Nasdaq Stock Market under the symbol "WINN".
As of March 3, 1997, the Company had approximately 650 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, as
traded through The Nasdaq Stock Market and the cash distributions declared per
share:
Price Range Cash Distributions Declared
--------------------- ---------------------------
High Low Per Share
---- --- ---------
1995
First Quarter $10.00 $ 9.375 $0.22
Second Quarter 10.25 9.25 0.22
Third Quarter 11.375 10.00 0.22
Fourth Quarter 12.00 10.375 0.27
1996
First Quarter 13.375 11.688 0.24
Second Quarter 13.00 10.875 0.255
Third Quarter 13.125 11.00 0.255
Fourth Quarter 13.625 11.875 0.255
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. The Company's ability to make
distributions will depend on the receipt of the distributions from the
Partnership and lease payments from the Lessee with respect to the Hampton
Inn-Cary, North Carolina, which is owned directly by the Company (the
"Company-Owned Hotel"). The Company intends to cause the Partnership to
distribute to its partners substantially all of the Partnership's cash available
for distribution.
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RECENT SALES OF UNREGISTERED SECURITIES
In the year ended December 31, 1996, the Company issued the following
securities which were not registered pursuant to the Securities Act of 1933, as
amended:
On April 23, 1996, the Company issued 33,103 shares of Common Stock to the
shareholders of Winston Advisors, Inc. in payment of its incentive advisory fee
for 1995 to Winston Advisors, Inc. Robert W. Winston, III is a 90% shareholder
and John B. Harris is a 10% shareholder of Winston Advisors, Inc.
On July 9, 1996, the Partnership issued 606,413 units of redeemable limited
partnership interests in the Partnership (the "Partnership Units") to the
shareholders of Cary Suites, Inc. in partial consideration for the acquisition
by the Company of the Homewood Suites Hotel in Cary, North Carolina. The
shareholders of Cary Suites, Inc. are Robert W. Winston, III (30%), Tracy S.
Winston (23.33%), Charles M. Winston (23.33%) and Florence B. Winston (23.34%).
On July 18, 1996, the Partnership issued 69,960 Partnership Units to the
shareholders of RWW, Inc. in partial consideration for the acquisition by the
Company of the Hampton Inn & Suites Hotel in Gwinnett, Georgia. The shareholders
of RWW, Inc. are Robert W. Winston, III (33.33%), Charles M. Winston (33.33%)
and Florence B. Winston (33.33%).
On July 19, 1996, the Partnership issued 109,516 Partnership Units to the
shareholders of WJS Associates - Perimeter, Inc. in partial consideration for
the acquisition by the Company of the Hampton Inn in Atlanta, Georgia. The
shareholders of WJS Associates - Perimeter, Inc. include one Winston Affiliate,
Charles M. Winston (33.33%).
On September 10, 1996, the Company issued 136,363 shares of Common Stock to
Promus for an approximate purchase price of $1.5 million pursuant to the
exercise of an option to invest in the Company granted to Promus in connection
with the Company's agreement with Promus to acquire hotels from Promus.
On December 19, 1996, the Partnership issued 45,651 Partnership Units to the
shareholders of Hotel II, Inc. in partial consideration for the acquisition by
the Company of the Courtyard by Marriott in Wilmington, North Carolina. The
shareholders of Hotel II, Inc. are Robert W. Winston, III (60%), trusts for the
benefit of two of his minor children (20%) and Marion B. Winston (20%).
Pursuant to the Partnership Agreement of the Partnership (the "Partnership
Agreement"), the Limited Partners have redemption rights (the "Redemption
Rights") which enable them to cause the Partnership to redeem their Partnership
Units in exchange for shares of Common Stock on a one-for-one basis or, at the
option of the Company or in certain other circumstances, cash. The Redemption
Rights relating to the Partnership Units issued as part of the purchase price
for the Hampton Inn, Perimeter (Atlanta), Georgia Acquisition Hotel will be
exercisable by the applicable Limited Partners in whole or in part, at any time.
The Redemption Rights relating to the Partnership Units issued as part of the
purchase price on the remaining three Acquisition Hotels will be exercisable by
the applicable Limited Partners, in whole or in part, any time after the first
anniversary of the date of the Company's acquisition of the related Hotels.
No underwriter was engaged in connection with the foregoing issuances of
securities. Issuances of Common Stock and Partnership Units to the above parties
were made in reliance upon Section 4(2) of the Securities Act of 1933, as
amended, as transactions not involving any public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial information
for the Company, the Lessee, and the Initial Hotels. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the 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, 1996 AND 1995
AND THE PERIOD JUNE 2, 1994 THROUGH DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
--------- --------- --------
STATEMENTS OF INCOME:
Revenue:
Percentage Lease revenue $ 26,611 $ 17,148 $ 5,116
Interest and other income 97 442 92
--------- --------- --------
Total revenue 26,708 17,590 5,208
--------- --------- --------
Expenses:
Real estate and personal property taxes and casualty
insurance 1,647 1,054 362
General and administrative 1,985 1,208 339
Interest expense 2,665 2,555 218
Depreciation 6,476 3,854 1,176
Amortization 147 117 49
--------- --------- --------
Total expenses 12,920 8,788 2,144
--------- --------- --------
Income before allocation to minority interest 13,788 8,802 3,064
Income allocation to minority interest 786 417 187
--------- --------- --------
Net income applicable to common shareholders $ 13,002 $ 8,385 $ 2,877
========= ========= ========
Weighted average number of common shares and common
share equivalents 13,747 9,211 7,073
Net income per common share $ 1.00 $ 0.96 $ 0.43
Distributions per common share $ 1.005 $ 0.93 $ 0.48
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 234 $ 2,496 $ 1,114
Investment in hotel properties 203,052 121,886 85,917
Total assets 203,502 123,969 88,114
Total debt 42,800 34,000 28,600
Shareholders' equity 141,813 80,872 53,705
OTHER DATA:
Funds From Operations $ 20,581 $ 12,656 $ 4,240
Cash Available for Distribution 17,557 11,185 3,866
Cash provided (used) by:
operating activities 18,729 12,628 3,417
investing activities (74,614) (36,059) (85,973)
financing activities 53,623 24,813 83,670
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WINSTON HOSPITALITY, INC.
SELECTED HISTORICAL FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD JUNE 2, 1994 THROUGH DECEMBER 31, 1994
(IN THOUSANDS)
1996 1995 1994
------- ------- -------
Revenue:
Room Revenue $58,956 $39,677 $12,474
Other, net 2,969 1,100 229
------- ------- -------
Total revenue 61,925 40,777 12,703
------- ------- -------
Expenses:
Property and operating expenses 22,831 14,313 4,778
Property repairs and maintenance 3,181 1,909 607
General and administrative 2,050 1,526 782
Franchise costs 5,361 3,565 1,107
Management fees 1,126 784 23
Percentage lease payments 26,611 17,148 5,116
------- ------- -------
Total expenses 61,160 39,245 12,413
------- ------- -------
Net income $ 765 $ 1,532 $ 290
======= ======= =======
COMBINED INITIAL HOTELS
SELECTED HISTORICAL FINANCIAL DATA
FOR THE FIVE MONTHS ENDED JUNE 2, 1994
AND THE YEARS ENDED DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
1994 1993 1992
------ ------- -------
Revenue:
Room revenue $7,415 $17,125 $15,380
Other, net 135 348 326
------ ------- -------
Total revenue 7,550 17,473 15,706
------ ------- -------
Expenses:
Property operating expenses 2,983 7,008 6,484
Franchise costs 646 1,507 1,275
Repairs and maintenance 465 844 760
Real estate and personal property taxes and
insurance 328 711 637
Management fees 381 882 793
Interest expense 1,215 2,892 3,224
Depreciation and amortization 973 2,249 2,378
------ ------- -------
Total expenses 6,991 16,093 15,551
------ ------- -------
Income (loss) before minority interest 559 1,380 155
Minority Interest 357 833 55
------ ------- -------
Net income (loss) $ 202 $ 547 $ 100
====== ======= =======
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ($ IN THOUSANDS)
The Company, which consummated an underwritten initial public offering
("IPO") in June 1994 and follow-on offerings in May 1995 and in June 1996,
operates as a REIT to invest in hotel properties. The Company owned sixteen
hotels as of December 31, 1994 (the "1994 Hotels") and purchased five hotels in
May 1995 (the "1995 Acquired Hotels") and acquired five hotels in May 1996,
three hotels in July 1996, one hotel in September 1996 and one hotel in December
1996 (collectively, all ten are the "1996 Acquired Hotels"). It currently leases
all Current Hotels to the Lessee under Percentage Leases through which it
receives its principal source of revenue.
RESULTS OF OPERATIONS
For the periods ended December 31, 1996, 1995 and 1994, the differences in
operating results are primarily attributable to the Company owning more hotels
in 1996 than it did in 1995 and 1994 and commencing operations on June 2, 1994.
The table below outlines the Company's investment in hotel properties for the
periods ended December 31, 1996, 1995 and 1994:
December 31, 1996 December 31, 1995 December 31, 1994
---------------------------------- ------------------------------- -------------------------------
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 period year end
------------- --------- -------- --------- -------- ----------- --------
Limited-service hotels 7 28 5 21 6 16
Extended-stay hotels 2 2
Full-service hotels 1 1
-- -- - -- - --
Total 10 31 5 21 6 16
== == = == = ==
In order to present a more meaningful comparison of operations, the following
comparisons are presented:
- actual operating results for the year ended December 31, 1996 versus
actual results for the year ended December 31, 1995 (Company and Lessee);
- actual operating results for the year ended December 31, 1995 versus
actual results for the period from June 2, 1994 through December 31, 1994
(Company and Lessee);
- pro forma operating results for the year ended December 31, 1996 versus
pro forma results for the year ended December 31, 1995, as if the
follow-on offerings and the 1996 and 1995 acquisitions occurred on the
later of January 1, 1995 or the hotel opening date (Company only);
- actual operating results for the year ended December 31, 1995 versus
actual operating results for the year ended December 31, 1994, as adjusted
for the pro forma results of operations for the Initial Hotels for the
period January 1 through June 1, 1994, as if the IPO closed and the
Initial Hotels were purchased on January 1, 1994 ("Actual As Adjusted")
(Company only).
In addition, a discussion follows of the results of the operations for the
Initial Hotels.
THE COMPANY
ACTUAL - YEAR ENDED DECEMBER 31, 1996 VERSUS ACTUAL - YEAR ENDED
DECEMBER 31, 1995
The Company had revenues of $26,708 in 1996, consisting of $26,611 of
Percentage Lease revenues and $97 of interest and other income. Percentage Lease
revenues increased by $9,463, or 55%, in 1996 from $17,148 in 1995. This
increase was comprised of: (i) $1,717 for the 1994 Hotels, which was due to the
rent formulas of the Percentage Leases increasing rent payments by the Lessee by
an average 35% of the $571 in increased room revenues attributable to inflation
and by an average of 67% of the $2,259 in increased room revenues attributable
primarily to higher rates; (ii) $2,286 for the 1995 Acquired Hotels; and (iii)
$5,460 for the 1996 Acquired Hotels.
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21
Real estate taxes and property insurance costs incurred in 1996 were
$1,647, an increase of $593 from $1,054 in 1995. This increase was primarily
attributable to the 1995 Acquired Hotels that were owned for the entire twelve
month period in 1996 and the 1996 Acquired Hotels. General and administrative
expenses increased $777 to $1,985 in 1996 from $1,208 in 1995. The increase was
attributable to: (i) costs related to the increase in size and activities of the
Company in 1996 over 1995; (ii) the Company becoming self-administered in 1996
and incurring costs associated therewith, offset in part by savings from costs
not incurred under its previous advisory agreement; (iii) inflationary cost
increases; and (iv) a non-recurring charge of $317 in 1996 related to the
termination of potential business combinations. Interest expense increased by
$110 to $2,665 in 1996 from $2,555 in 1995, primarily due to an increase in
weighted average outstanding borrowings in 1996 from 1995. Depreciation
increased $2,622 to $6,476 in 1996 from $3,854 in 1995, primarily due to
depreciation related to the 1995 Acquired Hotels, the 1996 Acquired Hotels and
renovations completed during 1995 and 1996.
ACTUAL - YEAR ENDED DECEMBER 31, 1995 VERSUS ACTUAL - THE PERIOD FROM
JUNE 2, 1994 THROUGH DECEMBER 31, 1994
As noted above, the differences in operations are attributable primarily to
the fact that the Company had only 213 days of operations in 1994. In addition,
the Company only owned the 1995 Acquired Hotels for the last seven months of
1995. The Company had revenues of $17,590 in 1995, consisting of $17,148 of
Percentage Lease revenues and $442 of interest and other income. Other income
includes approximately $314 in non-recurring commission income. Percentage Lease
revenues increased by $12,032 to $17,148 in 1995 from $5,116 in 1994.
Approximately $9,303 of the increase was attributable to the 1994 Hotels, and
approximately $2,729 of the increase was attributable to the 1995 Acquired
Hotels.
The increase in operating expenses was attributable primarily to the fact
that the Company existed for only seven months with fewer hotels in 1994.
Additional analyses of operating expenses are included in the pro forma
comparisons below.
PRO FORMA - YEAR ENDED DECEMBER 31, 1996 VERSUS PRO FORMA - YEAR ENDED
DECEMBER 31, 1995
The Company had pro forma revenues of $30,501 for the year ended December
31, 1996, consisting of $30,404 of pro forma Percentage Lease revenues and $97
of pro forma interest and other income. Pro forma Percentage Lease revenues
increased by $4,900, or 19%, to $30,404 in 1996 from $25,504 in 1995. This
increase was composed of: (i) $2,424 due to rent formulas of the Percentage
Leases increasing pro forma rent payments by the Lessee by an average of 35% of
the $864 in increased pro forma room revenues attributable to inflation and 67%
of the $3,160 in increased pro forma room revenues attributable primarily to
higher rates; (ii) $2,454 in increased pro forma lease revenues attributable to
the opening of four additional hotels; and (iii) $22 in increased pro forma
lease revenues attributable to food and beverage revenue.
Pro forma real estate taxes and property insurance costs incurred in 1996
were $1,809, an increase of $206 from $1,603 in 1995. This increase was
attributable to an increase in property taxes in 1996 offset in part by a
decrease in insurance premiums in 1996. Pro forma general and administrative
expenses increased $450 to $1,704 in 1996 from $1,254 in 1995. The increase was
attributable to the Company becoming self-administered in 1996, inflationary
cost increases and a non-recurring charge of $317 in 1996 related to the
termination of potential business combinations, offset in part by savings from
costs not incurred under its previous advisory agreement. Pro forma depreciation
increased $2,039 to $7,800 in 1996 from $5,761 in 1995 primarily due to
additional depreciation on renovations completed during 1995 and 1996.
ACTUAL - YEAR ENDED DECEMBER 31, 1995 VERSUS ACTUAL AS ADJUSTED - YEAR ENDED
DECEMBER 31, 1994
The Company had revenues of $17,590 in 1995, consisting of $17,148 of
Percentage Lease revenues and $442 of interest and other income. Percentage
Lease revenues increased by $9,122 or 114%, from pro forma Percentage Lease
21
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revenues of $8,026 in 1994. The increase was attributable to an increase of
$1,583 for the Initial Hotels and $7,539 for six hotels acquired in 1994 (the
"1994 Acquired Hotels"). The increase in Percentage Lease revenues at the
Initial Hotels was due to the structure of the rent formulas in the Percentage
Leases which resulted in rent payments by the Lessee increasing by an average of
63% of the $2,520 increases in room revenues at the Initial Hotels. The
increased room revenues were attributable primarily to increased average daily
rates. During 1995, the Company also earned approximately $314 in commission
income.
Real estate taxes and property insurance costs incurred in 1995 were
$1,054, an increase of $507 from $547 in 1994. This was attributable to an
increase of $75, or 15%, of the total increase, for the Initial Hotels and $432
for the 1994 Acquired Hotels. The advisory fee paid to a Winston Affiliate
increased $409 to $509 in 1995 from $100 in 1994, due to performance incentives
for increases in funds from operations per share payable beginning in 1995.
General and administrative expenses increased $199, to $699 in 1995 from $500 in
1994. This increase was due to inflationary increases, $65 of costs related to
acquisition projects abandoned in 1995, and other costs attributable to the
increase in the activities of the Company in 1995 over 1994. Interest expense
increased by $2,337 to $2,555 in 1995 from $218 in 1994. The increase is
attributable to increased borrowings related to the purchase of the 1994
Acquired Hotels. Depreciation and amortization increased $1,697 to $3,971 in
1995 from $2,274 in 1994. This increase primarily relates to depreciation for
the 1994 Acquired Hotels.
THE LESSEE
ACTUAL - YEAR ENDED DECEMBER 31, 1996 VERSUS ACTUAL - YEAR ENDED
DECEMBER 31, 1995
Total revenues increased $21,148, or 52% to $61,925 in 1996 from $40,777 in
1995. This increase is primarily attributable to an increase in room revenues of
$19,279, or 49% to $58,956 in 1996, from $39,677 in 1995. The increase in room
revenues was due to: (i) an increase in room revenues of $2,830, or 8% for the
1994 Hotels; (ii) an increase in room revenues of $5,089 for the 1995 Acquired
Hotels; and (iii) an increase in room revenues of $11,360 for the 1996 Acquired
Hotels. Food and beverage revenue increased $1,547 to $1,685 in 1996 from $138
in 1995, primarily due to one of the 1996 Acquired Hotels being a full-service
hotel.
The Lessee had total expenses in 1996 of $61,160, up $21,915 from $39,245
in 1995. This increase was primarily attributable to the operation of a greater
number of hotels for the twelve months ended December 31, 1996 as compared with
the same period of 1995.
In general, the net income of the Lessee was negatively impacted during the
twelve months ended December 31, 1996 by the following conditions: (i) the
unseasonably cold weather experienced during the first quarter of 1996; (ii)
renovations at several hotels; (iii) start-up general and administrative costs
incurred in connection with managing the 1996 Acquired Hotels; and (iv) a
short-term management contract for the full-service hotel in Garland, Texas.
Furthermore, the Lessee incurred incremental on-going general and administrative
costs during the twelve months ended December 31, 1996, in connection with the
management of the 1996 Acquired Hotels. During 1996, the 1996 Acquired Hotels
had been leased and were operated for the following periods of time: five for
approximately eight months, three for approximately six months, one for
approximately four months and one for less than one month.
ACTUAL - YEAR ENDED DECEMBER 31, 1995 VERSUS ACTUAL - THE PERIOD FROM
JUNE 2, 1994 THROUGH DECEMBER 31, 1994
The Lessee had room revenues of $39,677 in 1995 compared to $12,474 in
1994, an increase of $27,203. The increase included $20,673, or 76% of the total
increase, for the 1994 Hotels, and $6,530 for the 1995 Acquired Hotels. Other
operating revenue totaled $877 in 1995 compared to $167 in 1994, an increase of
$710. This increase was attributable primarily to telephone revenue increasing
by $428, to $533 in 1995 from $105 in 1994, and miscellaneous income increasing
by $191, to $222 in 1995 from $31 in 1994. The increase in telephone revenue
included $332 for the 1994 Hotels and $96 for the 1995 Acquired Hotels. The
miscellaneous income increase for 1995 was made up of $134 for the 1994 Hotels
and $57 for the 1995 Acquired Hotels.
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23
The Lessee had property and operating expenses in 1995 of $14,124, up
$9,369 from $4,755 in 1994. The increase in operating expenses was attributable
primarily to the fact that the Lessee existed for only seven months with fewer
hotels in 1994.
A breakdown of pro forma room revenue and other related information is
presented in Table I below for the 27 hotels that were open and operated since
January 1, 1995 or earlier (the "Stabilized Hotels"), for those four hotels that
were opened during 1995 or 1996 (the "Newly Developed Hotels") and the Current
Hotels:
TABLE I.
Twelve Months Ended December 31,
----------------------------------------
1996 1995 % Change
---- ---- --------
Stabilized Hotels:
- ------------------
Room Revenues $61,257 $57,290 6.9
Occupancy 78.6% 80.8% (2.7)
Average Daily Rate $ 60.16 $ 54.84 9.7
Revenue Per Available Room $ 47.27 $ 44.32 6.7
Percentage Lease Payments $27,755 $25,309 9.7
Newly Developed Hotels:
- -----------------------
Room Revenues $ 5,651 $ 320
Occupancy 65.4% 41.7%
Average Daily Rate $ 81.42 $ 82.57
Revenue Per Available Room $ 53.22 $ 34.44
Percentage Lease Payments $ 2,649 $ 195
Current Hotels:
- ---------------
Room Revenues $66,908 $57,610 16.1
Occupancy 77.6% 80.5% (3.6)
Average Daily Rate $ 61.51 $ 54.94 11.9
Revenue Per Available Room $ 47.72 $ 44.25 7.8
Percentage Lease Payments $30,404 $25,504 19.2
THE INITIAL HOTELS
In June 1994 in connection with the IPO, the Initial Hotels were acquired by
the Company and leased to the Lessee. A breakdown of room revenue and other
related information for the periods indicated is presented in Table II below:
TABLE II
Year Ended December 31, % Change
------------------------------------------ --------------------------------
1994(a) 1993 1992 1994 vs 1993 1993 vs 1992
------- ---- ---- ------------ ------------
Room Revenues $18,558 $17,125 $15,380 8.4 11.3
Occupancy 84.3% 83.6% 80.0% 0.8 4.5
Average Daily Rate $ 48.40 $ 45.04 $ 42.00 7.5 7.2
Revenue Per Available Room $ 40.81 $ 37.64 $ 33.62 8.4 12.0
(a) pro forma
Property operating expenses for the Initial Hotels of $6,879 in 1994
represented 36.4% of total revenue in 1994, as compared with 37.2% in 1993.
Other comparisons are not meaningful due to the change in ownership.
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24
The following table sets forth certain combined historical information for the
Initial Hotels, as a percentage of combined Initial Hotels revenues, for the
periods indicated.
TABLE III
5 Months Ended June 2, 1994 Year Ended December 31,
--------------------------- -----------------------
1993 1992
---- ----
Room revenues 98.2% 98.0% 97.9%
Other revenues, net 1.8 2.0 2.1
----- ----- -----
Total revenue 100.0 100.0 100.0
Property operating expenses 36.7 37.2 37.8
Other expenses 55.9 54.9 61.2
----- ----- -----
Net income before minority interest 7.4% 7.9% 1.0%
===== ===== =====
The decline in property operating expenses, as a percentage of revenues,
results from certain expenses, such as payroll expenses, being fixed in nature.
Other operating expenses, such as utilities, housekeeping and franchise costs,
are variable depending on occupancy levels. Certain other expenses, such as
interest expense, real estate taxes and insurance, and depreciation and
amortization are fixed, and decrease as a percentage of revenues as revenues
increase.
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,
1996, cash flow provided by operating activities was $18,729 and funds from
operations, which is equal to net income before minority interest and
non-recurring costs plus depreciation, was $20,581. Under Federal income tax law
provisions applicable to REITs, the Company is required to distribute at least
95% of its taxable income to maintain its tax status as a REIT. In 1996, the
Company declared distributions of $14,423 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 for the year ended
December 31, 1996 totaled $74,614, primarily relating to the purchase and
renovation of the 1996 Acquired Hotels. Further, the Company anticipates
spending an additional $5,700 in connection with the refurbishment of its
hotels. These expenditures are in addition to reserves of 5% of room revenues
for its limited service hotels and 7% of room revenues and food and beverage
revenues from its full service hotels which the Company is required to set aside
under its Percentage Leases for periodic capital improvements and the
refurbishment and replacement of furniture, fixtures and equipment at its
Current Hotels. In the year ended December 31, 1996, the Company set aside
$3,024 for such reserves. These reserves are expected to be funded from
operating cash flow, and possibly also from borrowings under the Company's line
of credit, which sources are expected to be adequate to fund such capital
requirements. These reserves are in addition to amounts spent on normal repairs
and maintenance which have approximated 5.4% and 4.8% of room revenues in 1996
and 1995, respectively, and are paid by the Lessee.
The Company's net cash provided by financing activities in the year ended
December 31, 1996 totaled $53,623, including $59,091 of net proceeds from a
follow-on offering in June 1996 and an increase of $8,800 in the line of credit
borrowings, offset by: (i) the payment of distributions to shareholders of
$13,062; (ii) the payment of distributions to minority interest of $643 and
(iii) the payment of $563 in fees connected with the Amended Line discussed
below.
On October 29, 1996, the Company amended and restated its line of credit with
a group of four banks led by Wachovia Bank of North Carolina, N.A., which
increased its total line of credit to $125,000, and extended the term to
November 1, 1998 (the "Amended Line"). The Company has collateralized the
Amended Line, which will provide borrowing availability
(the "Line Availability"), with 28 of its Current Hotels. The Line Availability,
which amounted to $89,716 as of December 31, 1996, is calculated quarterly, and
increases if cash flow attributable to the collateral hotels increases and/or
the Company
24
25
adds additional hotels as collateral. The terms of the Amended Line permit
borrowings for distributions, capital expenditures and working capital of up to
17% of the Line Availability, and new hotel development of up to 50% of the Line
Availability. The Amended Line bears interest generally at LIBOR plus 1.75%. The
Company's Articles of Incorporation limit its total amount of indebtedness to
45% of the purchase prices paid by the Company for its investments in hotel
properties, as defined. As of December 31, 1996, the Company had additional
borrowing capacity under the debt limitation of approximately $99,000, assuming
it invests all borrowings in additional hotels.
The Company intends to acquire and develop additional hotel properties,
including those described below, that meet its investment criteria and is
continually evaluating acquisition opportunities. It is expected that future
hotel acquisitions will be financed, in whole or in part, from additional
follow-on offerings, from borrowings under the line of credit, from joint
venture agreements, and 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.
Under an arrangement with Promus, as amended, the Company has a purchase
agreement to acquire a Homewood Suites hotel being developed by Promus in
Richmond, Virginia, has an option to purchase a limited number of additional
Promus-developed Homewood Suites hotels (which are as yet unidentified) that
Promus is obligated to offer the Company in the future, and will require its
Lessee to retain Promus to manage the hotels acquired from it. In addition to
offering the Company the right to acquire a limited number of hotels, Promus has
agreed to invest up to $15,000 in the Company's Common Stock (at the
then-current market price per share), at the rate of $15 per room, as the
Company acquires hotels from Promus. The Company has agreed to use its best
efforts to spend up to $100,000 toward the acquisition or development of
Promus-brand hotels, including the Homewood Suites hotel in Richmond, any hotels
acquired in the future from Promus under the arrangement, and the three
development hotels described below. In September 1996, pursuant to the terms of
this arrangement and in connection with the Company's purchase of the Homewood
Suites in Clear Lake, Texas, Promus exercised a portion of its option and
invested approximately $1,500 for approximately 136,000 newly issued shares of
Common Stock.
The Company expects to acquire the 123-suite Homewood Suites - Richmond,
Virginia upon its completion, which Promus estimates will occur during the third
quarter of 1997, for a purchase price approximating Promus' development cost,
estimated to be $8,600. Conditions to the Company's obligation to purchase
include its approval of the building specifications and Promus' completion of
construction within certain cost limitations and by a specified delivery date.
The Company has commenced development of a 137-suite Homewood Suites hotel
near the Crabtree Valley Mall in Raleigh, North Carolina and a 112-suite
Homewood Suites hotel in Alpharetta, Georgia. Total development costs are
expected to approximate $13,000 and $10,000 respectively for these projects
with completion scheduled for late 1997. In addition, the Company plans to
develop a 96-suite Homewood Suites hotel on a 3.9 acre site owned in Durham,
North Carolina, and a 112-suite Homewood Suites hotel on a 2.8 acre site in
Lake Mary (north of Orlando), Florida. Total development costs are expected to
approximate $9,000 and $10,000, respectively, for these projects, which are
tentatively expected to open during the first quarter of 1998. However, there
is no assurance that such development will be undertaken, or if commenced, that
it will be completed on schedule or on budget (see "Forward Looking
Statements").
SEASONALITY
The 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 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.
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26
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, including,
but not limited to, those paragraphs cross-referenced to this section. These
statements represent the Company's judgment and are subject to risks and
uncertainties that could cause actual operating results to differ materially
from those expressed or implied in the forward looking statements. Important
factors that could cause actual results to differ include, but are not limited
to the following: (i) risks associated with the Company's acquisition of hotels
with little or no operating history, including the risk that such hotels will
not achieve the level of revenue assumed by the Company in calculating the
respective Percentage Rent formulas; (ii) development risks, including risk of
construction delay, cost overruns, receipt of zoning, occupancy and other
required governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not pursued to
completion; and (iii) factors identified in the Company's filings with the
Securities and Exchange Commission including the factors listed in the
Company's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on April 25, 1996 and amended on May 31, 1996.
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
4 through 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 13, 1997. Information on the Company's executive officers is included
under the caption "Executive Officers" on pages 8 and 9 of this report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from pages 7 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 13, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from pages 2 and 3, "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 13, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from pages 13 and 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 13, 1997.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-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 35
Consolidated Balance Sheets as of December 31, 1996 and 1995 36
Consolidated Statements of Income for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 37
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1996 and 1995 and the period June 2, 1994 through December 31, 1994 38
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995 and the period June 2, 1994 through December 31, 1994 39
Notes to Consolidated Financial Statements 40
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996 46
Notes to Schedule III 47
Winston Hospitality, Inc.:
Report of Independent Accountants 48
Balance Sheets as of December 31, 1996 and 1995 49
Statements of Income for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 50
Statements of Shareholders' Equity for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 51
Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 52
Notes to Financial Statements 53
Initial Hotels:
Report of Independent Accountants 55
Combined Statement of Income and Capital Deficiency for the five months
ended June 2, 1994 56
Combined Statement for Cash Flows for the five months ended June 2, 1994 57
Notes to Combined Financial Statements 58
(b) REPORTS ON FORM 8-K. The Company did not file a current report on Form
8-K during the fourth quarter of 1996.
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are listed
below. Management contracts or compensatory plans are filed as Exhibits
10.3, 10.20, 10.21 and 10.39.
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Exhibit Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation (filed as an exhibit
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) and
Articles of Amendment to the Amended and Restated Articles of
Incorporation (filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995 as filed
with the Securities and Exchange Commission in August, 1995 and
incorporated herein by reference)
3.2(1) Amended and Restated By-Laws
4.1(1) Specimen certificate for Common Stock, $0.01 par value per share
4.2 Amended and Restated Articles of Incorporation (see Exhibit 3.1)
4.3 Amended and Restated Bylaws (see Exhibit 3.2)
10.1(1) First Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership
10.2(2) Form of Percentage Leases
10.3(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.4(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn
Raleigh, North Carolina
10.5(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn Hilton
Head, South Carolina
10.6(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Hampton Inn Chester
(Richmond), Virginia
10.7(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Fayetteville, North Carolina
10.8(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort
Inn-Durham/Chapel Hill, North Carolina
10.9(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort
Inn-Charleston, South Carolina
10.10(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn Chester
(Richmond), Virginia
10.11(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Comfort Inn
Augusta, Georgia
28
29
Exhibit Description
- ------- -----------
10.12(2) Management Agreement between Winston Hospitality, Inc. and
Interstate Management & Investment Corp. for the Quality Suites
Charleston, South Carolina
10.13(2) Ceiling Rate Agreement between Winston Hotels, Inc. and Salomon
Brothers Holding Co.
10.14(2) Limitation of Future Hotel Ownership and Development Agreement
10.15(3) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Hampton Inn-Raleigh, North
Carolina
10.16(3) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Charleston,
South Carolina
10.17(3) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Clearwater/St.
Petersburg, Florida
10.18(3) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Comfort Inn-Augusta,
Georgia
10.19(3) Percentage Lease among Winston Hospitality, Inc., Winston Hotels,
Inc. and WINN Limited Partnership for the Quality Suites-Charleston,
South Carolina
10.20(3) Employment Agreement, dated September 29, 1995, by and between
Kenneth Crockett and Winston Advisors, Inc.
10.21(3) Assignment Agreement dated as of January 1, 1996 by and between
Winston Advisors, Inc. and Winston Hotels, Inc. (assigning the
Crockett Employment Agreement)
10.22(4) Memorandum of Understanding, dated March 15, 1996, among Winston
Hotels, Inc., Winston Hospitality, Inc. and Promus Hotels, Inc.
10.23(4) Stock Purchase Agreement, dated April 24, 1996, between Promus
Hotels, Inc. and Winston Hotels, Inc.
10.24(4) Agreement of Purchase and Sale, dated April 24, 1996, between
WINN Limited Partnership and Promus Hotels, Inc. relating to three
hotel properties being developed by Promus Hotels, Inc.
10.25(4) Agreement of Purchase and Sale, dated April 24, 1996, relating to a
hotel property located in Clear Lake, Texas.
10.26(4) Option to Purchase Additional Hotels, dated April 24, 1996, between
WINN Limited Partnership and Promus Hotels, Inc.
10.27(4) Agreement of Purchase and Sale, dated February 1, 1996, among WINN
Limited Partnership, Dallas Lodging Associates, Inc., A.B. Lodging
Associates, Inc., London Lodging Associates and Duncanville Lodging
Associates I, Ltd.
29
30
Exhibit Description
- ------- -----------
10.28(4) Management Agreement, dated April 25, 1996, between Winston
Hospitality, Inc. and Impac Hotel Group, Inc.
10.29(4) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Cary Suites, Inc.
10.30(4) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and RWW, Inc.
10.31(4) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and WJS Associates.
10.32(4) Agreement of Purchase and Sale, dated April 24, 1996, between WINN
Limited Partnership and Hotel II, Incorporated.
10.33(4) Sales Contract, dated March 31, 1996, among WINN Limited
Partnership, Louis Bowie and Title Company of North Carolina.
10.34(4) Sales Contract, dated February 9, 1996, among WINN Limited
Partnership, Russell Parman, Ruby Parman and Title Company of North
Carolina.
10.35(5) Amendment No. 1 to Stock Purchase Agreement, dated as of August 7,
1996, by and between Promus Hotels, Inc. and Winston Hotels, Inc.
amending the Stock Purchase Agreement, dated April 24, 1996, by and
between Promus Hotels, Inc. and Winston Hotels, Inc.
10.36(5) Amendment to Agreement of Purchase and Sale, dated as of August 7,
1996, by and between WINN Limited Partnership and Promus Hotels,
Inc., amending the Agreement of Purchase and Sale, dated April 24,
1996, by and between WINN Limited Partnership and Promus Hotels,
Inc. relating to three hotel properties being developed by Promus
Hotels, Inc.
10.37(5) Amendments to Agreement of Purchase and Sale, dated May 21, 1996
and August 7, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc. amending the Agreement of Purchase and Sale,
dated April 24, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc., relating to a hotel property being developed in
Clear Lake, Texas.
10.38(5) First Amendment to Option to Purchase Additional Hotels, dated as of
August 7, 1996, by and between Promus Hotels, Inc. and WINN Limited
Partnership, amending the Option to Purchase Additional Hotels,
dated April 24, 1996, by and between WINN Limited Partnership and
Promus Hotels, Inc.
10.39(5) Winston Hotels, Inc. Stock Incentive Plan, as amended and restated
on May 28, 1996.
30
31
Exhibit Description
- ------- -----------
10.40 Credit Agreement, dated as of October 29, 1996, among Winston
Hotels, Inc., WINN Limited Partnership, the banks listed therein,
Wachovia Bank of North Carolina, N.A., as Collateral Agent and
Wachovia Bank of Georgia, N.A., as Administrative Agent (the "Credit
Agreement").
10.41 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Branch Banking and Trust Company for
the principal sum of $35,000,000 pursuant to the Credit Agreement.
10.42 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Nationsbank, N.A. for the principal
sum of $20,000,000 pursuant to the Credit Agreement.
10.43 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Southtrust Bank of Alabama, N.A. for
the principal sum of $20,000,000 pursuant to the Credit Agreement.
10.44 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Wachovia Bank of North Carolina,
N.A. for the principal sum of $50,000,000 pursuant to the Credit
Agreement.
10.45 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).
23 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Data Schedule (for SEC use only)
(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) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 1996 and incorporated
herein by reference.
(4) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on May 14, 1996 and incorporated herein
by reference.
31
32
(5) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 14, 1996 and incorporated
herein by reference.
32
33
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 and President
Date: March 27, 1997
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
- --------- ----- ----
* Charles M. Winston Chairman of the Board of Directors March 27, 1997
- ----------------------------
Charles M. Winston
/s/ Robert W. Winston, III Chief Executive Officer, March 27, 1997
- ---------------------------- President and Director
Robert W. Winston, III (Principal Executive Officer)
/s/ Philip R. Alfano Senior Vice President, Chief Financial March 27, 1997
- ---------------------------- Officer and Secretary (Principal
Philip R. Alfano Financial and Accounting Officer)
* Edwin B. Borden Director March 27, 1997
- ----------------------------
Edwin B. Borden
* Thomas F. Darden, II Director March 27, 1997
- ----------------------------
Thomas F. Darden, II
* Richard L. Daugherty Director March 27, 1997
- ----------------------------
Richard L. Daugherty
* Paul Fulton Director March 27, 1997
- ----------------------------
Paul Fulton
* James H. Winston Director March 27, 1997
- ----------------------------
James H. Winston
*By /s/ Robert W. Winston, III
---------------------------------------------
Robert W. Winston, III, Attorney-in-Fact
*By /s/ Philip R. Alfano
---------------------------------------------
Philip R. Alfano, Attorney-in-Fact
33
34
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
-------
Winston Hotels, Inc.:
Report of Independent Accountants 35
Consolidated Balance Sheets as of December 31, 1996 and 1995 36
Consolidated Statements of Income for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 37
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1996 and 1995 and the period June 2, 1994 through December 31, 1994 38
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995 and the period June 2, 1994 through December 31, 1994 39
Notes to Consolidated Financial Statements 40
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1996 46
Notes to Schedule III 47
Winston Hospitality, Inc.:
Report of Independent Accountants 48
Balance Sheets as of December 31, 1996 and 1995 49
Statements of Income for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 50
Statements of Shareholders' Equity for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 51
Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994 52
Notes to Financial Statements 53
Initial Hotels:
Report of Independent Accountants 55
Combined Statement of Income and Capital Deficiency for the five months
ended June 2, 1994 56
Combined Statement of Cash Flows for the five months ended June 2, 1994 57
Notes to Combined Financial Statements 58
34
35
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Winston Hotels, Inc.
We have audited the accompanying consolidated balance sheets of Winston
Hotels, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1996 and 1995 and the period June 2, 1994 through December 31,
1994. Our audits also included the financial statement schedule of Winston
Hotels, Inc. as listed on the index and included in this Form 10-K. 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 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 consolidated financial position of Winston Hotels,
Inc. as of December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, 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.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
January 10, 1997
35
36
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995
--------- ---------
ASSETS
Investment in hotel properties:
Land $ 20,639 $ 12,869
Buildings and improvements 166,664 103,264
Furniture and equipment 15,749 5,753
--------- ---------
Operating properties 203,052 121,886
Less accumulated depreciation 11,508 5,033
--------- ---------
191,544 116,853
Properties under development 5,138 1,091
--------- ---------
Net investment in hotel properties 196,682 117,944
Cash and cash equivalents 234 2,496
Lease revenue receivable 4,611 2,547
Deferred expenses, net 1,362 760
Prepaid expenses and other assets 613 222
--------- ---------
$ 203,502 $ 123,969
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 42,800 $ 34,000
Accounts payable and accrued expenses 1,799 1,574
Distributions payable 4,352 2,785
Amounts due to Lessee 1,391 1,187
Minority interest in Partnership 11,347 3,551
Commitments (Note 8)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued and outstanding
Common stock, $.01 par value, 50,000,000 shares authorized,
15,799,580 and 9,880,114 shares issued and outstanding 158 99
Additional paid-in capital 145,216 82,988
Unearned directors' compensation (181) (256)
Deficit (3,380) (1,959)
--------- ---------
Total shareholders' equity 141,813 80,872
--------- ---------
$ 203,502 $ 123,969
========= =========
The accompanying notes are an integral part of the financial statements
36
37
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD JUNE 2, 1994 THROUGH DECEMBER 31, 1994
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
----------- ---------- ----------
Revenue:
Percentage lease revenue $ 26,611 $ 17,148 $ 5,116
Interest and other income 97 442 92
----------- ---------- ----------
Total revenue 26,708 17,590 5,208
----------- ---------- ----------
Expenses:
Real estate taxes and property and
casualty insurance 1,647 1,054 362
General and administrative 1,985 1,208 339
Interest expense 2,665 2,555 218
Depreciation 6,476 3,854 1,176
Amortization 147 117 49
----------- ---------- ----------
Total expenses 12,920 8,788 2,144
----------- ---------- ----------
Income before allocation to minority
interest 13,788 8,802 3,064
Income allocation to minority interest 786 417 187
----------- ---------- ----------
Net income applicable to common
shareholders $ 13,002 $ 8,385 $ 2,877
=========== ========== ==========
Net income per common share $ 1.00 $ 0.96 $ 0.43
=========== ========== ==========
Weighted average number of common
shares and common share equivalents 13,747,387 9,210,883 7,073,158
=========== ========== ==========
The accompanying notes are an integral part of the financial statements.
37
38
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD JUNE 2, 1994 THROUGH DECEMBER 31, 1994
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Common Stock Additional Unearned Total
---------------------- Paid-in Directors' Accumulated Shareholders'
Shares Dollars Capital Compensation Deficit Equity
------ ------- ------- ------------ ------- ------
Issuance of shares 6,775,114 $ 68 $ 59,169 $ (375) $ 58,862
Minority interest at closing of initial
public offering (3,364) (3,364)
Deficit assumed from acquisition of
Winston Affiliates' interests $ (1,462) (1,462)
Distributions ($0.48 per share) (3,252) (3,252)
Unearned compensation amortization 44 44
Net income 2,877 2,877
---------- -------- -------- -------- -------- --------
Balances at December 31, 1994 6,775,114 68 55,805 (331) (1,837) 53,705
Issuance of shares 3,105,000 31 27,183 27,214
Distributions ($0.93 per share) (8,507) (8,507)
Unearned compensation amortization 75 75
Net income 8,385 8,385
---------- -------- -------- -------- -------- --------
Balances at December 31, 1995 9,880,114 99 82,988 (256) (1,959) 80,872
Issuance of shares 5,919,466 59 60,532 60,591
Adjustment to minority interest 1,696 1,696
Distributions ($1.005 per share) (14,423) (14,423)
Unearned compensation amortization 75 75
Net income 13,002 13,002
---------- -------- -------- -------- -------- --------
Balances at December 31, 1996 15,799,580 $ 158 $145,216 $ (181) $ (3,380) $141,813
========== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
38
39
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE PERIOD JUNE 2, 1994 THROUGH DECEMBER 31, 1994
($ IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income $ 13,002 $ 8,385 $ 2,877
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority Interest 786 417 187
Depreciation 6,476 3,854 1,176
Amortization 321 196 30
Unearned compensation amortization 75 75 44
Changes in assets and liabilities:
Lease revenue receivable (2,064) (1,159) (1,388)
Prepaid expenses and other assets (168) (88) (134)
Current liabilities 301 948 625
-------- -------- --------
Net cash provided by operating activities 18,729 12,628 3,417
-------- -------- --------
Cash flows from investing activities:
Franchise fees paid (565) (216) (290)
Deferred acquisition costs (18) (77) (98)
Investment in hotel properties (74,031) (35,766) (85,585)
-------- -------- --------
Net cash used in investing activities (74,614) (36,059) (85,973)
-------- -------- --------
Cash flows from financing activities:
Purchase of interest rate cap agreements (261)
Fees paid to increase and extend the line of credit (563) (130) (87)
Net proceeds from issuance of stock 59,091 27,443 57,103
Payment of distributions to common shareholders (13,062) (7,261) (1,829)
Payment of distributions to minority interest (643) (378) (117)
Increase in line of credit borrowing 8,800 5,400 28,600
-------- -------- --------
Net cash provided by financing activities 53,623 24,813 83,670
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,262) 1,382 1,114
Cash and cash equivalents at beginning of period 2,496 1,114
-------- -------- --------
Cash and cash equivalents at end of period $ 234 $ 2,496 $ 1,114
======== ======== ========
Supplemental disclosure:
Cash paid for interest $ 2,158 $ 2,517 $ 43
======== ======== ========
Summary of non-cash investing and financing activities:
Distributions declared but not paid $ 4,352 $ 2,785 $ 1,514
Investment in hotel properties payable 1,315 1,187 7
Adjustment to minority interest (1,696) 3,364
Issuance of units in exchange for hotel properties 9,555 (1,462)
Issuance of shares in exchange for hotel properties 1,500 1,724
======== ======== ========
The accompanying notes are an integral part of the financial statements.
39
40
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, the
Company completed an initial public offering ("IPO") of $0.01 par value common
stock ("Common Stock"), utilizing the majority of 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
(the "Winston Affiliates"). WHI and the Partnership (collectively the "Company")
began operations as a REIT on June 2, 1994.
During 1995 and 1996, WHI completed follow-on offerings and invested the
net proceeds from these offerings in the Partnership. The Partnership utilized
the proceeds to acquire 21 additional hotel properties (see Note 3). As of
December 31, 1996, WHI's ownership in the Partnership was 92.28% (see Note 6).
As of December 31, 1996, the Company owned 31 hotel properties (the "Current
Hotels"), primarily in the Southeast region of the United States. The Current
Hotels are leased, pursuant to separate percentage operating lease agreements
(the "Percentage Leases"), to Winston Hospitality, Inc. (the "Lessee"), which is
owned by certain officers and shareholders of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include
the accounts of WHI and the Partnership. All significant intercompany balances
and transactions have been eliminated.
Investment in Hotel Properties. Hotel properties are recorded at cost,
reduced by approximately $7,743 to reflect the historical carrying value for the
Winston Affiliates' interest in the Initial Hotels, and are depreciated using
the straight-line method over estimated useful lives of the assets of 5 and 30
years for furniture 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 Lessee.
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.
Deferred Expenses. Included in deferred expenses are franchise fees, loan
costs, and amounts paid for interest rate caps, all of which are recorded at
cost. Amortization of franchise fees is computed using the straight-line method
over ten years. Amortization of loan costs and interest rate caps, computed
using the straight-line method over the period of the related revolving credit
and interest rate cap agreements, are included in interest expense.
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 is: i) increased or decreased by its
pro-rata share of the net income or net loss, respectively, of the Partnership;
and ii) adjusted to equal the
40
41
net equity of the Partnership multiplied by the limited partners' ownership
percentage immediately after each issuance of units of the Partnership through
an adjustment to additional paid-in capital.
Net Income Per Common Share. Net income per common share is computed by
dividing income before allocation to minority interest by the weighted average
number of common shares and common share equivalents outstanding for the period.
Common share equivalents include redeemable limited partnership units (see Note
6) and the dilutive effect of the stock options.
Distributions. The ability to pay regular quarterly distributions is
dependent upon receipt of distributions from the Partnership and the results of
operations of WHI's hotel property.
Income Taxes. The Company qualifies as a REIT under Section 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 IPO are
treated differently for federal tax purposes than for financial reporting
purposes. At December 31, 1996, the net tax basis of the Company's assets and
liabilities was approximately $11,400 less than the amounts reported in the
accompanying consolidated financial statements.
For federal income tax purposes, 1996 distributions amounted to $1.005 per
share, one percent of which is considered a return of capital.
Fair Value of Financial Instruments. Cash and cash equivalents are equal to
their fair value due to the nature of the financial instruments. The value of
interest rate cap agreements fluctuate with interest rates. As of December 31,
1996 and 1995, interest rates related to the contract period were below the
contract rates, and therefore these contracts were estimated to have nominal
current fair value as of that date. Due to banks consists of a line of credit
which reprices periodically to allow for the fair value to equal the carrying
value. The Company's remaining assets and liabilities are not considered
financial instruments.
Concentration of Credit Risk. The Company places cash deposits at federally
insured depository institutions. At December 31, 1996, bank account balances
exceeded federal depository insurance limits by approximately $119.
Reclassifications. Certain reclassifications have been made to the 1994 and
1995 financial statements to conform with the 1996 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.
41
42
3. HOTEL PROPERTIES:
The Company's acquisition of hotel properties for the years 1996, 1995 and
1994 may be summarized as follows:
Number of Number of
Year Purchase Cost Hotel Properties Rooms/Suites
---- ------------- ---------------- ------------
1994 $ 36,342 6 776
1995 33,107 5 680
1996* 73,200 10 1,322
-------- -- -----
Total $142,649 21 2,778
======== == =====
* Includes $38,313 paid to Winston Affiliates for the acquisition of four
hotels with 534 rooms/suites.
The Partnership issued 722,024 limited partnership units in connection with
the acquisition of three hotels acquired in 1996 from Winston Affiliates. These
affiliates have agreed to reduce the purchase prices for the hotels by returning
up to $9,555 of units, in the event the Company's aggregate yield, as defined,
from these hotels in the first 12 months of ownership is less than 13%. At
December 31, 1996, management of the Company estimates that these hotels will
meet the minimum yield and none of the units will be required to be returned.
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
following unaudited pro forma financial information assumes the Current Hotels
were acquired as of the later of January 1, 1995 or their date of opening:
Pro forma for the
year ended December 31,
----------------------------------
1996 1995
----------- -----------
Percentage lease and other revenue $ 30,501 $ 25,948
----------- -----------
Expenses:
Real estate taxes and property and casualty
insurance 1,809 1,603
General and administrative 2,021 1,354
Depreciation 7,800 5,761
Amortization 159 98
Interest expense 2,276 2,254
----------- -----------
Total expense 14,065 11,070
----------- -----------
Income before allocation to minority interest 16,436 14,878
Income allocation to minority interest 1,219 919
----------- -----------
Net income applicable to common shareholders $ 15,217 $ 13,959
=========== ===========
Net income per common share $ 0.97 $ 0.89
=========== ===========
Weighted average number of common shares and
common share equivalents 16,974,234 16,740,946
=========== ===========
42
43
4. DEFERRED EXPENSES:
At December 31, 1996 and 1995 deferred expenses consist of:
1996 1995
---- ----
Franchise fees $ 848 $506
Line of credit fees 779 216
Interest rate caps 149 261
Acquisition costs 21 3
------ ----
1,797 986
Less accumulated amortization 435 226
------ ----
Deferred expenses, net $1,362 $760
====== ====
During 1995, the Company entered into interest rate cap agreements to
eliminate the exposures to increases in 90-day LIBOR over 7.25%, and therefore
from exposures in interest rate increases under the collateralized line of
credit over 8.50%, on $30,000, for the period May 30, 1995 through May 30,
1997.
5. DUE TO BANKS:
In October 1996, the Company amended and restated its line of credit with a
group of four banks led by Wachovia Bank of North Carolina, N.A., and extended
the term to November 1, 1998 (the "Amended Line"). The Company has
collateralized the Amended Line with 28 of its Current Hotels, which provide
borrowing availability (the "Line Availability") up to a maximum of $125,000.
The Line Availability is calculated quarterly, and increases if cash flow
attributable to the collateralized hotels increases and/or the Company adds
additional hotels as collateral. The terms of the Amended Line limit borrowings
for distributions, capital expenditures and working capital up to 17% of the
Line Availability, and new hotel development of up to 50% of the Line
Availability. Interest on borrowings is generally at LIBOR plus 1.75% and is
payable quarterly in arrears. As of December 31, 1996 and 1995 the weighted
average interest rate on the outstanding balance under the line of credit was
7.20% and 7.00%, respectively. A commitment fee of .0625% is also paid quarterly
on the unused portion of the line of credit.
The Amended Line restricts the use of proceeds to certain geographic areas
with respect to future hotel acquisitions. It also requires maintenance of
certain financial ratios including liquidity and net worth. The unused portion
of the Line Availability was $46,916 at December 31, 1996.
The Company's Articles of Incorporation limit its total amount of
indebtedness to 45% of the purchase prices paid by the Company for its
investments in hotel properties, as defined. As of December 31, 1996, the
Company had additional borrowing capacity of approximately $99,000, assuming it
invests all borrowings in additional hotels.
6. CAPITAL STOCK:
The Board of Directors is authorized to provide for the issuance of shares
of Preferred Stock in one or more series, to establish the number of shares in
each series and to fix the designation, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof.
Pursuant to the Partnership Agreement, 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
43
44
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.
WHI has issued 7,500 shares to each of its five initial independent directors
which shares vest at a rate of 1,500 shares per year beginning on June 2, 1994.
The 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.
7. STOCK OPTION PLAN:
The Company has adopted the Winston Hotels Stock Incentive Plan (the "Plan")
under which the Company may grant options to its employees for up to 5% of the
amount of authorized and issued shares of Common Stock, excluding shares issued
pursuant to the Plan. The Plan permits the grant of incentive or nonqualified
stock options, stock appreciation rights, stock awards or performance shares to
participants. Under the Plan, the exercise price of each option equals the
market price of the Company's Common Stock on the date of grant and an option's
maximum term is ten years. Options are granted upon approval of the Board of
Directors and vest either after one year or 25% per year over four years.
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 net income and net income per
share would not have been material.
A summary of the status of the Plan as of December 31, 1996, 1995 and 1994,
and changes during the years ending on those dates, is presented below:
1996 1995 1994
-------------------------- --------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 376,000 $10.80 176,000 $10.16
Granted 25,000 12.88 200,000 11.36 176,000 $10.16
------- ------ ------- ------ ------- ------
Outstanding at end of year 401,000 $10.93 376,000 $10.80 176,000 $10.16
======= ====== ======= ====== ======= ======
Options exercisable at year-end 226,000 176,000
======= =======
The following table summarizes information about the Plan at December 31,
1996:
Options Options
Exercise Outstanding Exercisable Average Remaining
Prices at 12/31/96 at 12/31/96 Contractual Life (years)
------ ----------- ----------- ------------------------
$ 9.13 25,000 25,000 8.0
$10.00 101,000 101,000 7.4
$11.00 50,000 50,000 7.4
$11.31 50,000 50,000 8.8
$11.38 150,000 9.0
$12.88 25,000 9.8
8. COMMITMENTS:
The Company has future lease commitments from the Lessee through 2006.
Minimum future rental payments under these noncancelable operating leases are as
follows:
44
45
Amount
------
Year ended December 31:
1997 $ 13,826
1998 13,826
1999 13,826
2000 13,826
2001 13,826
2002 and thereafter 47,960
--------
$117,090
========
Under the terms of the Percentage Leases, the Lessee is obligated to pay the
Company the greater of base rents or percentage rents. The Company earned
minimum rents of $11,154, $7,853 and $2,583 for the years ended December 31,
1996, 1995 and the period from June 2, 1994 through December 31, 1994,
respectively, and percentage rents of $15,457, $9,295 and $2,533 for the years
ended December 31, 1996, 1995 and the period from June 2, 1994 through December
31, 1994, respectively. The percentage rents are based on percentages of gross
room revenue and certain food and beverage revenues. The Lessee operates 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 Lessee.
Pursuant to the Percentage Leases, the Company reserves 5% of room revenues
from the limited-service hotels, and 7% of gross room, food and beverage
revenues from the full-service hotel to fund periodic improvements to the
buildings and grounds, and the periodic replacement and refurbishment of
furniture, fixtures and equipment.
The Company has a contract to acquire a Homewood Suites hotel upon the
completion of its development, which is expected to occur during the third
quarter of 1997, for a purchase price approximating the development cost, which
is estimated to be $8,600. Conditions to the Company's purchase obligation
include its approval of the building specifications and completion of
construction within certain cost limitations and by a specified delivery date.
The developer has committed to acquire approximately $1,845 in newly issued
Common Stock in connection with the acquisition.
45
46
WINSTON HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
($ 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 $ 5 $ 264 $ 2,755 $ 3,019
Hampton Inn
Brunswick, GA * 716 3,887 56 716 3,943 4,659
Hampton Inn
Cary, NC * 613 4,596 2 613 4,598 5,211
Hampton Inn
Charlotte, NC * 833 3,609 833 3,609 4,442
Hampton Inn
Chester, VA * 461 2,238 7 461 2,245 2,706
Hampton Inn
Duncanville, TX * 480 2,689 202 480 2,891 3,371
Hampton Inn
Durham, NC * 634 4,582 47 634 4,629 5,263
Hampton Inn & Suites
Gwinnett, GA * 557 6,959 557 6,959 7,516
Hampton inn
Hilton Head, SC * 310 3,969 266 310 4,235 4,545
Hampton Inn
Jacksonville, NC * 473 4,140 13 473 4,153 4,626
Hampton Inn
Perimeter , GA * 914 6,293 914 6,293 7,207
Hampton Inn
Raleigh, NC * 697 5,955 621 697 6,576 7,273
Hampton Inn
Southern Pines, NC * 614 4,280 17 614 4,297 4,911
Hampton Inn
Southlake, GA * 680 4,065 27 680 4,092 4,772
Hampton Inn
Wilmington, NC * 460 3,208 36 460 3,244 3,704
Comfort Inn
Augusta, GA * 404 3,541 7 404 3,548 3,952
Comfort Inn
Charleston, SC * 438 5,853 354 438 6,207 6,645
Comfort Inn
Chester, VA * 661 6,447 10 661 6,457 7,118
------------------------------------------------------------------------
Life Upon
Which
Accumulated Net Book Value Depreciation in
- ----------------------------- Depreciation Land, Buildings Latest Income
Buildings and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- -----------------------------------------------------------------------------------------------------------
Hampton Inn
Boone, NC $ 237 $ 2,782 6/2/94 30
Hampton Inn
Brunswick, GA 338 4,321 6/2/94 30
Hampton Inn
Cary, NC 396 4,815 6/2/94 30
Hampton Inn
Charlotte, NC 311 4,131 6/2/94 30
Hampton Inn
Chester, VA 155 2,551 11/29/94 30
Hampton Inn
Duncanville, TX 62 3,309 5/7/96 30
Hampton Inn
Durham, NC 396 4,867 6/2/94 30
Hampton Inn & Suites
Gwinnett, GA 97 7,419 7/18/96 30
Hampton inn
Hilton Head, SC 287 4,258 11/29/94 30
Hampton Inn
Jacksonville, NC 357 4,269 6/2/94 30
Hampton Inn
Perimeter , GA 87 7,120 7/19/96 30
Hampton Inn
Raleigh, NC 335 6,938 5/18/95 30
Hampton Inn
Southern Pines, NC 370 4,541 6/2/94 30
Hampton Inn
Southlake, GA 351 4,421 6/2/94 30
Hampton Inn
Wilmington, NC 278 3,426 6/2/94 30
Comfort Inn
Augusta, GA 187 3,765 5/18/95 30
Comfort Inn
Charleston, SC 317 6,328 5/18/95 30
Comfort Inn
Chester, VA 448 6,670 11/29/94 30
(continued)
46
47
---------------------------------------------------------------------------------
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
Clearwater, FL 532 3,436 396 532 3,832 4,364
Comfort Inn
Durham, NC * 947 6,208 9 947 6,217 7,164
Comfort Inn
Fayetteville, NC * 1,223 8,047 363 1,223 8,410 9,633
Comfort Inn
Greenville, SC 871 3,551 22 871 3,573 4,444
Comfort Suites
London, KY 345 2,170 345 2,170 2,515
Comfort Inn
Raleigh, NC * 459 4,075 19 459 4,094 4,553
Comfort Inn
Wilmington, NC * 532 5,889 226 532 6,115 6,647
Holiday Inn Express
Abingdon, VA * 918 2,263 36 918 2,299 3,217
Holiday Inn Select
Dallas, TX * 1,060 13,615 124 1,060 13,739 14,799
Homewood Suites
Cary, NC * 1,010 12,367 1,010 12,367 13,377
Homewood Suites
Clear Lake, TX * 879 5,978 879 5,978 6,857
Quality Suites
Charleston, SC * 912 11,224 8 912 11,232 12,144
Courtyard by Marriott
Wilmington, NC * 742 5,907 742 5,907 6,649
------- ----------- ------ ------- -------- --------
$20,639 $ 163,791 $2,873 $20,639 $166,664 $187,303
======= =========== ====== ======= ======== ========
------------------------------------------------------------------------
Life Upon
Which
Accumulated Net Book Value Depreciation in
- ----------------------------- Depreciation Land, Buildings Latest Income
Buildings and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- -----------------------------------------------------------------------------------------------------------
Comfort Inn
Clearwater, FL 187 4,177 5/18/95 30
Comfort Inn
Durham, NC 431 6,733 11/29/94 30
Comfort Inn
Fayetteville, NC 577 9,056 11/29/94 30
Comfort Inn
Greenville, SC 78 4,366 5/6/96 30
Comfort Suites
London, KY 49 2,466 5/7/96 30
Comfort Inn
Raleigh, NC 329 4,224 8/16/94 30
Comfort Inn
Wilmington, NC 522 6,125 6/2/94 30
Holiday Inn Express
Abingdon, VA 38 3,179 5/7/96 30
Holiday Inn Select
Dallas, TX 303 14,496 5/7/96 30
Homewood Suites
Cary, NC 206 13,171 7/9/96 30
Homewood Suites
Clear Lake, TX 66 6,791 9/13/96 30
Quality Suites
Charleston, SC 592 11,552 5/18/95 30
Courtyard by Marriott
Wilmington, NC 6,649 12/19/96 30
------ --------
$8,387 $178,916
====== ========
* These properties serve as collateral for the $125,000 line of credit
which, as of December 31, 1996, had an outstanding balance of $42,800.
WINSTON HOTELS, INC.
NOTES TO SCHEDULE III
1996 1995
-------- --------
(a) Reconciliation of Real Estate:
Balance at beginning of period $116,133 $ 82,046
Acquisitions during period 69,568 32,992
Additions during period 1,602 1,095
-------- --------
Balance at end of period $187,303 $116,133
======== ========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of period $ 3,937 $ 930
Depreciation for period 4,450 3,007
-------- --------
Balance at end of period $ 8,387 $ 3,937
======== ========
(c) The aggregate cost of land, buildings and furniture and equipment for
federal income tax purposes is approximately $203,000.
(d) Refer to Notes 1 and 3 to the financial statements of Winston Hotels, Inc.
for transactions with affiliates and the basis of the carrying value as
reflected in the financial statements.
47
48
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Winston Hospitality, Inc.
We have audited the accompanying balance sheets of Winston Hospitality,
Inc. as of December 31, 1996 and 1995 and the related statements of income,
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995 and the period June 2, 1994 through December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Winston Hospitality, Inc. as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995 and the period June 2, 1994
through December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
March 5, 1997
48
49
WINSTON HOSPITALITY, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995
------ ------
ASSETS
Current assets:
Cash and cash equivalents $5,463 $2,249
Accounts receivable:
Trade 1,166 836
Lessor 1,391 1,187
Affiliates 95 79
Shareholders 71
Prepaid expenses and other assets 220 117
------ ------
Total current assets 8,406 4,468
------ ------
Furniture, fixtures and equipment:
Furniture and equipment 323 186
Leasehold improvements 113 106
------ ------
436 292
Less accumulated depreciation and amortization 178 95
------ ------
Net furniture, fixtures and equipment 258 197
------ ------
$8,664 $4,665
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $1,259 $ 593
Percentage lease payable to Lessor 4,611 2,547
Accounts payable - affiliates 146
Accrued salaries and wages 874 607
Accrued sales and occupancy taxes 462 219
Other current liabilities 618 214
------ ------
Total current liabilities 7,970 4,180
------ ------
Commitments (Note 3)
Shareholders' equity:
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 49 49
Retained earnings 644 435
------ ------
Total shareholders' equity 694 485
------ ------
$8,664 $4,665
====== ======
The accompanying notes are an integral part of the financial statements.
49
50
WINSTON HOSPITALITY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD
JUNE 2, 1994 THROUGH DECEMBER 31, 1994
($ IN THOUSANDS)
1996 1995 1994
------- ------- -------
Revenue:
Room revenue $58,956 $39,677 $12,474
Food and beverage revenue 1,685 138 49
Other revenue, net 1,191 877 167
Interest income 93 85 13
------- ------- -------
Total revenue 61,925 40,777 12,703
------- ------- -------
Expenses:
Property and operating expenses 21,550 14,124 4,755
Property maintenance and repairs 3,181 1,909 607
Food and beverage expense 1,281 189 23
General and administrative 2,050 1,526 782
Franchise costs 5,361 3,565 1,107
Management fees 1,126 784 23
Percentage lease payments 26,611 17,148 5,116
------- ------- -------
Total expenses 61,160 39,245 12,413
------- ------- -------
Net income $ 765 $ 1,532 $ 290
======= ======= =======
The accompanying notes are an integral part of the financial statements.
50
51
WINSTON HOSPITALITY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD
JUNE 2, 1994 THROUGH DECEMBER 31, 1994
($ IN THOUSANDS)
Common Stock Additional Total
----------------------- Paid-in Retained Shareholders'
Shares Dollars Capital Earnings Equity
------ ------- ------- -------- ------
Issuance of shares 100 $ 1 $ 49 $ 50
Net income $ 290 290
Distributions (275) (275)
--- --- ---- ------ -------
Balances at December 31, 1994 100 1 49 15 65
Net income 1,532 1,532
Distributions (1,112) (1,112)
--- --- ---- ------ -------
Balances at December 31, 1995 100 1 49 435 485
Net income 765 765
Distributions (556) (556)
--- --- ---- ------ -------
Balances at December 31, 1996 100 $ 1 $ 49 $ 644 $ 694
=== === ==== ====== =======
The accompanying notes are an integral part of the financial statements.
51
52
WINSTON HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD
JUNE 2, 1994 THROUGH DECEMBER 31, 1994
($ IN THOUSANDS)
1996 1995 1994
------- ------- -------
Cash flows from operating activities:
Net income $ 765 $ 1,532 $ 290
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 83 63 32
Changes in assets and liabilities:
Accounts receivable - trade (330) (310) (526)
Prepaid expenses and other assets (103) (65) (52)
Accounts payable - trade 666 132 461
Percentage lease payable to Lessor 2,064 1,159 1,388
Accrued expenses and other liabilities 914 30 1,010
------- ------- -------
Net cash provided by operating activities 4,059 2,541 2,603
------- ------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (144) (67) (225)
Advances to lessor, affiliates and shareholders (145) (1,233) (33)
------- ------- -------
Net cash used in investing activities (289) (1,300) (258)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock 50
Distributions to shareholders (556) (1,112) (275)
------- ------- -------
Net cash used in financing activities (556) (1,112) (225)
------- ------- -------
Net increase in cash and cash equivalents 3,214 129 2,120
Cash and cash equivalents at beginning of the period 2,249 2,120
------- ------- -------
Cash and cash equivalents at end of period $ 5,463 $ 2,249 $ 2,120
======= ======= =======
The accompanying notes are an integral part of the financial statements.
52
53
WINSTON HOSPITALITY, INC.
NOTE TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION:
Winston Hospitality, Inc. (the "Lessee") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston Hotels,
Inc. ("WHI") (collectively, the "Company"). Approximately 92.28% of the
Partnership is owned by WHI. The two shareholders of the Lessee (Robert W.
Winston, III and John B. Harris, Jr.) are also shareholders of WHI and/or
partners in the Partnership. The Company owned sixteen hotels as of December 31,
1994, twenty-one hotels as of December 31, 1995, and thirty-one hotels as of
December 31, 1996 (collectively, all thirty-one hotels are the "Current
Hotels").
Each hotel is separately leased by the Company to the Lessee under a
Percentage Lease Agreement. These leases require 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.
Thirty of the 31 hotels are limited-service hotels and one is a
full-service hotel. All 31 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 is paid by the Company and the on-going franchise fees are
paid by the Lessee.
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. The
Lessee places cash deposits with federally insured depository institutions. At
December 31, 1996, bank account balances exceeded federal depository insurance
limits by approximately $4,667.
Fair Value of Financial Instruments. The Lessee's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity. The Lessee's remaining assets and
liabilities are not considered financial instruments.
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 the Lessee and are charged to expense as incurred.
Income Taxes. The Lessee 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.
53
54
Reclassifications. Certain reclassifications have been made to the 1995 and
1994 financial statements to conform with the 1996 presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
3. COMMITMENTS:
Under the terms of the Percentage Lease Agreements, the Lessee has future
lease commitments to the Company through 2006. Minimum future rental payments
under these non-cancelable operating leases are as follows:
Amount
Year ended December 31:
1997 $ 13,826
1998 13,826
1999 13,826
2000 13,826
2001 13,826
2002 and thereafter 47,960
--------
$117,090
========
The Lessee incurred minimum rents of $11,154, $7,853 and $2,583 as well as
percentage rents of $15,457, $9,295 and $2,533 for the years ended December 31,
1996 and 1995 and the period June 2, 1994 through December 31, 1994,
respectively.
The Lessee has entered into separate contracts with unrelated parties for the
management of ten of the hotels. The terms of these agreements provide for
management fees to be paid based on predetermined formulas for a period of ten
years through 2006. The contracts are cancelable under certain circumstances as
outlined in the agreements.
Various legal proceedings against the Lessee 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 the Lessee .
4. DISTRIBUTIONS:
Beginning with the year ended December 31, 1996, the shareholders have agreed
to limit distributions by the Lessee to amounts necessary to pay their income
taxes on the net income derived from the Lessee until such time as the tangible
net worth of the Lessee reaches $4,000. Thereafter, they have agreed to invest
at least 75% of their after-tax distributions of net income from the Lessee in
Common Stock of the Company. The obligations to use distributions from the
Lessee to purchase Common Stock cease (i) if the Company no longer qualifies as
a REIT or, (ii) with respect to either shareholder, if they cease to be an
officer or director of the Company or an officer or director of the Lessee.
5. PROFIT SHARING PLAN:
On January 1, 1996, the Lessee adopted the Winston 401(k) Plan (the "Plan")
for substantially all employees, except any highly compensated employee, as
defined in the Plan, who have attained the age of 21 and completed one year of
service. Under the plan, employees may contribute from 1% to 15% of
compensation, subject to an annual maximum as determined under the Internal
Revenue Code. The Lessee will make matching contributions of a specified
percentage of the employee's contribution, currently 3% of the first 6% of the
employee's contribution, and may make additional discretionary contributions.
54
55
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Winston Hotels, Inc.
We have audited the accompanying combined statement of income and capital
deficiency, and cash flows of the Initial Hotels (described in Note 1) for the
five months ended June 2, 1994. These combined financial statements are the
responsibility of the Companys' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of the Initial Hotels' operations
and their cash flows for the five months ended June 2, 1994, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
September 21, 1994
55
56
INITIAL HOTELS
COMBINED STATEMENT OF INCOME AND CAPITAL DEFICIENCY
FOR THE FIVE MONTHS ENDED JUNE 2, 1994
($ IN THOUSANDS)
Revenue:
Room revenue $ 7,415
Other revenue, net 135
-------
Total revenue 7,550
-------
Expenses:
Property operating expenses 2,983
Franchise costs 646
Repairs and maintenance 465
Real estate and personal property taxes and insurance 328
Management fees 381
Interest expense 1,215
Depreciation and amortization 973
-------
Total expenses 6,991
-------
Income before minority interest 559
Minority interest 357
-------
Net income 202
Less distributions to shareholders (23)
Capital deficiency at December 31, 1993 (306)
-------
Capital deficiency at June 2, 1994 $ (127)
=======
The accompanying notes are an integral part of the financial statements.
56
57
INITIAL HOTELS
COMBINED STATEMENT OF CASH FLOWS
FOR THE FIVE MONTHS ENDED JUNE 2, 1994
($ IN THOUSANDS)
Cash flows from operating activities:
Net income $ 202
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest 357
Depreciation and amortization 973
Changes in assets and liabilities:
Accounts receivable (153)
Prepaid expenses and other assets 12
Accounts payable, trade, accrued expenses and other liabilities 145
Amounts due to affiliates 219
------
Net cash provided by operating activities 1,755
------
Cash flows used in investing activities:
Additions to hotel properties (313)
------
Cash flows from financing activities:
Principal payments on long-term debt (535)
Advances from affiliates 74
Payments on advances from affiliates (141)
Distributions to shareholders (23)
Payments on capital lease obligations (74)
------
Net cash used in financing activities (699)
------
Net change in cash and cash equivalents 743
Cash and cash equivalents at beginning of period 454
------
Cash and cash equivalents at end of period $1,197
======
Supplemental disclosures -- cash paid for interest $1,215
======
The accompanying notes are an integral part of the financial statements.
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INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements are a combination of the statements
of operations, capital deficiency and cash flows of nine "sub-chapter S"
corporations ("Corporations") presented on a historical basis through June 2,
1994, as discussed below. Collectively, the nine corporations owned 10 hotels,
eight of which are located in North Carolina and two in Georgia. Nine of the
hotels are operated under franchise agreements with one franchisor.
The Corporations combined in these financial statements and their
respective ownership prior to the transactions discussed below are as follows:
Ownership Interest
-------------------
Winston Third
Corporation Affiliates Party
- ----------- ---------- -----
WJS Associates - W/D, Inc.
(name subsequently changes to Winston Hotels, Inc.) 33% 67%
WJS Associates-Boone, Inc. 40% 60%
WJS Associates-Brunswick, Inc. 25% 75%
WJS Associates-Cary, Inc. 25% 75%
WJS Associates-Southern Pines, Inc. 25% 75%
WJS Associates-Jacksonville, Inc. 25% 75%
WJS Associates-Southlake, Inc. 25% 75%
WJS Associates-Charlotte 29, Inc. 25% 75%
Hotel I, Inc. 100% ---
All significant intercompany balances and transactions have been
eliminated. Ownership interest represented by third parties have been reflected
as minority interest in order to reflect the net income (loss) and capital
deficiency of the Winston Affiliates.
During 1994, the Winston Affiliates organized a real estate investment
trust ("REIT") whereby one of the existing Corporations, WJS Associates-W/D,
Inc., became the REIT ("Winston Hotels, Inc."). The REIT conducted an initial
public offering ("Offering") of its common stock, a portion of the proceeds of
which were used to acquire one hotel property from WJS Associates-Cary, Inc.
(via a merger) and a 93.4% general partnership interest in a limited partnership
("Partnership"). The Partnership acquired the remaining nine hotels from the
remaining eight Corporations listed above. The REIT and the Partnership issued
shares of stock in the REIT, units of Partnership interest in the Partnership
and cash in exchange for the equity interest of the Winston Affiliates in the
hotels. In order to present comparable results of operations and changes in cash
flows of the hotel properties, the accompanying financial statements represent
the historical results of operations and cash flows of the Initial Hotels
through June 2, 1994 immediately prior to their acquisition by the REIT as of
that date. Accordingly, the following non-recurring transactions have not been
recognized in the accompanying combined financial statements:
(1) gain or loss on sale of assets to the REIT, and
(2) compensation of $800 to an officer of eight of the Corporations in
the form of $400 in cash, units in the Partnership redeemable for
approximately 24,000 shares of common stock of the REIT and
approximately 16,000 shares of common stock of the REIT.
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59
As stated above, WJS Associates-W/D, Inc. became the REIT and WJS
Associates-Cary, Inc. was merged into WJS Associates-W/D, Inc. effective June 2,
1994. The remaining Corporations, having sold their only operating asset, plan
to liquidate their remaining assets, satisfy their liabilities, make final
distributions to their shareholders and terminate their existence.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Investment in Hotel Properties. The hotel properties are started at cost.
Depreciation is computed using an accelerated method based upon the following
estimated useful lives:
Years
-----
Buildings 31.5
Furniture and equipment 5-10
Signs 15
Maintenance and repairs. Maintenance and repairs are charged to operations
as incurred; major renewals and betterments are capitalized. Upon the sale or
disposition of a fixed asset, the asset and related accumulated depreciation are
removed from the accounts, and the gain or loss is included in operations.
Deferred Expenses. Deferred expenses primarily consist of franchise fees
and deferred loan costs. Amortization is computed using the straight-line method
based upon the terms of the franchise and loan agreements.
Income Taxes. The Corporations have elected to be taxed as S Corporations
and, accordingly, are not subject to federal or state income taxes.
Revenue Recognition. Revenue is recognized as earned. On-going 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.
3. COMMITMENTS:
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of hotel franchise
agreements expiring at various dates through 2001. Fees are computed based upon
percentages (generally 8%) of gross room revenues.
4. RELATED PARTY TRANSACTIONS:
Management services for the Corporations have been provided by related
management entities owned by certain shareholders of the Corporations.
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INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
10.40 Credit Agreement, dated as of October 29, 1996, among Winston
Hotels, Inc., WINN Limited Partnership, the banks listed therein,
Wachovia Bank of North Carolina, N.A., as Collateral Agent and
Wachovia Bank of Georgia, N.A., as Administrative Agent (the "Credit
Agreement").
10.41 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Branch Banking and Trust Company for
the principal sum of $35,000,000 pursuant to the Credit Agreement.
10.42 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Nationsbank, N.A. for the principal
sum of $20,000,000 pursuant to the Credit Agreement.
10.43 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Southtrust Bank of Alabama, N.A. for
the principal sum of $20,000,000 pursuant to the Credit Agreement.
10.44 Promissory Note, dated October 29, 1996, from Winston Hotels, Inc.
and WINN Limited Partnership to Wachovia Bank of North Carolina,
N.A. for the principal sum of $50,000,000 pursuant to the Credit
Agreement.
10.45 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).
23 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Data Schedule (for SEC use only)
60