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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998 Commission file number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1624289
(State of incorporation) (I.R.S. Employer Identification No.)
2209 CENTURY DRIVE
RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices)
(Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The number of shares of Common Stock, $.01 par value, outstanding on
April 30, 1998 was 16,298,980.
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WINSTON HOTELS, INC.
INDEX
The Registrant hereby amends its Quarterly Report on Form 10-Q/A (Amendment No.
1) for the period ended March 31, 1998, filed with the Securities and Exchange
Commission on August 17, 1998 to reflect a change in accounting principle
effective January 1, 1998. This change resulted from the withdrawal of the
consensus reached by the Financial Accounting Standards Board's Emerging Issues
Task Force regarding EITF 98-9 "Accounting for Contingent Rent in Interim
Financial Periods," (originally issued on May 21, 1998) on November 19, 1998.
Page
----
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997 3
Unaudited Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C. (1)
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 8
Unaudited Statement of Income for the three months ended March 31, 1998 9
Unaudited Statement of Cash Flows for the three months ended
March 31, 1998 10
Note to Financial Statements 11
WINSTON HOSPITALITY, INC. (1)
Unaudited Statement of Income for the three months ended
March 31, 1997 12
Unaudited Statement of Cash Flows for the three months ended
March 31, 1997 13
Note to Financial Statements 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
(1) The financial statements of CapStar Winston Company, L.L.C.
and Winston Hospitality, Inc. are included in this report as
they contain material information with respect to the
Company's investment in hotel properties. For the three months
ended March 31, 1998, CapStar Winston Company, L.L.C. served
as the lessee of all 41 of Winston Hotels, Inc.'s (the
"Company's") hotels. For the three months ended March 31,
1997, Winston Hospitality, Inc. served as the lessee of all 31
of the Company's hotels. In November 1997, CapStar Winston
Company, L.L.C. replaced Winston Hospitality, Inc. as the
lessee of all 38 of the Company's hotels. These two companies
are not affiliated with the Company other than their lessee
relationships.
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WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
ASSETS
Investment in hotel properties:
Land $ 31,993 $ 27,504
Buildings and improvements 259,571 224,535
Furniture and equipment 26,658 22,528
--------- ---------
Operating properties 318,222 274,567
Less accumulated depreciation (24,726) (21,572)
--------- ---------
293,496 252,995
Properties under development 21,377 26,490
--------- ---------
Net investment in hotel properties 314,873 279,485
Corporate FF&E, net 139 23
Cash and cash equivalents 1,041 164
Lease revenue receivable 6,910 5,682
Deferred expenses, net 1,596 1,403
Prepaid expenses and other assets 2,505 1,070
--------- ---------
Total Assets $ 327,064 $ 287,827
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 86,881 $ 44,081
Accounts payable and accrued expenses 1,700 3,527
Distributions payable 6,605 6,950
Minority interest in Partnership 15,259 15,779
--------- ---------
Total liabilities 110,445 70,337
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized,
3,000 shares issued and outstanding (liquidation preference of
$76,734 and $77,100) 30 30
Common stock, $.01 par value, 50,000 shares authorized,
16,299 and 16,194 shares issued and outstanding 163 162
Additional paid-in capital 224,598 223,427
Unearned compensation (391) (106)
Distributions in excess of earnings (7,781) (6,023)
--------- ---------
Total shareholders' equity 216,619 217,490
--------- ---------
Total liabilities and shareholders' equity $ 327,064 $ 287,827
========= =========
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
Revenue:
Percentage lease revenue $10,073 $ 7,148
Interest and other income 49 30
------- -------
Total revenue 10,122 7,178
------- -------
Expenses:
Real estate taxes and property and casualty insurance 979 565
General and administrative 599 370
Interest 625 815
Depreciation 3,158 2,222
Amortization 87 40
------- -------
Total expenses 5,448 4,012
------- -------
Income before allocation to minority interest 4,674 3,166
Income allocation to minority interest 297 230
------- -------
Net income 4,377 2,936
Preferred stock distribution 1,734 --
------- -------
Net income applicable to common shareholders $ 2,643 $ 2,936
======= =======
Earnings per share:
Net income per common share $ 0.16 $ 0.19
======= =======
Net income per common share assuming dilution $ 0.16 $ 0.18
======= =======
Weighted average number of common shares 16,224 15,815
======= =======
Weighted average number of common shares assuming dilution 18,042 17,154
======= =======
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
Cash flows from operating activities:
Net income $ 4,377 $ 2,936
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest 297 230
Depreciation 3,158 2,222
Amortization of franchise fees 30 22
Amortization recorded as interest expense 91 112
Unearned compensation amortization 57 18
Changes in assets and liabilities:
Lease revenue receivable (1,228) (153)
Prepaid expenses and other assets 38 (219)
Current liabilities (1,827) (337)
-------- -------
Net cash provided by operating activities 4,993 4,831
-------- -------
Cash flows from investing activities:
Deferred acquisition costs (100) (32)
Prepaid acquisition costs (1,548) --
Investment in hotel properties (39,250) (3,501)
Sale of land parcel 445 --
-------- -------
Net cash used in investing activities (40,453) (3,533)
-------- -------
Cash flows from financing activities:
Fees paid to increase and extend line of credit -- (6)
Net proceeds from issuance of stock 485 200
Payment of distributions to shareholders (6,478) (4,029)
Payment of distributions to minority interest (470) (323)
Increase in line of credit borrowing 42,800 2,931
-------- -------
Net cash provide by (used in) financing activities 36,337 (1,227)
-------- -------
Net increase in cash and cash equivalents 877 71
Cash and cash equivalents at beginning of period 164 234
-------- -------
Cash and cash equivalents at end of period $ 1,041 $ 305
======== =======
Supplemental disclosure:
Cash paid for interest $ 780 $ 384
======== =======
Summary of non-cash investing and financing activities:
Investment in hotel properties payable $ 8 $ 2,327
Distributions declared but not paid 6,605 4,613
Conversion of partnership units for common shares 152 --
Deferred equity compensation 339 --
Minority interest payable adjustment due to the exercise of stock
options and conversion of partnership units for common shares 196 --
======== =======
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ AMTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
Winston Hotels, Inc. (the "Company") operates so as to qualify as a
real estate investment trust ("REIT") for federal income tax purposes.
The accompanying unaudited consolidated financial statements reflect,
in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. Due to the seasonality of the
hotel business, the information for the three months ended March 31,
1998 and the information for the three months ended March 31, 1997 are
not necessarily indicative of the results for a full year.
2. ACQUISITIONS AND DEVELOPMENT
On March 3, 1998, the Company acquired the 168-suite Residence Inn by
Marriott in Phoenix, Arizona for $15,700 in cash. On March 17, 1998,
the Company purchased the newly-built 164-room Hilton Garden Inn in
Alpharetta, Georgia for $13,500 in cash. In addition, on March 10,
1998, the Company announced the opening of its first
internally-developed hotel, a 137-suite Homewood Suites hotel in
Raleigh, North Carolina. The cost of the hotel was approximately
$12,000.
3. PRO FORMA FINANCIAL INFORMATION
This unaudited pro forma condensed statement of income of the Company
is presented as if the September 1997 Preferred Stock offering had
occurred January 1, 1997 and the Company had acquired all 41 of the
hotels owned as of March 31, 1998 on the later of January 1, 1997, or
the hotel opening date for the two newly developed hotels which opened
in March 1998. This unaudited pro forma condensed statement of income
is not necessarily indicative of what actual results of operations of
the Company would have been assuming such transactions had been
completed as of the dates described above, nor does it purport to
represent the results of operations for future periods:
PRO FORMA FOR THE
QUARTER ENDED MARCH 31,
-----------------------
1998 1997
------- -------
Percentage lease and other revenue $10,695 $10,250
------- -------
Expenses:
Real estate taxes and property and casualty insurance 1,001 830
General and administrative 601 390
Depreciation 3,243 2,863
Amortization 87 50
Interest expense 786 729
------- -------
Total expense 5,718 4,862
------- -------
Income before allocation to minority interest 4,977 5,388
------- -------
Income allocation to minority interest 319 441
Preferred stock distribution 1,734 1,734
------- -------
Net income applicable to common shareholders $ 2,924 $ 3,213
------- -------
Net income per common share $ 0.18 $ 0.20
======= =======
Net income per common share assuming dilution $ 0.18 $ 0.20
======= =======
Weighted average number of common shares 16,224 15,815
======= =======
Weighted average number of common shares assuming dilution
18,042 17,969
======= =======
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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ AMTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," on December 31, 1997. SFAS No. 128
requires the Company to change its method of computing, presenting and
disclosing earnings per share information. All prior period data
presented has been restated to conform to the provisions of SFAS No.
128.
The following is a reconciliation of the net income applicable to
common shareholders used in the net income per common share calculation
to the income before allocation to minority interest used in the net
income per common share - assuming dilution:
QUARTER ENDED MARCH 31,
-----------------------
1998 1997
------- --------
Net income $4,377 $2,936
Less: preferred shares distribution 1,734 --
------ ------
Net income applicable to common shareholders 2,643 2,936
Plus: income allocation to minority interest 297 230
------ ------
Net income assuming dilution $2,940 $3,166
====== ======
The following is a reconciliation of the weighted average shares used
in net income per common share to the weighted average shares used in
the net income per common share - assuming dilution:
QUARTER ENDED MARCH 31,
-----------------------
1998 1997
------- --------
Weighted average number of common shares 16,224 15,815
Units with redemption rights 1,769 1,265
Stock options 49 73
------ ------
Weighted average number of common shares
assuming dilution 18,042 17,154
====== ======
5. SUBSEQUENT EVENTS:
On April 21, 1998, the Company purchased the 171-room Holiday Inn in
Tinton Falls, New Jersey for approximately $5,700 in cash. On May 5,
1998, the Company opened the 112-suite Homewood Suites hotel in Lake
Mary, Florida which represents an investment of approximately $10,000.
On May 8, 1998, the Company purchased the 155-room Hilton Garden Inn
hotel in Albany, New York for approximately $12,800 in cash.
6. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS:
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130") effective January 1,
1998. SFAS 130 requires the Company to display an amount representing
the total comprehensive income for the period in a financial statement
which is displayed with the same prominence as other financial
statements. The Company does not have any items representing
comprehensive income and therefore has not presented a Statement of
Comprehensive Income in the accompanying financial statements.
The Company will adopt Statement of Financial Accounting Standards No.
131 "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131") effective December 31, 1998. SFAS 131
requires the Company to report selected information about operating
segments in its financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement is not
expected to have a material impact on the Company's financial
statements.
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CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEET
($ IN THOUSANDS)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS
Current assets: (unaudited)
Cash and cash equivalents $ 6,198 $ 3,393
Accounts receivable 2,527 1,614
Due from Winston Hospitality, Inc. 526 1,636
Due from CapStar Management Company, L.P. 456 385
Deposits and other assets 206 197
------- -------
Total current assets 9,913 7,225
------- -------
Furniture, fixtures and equipment, net of accumulated
depreciation of $17 and $5 289 241
Intangible assets, net of accumulated amortization of $321 and $93 33,915 34,088
Deferred franchise costs, net of accumulated amortization of $24 and $7 585 601
------- -------
$44,702 $42,155
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,688 $ 1,459
Accrued expenses 3,196 2,920
Percentage lease payable to Winston Hotels, Inc. 6,910 5,682
Advance deposits 174 135
------- -------
Total current liabilities 11,968 10,196
------- -------
Members' capital 32,734 31,959
------- -------
$44,702 $42,155
======= =======
See accompanying notes to financial statements.
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CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
($ IN THOUSANDS)
Revenue:
Rooms $22,573
Food and beverage 901
Telephone and other operating departments 1,170
-------
Total revenue 24,644
-------
Operating costs and expenses:
Rooms 4,904
Food and beverage 682
Telephone and other operating departments 473
Undistributed expenses:
Lease expense 10,073
Administrative and general 2,482
Sales and marketing 826
Franchise fees 1,609
Repairs and maintenance 1,222
Energy 895
Other 446
Depreciation and amortization 257
-------
Total expenses 23,869
-------
Net income $ 775
=======
See accompanying notes to financial statements.
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CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1998
($ IN THOUSANDS)
Cash flows from operating activities:
Net income $ 775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 257
Increase in accounts receivable (913)
Decrease in due from Winston Hospitality, Inc. 1,110
Increase in due from CapStar Management Company, L.P. (71)
Increase in deposits and other assets (9)
Increase in accounts payable and accrued expenses 505
Increase in percentage lease payable to Winston Hotels, Inc. 1,228
Increase in advance deposits 39
-------
Net cash provided by operating activities 2,921
-------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (76)
Proceeds from sale of fixed assets 16
Additions to intangible assets (56)
-------
Net cash used in investing activities (116)
-------
Net increase in cash and cash equivalents 2,805
Cash and cash equivalents at beginning of period 3,393
-------
Cash and cash equivalents at end of period $ 6,198
=======
See accompanying notes to financial statements.
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CAPSTAR WINSTON COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements reflect, in the opinion of
CapStar Winston Company, L.L.C. management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.
During November 1997, CapStar Management Company ("CMC") and CapStar Hotel
Company purchased substantially all of the assets and assumed certain
liabilities of Winston Hospitality, Inc., including 38 hotel leases, certain
operating assets and liabilities, and goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets purchased and
liabilities assumed in the transaction to CapStar Winston Company, L.L.C. (the
"Lessee").
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WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF INCOME
($ IN THOUSANDS)
Three Months
Ended
March 31, 1997
--------------
Revenue:
Room revenue $16,325
Food and beverage revenue 631
Other revenue, net 304
Interest income 22
-------
Total revenue 17,282
-------
Expenses:
Property and operating expenses 6,218
Property maintenance and repairs 868
Food and beverage expense 455
General and administrative 594
Franchise costs 1,458
Management fees 297
Percentage lease payments 7,148
-------
Total expenses 17,038
-------
Net income $ 244
=======
The accompanying note is an integral part of the financial statements.
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WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
Three Months
Ended
March 31, 1997
--------------
Cash flows from operating activities:
Net income $ 244
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 27
Changes in assets and liabilities:
Accounts receivable - trade (194)
Prepaid expenses and other assets 35
Accounts payable - trade (14)
Percentage lease payable to Lessor 153
Accrued expenses and other liabilities 240
-------
Net cash provided by operating activities 491
-------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (38)
Advances to lessor, affiliates and shareholders (1,068)
-------
Net cash used in investing activities (1,106)
-------
Net decrease in cash and cash equivalents (615)
Cash and cash equivalents at beginning of the period 5,463
-------
Cash and cash equivalents at end of period $ 4,848
=======
The accompanying note is an integral part of the financial statements.
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WINSTON HOSPITALITY, INC.
NOTE TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements reflect, in the opinion of
Winston Hospitality, Inc. management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.
During November 1997, CapStar Management Company ("CMC") and CapStar Hotel
Company purchased substantially all of the assets and assumed certain
liabilities of Winston Hospitality, Inc., including 38 hotel leases, certain
operating assets and liabilities, and goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets purchased and
liabilities assumed in the transaction to CapStar Winston Company, L.L.C. (the
"Lessee").
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ AMOUNTS IN THOUSANDS)
OVERVIEW
Winston Hotels, Inc. (the "Company"), which consummated an underwritten initial
public offering ("IPO") in June 1994, follow-on Common Stock offerings in May
1995 and in June 1996, and a Preferred Stock offering in September 1997,
operates as a REIT to invest in hotel properties. The Company owned 41 hotels
(the "Current Hotels") as of March 31, 1998. The Company owned 16 hotels as of
December 31, 1994 (the "1994 Hotels"), purchased five hotels in May 1995 (the
"1995 Acquired Hotels"), acquired 10 hotels in 1996 (the "1996 Acquired
Hotels"), acquired seven hotels in 1997 (the "1997 Acquired Hotels") and
acquired two hotels and opened one internally developed hotel in the first
quarter of 1998 (the "1998 Hotels"). It currently leases all 41 Current Hotels
to CapStar Winston Company, L.L.C. (the "Lessee") under Percentage Leases
through which it receives its principal source of revenue. The Company acquired
one additional full-service hotel in April 1998, on additional extended-stay
hotel in May 1998 and one additional full-service hotel in May 1998.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998 and the comparable period for 1997,
the differences in operating results are primarily attributable to the fact that
the Company owned more hotels in 1998 than it did in 1997. The table below
outlines the Company's investment in hotel properties for the periods ended
March 31, 1998 and 1997.
First Quarter 1998 First Quarter 1997
-------------------------- -----------------------------
Acquisitions Properties Acquisitions Properties
during owned at during owned at
Type of Hotel the quarter March 31 the quarter March 31
------------- ----------- -------- ----------- --------
Limited-service hotels -- 35 -- 28
Extended-stay hotels 2 4 -- 2
Full-service hotels 1 2 -- 1
-- -- -- --
Total 3 41 -- 31
== == == ==
In order to present a more meaningful comparison of operations, in addition to
the comparison of actual results of the Company and the Lessee for the three
months ended March 31, 1998 versus actual results for the three months ended
March 31, 1997, below also is an analysis of the pro forma results of the
Company for the three months ended March 31, 1998 versus pro forma results for
the three months ended March 31, 1997 as if the 1997 Preferred Stock offering
and the 1997 and 1998 acquisitions had occurred on the later of January 1, 1997,
or the hotel opening date for the two newly developed hotels which opened in
March 1998.
THE COMPANY
ACTUAL - THREE MONTHS ENDED MARCH 31, 1998 VS ACTUAL - THREE MONTHS ENDED MARCH
31, 1997
The Company had revenues of $10,122 in 1998, consisting of $10,073 of Percentage
Lease revenues and $49 of interest and other income. Percentage Lease revenues
increased by $2,925 to $10,073 in 1998 from $7,148 in 1997. This increase was
comprised of: (i) $483 due to the 1998 Hotels, (ii) $2,245 due to the 1997
Acquired Hotels owned for the entire three-month period in 1998, and (iii) an
increase of $197 in lease revenues generated from hotels acquired prior to 1997.
Real estate taxes and property insurance costs incurred in 1998 were $979, an
increase of $414 from $565 in 1997. This increase was primarily attributable to
the 1997 Acquired Hotels that were not owned in the first quarter of 1997, the
1998 Hotels, as well as increased property tax assessments and tax rates from
1997 to 1998. General and administrative expenses increased $229 to $599 in 1998
from $370 in 1997. The increase was attributable to the increase in size and
activities of the Company in 1998. Interest expense decreased by $190 to $625 in
1998 from $815 in 1997. Although the weighted average outstanding debt balance
increased from 1997 to 1998, from $45,023 to $58,682, capitalized interest costs
related to development and renovation projects increased from $174 to $640,
resulting in a lower interest expense in 1998. Interest rates remained constant
between the two quarters. Depreciation increased $936 to $3,158 in 1998 from
$2,222 in 1997, primarily due to depreciation related to the 1997 Acquired
Hotels, the 1998 Hotels and renovations completed during 1997 and 1998.
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PRO FORMA - THREE MONTHS ENDED MARCH 31, 1998 VS PRO FORMA - THREE MONTHS ENDED
MARCH 31, 1997
The Company had revenues of $10,695 for the three months ended March 31, 1998,
consisting of $10,646 of Percentage Lease revenues and $49 of interest and other
income. Percentage Lease revenues increased by $470 to $10,646 in 1998 from
$10,176 in 1997. Of this increase, $305 was primarily attributable to an
increase in room rates in 1998 from 1997 and $165 was attributable to the
opening of two hotels in 1998.
Real estate taxes and property insurance costs incurred in 1998 were $1,001, an
increase of $171 from $830 in 1997. The increase was due primarily to increased
property tax assessments and tax rates from 1997 to 1998 as well as additional
taxes paid due to the opening of two hotels in 1998. General and administrative
expenses increased $211 to $601 in 1998 from $390 in 1997. The increase was
primarily attributable to payroll costs associated with the increase in
headcount from 1997 to 1998. Interest expense increased by $57 to $786 in 1998
from $729 in 1997. The increase was attributable to $561 of additional interest
expense related primarily to borrowings under the line of credit to fund
acquisitions of the 1997 Acquired Hotels and 1998 Hotels, offset by both the
capitalization of additional interest costs, totaling $467, in connection with
the development and certain renovation projects during the respective periods,
as well as a reduction in line of credit fees totaling $37. Depreciation
increased $380 to $3,243 in 1998 from $2,863 in 1997 primarily due to
renovations and other capital expenditures during 1997 and 1998.
THE LESSEE
ACTUAL - THREE MONTHS ENDED MARCH 31, 1998 VS ACTUAL - THREE MONTHS ENDED MARCH
31, 1997
The following table sets forth certain historical financial information for the
Current Hotels for the periods indicated:
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ --------------------
Revenue:
Rooms $22,573 91.6% $16,325 92.3%
Food and beverage 901 3.7% 624 3.5%
Telephone and other operating departments 1,170 4.7% 742 4.2%
------- ----- ------- -----
Total revenue 24,644 100.0% 17,691 100.0%
------- ----- ------- -----
Operating costs and expenses:
Rooms 4,904 19.9% 3,431 19.4%
Food and beverage 682 2.8% 445 2.5%
Telephone and other operating departments 473 1.9% 404 2.3%
Undistributed expenses:
Lease 10,073 40.9% 7,148 40.4%
Administrative and general 2,482 10.1% 2,234 12.6%
Sales and marketing 826 3.4% 662 3.7%
Franchise fees 1,609 6.5% 1,118 6.3%
Repairs and maintenance 1,222 5.0% 915 5.2%
Energy 895 3.6% 695 3.9%
Other 446 1.8% 368 2.1%
Depreciation and amortization 257 1.0% 27 0.2%
------- ----- ------- -----
Total expenses 23,869 96.9% 17,447 98.6%
======= ===== ======= =====
Net income $ 775 3.1% $ 244 1.4%
======= ===== ======= =====
During November 1997, CapStar Management Company ("CMC") and CapStar Hotel
Company purchased substantially all of the assets and assumed certain
liabilities of Winston Hospitality, Inc., including 38 hotel leases, certain
operating assets and liabilities, and goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets purchased and
liabilities assumed in the transaction to CapStar Winston Company, L.L.C. (the
"Lessee").
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Since the Lessee was not operating prior to the purchase transaction, no
comparative data is available for the period January 1, 1997 through March 31,
1997. However, for purposes of this management discussion and analysis, the
financial information of the Lessee for the three months ended March 31, 1998
will be compared with the financial information of Winston Hospitality, Inc. for
the three months ended March 31, 1997. The Winston Hospitality financial
information for the three months ended March 31, 1997 contained in the table
above has been reclassified and grouped according to the Lessee format in order
to facilitate an accurate comparison of the data.
The Lessee had room revenues of $22,573 in 1998, up $6,248 from $16,325 in 1997.
The increase in room revenues was due to an increase in room revenues of (i)
$490 for the 1994 Hotels, the 1995 Acquired Hotels and the 1996 Acquired Hotels,
(ii) $5,102 for the 1997 Acquired Hotels, and (iii) $656 for the 1998 Hotels.
Food and beverage revenue increased $277, to $901 in 1998 from $624 in 1997,
primarily due to the 1997 Acquired Hotels and 1998 Hotels. Telephone and other
operating departments revenue increased $428 to $1,170 in 1998 from $742 in
1997, primarily due to an increase in revenue associated with long distance
phone calls and in-room movies.
The Lessee had total expenses in 1998 of $23,869, up $6,422 from $17,447 in
1997. The increase, as shown above, in all expense categories except
depreciation and amortization expense, were primarily attributable to the
operation of a greater number of hotels for the three months ended March 31,
1998 as compared with the same period of 1997. Although administrative and
general expenses increased in 1998 from 1997, these expenses decreased as a
percentage of total revenue from 1997 to 1998 as a result of efficiencies
developed within the management company, making the incremental cost per hotel
less expensive. Depreciation and amortization expense increased due to
amortization being charged in 1998 as a result of goodwill and other intangible
assets arising out of the purchase of Winston Hospitality, Inc. by CMC and
CapStar Hotel Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the quarter ended March 31,
1998, cash flow provided by operating activities was $4,993 and funds from
operation, which is equal to net income before minority interest plus
depreciation, less preferred dividends, was $6,098. Under Federal income tax law
provisions applicable to REITs, the Company is required to distribute at least
95% of its taxable income to maintain its tax status as a REIT. In the quarter
ended March 31, 1998, the Company declared distributions of $6,605 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 three months ended
March 31, 1998 totaled $40,453, including $29,232 related to the acquisition of
the 1998 Hotels, $2,877 for hotel renovations and $7,141 for the development of
six new extended-stay hotels and one limited-service hotel, which are expected
to cost approximately $71,000. The total cost of the 1998 Hotels was $40,898,
including $11,666 related to the development of the Homewood Suites hotel in
Raleigh, N.C.
The Company plans to spend approximately $7,000 to renovate certain of its
Current Hotels during the next twelve months. These expenditures are in addition
to the reserve of 5% of room revenues for its limited-service hotels and 7% of
room revenues and food and beverage revenues from its full-service hotels which
the Company is required to set aside under its Percentage Leases for periodic
capital improvements and the refurbishment and replacement of furniture,
fixtures and equipment at its Current Hotels. In the three months ended March
31, 1998, the Company set aside $1,190 for such reserves. These reserves are in
addition to amounts spent on normal repairs and maintenance which have
approximated 5.4% and 5.3% of room revenues for the three months ended March 31,
1998 and 1997, respectively, and are paid by the Lessee.
The Company's net cash provided by financing activities during the quarter ended
March 31, 1998 totaled $36,337, including an increase of $42,800 in the line of
credit borrowings and $485 of net proceeds from the issuance of common stock
related to the exercise of stock options, offset by the payment of distributions
to shareholders of $6,478 and the payment of distributions to minority interest
holders of $470.
The Company has collateralized a portion of its $125,000 line of credit with 28
of its Current Hotels amounting to $96,401 as of March 31, 1998. This amount is
calculated quarterly, and increases if cash flow attributable to the collateral
hotels increases and/or the Company adds additional hotels as collateral. The
total additional, non-collateralized line availability accessible to the Company
as of March 31, 1998 was $28,599. The Company's Articles of Incorporation limit
its total
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amount of indebtedness to 45% of the purchase prices paid by the Company for its
investments in hotel properties, as defined. As of March 31, 1998, the Company
had additional borrowing capacity under the debt limitation of approximately
$126,000 assuming it invests all borrowings in additional hotels.
Under an arrangement with Promus Hotels, Inc. ("Promus") the Company has an
agreement to acquire a 123-suite Homewood Suites hotel being developed by Promus
in Richmond, Virginia. The Company expects to acquire this hotel upon its
completion, which Promus estimates will occur during the second quarter of 1998,
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. Pursuant to the
arrangement, Promus has agreed to invest $1,845 in the Company's Common Stock
(at the then-current market price per share), in connection with the purchase of
this hotel.
The Company intends to acquire and develop additional hotel properties,
including those described above, 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/or from the issuance of other debt or equity securities.
There can be no assurances that the Company will acquire any additional hotels,
or that any hotel development will be undertaken, or if commenced, that it will
be completed on schedule or on budget. Further, there can be no assurances that
the Company will be able to obtain any additional financing.
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.
FORWARD LOOKING STATEMENTS
This report contains certain "forward looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including, but
not limited to, those paragraphs relating to development and acquisition of
hotels in this section. These statements represent the Company's judgment and
are subject to risks and uncertainties that could cause actual operating results
to differ materially from those expressed or implied in the forward looking
statements. Important factors that could cause actual results to differ include,
but are not limited to the following (i) risk associated with the Company's
acquisition of hotels with little or no operating history, including the risk
that such hotels will not achieve the level of revenue assumed by the Company in
calculating the respective Percentage Rent formula; (ii) development risk,
including risk of construction delay, cost overruns, receipt of zoning,
occupancy and other required governmental permits and authorizations and the
incurrence of development costs in connection with projects that are not pursued
through completion; and (iii) factors identified in the Company's filings with
the Securities and Exchange Commission, including the factors listed in the
Company's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on August 1, 1997.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WINSTON HOTELS, INC.
Date February 23, 1999 /s/ James D. Rosenberg
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James D. Rosenberg
President, Chief Financial Officer
and Chief Operating Officer
(Authorized officer and Principal
Financial Officer)
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WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended March 31, 1998
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
27. Financial Data Schedule (For SEC use only).
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