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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, 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 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(b) of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange
Preferred Stock, $0.01 par value per share New York Stock Exchange
(Title of Class) (Name of Exchange Upon Which Registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, $0.01 par
value per share, at March 15, 1999, held by those persons deemed by the
registrant to be non-affiliates was approximately $133,379,000.
As of March 15, 1999, there were 16,333,980 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 18, 1999 Part III
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WINSTON HOTELS, INC.
FORM 10-K ANNUAL REPORT
INDEX
Page
----
PART I.
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
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
STOCKHOLDER MATTERS 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 28
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 through WINN Limited Partnership (the
"Partnership") owns 51 hotels (the "Current Hotels") having an aggregate of
6,904 rooms as of December 31, 1998. WHI owned a 90.37% partnership interest in
the Partnership as of December 31, 1998 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, WHI completed an initial public offering (the "IPO") 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 WHI
to acquire nine hotel properties (together with the hotel acquired by WHI, the
"Initial Hotels"). During 1994, the Company acquired six additional hotels (the
"1994 Acquired Hotels") utilizing proceeds from the IPO and borrowings under its
line of credit. In 1995, WHI completed a second public offering (the "Follow-on
Offering") and used the proceeds to purchase five additional hotels (the "1995
Acquired Hotels"). In 1996, WHI completed an additional follow-on offering and
used the proceeds primarily to 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") . In 1997, WHI completed an offering of 3,000,000 shares
of 9.25% Series A Cumulative Preferred Stock ($25 liquidation preference per
share) and used the net proceeds of approximately $71,500,000 to pay down
existing debt. During 1997, the Company also acquired seven additional hotel
properties (the "1997 Acquired Hotels") utilizing borrowings under its line of
credit. During 1998, the Company acquired eight hotels and opened five
internally developed hotels (the "1998 Hotels") utilizing borrowings under its
line of credit as well as under various demand notes.
Under the REIT qualification requirements of the Internal Revenue Code,
REITs generally must lease their hotels to third party operators. Therefore, the
Company leases 49 of the 51 Current Hotels to CapStar Winston Company, L.L.C.
("CapStar Winston"), one of the Current Hotels to Bristol Hotels & Resorts, Inc.
("Bristol") and one of the Current Hotels to Prime Hospitality Corp. ("Prime").
All 51 of the Current Hotels are leased pursuant to leases that provide for rent
payments based, in part, on revenues from the Current Hotels (the "Percentage
Leases"). Under the terms of the Percentage Leases, the lessees are obligated to
pay the Company the greater of base rent or percentage rent ("Percentage Rent").
The Percentage Leases are designed to allow the Company to participate in the
growth in revenues at the Current Hotels by providing that a portion of each
Current Hotel's room revenues in excess of specified amounts will be paid to the
Company as Percentage Rent. CapStar Winston operates 39 of the 49 Current Hotels
it leases from the Company and Interstate Management and Investment Corporation
("IMIC") and Promus Hotels, Inc. ("Promus"), operate nine hotels and one hotel,
respectively, under management agreements with CapStar Winston.
Prior to November 17, 1997, 38 of the Current Hotels were leased pursuant to
the Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and
November 24, 1997, CapStar Management Company, L.P. purchased substantially all
of the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including the 38 existing leases. Concurrent with these transactions, the leases
were assigned to CapStar Winston, an affiliate of CapStar Management Company,
L.P.
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 future, may result from:
(i) continued sales and marketing programs by the lessees; (ii) completion of
refurbishment projects as needed at the Current Hotels; (iii) maintaining hotel
franchises with demonstrated market acceptance and national reservation systems;
and (iv) continuation of the industry-wide trend of increasing average daily
room rate ("ADR") and revenue per available room ("REVPAR").
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The Percentage Leases provide that a percentage of room revenues in
specified ranges is paid as Percentage Rent. For most leases, the percentage of
room revenues paid as Percentage Rent increases as a higher specified level of
room revenues is achieved. Pursuant to each Percentage Lease, base rent and the
ranges of room revenues specified for purposes of calculating Percentage Rent
are adjusted on a quarterly or annual basis for inflation beginning on the first
day after the first full fiscal year of the Percentage Lease, based on changes
in the United States Consumer Price Index ("CPI").
Acquisition Strategy
The Company intends to acquire additional hotel properties with strong
national franchise affiliations in the mid-scale and upscale market segments, or
hotel properties with the potential to obtain such franchise affiliations. In
particular, the Company will consider acquiring limited-service hotels such as
Hampton Inn and Fairfield Inn hotels; full-service hotels such as Hilton Garden
Inn, Courtyard by Marriott and Holiday Inn hotels; and extended-stay hotel
properties such as Homewood Suites, Hampton Inn and Suites, Residence Inn,
Staybridge by Holiday Inn and Hilton Residential Suites 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) successful hotels available at
favorable prices; and (iii) newly developed hotels that the developer does not
intend to own. The Company believes its relationship with each lessee and
franchisor will provide additional potential investment opportunities,
opportunities the Company may not otherwise have had.
Additional investments in hotel properties may be made through the
Partnership, directly by WHI or with entities affiliated with the Company. The
Company's ability to acquire additional hotel properties and develop hotels
depends primarily on its ability to obtain additional debt financing, proceeds
from subsequent issuances of Common Stock or other securities, proceeds from the
sale of hotel properties or co-investments from other investors.
Development Strategy
The Company intends to pursue hotel development as suitable opportunities
arise. The Company may finance 100% of such development or seek partners who
would co-invest in development or rehabilitation joint ventures. The Company
intends to consider development of hotels with strong national franchise
affiliations in markets where the Company believes that carefully timed and
managed development will yield returns to the Company that exceed returns from
any available hotels in those markets that meet the Company's acquisition
criteria (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward Looking Statements").
During 1998, the Company opened five internally developed hotels. The
following table sets forth certain information for each project.
HOTEL AND LOCATION ROOMS DEVELOPMENT COSTS (APPX.) COMPLETION DATE
- ------------------ ----- ------------------------- ---------------
($ in thousands)
Homewood Suites
Crabtree Valley
Raleigh, NC 137 $13,100 March 9, 1998
Homewood Suites
Lake Mary, FL 112 10,000 May 5, 1998
Homewood Suites
Alpharetta, GA 112 10,200 May 22, 1998
Courtyard by Marriott
Winston-Salem, NC 122 8,000 October 3, 1998
Homewood Suites
Durham, NC 96 9,500 November 4, 1998
Operations and Property Management
CapStar Winston currently leases 49 of the Current Hotels, 39 of which they
also operate. IMIC manages nine of the Current Hotels and Promus manages one of
the Current Hotels (collectively the "Property Managers") pursuant to management
agreements with
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CapStar Winston with respect to each of such hotels. Bristol leases and
operates one of the Current Hotels and Prime leases and operates one of the
Current Hotels. The lessees and the Property Managers seek to increase revenues
at the Current Hotels by using established systems to manage the Current Hotels
for marketing, rate achievement, expense management, physical facility
maintenance, human resources, accounting and internal auditing. They are trained
in all aspects of hotel operations, including negotiation of prices with
corporate and other clients and responsiveness to marketing requirements in
their particular markets, with particular emphasis placed on customer service.
The lessees and the Property Managers employ a mix of marketing techniques
designed for each specific Current Hotel, which include individual toll-free
lines, cross-marketing of the Current Hotels' billboards and direct marketing,
as well as taking advantage of national advertising by the franchisors of the
Current Hotels.
The lessees lease the Current Hotels pursuant to the Percentage Leases.
Under the Percentage Leases, the lessees generally are required to perform all
operational and management functions necessary to operate the Current Hotels.
The lessees are entitled to all profits and cash flow from the Current Hotels
after payment of rent under the Percentage Leases and other operating expenses,
including, in the case of the ten Current Hotels managed by the Property
Managers, the management fee payable to the Property Managers. The lessees,
their affiliates and the Property Managers may manage other hotel properties in
addition to hotels owned by the Company, however, the lessees and their
affiliates may not build or develop a hotel or motel within five miles of a
leased Company hotel.
CapStar Winston is a wholly owned subsidiary of MeriStar Hotels and Resorts,
Inc. ("MeriStar"), a New York Stock Exchange company. As of February 2, 1999,
MeriStar, the nation's largest independent hotel management company, leased or
managed (including five under contract) 216 hotels with 44,831 rooms in 32
states, the District of Columbia, Canada and the U.S.
Virgin Islands.
IMIC, a hotel development and management company, operates nine of the
Current Hotels under separate management agreements with CapStar Winston. Each
year, CapStar Winston pays IMIC a base management fee for each Current Hotel
managed by IMIC based on a percentage of the budgeted gross operating profit for
that year with incentive amounts based on actual gross operating profits if they
exceed budgeted amounts. IMIC has agreed that each year it will spend a
specified percentage of the gross revenues of each Current Hotel managed by IMIC
on repairs and maintenance of the hotel. CapStar Winston and the Company have
retained the right to control the expenditure of funds budgeted for capital and
non-routine items, including, at their discretion, approving plans and selecting
and overseeing contractors and other vendors. IMIC currently operates 28 hotels
in six states, including 22 limited-service hotels and six full-service,
convention or resort hotels.
Promus manages one of the Current Hotels under a management agreement with
CapStar Winston. Each year, CapStar Winston pays Promus a management fee based
on a percentage of the gross operating profit for the hotel managed by Promus
with certain incentive amounts.
Bristol, a New York Stock Exchange company, is one of the leading independent
hotel operating companies in the United States. As of February 17, 1999, Bristol
operated 120 primarily full-service hotels in the upscale and midscale segments
of the hotel industry containing more than 32,000 rooms. Bristol is the largest
franchisee of Bass Hotels & Resorts (formerly Holiday Hospitality) branded
hotels including Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn
Express hotels.
Prime, a New York Stock Exchange company, is one of the nation's premier
lodging companies. Prime operates three proprietary brands, AmeriSuites
(all-suites), HomeGate Studios & Suites (extended-stay) and Wellesley Inns
(limited-service). It also owns and/or manages hotels operated under franchise
agreements with national hotel chains. As of February 4, 1999, Prime Hospitality
Corporation owned 151 hotels, operated 28 hotels under lease agreements with
REITs and managed 10 hotels from third parties.
Investments by Shareholders of Former Lessee
In November 1997, CapStar purchased substantially all of the assets and
assumed certain liabilities of Winston Hospitality, Inc., including 38 of the
Current Hotels' leases. In connection with the transaction, Robert W. Winston,
III and John B. Harris, Jr., shareholders of Winston Hospitality, Inc. owning
90% and 10% respectively, entered into an agreement to use their best efforts to
purchase an aggregate of 400,000 shares of the Company's Common Stock, par value
$0.01 per share, prior to November 24, 1999. If such investment is not made
prior to this date, the Company has the right to require Messrs. Winston and
Harris to purchase the number of shares equal to the difference of 400,000 less
the aggregate number of shares purchased by them during such two-year period. As
of February 28, 1999, 53,900 shares had been purchased.
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Franchise Agreements
The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise licenses. Franchisors provide
a variety of benefits for franchisees which include national advertising,
publicity and other marketing programs designed to increase brand awareness,
training of personnel, continuous review of quality standards and centralized
reservation systems.
The hotel franchise licenses generally specify certain management,
operational recordkeeping, accounting, reporting and marketing standards and
procedures with which the lessees must comply. The franchise licenses obligate
the lessees to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided, display of signs, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.
Of the Current Hotels, two of the franchise licenses expire in 1999, one
expires in 2003, two expire in 2006, one expires in 2007, three expire in 2008,
three expire in 2009, two expire in 2010, three expire in 2011, two expire in
2014, one expires in 2015, three expire in 2016, 18 expire in 2017 and 10 expire
in 2018. The franchise agreements provide for termination at the franchisor's
option upon the occurrence of certain events, including the lessees' failure to
pay royalties and fees or perform its other covenants under the 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
lessees are entitled to terminate the franchise license only by giving at least
12 months' notice and paying a specified amount of liquidated damages. The
license agreements will not renew automatically upon expiration. The lessees are
responsible for making all payments under the franchise agreements to the
franchisors. Under the franchise agreements, the lessees pay a franchise fee of
an aggregate of between 3% and 5% of room revenues, plus additional fees that
amount to between 3% and 4% of room revenues from the Current Hotels.
Prior to the sale of assets by Winston Hospitality, Inc., the Company served
as guarantor of certain obligations of Winston Hospitality, Inc. under three
franchise agreements between Winston Hospitality, Inc. and Holiday Inn. Although
CapStar Winston entered into new 18-month franchise agreements for the operation
of the three Holiday Inn hotels, Winston Hospitality, Inc. and the Company
remain obligated to Holiday Inn for certain liquidated damages in the event of a
termination of the Holiday Inn franchise agreements prior to the expiration of
the 18-month term. CapStar Winston and its affiliates shall indemnify the
Company and Winston Hospitality, Inc. for certain obligations arising from
CapStar Winston or its affiliates' failure to satisfy certain conditions in its
franchise agreements with Holiday Inn.
Competition
The hotel industry is highly competitive with various participants competing
on the bases of price, level of service and geographic location. The Current
Hotels compete with other hotel properties in their geographic markets. Some of
the Company's competitors may have greater marketing and financial resources
than the Company, the lessees, and the Property Managers. Several of the Current
Hotels are located in areas in which they may compete with other Current Hotels
for business. The Company competes for acquisition opportunities with entities
that may have greater financial resources than the Company. These entities may
generally be able to accept more risk than the Company can prudently manage,
including risks with respect to the creditworthiness of a hotel operator.
Employees
The Company had 23 employees as of February 28, 1999.
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,
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including ACMs. In connection with the ownership and operation of the Current
Hotels, the Company, the lessees, 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
Current Hotels. The Phase I ESAs were intended to identify potential sources of
contamination for which the Current Hotels may be responsible and to assess the
status of environmental regulatory compliance. The Phase I ESAs included
historical reviews of the Current Hotels, reviews of certain public records,
preliminary investigations of the sites and surrounding properties, screening
for the presence of asbestos, PCBs and underground storage tanks, and the
preparation and issuance of a written report. The Phase I ESAs did not include
invasive procedures, such as soil sampling or ground water analysis. The Phase I
ESA reports have not revealed any environmental condition, liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such condition, liability or compliance concern.
Nevertheless, it is possible that these reports do not reveal all environmental
conditions, liabilities or compliance concerns or that there are material
environmental conditions, liabilities or compliance concerns that arose at a
Current Hotel after the related Phase I ESA report was completed of which the
Company is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the Current Hotels will not be
affected by the condition of the properties in the vicinity of the Current
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Company.
The Company believes that the Current Hotels are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters. The Company has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substance or other environmental substances in connection with any of its
properties.
Tax Status
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended (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
operational 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 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 of the Registrant
The following table lists the executive officers of the Company:
NAME AGE POSITION
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Charles M. Winston 69 Chairman of the Board of Directors
Robert W. Winston, III 37 Chief Executive Officer
James D. Rosenberg 45 President, Chief Financial Officer, Chief Operating Officer
and Secretary
Joseph V. Green 48 Executive Vice President - Acquisitions and Finance
Kenneth R. Crockett 42 Executive Vice President of Development
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CHARLES M. WINSTON. Charles Winston has served as Chairman of the Board of
Directors since March 15, 1994. Mr. Winston is a native of North Carolina and a
graduate of the University of North Carolina at Chapel Hill with an A.B. degree.
He was Chairman of the Board of WJS Management, Inc., the former operator of
nine of the Initial Hotels, and a principal executive officer of several
corporations, which developed a total of ten hotels purchased by the Company in
1994 and 1996, positions he had held since 1987. Mr. Winston has more than 35
years of experience in developing and operating full service restaurants. Mr.
Winston also serves on the board of directors of BB&T Corporation. Mr. Winston
is Robert Winston's father and brother of James Winston, a director.
ROBERT W. WINSTON, III. Robert Winston has served as Chief Executive Officer
and Director of the Company since March 15, 1994. Mr. Winston also served as the
Company's President from March 15, 1994 through January 14, 1999 and as
Secretary for the periods from March 1994 through May 1995 and from October 1997
until May 5, 1998. Mr. Winston is a native of North Carolina and a graduate of
the University of North Carolina at Chapel Hill with a B.A. degree in economics.
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 in Wilmington, North
Carolina. His company managed that hotel from 1991 until the closing of the IPO
in June 1994. Mr. Winston developed, directly or through affiliated entities,
three hotels purchased by the Company in 1996. Mr. Winston is Charles Winston's
son and James Winston's nephew.
JAMES D. ROSENBERG. Mr. Rosenberg assumed the title of President on January
14, 1999. Mr. Rosenberg has also served as Chief Operating Officer and Chief
Financial Officer since January 5, 1998 and as Secretary from May 5, 1998. Mr.
Rosenberg is a CPA and a graduate of Presbyterian College and received an MBA
from the University of South Carolina. Prior to joining the Company, Mr.
Rosenberg held the position of Senior Vice President with Holiday Inn Worldwide
since 1994 where he was responsible for managing 85 hotels in seven countries.
Prior to joining the Holiday Inn organization, Mr. Rosenberg was a partner in
Sage Hospitality Resources and served as Executive Vice President and Chief
Financial Officer of the Denver-based hospitality firm. From 1989 to 1993, Mr.
Rosenberg served as Chief Operating Officer of Crossroads Hospitality, a
division of Pittsburgh-based Interstate Hotel Corporation. Mr. Rosenberg started
his career with Price Waterhouse, L.L.P.
JOSEPH V. GREEN. Mr. Green assumed the responsibilities of Executive Vice
President - Acquisitions and Finance effective January 1, 1998, after having
advised Winston Hospitality, Inc. on matters regarding hotel acquisitions and
finance since 1993, including the initial public offering of Winston Hotels,
Inc. Mr. Green is a graduate of East Carolina University, was awarded his J.D.
degree from Wake Forest University School of Law and received a Master of Laws
in Taxation from Georgetown University.
KENNETH R. CROCKETT. Mr. Crockett was appointed Senior Vice President of
Development of the Company in September 1995 and Executive Vice President of
Development in January 1998. Mr. Crockett is a graduate of the University of
North Carolina at Chapel Hill with a B.S. degree in Business Administration.
Prior to joining the Company, Mr. Crockett was an Associate Partner for project
development in commercial real estate at Capital Associates, a real estate
development firm located in the Raleigh, North Carolina area. 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:
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1998 1997
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Room Lease Room Lease
# Revenues Occupancy Revenues # Revenues Occupancy Revenues
Rooms ($000) ADR % ($000) Rooms ($000) ADR % ($000)
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Hampton Inns
Boone, NC 95 $ 1,842 $ 71.16 74.65% $ 758 95 $ 1,819 $64.17 81.77% $ 751
Brunswick, GA 128 2,265 55.67 87.08% 954 128 2,092 56.96 79.14% 849
Cary, NC 130 2,455 65.89 78.52% 1,126 130 2,592 64.16 85.15% 1,230
Charlotte, NC 125 2,831 76.11 81.52% 1,368 125 2,695 70.53 83.75% 1,288
Chester, VA 66 1,396 69.47 83.42% 626 66 1,360 68.02 83.02% 607
Duncanville, TX 119 1,425 49.40 66.41% 519 119 1,425 47.76 68.68% 527
Durham, NC 137 2,858 69.64 82.08% 1,308 137 2,921 69.50 84.03% 1,358
Gwinnett, GA (Hampton Inn & Suites) 136 2,728 77.28 71.11% 1,386 135 2,696 72.99 74.60% 1,373
Hilton Head, SC 124 2,285 71.08 71.03% 923 125 2,062 65.16 69.90% 786
Jacksonville, NC 120 2,033 57.83 80.26% 860 120 1,955 53.62 83.24% 816
Las Vegas, NV* 128 1,010 60.72 57.50% 500 -- -- -- -- --
Perimeter, GA 131 2,641 78.03 70.78% 1,356 131 2,610 77.39 70.54% 1,343
Raleigh, NC 141 2,966 70.46 81.79% 1,423 141 2,936 66.60 85.65% 1,411
Southern Pines, NC 126 1,968 57.09 74.95% 793 126 1,887 53.72 76.39% 749
Southlake, GA 124 2,097 63.03 73.51% 838 124 2,107 63.77 72.99% 854
W. Springfield, MA 126 2,484 74.99 72.03% 1,122 126 2,291 70.74 70.42% 994
White Plains, NY 156 4,482 97.34 80.86% 2,235 156 4,000 91.18 77.04% 1,908
Wilmington, NC 118 2,275 66.93 78.93% 974 118 2,304 67.30 79.49% 1,001
Comfort Inns
Augusta, GA 123 1,471 52.76 62.10% 514 123 1,462 50.47 64.53% 517
Charleston, SC 128 2,548 70.40 77.47% 1,211 128 2,426 68.21 76.13% 1,138
Chester, VA 122 2,105 65.95 71.61% 960 123 2,131 67.09 70.76% 985
Clearwater/St. Petersburg, FL 120 1,850 53.18 79.42% 708 120 1,739 51.76 76.70% 644
Durham, NC 138 2,797 70.39 78.89% 1,359 138 2,887 70.64 81.14% 1,429
Fayetteville, NC 176 2,358 54.45 67.41% 1,081 176 2,487 52.24 74.10% 1,179
Greenville, SC 190 1,758 47.09 53.83% 569 190 1,540 49.90 44.43% 385
London, KY (Comfort Suites) 62 955 55.83 75.59% 408 62 900 54.14 73.50% 374
Orlando, FL (Comfort Suites) 214 4,027 59.35 86.70% 1,840 215 4,117 59.89 87.60% 1,908
Raleigh, NC 149 1,636 48.52 61.99% 556 149 1,646 49.85 60.72% 569
Wilmington, NC 146 2,423 57.13 79.59% 1,040 146 2,470 59.45 77.98% 1,081
Homewood Suites
Alpharetta, GA* 112 1,229 91.51 53.53% 577 -- -- -- -- --
Cary, NC 120 3,363 91.92 83.53% 2,060 140 3,448 80.03 84.31% 2,221
Clear Lake, TX 92 2,636 96.37 81.46% 1,237 92 2,514 93.26 80.29% 1,163
Durham, NC* 96 171 72.95 42.10% 135 -- -- -- -- --
Lake Mary, FL* 112 1,398 87.40 59.26% 650 -- -- -- -- --
Phoenix, AZ* 126 997 69.87 52.92% 617 -- -- -- -- --
Raleigh, NC* 137 1,720 82.55 51.21% 954 -- -- -- -- --
Holiday Inns
Abingdon, VA (Holiday Inn Express) 81 1,397 62.55 75.55% 675 81 1,292 58.38 75.11% 607
Clearwater, FL (Holiday Inn Express) 127 2,196 63.48 74.62% 937 127 2,229 58.73 81.88% 966
Dallas, TX (Holiday Inn Select) 244 4,503 74.66 67.73% 2,126 244 4,695 73.48 71.75% 2,263
Secaucus, NJ# 160 5,305 109.79 82.74% 2,748 160 5,001 97.02 85.44% 2,549
Tinton Falls, NJ# 171 3,946 86.75 72.88% 1,286 171 3,554 78.90 72.16% 1,098
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1998 1997
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Room Lease Room Lease
# Revenues Occupancy Revenues # Revenues Occupancy Revenues
Rooms ($000) ADR % ($000) Rooms ($000) ADR % ($000)
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Courtyard by Marriott
Ann Arbor, MI 160 3,855 87.16 75.73% 1,780 160 3,951 81.47 82.83% 1,846
Houston, TX 198 3,300 75.08 60.56% 1,456 202 3,489 74.20 63.78% 1,596
Wilmington, NC 128 2,517 71.87 74.97% 1,069 128 2,377 72.32 70.34% 978
Winston-Salem, NC* 122 395 73.50 48.94% 186 -- -- -- -- --
Hilton Garden Inns
Albany, NY* 155 2,086 91.56 53.45% 1,341 -- -- -- -- --
Alpharetta, GA* 164 2,593 95.32 54.21% 1,594 -- -- -- -- --
Raleigh/Durham, NC* 155 1,923 87.29 58.01% 1,113 -- -- -- -- --
Quality Suites - Charleston, SC 168 4,113 81.80 82.00% 1,910 168 3,860 78.09 80.62% 1,753
Residence Inn - Phoenix, AZ# 168 4,200 90.74 75.48% 2,251 168 4,108 96.35 69.53% 2,198
Fairfield Inn - Ann Arbor, MI 110 1,901 66.38 71.33% 748 110 1,811 61.97 72.58% 687
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TOTAL 6,904 $121,713 $ 72.14 72.11% $56,765 5,623 $105,886 $68.54 75.28% $47,979
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* Hotel opened during 1998.
# Hotel acquired during 1998.
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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 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 property also is
near an outlet shopping center and several restaurants. The hotel was acquired
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. 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 comprises the Research Triangle. The hotel was
acquired 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 is close to the Charlotte Motor Speedway, the
University of North Carolina at Charlotte, and the University Hospital. The
hotel was acquired contemporaneously with the IPO.
5. Hampton Inn -- 12610 Chestnut Hill Road, Chester (Richmond), Virginia. This
two-story, interior corridor hotel 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. 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 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 was acquired in May 1996.
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 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 was acquired
contemporaneously with the IPO.
8. Hampton Inn & Suites -- 1725 Pineland Road, Duluth (Gwinnett), 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 was acquired in July 1996.
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. The property was acquired 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. The hotel was acquired
contemporaneously with the IPO.
11. Hampton Inn -- 7100 Cascade Valley Court, Las Vegas, Nevada. This
three-story, interior corridor hotel is located on an approximately 2.7 acre
site near Mountain View Hospital and twelve miles from the Las Vegas Strip. The
hotel was acquired in May 1998.
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12. Hampton Inn -- 769 Hammond Drive, Atlanta (Perimeter), 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
was acquired in July 1996.
13. 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 Raleigh Beltline Highway, Interstate 40, the Crabtree Valley Mall and
the Raleigh-Durham International Airport, to which the hotel offers free airport
transportation. The property was acquired contemporaneously with the 1995
follow-on offering.
14. 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 was acquired
contemporaneously with the IPO.
15. Hampton Inn -- 1533 Southlake Parkway, Morrow (Southlake), 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 was
acquired contemporaneously with the IPO.
16. Hampton Inn -- 1011 Riverdale Street, West Springfield, Massachusetts. This
four-story, interior corridor hotel is located on an approximately 2.5 acre site
near Interstate 91, just a few miles from downtown West Springfield, the
Basketball Hall of Fame, and Riverside Amusement Park. The property was acquired
in July 1997.
17. Hampton Inn -- 200 Tarrytown Road, Route 119, Elmsford (White Plains), New
York. This seven-story, interior corridor hotel is located on an approximately
4.0 acre site off I-287. The hotel is 17 miles north of New York City and is
centrally located to Westchester County's major corporate headquarters such as
AT&T, Bayer, Ciba, Coca-Cola, Fuju, Hitachi, IBM, KLM, NYNEX, PepsiCo, and the
area's many corporate parks. The property was acquired in October 1997.
18. 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 was
acquired contemporaneously with the IPO.
19. 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 was acquired in May
1995.
20. 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. The property was acquired in May 1995.
21. 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. The property
was acquired in November 1994.
22. Comfort Inn -- 3580 Ulmerton Road, Clearwater/St. Petersburg, Florida. This
three-story, interior corridor hotel is located on an approximately 2.8 acre
site on Tampa Bay near Interstate 75, Busch Gardens amusement park, golf
courses, restaurants, shopping, and many gulf coast beaches. 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.
23. 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 property was acquired in November 1994.
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24. 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. The property was acquired in
November 1994.
25. 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 was
acquired in May 1996.
26. 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 the Rockcastle River which
offers whitewater sports attractions and bass fishing. The property was acquired
in May 1996.
27. Comfort Suites -- 9350 Turkey Lake Road, Orlando, Florida. This
three-story, interior corridor hotel is located on an approximately 7.0 acre
site conveniently located close to Interstate 4 and Florida Turnpike at the
International Drive area off Sand Lake Road. Nearby attractions include
Universal Studios, Sea World, Walt Disney World, and Orange County Convention
Center. The property was acquired in May 1997.
28. 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. The property was acquired in August
1994.
29. 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 and the University of North Carolina at
Wilmington. The hotel was acquired contemporaneously with the IPO.
30. Homewood Suites -- 10775 Davis Drive, Alpharetta, Georgia. This six-story,
all-suites (with full kitchen), interior corridor hotel is located on an
approximately 2.8 acre site near North Point Mall and GA 400. The hotel was
internally developed and opened in May 1998.
31. Homewood Suites -- 100 MacAlyson Court, Cary, North Carolina. This
four-story, all-suites (with full kitchen), 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 was acquired in July 1996.
32. Homewood Suites -- 401 Bay Area Boulevard, Clearlake, Texas. This
three-story, all-suites (with full kitchen), 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 was acquired in September 1996.
33. Homewood Suites -- 3600 Mount Moriah Road, Durham, North Carolina. This
four-story, all-suites (with full kitchen) interior corridor hotel is located on
an approximately 3.9 acre site near Interstate 40 and the University of North
Carolina at Chapel Hill. The hotel was internally developed and opened in
November 1998.
34. Homewood Suites -- 755 Currency Circle, Lake Mary, Florida. This five-story,
all-suites (with full kitchen), interior corridor hotel is located on an
approximately 2.8 acre site near Seminole Towne Center Mall and the Central
Florida Zoological Park. The hotel was internally developed and opened in May
1998.
35. Homewood Suites -- 2536 West Beryl Avenue, Phoenix, Arizona. This
five-story, all suites (with full kitchen), interior corridor hotel is located
on an approximately 3.1 acre site off of Interstate 17 and is near the Metro
Mall and the Castles and Coasters Amusement Park. The hotel was acquired in June
1998.
36. Homewood Suites -- 5400 Edwards Mill Road, Raleigh, North Carolina. This
seven-story, all-suites (with full kitchen), interior corridor hotel is located
on an approximately 3.8 acre near the Raleigh Beltline Highway, Interstate 40,
the Crabtree Valley Mall and the Raleigh-Durham International Airport, to which
the hotel offers free airport transportation. The hotel was internally developed
and opened in March 1998.
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37. 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, Abingdon's Historic District and the Barter Theater
(State Theater of Virginia). The property was acquired in May 1996.
38. Holiday Inn Express -- 13625 Icot Boulevard, Clearwater, Florida. This
three-story, interior corridor hotel is located on an approximately 2.4 acre
site near Interstate 75, Busch Gardens amusement park, golf courses,
restaurants, shopping, and many gulf and coast beaches in the Tampa Bay area,
and is just minutes from St. Petersburg. The property was acquired in August
1997.
39. Holiday Inn Select -- 11350 LBJ Freeway, Garland (Dallas), 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 approximately 9,800 square foot conference
center, four other meeting rooms and a 50-person auditorium. Other amenities
include a full-service restaurant and a nightclub. The property was acquired in
May 1996.
40. Holiday Inn -- 300 Plaza Drive, Secaucus, New Jersey. This eight-story,
interior corridor hotel is located on an approximately 0.57 acre site which is
adjacent to the Harmon Meadow Mall and is near the Meadowlands Sports Complex,
the Statue of Liberty and Mid-town Manhattan. This hotel offers a full-service
restaurant with evening bar and lounge. The property was acquired in May 1998.
41. Holiday Inn -- 700 Hope Road, Tinton Falls, New Jersey. This five-story,
interior corridor hotel is located on an approximately 5.2 acre site located
near Monmouth Park Racetrack, the Garden State Parkway and Fort Monmouth. This
hotel offers a full-service restaurant with evening bar and lounge. The property
was acquired in April 1998.
42. Courtyard by Marriott -- 3205 Boardwalk, Ann Arbor, Michigan. This
four-story, interior corridor hotel is located on an approximately 4.0 acre site
just off Interstate 94 and is adjacent to the Company's Fairfield Inn. Area
attractions include Briarwood Mall, Downtown Ann Arbor, the University of
Michigan, and the Henry Ford Museum. The property was acquired in September
1997.
43. Courtyard by Marriott -- 2504 N. Loop West, Houston, Texas. This
three-story, interior corridor hotel is located on an approximately 3.9 acre
site directly off Loop 610 and Highway 290. It is easily accessible to all major
thoroughfares around the city, and is only minutes from Downtown and the
Galleria area. The property was acquired in July 1997.
44. 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 Revolutionary and Civil War historical
sites. The property was acquired in December 1996.
45. Courtyard by Marriott -- 1600 Westbrook Plaza Drive, Winston-Salem, North
Carolina. This four-story, interior corridor hotel is located on an
approximately 3.0 acre site near Wake Forest University, Interstate 40 and
Winston-Salem State University. The hotel offers a full-service restaurant with
evening bar and lounge. The property was internally developed and opened in
October 1998.
46. Hilton Garden Inn -- 800 Albany Shaker Road, Albany, New York. This
six-story, interior corridor hotel is located on an approximately 4.0 acre site
across from the Albany International Airport. The hotel offers a full-service
restaurant and lounge. Other amenities include an indoor swimming pool, fitness
center, pantry shop and business center. Each room has a microwave, refrigerator
and state-of-the-art telecommunications connections. The property was acquired
in May 1998.
47. Hilton Garden Inn -- 4025 Windward Plaza, Alpharetta, Georgia. This
six-story, interior corridor hotel is located on an approximately 3.4 acre site
near North Point Mall and GA 400. The offers a full-service restaurant and
lounge. Other amenities include an indoor swimming pool, fitness center, pantry
shop and business center. Each room has a microwave, refrigerator and
state-of-the-art telecommunications connections. The property was acquired in
March 1998.
48. Hilton Garden Inn -- 1500 RDU Center Drive, Morrisville (Raleigh/Durham),
North Carolina. This six-story, interior corridor hotel is located on an
approximately 6.0 acre site near the Raleigh/Durham International Airport and
the Research Triangle Park. This hotel offers a full-service restaurant. Other
amenities include an indoor swimming pool, fitness center, pantry shop and
business center. Each room has a microwave, refrigerator and state-of-the-art
telecommunications connections. The property was acquired in June 1998.
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49. 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 is designed around a
five-story atrium. The property was acquired in May 1995.
50. Residence Inn - 8242 North Black Canyon Highway, Phoenix, Arizona. This
two-story, all suites (with full kitchen), exterior corridor hotel is located on
an approximately 4.9 acre site near Downtown Phoenix and the Black Canyon
commercial district. This hotel was acquired in March 1998.
51. Fairfield Inn -- 3285 Boardwalk, Ann Arbor, Michigan. This four-story,
interior corridor hotel is located on an approximately 2.5 acre site adjacent to
the Company's Courtyard by Marriott. Nearby attractions include Bearwood Mall,
Downtown Ann Arbor, the University of Michigan and the Henry Ford Museum.
Amenities include a heated indoor pool and whirlpool.
The property was acquired in September 1997.
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, neither WHI nor the
Partnership can operate hotels. Therefore, WHI and the Partnership lease the
Current Hotels for terms of 10 or 15 years pursuant to Percentage Leases, which
provide for rent equal to the greater of Base Rent or Percentage Rent. The
Percentage Leases for the Current Hotels contain the provisions described below.
The Company intends that future leases with respect to its hotel property
investments will contain substantially similar provisions, although the Company
may, in its discretion, alter any of these provisions with respect to any
particular lease, depending on the purchase price paid, economic conditions and
other factors deemed relevant at the time.
Percentage Lease Terms
Each Percentage Lease for the Current Hotels has a non-cancelable term of 10
or 15 years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Lease.
Amounts Payable Under the Percentage Leases
During the term of each Percentage Lease, the lessees are or will be
obligated to pay (i) the greater of Base Rent or Percentage Rent (collectively,
the "Rent") and (ii) certain other additional charges. Base Rent accrues and is
required to be paid monthly. Percentage Rent consists of minimum percentage rent
and excess percentage rent, if any. Minimum percentage rent is calculated based
primarily on the amount of room revenue up to a predetermined threshold per the
lease. The percentage, which differs by hotel, is multiplied by this amount to
calculate minimum percentage rent. These percentages range from 23% to 81%.
Excess percentage rent is calculated based primarily on the amount of any room
revenue in excess of the predetermined threshold mentioned above. The
percentage, which differs by hotel, is multiplied by this amount to calculate
excess percentage rent. These percentages range from 5% to 80%. For most leases,
the percentage used to calculate excess percentage rent exceeds the percentage
used to calculate the minimum percentage rent. Percentage Rent is due either
monthly or quarterly.
Beginning in the fiscal year following the year in which most Percentage
Leases commence, and for each fiscal year thereafter, (i) the annual Base Rent
and (ii) the Percentage Rent formulas will be adjusted on a quarterly or annual
basis for inflation, based on changes in the CPI. The adjustment in any quarter
may not exceed 2%, which may be less than the change in CPI for the quarter.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Company, the Percentage Leases require
the lessees to pay rent, insurance, all costs and expenses and all utility and
other charges incurred in the operation of the Current Hotels. The Percentage
Leases also provide for rent reductions and abatements in the event of damage
to, destruction of or a partial taking of any Current Hotel.
Maintenance and Modifications
Under the Percentage Leases, the Company is required to maintain the
underground utilities and the structural elements of the improvements, including
exterior walls (excluding plate glass) and the roof of such Current Hotel. In
addition, the Percentage Leases obligate the Company to fund periodic capital
improvements (in addition to maintenance of underground utilities and structural
elements) to the buildings and grounds comprising their respective Current
Hotels, and the periodic repair, replacement and refurbishment of furniture,
fixtures and equipment in their respective Current Hotels, up to an amount equal
to 5% of room revenues
15
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(7% of room revenues and food and beverage revenue for one of its full-service
hotels). These obligations will be carried forward to the extent that the
lessees have not expended such amounts, and any unexpended amounts will remain
the property of the Company upon termination of the Percentage Leases. Except
for capital improvements and maintenance of structural elements and underground
utilities, the lessees are required, at their expense, to maintain the Current
Hotels in good order and repair, except for ordinary wear and tear, and to make
non-structural, foreseen and unforeseen, and ordinary and extraordinary repairs
which may be necessary and appropriate to keep the Current Hotels in good order
and repair.
The lessees are not obligated to bear the cost of capital improvements to
the Current Hotels. With the consent of the Company, however, the lessees, at
their expense, may make non-capital and capital additions, modifications or
improvements to the Current Hotels, provided that such action does not
significantly alter the character or purposes of the Current Hotels or
significantly detract from the value or operating efficiencies of the Current
Hotels. All such alterations, replacements and improvements shall be subject to
all the terms and provisions of the Percentage Leases and will become the
property of the Company upon termination of the Percentage Leases. The Company
owns or will own substantially all personal property not affixed to, or deemed a
part of, the real estate or improvements thereon comprising 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.
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 lessees have 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, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
On August 11, 1997, Common Stock shares in the Company began trading on the
New York Stock Exchange ("NYSE") under the symbol "WXH." Prior to this date, the
Common Stock was traded on the Nasdaq National Market under the symbol "WINN."
As of March 15, 1999, the Company had approximately 17,000 common shareholders
based on the number of shareholders of record and an estimate of the number of
participants represented by security position listings. The following table sets
forth, for the indicated periods, the high and low closing prices for the Common
Stock as traded on the Nasdaq National Market or the NYSE, as applicable, and
the cash distributions declared per share:
PRICE RANGE
----------- CASH DISTRIBUTIONS DECLARED
HIGH LOW PER SHARE
---- --- ---------
1998
First Quarter $13.875 $12.813 $0.27
Second Quarter 13.50 11.25 0.27
Third Quarter 12.125 8.563 0.27
Fourth Quarter 9.50 6.938 0.28
1997
First Quarter $14.00 $12.875 $0.27
Second Quarter 15.063 12.125 0.27
Third Quarter 14.625 13.063 0.27
Fourth Quarter 14.375 13.00 0.27
Although the declaration of distributions is within the discretion of the
Board of Directors and depends on the Company's results of operations, cash
available for distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Directors, the Company's policy is to make regular
quarterly distributions to its shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
In the year ended December 31, 1998, the Company issued the following
securities which were not registered pursuant to the Securities Act of 1933, as
amended:
In January 1998, the Company issued David C. Sullivan, a Director, 5,687
shares of the Company's Common Stock for compensation for services to be
rendered as a director. These shares were granted under the Director's Stock
Incentive Plan and vest at the rate of 20% on the date of the grant and 20% per
year thereafter. Mr. Sullivan is entitled to vote and receive the dividends paid
on such shares prior to vesting.
Pursuant to the Partnership Agreement of the Partnership, the Partnership's
limited partners have 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.
In March 1998, Mr. John B. Harris, Jr., redeemed 30,813 Partnership Units in
exchange for shares of Common Stock on a one-for-one basis.
No underwriter was engaged in connection with the foregoing issuances of
securities. Issuances of Common Stock 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.
17
18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company
for the years ended December 31, 1998, 1997, 1996, 1995 and for the period June
2, 1994 (date of inception) through December 31, 1994 and selected historical
balance sheet data as of December 31, 1998, 1997, 1996, 1995 and 1994. This
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included elsewhere in this report.
WINSTON HOTELS, INC.
Selected Historical Financial and Other Data
For the years ended December 31, 1998, 1997, 1996 and 1995
and the period June 2, 1994 (date of inception) through December 31,1994
(in thousands, except per share amounts)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENTS OF INCOME:
Revenue:
Percentage lease revenue $ 54,700 $ 35,868 $ 26,611 $ 17,148 $ 5,116
Interest and other income 249 234 97 442 92
--------- --------- --------- --------- --------
Total revenue 54,949 36,102 26,708 17,590 5,208
--------- --------- --------- --------- --------
Expenses:
Real estate and personal property taxes and
casualty insurance 5,017 2,702 1,647 1,054 362
General and administrative 3,692 2,021 1,985 1,208 339
Interest expense 8,637 3,066 2,665 2,555 218
Depreciation 16,389 10,064 6,476 3,854 1,176
Amortization 339 176 147 117 49
--------- --------- --------- --------- --------
Total expenses 34,074 18,029 12,920 8,788 2,144
--------- --------- --------- --------- --------
Income before allocation to minority interest 20,875 18,073 13,788 8,802 3,064
Income allocation to minority interest 1,349 1,329 786 417 187
--------- --------- --------- --------- --------
Net income 19,526 16,744 13,002 8,385 2,877
Preferred stock distribution 6,938 2,100 -- -- --
--------- --------- --------- --------- --------
Net income available to common shareholders $ 12,588 $ 14,644 $ 13,002 $ 8,385 $ 2,877
========= ========= ========= ========= ========
Earnings per share:
Net income per common share $ 0.77 $ 0.92 $ 1.01 $ 0.96 $ 0.42
========= ========= ========= ========= ========
Net income per common share assuming dilution $ 0.77 $ 0.91 $ 1.00 $ 0.96 $ 0.42
========= ========= ========= ========= ========
Weighted average number of common shares 16,286 15,990 12,922 8,715 6,775
Weighted average number of common shares
assuming dilution 18,040 17,555 13,768 9,167 7,211
Distributions per common share $ 1.09 $ 1.08 $ 1.005 $ 0.93 $ 0.48
BALANCE SHEET DATA:
Cash and cash equivalents $ 33 $ 164 $ 234 $ 2,496 $ 1,114
Investment in hotel properties 397,861 279,485 196,682 121,886 85,917
Total assets 412,156 287,827 203,502 123,969 88,114
Total debt 173,085 44,081 42,800 34,000 28,600
Shareholders' equity 213,425 217,490 141,813 80,872 53,705
OTHER DATA:
Lessees room revenue $ 117,752 $ 79,526 $ 58,956 $ 39,677 $ 12,474
Funds from operations (1) 30,326 26,037 20,581 12,656 4,240
Cash available for distribution 24,093 21,809 17,557 11,185 3,866
Cash provided by (used in):
operating activities 34,605 27,811 18,729 12,628 3,417
investing activities (135,398) (82,349) (74,614) (36,059) (85,973)
financing activities 100,662 54,468 53,623 24,813 83,670
18
19
(1) Funds from operations, as defined by NAREIT, is income (loss) before
minority interest (determined in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales of
properties plus real estate-related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures.
The following table sets forth selected financial information for Winston
Hospitality, Inc. for the ten-months ended October 31, 1997 and 1996 and the
years ended December 31, 1996 and 1995 and for the period June 2, 1994 (date of
inception) through December 31, 1994. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto included
elsewhere in this report.
Winston Hospitality, Inc.
Selected Historical Financial Data
For the ten-months ended October 31, 1997 and 1996
and the years ended December 31, 1996 and 1995
and the period June 2, 1994 (date of inception) through December 31, 1994
(in thousands)
PERIOD JUNE 2,
TEN MONTHS ENDED OCTOBER 31, YEARS ENDED DECEMBER 31, 1994 THROUGH
1997 1996 1996 1995 DECEMBER 31, 1994
---- ---- ---- ---- -----------------
(unaudited)
Room revenue $67,145 $49,633 $58,956 $39,677 $12,474
Other revenue 3,944 2,390 2,969 1,100 229
------- ------- ------- ------- -------
Total revenue 71,089 52,023 61,925 40,777 12,703
------- ------- ------- ------- -------
Property and operating expenses 38,292 27,965 34,549 22,097 7,297
Percentage lease payments 30,980 22,800 26,611 17,148 5,116
------- ------- ------- ------- -------
Total expenses 69,272 50,765 61,160 39,245 12,413
------- ------- ------- ------- -------
Net income $ 1,817 $ 1,258 $ 765 $ 1,532 $ 290
======= ======= ======= ======= =======
The following table sets forth selected financial information for CapStar
Winston for the year ended December 31, 1998 and the period October 15, 1997
(date of inception) through December 31, 1997. This information should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements and notes thereto
included elsewhere in this report.
Capstar Winston Company, L.L.C.
Selected Historical Financial Data
for the year ended December 31, 1998 and
the period October 15, 1997 (date of inception)
through December 31, 1997
(in thousands)
PERIOD OCTOBER 15,
YEAR ENDED 1997 THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Room revenue $113,451 $ 8,197
Other revenue 12,182 846
-------- -------
Total revenue 125,633 9,043
-------- -------
Rooms expense 25,664 2,158
Percentage lease expense 52,720 3,242
Other expenses 46,653 3,704
-------- -------
Total expenses 125,037 9,104
-------- -------
Net income (loss) $ 596 $ (61)
======== =======
19
20
The following table sets forth selected financial information for the Initial
Hotels for the five months ended June 2, 1994.
COMBINED INITIAL HOTELS
Selected Historical Financial Data
For the five months ended June 2, 1994
(in thousands)
1994
------
Revenue:
Room revenue $7,415
Other, 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
======
20
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ($ IN THOUSANDS)
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 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 eight hotels and opened five internally developed hotels in 1998 (the
"1998 Hotels"). It currently leases 49 of the total 51 Current Hotels to CapStar
Winston Company, L.L.C. ("CapStar Winston"), one of the Current Hotels to
Bristol Hotels & Resorts, Inc. ("Bristol") and one of the Current Hotels to
Prime Hospitality Corp. ("Prime") under leases that provide for rent payments
based, in part, on revenues from the Current Hotels ("Percentage Leases")
through which it receives its principal source of revenue.
Prior to November 17, 1997, the Current Hotels were leased pursuant to the
Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and November
24, 1997, CapStar Management Company, L.P. purchased substantially all of the
assets and assumed certain liabilities of Winston Hospitality, Inc., including
the Current Hotels' leases. Concurrent with the transaction, the leases were
assigned to CapStar Winston, an affiliate of CapStar Management Company, L.P.,
and the terms of the leases were extended to 15 years from the date of the
transaction.
CapStar Winston is a wholly owned subsidiary of MeriStar Hotels and Resorts,
Inc. ("MeriStar"). As of February 2, 1999, MeriStar, the nation's largest
independent hotel management company, leased or managed (including five under
contract) 216 hotels with 44,831 rooms in 32 states, the District of Columbia,
Canada and the U.S. Virgin Islands.
RESULTS OF OPERATIONS
For the periods ended December 31, 1998, 1997, and 1996, the differences in
operating results are primarily attributable to the Company owning more hotels
in 1998 than it did in 1997 and owning more hotels in 1997 than it did in 1996.
The table below outlines the Company's hotel properties owned as of December 31,
1998, 1997 and 1996:
December 31, 1998 December 31, 1997 December 31, 1996
------------------------------- -------------------------------- --------------------------------
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 1 29 4 28 7 24
Extended-stay hotels 6 11 1 5 2 4
Full-service hotels 6 11 2 5 1 3
-- -- -- -- -- --
Total 13 51 7 38 10 31
== == == == == ==
* Five of the total 13 hotels added in 1998 were internally-developed
properties.
In order to present a more meaningful comparison of operations, the
following comparisons are presented:
THE COMPANY:
o actual operating results for the year ended December 31, 1998 versus actual
operating results for the year ended December 31, 1997;
o actual operating results for the year ended December 31, 1997 versus actual
operating results for the year ended December 31, 1996;
o pro forma operating results for the year ended December 31, 1998 versus pro
forma operating results for the year ended December 31, 1997, as if the
Preferred Stock offering and the addition of the 1998 Hotels and 1997
Acquired Hotels occurred on the later of January 1, 1997 or the hotel
opening date;
o pro forma operating results for the year ended December 31, 1997 versus pro
forma operating results for the year ended December 31, 1996, as if the
follow-on Common Stock offerings, the Preferred Stock offering and the
addition of the 1997 Acquired Hotels and the 1996 Acquired Hotels occurred
on the later of January 1, 1996 or the hotel opening date.
21
22
WINSTON HOSPITALITY, INC.:
o actual operating results for the ten months ended October 31, 1997 versus
actual operating results for the ten months ended October 31, 1996.
CAPSTAR WINSTON COMPANY, L.L.C.:
During November 1997, CapStar Management Company, L.P. purchased
substantially all of the assets and assumed certain liabilities of Winston
Hospitality, Inc., including all 38 of the then existing Current Hotels'
leases. Concurrent with the purchase, CapStar Management Company, L.P.
contributed/assigned the assets purchased and liabilities assumed in the
transaction to CapStar Winston.
Since CapStar Winston operated for a partial year in 1997 (November and
December) and for a full year in 1998, the operating results of these two
periods are very different and difficult to compare. Thus, no management
discussion and analysis will be included herein. (See Item 14 for CapStar
Winston's financial statement disclosure.)
THE COMPANY
ACTUAL - YEAR ENDED DECEMBER 31, 1998 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1997
The Company had revenues of $54,949 in 1998, consisting of $54,700 of
Percentage Lease revenues and $249 of interest and other income. Percentage
Lease revenues increased $18,832, or 53%, in 1998 from $35,868 in 1997. This
increase was attributable to (i) $12,132 related to the 1998 Hotels; (ii) $6,479
related to the 1997 Acquired Hotels owned for the entire 12-month period in
1998; and (iii) an increase of $221 in lease revenues generated from the hotels
owned as of December 31, 1996.
Real estate taxes and property insurance costs incurred in 1998 were $5,017,
an increase of $2,315 from $2,702 in 1997. $940 of this increase was
attributable to the 1998 Hotels and $813 was due to the 1997 Acquired Hotels
that were owned for the entire 12-month period in 1998. The remaining increase
was due to an increase in assessed values and rates. General and administrative
expenses increased $1,671 to $3,692 in 1998 from $2,021 in 1997. The increase
was primarily attributable to (i) an increase in the number of employees and
related compensation expense throughout the year; (ii) costs related to the
increase in size and activities of the Company in 1998 over 1997; as well as
(iii) advertising costs associated with the opening of five internally developed
hotels during 1998. Interest expense increased $5,571 to $8,637 in 1998 from
$3,066 in 1997, primarily due to an increase in weighted-average outstanding
borrowings from $48,842 in 1997 to $116,296 in 1998. This increase was due to
the borrowings necessary to acquire and develop the 1998 Hotels as well as an
increase in renovation activity in 1998. Interest rates remained relatively flat
from 1997 to 1998. Depreciation increased $6,325 to $16,389 in 1998 from $10,064
in 1997, primarily due to depreciation related to the 1998 Hotels, the 1997
Acquired Hotels and renovations completed during 1998 and 1997.
ACTUAL - YEAR ENDED DECEMBER 31, 1997 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1996
The Company had revenues of $36,102 in 1997, consisting of $35,868 of
Percentage Lease revenues and $234 of interest and other income. Percentage
Lease revenues increased $9,257, or 35%, in 1997 from $26,611 in 1996. This
increase was attributable to (i) $3,639 related to the 1997 Acquired Hotels;
(ii) $4,889 related to the 1996 Acquired Hotels owned for the entire 12-month
period in 1997; and (iii) an increase of $729 in lease revenues generated from
hotels acquired prior to 1996.
Real estate taxes and property insurance costs incurred in 1997 were $2,702,
an increase of $1,055 from $1,647 in 1996. This increase was primarily
attributable to the 1997 Acquired Hotels and the 1996 Acquired Hotels that were
owned for the entire 12-month period in 1997. General and administrative
expenses increased $36 to $2,021 in 1997 from $1,985 in 1996. This increase was
attributable to additional overhead costs related to increased activities of the
Company in 1997 and approximately $265 in one-time costs incurred in 1997 with
both listing the Company's Common Stock on the NYSE and changes in the financial
management staff. These increases were partly offset by the increase in internal
time of the development and construction department devoted to development
projects and a non-recurring charge of $317 incurred in 1996 related to the
termination of a potential business combination. Interest expense increased $401
to $3,066 in 1997 from $2,665 in 1996. The increase was attributable to (i) $28
related to the increase in weighted average interest rates from 1996 to 1997;
(ii) $1,133 related to the increase in weighted average borrowings from 1996 to
1997; and (iii) $377 of increased amortization on line of credit fees and unused
line of credit fees in connection with the $125,000 line of credit which was
obtained in the fourth quarter of 1996. These increases were offset in part by a
$1,137 increase in capitalized interest costs from 1996 to 1997. Depreciation
increased $3,588 to $10,064 in 1997 from $6,476 in 1996, primarily due to
additional depreciation related to the 1997 Acquired Hotels, the 1996 Acquired
Hotels and renovations completed during 1997 and 1996.
22
23
PRO FORMA YEAR ENDED DECEMBER 31, 1998 VERSUS PRO FORMA YEAR ENDED DECEMBER 31,
1997
The Company had pro forma revenues of $56,650 for the year ended December
31, 1998, consisting of $56,401 of pro forma Percentage Lease revenues and $249
of pro forma interest and other income. Pro forma Percentage Lease revenues
increased $8,781, or 18%, to $56,401 in 1998 from $47,620 in 1997. Of this
increase, $7,667 was attributable to the opening of 10 hotel properties in 1998
(the "1998 New Hotels") and the remaining increase of $1,114 was primarily due
to an increase in room rates in 1998 from 1997.
Pro forma real estate taxes and property insurance costs incurred in 1998
were $5,257, an increase of $1,163 from $4,094 in 1997. This increase was
primarily attributable to the 1998 New Hotels and an increase in tax rates and
assessed values in 1998. Pro forma general and administrative expenses increased
$1,607 to $3,701 in 1998 from $2,094 in 1997. The increase was primarily
attributable to (i) an increase in the number of employees and related
compensation expense throughout the year; (ii) costs related to the increase in
size and activities of the Company in 1998 over 1997; as well as (iii)
advertising costs associated with the opening of five internally developed
hotels during 1998. Pro forma interest expense increased $4,852 to $8,912 in
1998 from $4,060 in 1997. The increase was primarily due to an increase in
weighted average borrowings from $68,957 in 1997 to $137,932 in 1998, which
resulted from borrowings made to acquire and develop the 10 hotel properties
opened in 1998. Interest rates remained flat from 1997 to 1998. Pro forma
depreciation increased $4,262 to $16,720 in 1998 from $12,458 in 1997, primarily
due to additional depreciation related to the 1998 New Hotels and renovations
completed during 1998 and 1997.
PRO FORMA - YEAR ENDED DECEMBER 31, 1997 VERSUS PRO FORMA - YEAR ENDED DECEMBER
31, 1996
The Company had pro forma revenues of $42,462 for the year ended December
31, 1997, consisting of $42,134 of pro forma Percentage Lease revenues and $328
of pro forma interest and other income. Pro forma Percentage Lease revenues
increased $3,652, or 9%, to $42,134 in 1997 from $38,482 in 1996. Of this
increase, $1,578 was attributable to an increase in room rates in 1997 from 1996
and $2,074 was attributable to the opening of three hotel properties in 1996
(the "1996 New Hotels").
Pro forma real estate taxes and property insurance costs incurred in 1997
were $3,072, an increase of $544 from $2,528 in 1996. This increase was
primarily attributable to the 1996 New Hotels and an increase in property tax
values in 1997. Pro forma general and administrative expenses decreased $27 to
$2,056 in 1997 from $2,083 in 1996. The decrease was primarily attributable to a
non-recurring charge of $317 in 1996 related to the termination of potential
business combinations, offset in part by a non-recurring charge of $265 in 1997
related to listing the Company's Common Stock on the NYSE and changes in the
financial management staff. Pro forma depreciation increased $1,411 to $10,920
in 1997 from $9,509 in 1996 primarily due to depreciation of the 1996 New Hotels
and renovations completed during 1997 and 1996.
WINSTON HOSPITALITY, INC.
ACTUAL - TEN MONTHS ENDED OCTOBER 31, 1997 VERSUS ACTUAL - TEN MONTHS ENDED
OCTOBER 31, 1996
Total revenues increased $19,066, or 37% to $71,089 from $52,023. This
increase was primarily attributable to an increase in room revenues of $17,512,
or 35% to $67,145 from $49,633. The increase in room revenues included: (i) an
increase of $5,220 for the 1997 Acquired Hotels; (ii) an increase of $11,275 for
the 1996 Acquired Hotels; and (iii) an increase of $1,017 for the hotels
acquired prior to 1996. Food and beverage revenue totaled $2,419 in 1997
compared to $1,240 in 1996, an increase of $1,179. This increase was
attributable primarily to the fact that the one full-service hotel was operated
for less than six of 10 months in 1996 versus 10 months in 1997.
Winston Hospitality, Inc. had total expenses in 1997 of $69,272, up $18,507
from $50,765 in 1996. The increase was attributable primarily to the operation
of a greater number of hotels for the 10 months ended October 31, 1997 as
compared with the same period of 1996.
In addition, the net income of Winston Hospitality, Inc. was positively
impacted during the 10 months ended October 31, 1997, when compared with the 10
months ended October 31, 1996, by the following conditions: (i) an increase in
the average daily rate from 1996; (ii) a short-term management contract for the
full-service hotel in Garland, Texas in 1996; and (iii) the unseasonably cold
weather experienced during the first quarter of 1996.
23
24
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,
1998, cash flow provided by operating activities was $34,605 and funds from
operations, which is equal to net income before allocation to minority interest,
plus depreciation, less preferred share distributions, was $30,326. 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 1998, the Company declared distributions of $24,718 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, 1998 totaled $135,398, primarily relating to the purchase and
development of the 1998 Hotels and renovation of the 1997 Acquired Hotels.
During 1998, the Company spent $12,354, or 10.5% of lessee room revenue, in
connection with the renovation of its Current Hotels. These capital expenditures
were well in excess of the 5% of room revenues for its hotels (7% of room
revenues and food and beverage revenues for one of its full service hotels)
which the Company is required to spend under its Percentage Leases for periodic
capital improvements and the refurbishment and replacement of furniture,
fixtures and equipment at its Current Hotels. These capital expenditures are
expected to be funded from operating cash flow, and possibly from borrowings
under the Company's line of credit, which sources are expected to be adequate to
fund such capital requirements. These capital expenditures are in addition to
amounts spent on normal repairs and maintenance which have approximated 5.3% and
5.2% of room revenues in 1998 and 1997, respectively, and are paid by the
lessees.
The Company's net cash provided by financing activities in the year ended
December 31, 1998 totaled $100,662. This amount included $71,000 of proceeds
from the closing of a loan through GE Capital Corporation in November 1998,
$23,619 of proceeds from additional borrowings under its $125,000 line of credit
and $34,385 of proceeds from borrowings under various demand notes. These
proceeds were offset in part by the payment of distributions to shareholders of
$24,886 and the payment of distributions to the Partnership's minority interest
of $1,886.
On February 1, 1999, the Company entered into a new three-year, $140,000
line of credit agreement with a group of four banks led by Wachovia Bank of
North Carolina, N.A. The Company has collateralized the line of credit with 29
of its Current Hotels. The line of credit bears interest generally at rates from
LIBOR plus 1.45% to LIBOR plus 1.70%, based primarily upon the Company's level
of total indebtedness. The Company's current rate is LIBOR plus 1.45%. The
Company's Articles of Incorporation (the "Articles") limit its total amount of
indebtedness to 45% of the investments in hotel properties at cost, as defined
in the Articles. In connection with the 1999 Annual Meeting of Shareholders, the
Board of Directors has recommended, and the shareholders will vote, with respect
to an increase in the debt limitation contained in the Articles to 60% of the
investments in hotel properties at cost, as defined in the Articles.
The Company intends to acquire and develop additional hotel properties that
meet its investment criteria and is continually evaluating acquisition
opportunities. It is expected that future hotel acquisitions will be financed,
in whole or in part, from additional follow-on offerings, from borrowings under
the line of credit, from joint venture agreements, from the sale of hotel
properties and/or from the issuance of other debt or equity securities. There
can be no assurances that the Company will make an investment in any additional
hotel properties that meet its investment criteria.
During 1998, the Company opened five internally developed hotels. The
following table sets forth certain information for each project.
HOTEL AND LOCATION ROOMS DEVELOPMENT COSTS (APPX.) COMPLETION DATE
------------------ ----- ------------------------- ---------------
Homewood Suites
Crabtree Valley
Raleigh, NC 137 $13,100 March 9, 1998
Homewood Suites
Lake Mary, FL 112 10,000 May 5, 1998
Homewood Suites
Alpharetta, GA 112 10,200 May 22, 1998
Courtyard by Marriott
Winston-Salem, NC 122 8,000 October 3, 1998
Homewood Suites
Durham, NC 96 9,500 November 4, 1998
24
25
SEASONALITY
The Company's operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above the minimum equal quarterly levels to be paid
as Percentage Rent, can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases.
YEAR 2000 MANAGEMENT
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If the computer
programs of the Company or one of its service providers, contractors, or
suppliers, are not Year 2000 compliant, they may recognize a date using "00" as
the Year 1900 rather than the Year 2000. If not corrected, this could result in
a system failure or miscalculations causing disruptions of operations.
The Company has identified its Year 2000 risk in three categories: internal
software and embedded chip technology, external noncompliance by service
providers, contractors and suppliers, and external noncompliance by franchisors
and lessees.
Internal Software and Embedded Chip Technology
The Company has begun its data gathering and testing phase with regard to
internal software and Embedded chip technology, with the assistance of its
systems integration consultants. Virtually all of the Company's internal
software are current versions of off-the-shelf, name-brand software. The
Company's hardware systems, which include computer hardware, a phone system,
copiers and facsimile machines, also contain embedded chip technology which
could pose a risk of noncompliance. The majority of this hardware has been
installed in the last twelve months. Based on the results of our data gathering
and tests to date, the cost of achieving Year 2000 compliance is not expected to
be material. If any of the Company's current software or hardware is not Year
2000 compliant and is not repairable, the Company plans to replace the
respective software or hardware with readily available Year 2000 compliant
software or hardware. Full compliance is expected by the third quarter of 1999.
External Noncompliance by Service Providers, Contractors and Suppliers
The Company has identified and contacted its significant service providers,
contractors and suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
It is expected that identification of any Year 2000 exposure with these parties
will be completed by April 30, 1999. To the extent that responses to Year 2000
readiness are unsatisfactory, the Company's contingency plan is to attempt to
change significant service providers, contractors or suppliers to those who have
demonstrated Year 2000 readiness, but cannot be assured that it will be
successful in finding such alternative service providers, contractors or
suppliers. The Company has received information concerning the Year 2000
compliance status of several of its significant service providers, contractors
or suppliers. At this time, some of the service providers, contractors and
suppliers have indicated they are already Year 2000 compliant, however, most
have responded that they are in the process of becoming Year 2000 compliant.
None have indicated that they will not be Year 2000 compliant by December 31,
1999. In the event that any of the Company's significant service providers,
contractors or suppliers do not successfully and timely achieve Year 2000
compliance, and the Company is unable to replace them with alternate service
providers, contractors or suppliers, the Company's business or operations could
be materially and adversely affected.
External Noncompliance by Franchisors and Lessees
The Company has significant relationships with certain nationally recognized
hotel franchisors and lessees. These franchisors have national reservation
systems on which the Company relies to receive a significant portion of its
Percentage Lease revenue. The Company has contacted these franchisors and
lessees to identify the extent to which the Company is vulnerable to those third
parties' failure to remedy their own Year 2000 issues. The Company has received
initial responses that these franchisors and lessees are working on Year 2000
compliance. The Company intends to follow-up with the franchisors and lessees
during the second quarter of 1999 to determine the extent of these third
parties' Year 2000 readiness and to determine if any contingency plans of the
Company will be necessary. In the event that any of these franchisors and
lessees do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be materially and adversely affected.
Historical costs incurred to address the Year 2000 problem include approximately
$300. The Company has not yet developed a final cost estimate related to fixing
Year 2000 issues.
25
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 August 1, 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1998, the Company's exposure to market risk for a change in
interest rates related solely to its debt outstanding under its $45 million
revolving demand note and its $125 million line of credit (the "Facilities").
Total debt outstanding under the Facilities totaled $102.085 million at December
31, 1998. The Company does not enter into derivative or interest rate
transactions for speculative purposes.
The Company had $71 million in debt at December 31, 1998 that was subject to a
fixed interest rate and principal payments. This debt is comprised of the
Company's 25-year loan with GE Capital Corporation, which carries an interest
rate of 7.375% for the first 10 years.
As of December 31, 1998, the Company was exposed to changes in interest rates
primarily as a result of its debt outstanding under the Facilities. The
Facilities were used to maintain liquidity and fund the Company's business
operations, hotel acquisitions, development and major renovations. Pursuant to
the Company's operating strategies, it maintains minimal cash balances and is
substantially dependent upon, among other things, the availability of adequate
working capital financing to support hotel acquisitions, development and major
renovations. The Facilities provided the Company with a maximum borrowing
capacity of $170 million. Borrowings under the $45 million demand note bore
interest at the prime rate (7.75% as of December 31, 1998). Borrowings under the
$125 million line of credit bore interest generally at LIBOR plus 1.75%. The
weighted average interest rate on the line of credit for 1998 was 7.56%. (See
Note 5 to the financial statements.)
On February 1, 1999, the Company entered into a new $140 million line of credit
agreement (the "New Line"). Proceeds from the New Line were used to pay off the
outstanding balances under the Facilities. The New Line, which expires in
February 2002, bears interest generally at rates from LIBOR plus 1.45% to LIBOR
plus 1.70%, based, in part, on the Company's level of total indebtedness. The
Company's current interest rate is LIBOR plus 1.45%. The definitive extent of
the Company's interest rate risk under the New Line is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. The New Line, combined with the $71 million loan with GE
Capital Corporation, provides the Company with a maximum borrowing capacity of
$211 million.
The Company's long-term debt has an expiration date of December 2023. The
following table presents the aggregate maturities and historical cost amounts of
the fixed debt principal and interest rates by maturity dates at December 31,
1998:
MATURITY DATE FIXED RATE DEBT INTEREST RATE
------------- --------------- -------------
1999 $ 1,025 7.375%
2000 1,103 7.375%
2001 1,187 7.375%
2002 1,278 7.375%
2003 1,376 7.375%
Thereafter 65,031 7.375%
------- -----
$71,000 7.375%
======= =====
26
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are filed with this report
on Form 10-K immediately following the signature page and are listed in Item 14
of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the Company's directors is incorporated by reference from
pages 5 and 6, "Proposal 1 - Election of Directors", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 18, 1999. Information on the Company's executive officers is included
under the caption "Executive Officers of the Registrant" on pages 7 and 8 of
this report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from pages 8 through 12,
"Executive Compensation", in the Company's Proxy Statement to be filed with
respect to the Annual Meeting of Shareholders to be held May 18, 1999.
ITEM 12. SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
This information is incorporated by reference from pages 2 through 4, "Share
Ownership of Management and Certain Beneficial Owners", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 18, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from page 14 ,"Certain
Relationships and Related Transactions", in the Company's Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held May 18,
1999.
27
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) FINANCIAL STATEMENTS AND SCHEDULES. The financial statements and schedules
listed below are included in this report.
Financial Statements and Schedules Form 10-K Page
- ---------------------------------- --------------
WINSTON HOTELS, INC.:
Report of Independent Accountants 34
Consolidated Balance Sheets as of December 31, 1998 and 1997 35
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 36
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996 37
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 38
Notes to Consolidated Financial Statements 39
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1998 46
Notes to Schedule III 48
WINSTON HOSPITALITY, INC.:
Report of Independent Accountants 49
Balance Sheet as of October 31, 1997 50
Statements of Income for the ten-months ended October 31, 1997 and 1996 (unaudited)
and the year ended December 31, 1996 51
Statements of Shareholders' Equity for the ten months ended October 31, 1997 and
the year ended December 31, 1996 52
Statements of Cash Flows for the ten-months ended October 31, 1997 and 1996 (unaudited)
and the year ended December 31, 1996 53
Notes to Financial Statements 54
CAPSTAR WINSTON COMPANY, L.L.C.:
Independent Auditors' Report 56
Balance Sheets as of December 31, 1998 and 1997 57
Statements of Operations for the year ended December 31, 1998 and the period
from October 15, 1997
(date of inception) through December 31, 1997 58
Statements of Members' Capital (Deficit) for the year ended December 31, 1998 and the period from
October 15, 1997 (date of inception) through December 31, 1997 59
Statements of Cash Flows for the year ended December 31, 1998 and the period from October 15, 1997
(date of inception) through December 31, 1997 60
Notes to Financial Statements 61
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1998.
28
29
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are listed
below. Management contracts or compensatory plans are filed as Exhibits
10.7, 10.26, 10.27 and 10.30.
Exhibit Description
------- -----------
3.1(12) Restated Articles of Incorporation
3.2(1) Amended and Restated Bylaws
4.1(1) Specimen certificate for Common Stock, $0.01 par value per share
4.2(8) Form of Stock Certificate for 9.25% Series A Cumulative Preferred Stock
4.3(10) Restated Articles of Incorporation as amended (see Exhibits 3.1 and 3.2)
4.4(10) Amended and Restated Bylaws (see Exhibit 3.2)
10.1(6) Second Amended and Restated Agreement of Limited Partnership of WINN Limited Partnership
10.2(8) Amendment No. 1 dated September 11, 1997 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership
10.3(10) Amendment No. 2 dated December 31, 1997 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership
10.4(2) Form of Percentage Leases
10.5(9) First Amendment to Lease dated November 17, 1997 between WINN Limited Partnership and
CapStar Winston Company, L.L.C.
10.6(9) First Amendment to Lease dated November 24, 1997 between WINN Limited Partnership and
CapStar Winston Company, L.L.C.
10.7(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.8(2) Limitation of Future Hotel Ownership and Development Agreement
10.9(3) Memorandum of Understanding, dated March 15, 1996, among Winston Hotels, Inc., Winston
Hospitality, Inc. and Promus Hotels, Inc.
10.10(3) Stock Purchase Agreement, dated April 24, 1996, between Promus Hotels, Inc. and Winston
Hotels, Inc.
10.11(3) 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.
10.12(3) Option to Purchase Additional Hotels, dated April 24, 1996, between WINN Limited
Partnership and Promus Hotels, Inc.
10.13(4) 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.
10.14(4) 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.
29
30
10.15(4) 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.
10.16(5) 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 "1996
Credit Agreement")
10.17(5) 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 1996 Credit Agreement
10.18(5) 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 1996 Credit Agreement
10.19(5) 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 1996 Credit Agreement
10.20(5) 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 1996 Credit Agreement
10.21(5) Form of Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement
used to secure certain obligations under the 1996 Credit Agreement (not including
certain variations existing in the different states where the properties are located)
10.22(7) Redemption and Registration Rights Agreement, dated as of July 14, 1997 by and among
WINN Limited Partnership, Winston Hotels, Inc., certain partnerships listed and
certain partners or designees thereof listed therein
10.23(9) Guaranty dated November 17, 1997 between CapStar Hotel Company, WINN Limited Partnership
and Winston Hotels, Inc.
10.24(9) Investment Agreement dated November 17, 1997 between Winston Hotels, Inc., Robert W.
Winston, III and John B. Harris, Jr.
10.25(9) First Amendment to Credit Agreement dated November 17, 1997 between Winston Hotels, Inc.,
WINN Limited Partnership, Wachovia Bank, N.A., Branch Banking and Trust Company,
NationsBank, N.A., and SouthTrust Bank, N.A.
10.26(10) Employment Agreement, dated July 31, 1997, by and between Kenneth R. Crockett and Winston
Hotels, Inc.
10.27(11) Winston Hotels, Inc. Stock Incentive Plan as amended May 1998
10.28(12) Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated
November 3, 1998
10.29(12) Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital
Company, LLC
10.30 Winston Hotels, Inc. Executive Deferred Compensation Plan
30
31
10.31 Credit Agreement, dated as of January 15, 1999, among Wachovia Bank, N.A., Branch Banking
and Trust Company, SouthTrust Bank, N.A., Centura Bank, Winston Hotels, Inc.,
WINN Limited Partnership and Wachovia Bank, N.A. as Agent (the "Credit Agreement")
10.32 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Wachovia Bank, N.A. for the principal sum of $60,000,000 pursuant to
the Credit Agreement
10.33 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Branch Banking and Trust Company for the principal sum of $40,000,000
pursuant to the Credit Agreement
10.34 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to SouthTrust Bank, N.A. for the principal sum of $25,000,000 pursuant to
the Credit Agreement
10.35 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Centura Bank for the principal sum of $15,000,000 pursuant to the
Credit Agreement
10.36 Form of Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement
used to secure certain obligations under the Credit Agreement (not including certain
variations existing in the different states where the properties are located)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants (PricewaterhouseCoopers LLP)
23.2 Accountants' Consent (KPMG LLP)
24 Powers of Attorney
27.1 Financial Data Schedule to the Company's Form 10-K for the year ended December 31, 1998
- ------------
(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 Quarterly Report on Form 10-Q as filed with
the Securities and Exchange Commission on May 14, 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 August 14, 1996 and incorporated
herein by reference.
(5) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1997 and incorporated
herein by reference.
(6) Exhibit to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on July 24, 1997 and incorporated herein by
reference.
31
32
(7) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 8, 1997 and incorporated
herein by reference.
(8) Exhibits to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on September 15, 1997 and incorporated herein by
reference.
(9) Exhibits to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on December 10, 1997 and incorporated herein by
reference.
(10) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1998 and as amended by Form
10-K/A filed with the Securities and Exchange Commission on April 1, 1998.
(11) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission (Registration No. 333-60079) and
incorporated herein by reference.
(12) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 16, 1998 and as amended on
Form 10-Q/A filed with the Securities and Exchange Commission on February
23, 1999 and incorporated herein by reference.
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
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
* Chairman of the Board of Directors March 25, 1999
- --------------------------------------------
Charles M. Winston
/s/ Robert W. Winston, III Chief Executive Officer and Director March 25, 1999
- -------------------------------------------- (Principal Executive Officer)
Robert W. Winston, III
/s/ James D. Rosenberg President, Chief Operating Officer, Chief March 25, 1999
- -------------------------------------------- Financial Officer and Secretary
James D. Rosenberg
/s/ Brent V. West Vice President and Controller March 25, 1999
- --------------------------------------------
Brent V. West
* Director March 25, 1999
- --------------------------------------------
Edwin B. Borden
* Director March 25, 1999
- --------------------------------------------
Thomas F. Darden, II
* Director March 25, 1999
- --------------------------------------------
Richard L. Daugherty
* Director March 25, 1999
- --------------------------------------------
James H. Winston
* Director March 25, 1999
- --------------------------------------------
David C. Sullivan
*By /s/ Robert W. Winston, III
- --------------------------------------------
Robert W. Winston, III, Attorney-in-Fact
*By /s/ James D. Rosenberg
- --------------------------------------------
James D. Rosenberg, Attorney-in-Fact
33
34
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Winston Hotels, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the consolidated financial position of Winston
Hotels, Inc. as of December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule of
Winston Hotels, Inc. as listed on the index and included in this Form 10-K, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein. These financial statements and financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
January 14, 1999, except for footnote 5
which is as of February 1, 1999
34
35
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1998 1997
--------- ---------
Investment in hotel properties:
Land $ 42,449 $ 27,504
Buildings and improvements 355,807 229,469
Furniture and equipment 32,296 17,594
--------- ---------
Operating properties 430,552 274,567
Less accumulated depreciation 37,920 21,572
--------- ---------
392,632 252,995
Properties under development 5,229 26,490
--------- ---------
Net investment in hotel properties 397,861 279,485
Corporate FF&E, net 294 23
Cash and cash equivalents 33 164
Lease revenue receivable 7,653 5,682
Deferred expenses, net 3,376 1,403
Prepaid expenses and other assets 2,939 1,070
--------- ---------
Total assets $ 412,156 $ 287,827
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 71,000 $ --
Due to banks 102,085 44,081
Accounts payable and accrued expenses 3,969 3,527
Distributions payable 6,789 6,950
Minority interest in Partnership 14,888 15,779
--------- ---------
Total liabilities 198,731 70,337
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding (liquidation
preference of $76,734 and $77,100) 30 30
Common stock, $.01 par value, 50,000,000 shares authorized,
16,313,980 and 16,194,480 shares issued and outstanding 163 162
Additional paid-in capital 224,757 223,427
Unearned directors' compensation (310) (106)
Distributions in excess of earnings (11,215) (6,023)
--------- ---------
Total shareholders' equity 213,425 217,490
--------- ---------
Total liabilities and shareholders' equity $ 412,156 $ 287,827
========= =========
The accompanying notes are an integral part of the financial statements.
35
36
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
------- ------- -------
Revenue:
Percentage lease revenue $54,700 $35,868 $26,611
Interest and other income 249 234 97
------- ------- -------
Total revenue 54,949 36,102 26,708
------- ------- -------
Expenses:
Real estate taxes and property and casualty
insurance 5,017 2,702 1,647
General and administrative 3,692 2,021 1,985
Interest 8,637 3,066 2,665
Depreciation 16,389 10,064 6,476
Amortization 339 176 147
------- ------- -------
Total expenses 34,074 18,029 12,920
------- ------- -------
Income before allocation to minority interest 20,875 18,073 13,788
Income allocation to minority interest 1,349 1,329 786
------- ------- -------
Net income 19,526 16,744 13,002
Preferred stock distribution 6,938 2,100 --
------- ------- -------
Net income applicable to common Shareholders $12,588 $14,644 $13,002
======= ======= =======
Earnings per share:
Net income per common share $ 0.77 $ 0.92 $ 1.01
======= ======= =======
Net income per common share assuming dilution $ 0.77 $ 0.91 $ 1.00
======= ======= =======
Weighted average number of common shares 16,286 15,990 12,922
======= ======= =======
Weighted average number of common shares
assuming dilution 18,040 17,555 13,768
======= ======= =======
The accompanying notes are an integral part of the financial statements.
36
37
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK PREFERRED STOCK ADDITIONAL UNEARNED DISTRIBUTIONS TOTAL
--------------- ----------------- PAID-IN DIRECTORS' IN EXCESS OF SHAREHOLDERS'
SHARES DOLLARS SHARES DOLLARS CAPITAL COMPENSATION EARNINGS EQUITY
------ ------- ------ ------- ---------- ------------ ------------- -------------
Balances at December 31, 1995 9,880 $ 99 -- $ -- $ 82,988 $ (256) $ (1,959) $ 80,872
Issuance of shares 5,919 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 15,799 158 -- -- 145,216 (181) (3,380) 141,813
Issuance of shares 395 4 3,000 30 76,451 -- -- 76,485
Adjustment to minority interest -- -- -- -- 1,760 -- -- 1,760
Distributions ($1.08 per common share) -- -- -- -- -- -- (17,287) (17,287)
Distributions ($0.70 per preferred share) -- -- -- -- -- -- (2,100) (2,100)
Unearned compensation amortization -- -- -- -- -- 75 -- 75
Net income -- -- -- -- -- -- 16,744 16,744
------ ------ ------ ------ -------- ------ ---------- --------
Balances at December 31, 1997 16,194 162 3,000 30 223,427 (106) (6,023) 217,490
Issuance of shares 120 1 -- -- 1,137 (401) -- 737
Adjustment to minority interest -- -- -- -- 193 -- -- 193
Distributions ($1.09 per common share) -- -- -- -- -- -- (17,780) (17,780)
Distributions ($2.31 per preferred share) -- -- -- -- -- -- (6,938) (6,938)
Unearned compensation amortization -- -- -- -- -- 197 -- 197
Net income -- -- -- -- -- -- 19,526 19,526
------ ------ ------ ------ -------- ------ --------- --------
Balances at December 31, 1998 16,314 $ 163 3,000 $ 30 $224,757 $ (310) $ (11,215) $213,425
====== ====== ====== ====== ======== ====== ========= ========
The accompanying notes are an integral part of the financial statements.
37
38
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ IN THOUSANDS)
1998 1997 1996
--------- -------- --------
Cash flows from operating activities:
Net income $ 19,526 $ 16,744 $ 13,002
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 1,349 1,329 786
Depreciation 16,389 10,064 6,476
Amortization 455 516 321
Unearned compensation amortization 197 75 75
Changes in assets and liabilities:
Lease revenue receivable (1,971) (1,071) (2,064)
Prepaid expenses and other assets (1,782) (457) (168)
Accounts payable and accrued expenses 442 611 301
--------- -------- --------
Net cash provided by operating activities 34,605 27,811 18,729
--------- -------- --------
Cash flows from investing activities:
Prepaid acquisition costs (448) (408) (565)
Deferred acquisition costs -- (64) (18)
Sale of land parcel 445 -- --
Investment in hotel properties (135,395) (81,877) (74,031)
--------- -------- --------
Net cash used in investing activities (135,398) (82,349) (74,614)
--------- -------- --------
Cash flows from financing activities:
Purchase of interest rate protection agreements -- (69) --
Fees paid to register additional common shares (45) -- --
Fees paid in connection with new financing facilities (2,125) (16) (563)
Proceeds from GE Capital Corporation loan 71,000 -- --
Proceeds from various demand notes 34,385 -- --
Net proceeds from issuance of common stock 600 200 59,091
Net proceeds from issuance of preferred stock -- 71,506 --
Payment of distributions to shareholders (24,886) (16,789) (13,062)
Payment of distributions to minority interest (1,886) (1,645) (643)
Net increase in line of credit borrowing 23,619 1,281 8,800
--------- -------- --------
Net cash provided by financing activities 100,662 54,468 53,623
--------- -------- --------
Net decrease in cash and cash equivalents (131) (70) (2,262)
Cash and cash equivalents at beginning of period 164 234 2,496
--------- -------- --------
Cash and cash equivalents at end of period $ 33 $ 164 $ 234
========= ======== ========
Supplemental disclosure:
Cash paid for interest $ 9,575 $ 4,044 $ 2,158
========= ======== ========
Summary of non-cash investing and financing activities:
Investment in hotel properties payable $ -- $ 1,134 $ 1,315
Distributions declared but not paid 6,789 6,950 4,352
Issuance of shares in exchange for hotel properties/minority
interest units 151 4,799 1,500
Issuance of units in exchange for hotel properties -- 11,287 9,555
Adjustment to minority interest due to follow-on offerings and
issuance of partnership units in connection with the acquisition
of hotel properties 193 1,760 1,696
The accompanying notes are an integral part of the financial statements.
38
39
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION:
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of $0.01 par value common stock
("Common Stock"), utilizing the majority of the proceeds to acquire one hotel
and a general partnership interest (as the sole general partner) in WINN Limited
Partnership (the "Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine hotel properties (collectively the ten hotels are
the "Initial Hotels"). The Initial Hotels were acquired from affiliates of WHI
(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 Common Stock offerings, as
well as a Preferred Stock offering in September 1997, and invested the net
proceeds from these offerings in the Partnership. The Partnership utilized the
proceeds to acquire 28 additional hotel properties as of December 31, 1997.
During 1998, the Company added 13 additional properties to its portfolio, five
of which were internally developed (see Note 3). As of December 31, 1998, WHI's
ownership in the Partnership was 90.37% (see Note 6). As of December 31, 1998,
the Company owned 51 hotel properties (the "Current Hotels"), primarily in the
Southeast region of the United States. 49 of the Current Hotels are leased,
pursuant to separate percentage operating lease agreements (the "Percentage
Leases"), to CapStar Winston Company, L.L.C. ("CapStar Winston"), one is leased
to Bristol Hotels and Resorts, Inc. ("Bristol") and one is leased to Prime
Hospitality Corp. ("Prime").
Prior to November 17, 1997, 38 of the Current Hotels were leased pursuant to
the Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and
November 24, 1997, CapStar Management Company, L.P. purchased substantially all
of the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including the 38 then existing leases. Concurrent with the transaction, the
leases were assigned to CapStar Winston, an affiliate of CapStar Management
Company, L.P., and the terms of the leases were extended to 15 years from the
date of the transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include
the accounts of WHI and the Partnership. All significant inter-company balances
and transactions have been eliminated.
Investment in Hotel Properties. Hotel properties are recorded at cost and
are depreciated using the straight-line method over estimated useful lives of
the assets of 5 and 30 years for furniture and equipment, and buildings and
improvements, respectively. Upon disposition, both the assets and accumulated
depreciation accounts are relieved and the related gain or loss is credited or
charged to the income statement. Repairs and maintenance of hotel properties are
paid by the lessees.
The Company evaluates long-lived assets for potential impairment by
analyzing the operating results, trends and prospects for the Company and
considering any other events and circumstances which might indicate potential
impairment.
Cash and Cash Equivalents. All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.
Deferred Expenses. Included in deferred expenses are franchise fees and loan
costs which are recorded at cost. Amortization of franchise fees is computed
using the straight-line method over ten years. Amortization of loan costs,
computed using the straight-line method over the period of the related debt
facility, 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;
(ii) decreased by distributions; and (iii) adjusted to equal the net equity of
the Partnership multiplied by the limited partners' ownership percentage
immediately after each issuance of units of the Partnership and/or Common Stock
of the Company through an adjustment to additional paid-in capital.
Earnings Per Share. Net income per common share is computed by dividing net
income applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Net income per common share
assuming dilution is computed by dividing income before allocation to minority
interest by the weighted-average number of common shares assuming
39
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dilution during the period. Weighted average number of common shares assuming
dilution includes common shares and dilutive common share equivalents, primarily
redeemable limited partnership units and stock options (see Note 6).
Distributions. The ability to pay regular quarterly distributions is
dependent upon receipt of distributions from the Partnership, which in turn are
dependent upon the results of operations of the Partnership's properties.
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, 1998, the net tax basis of the Company's assets and
liabilities was approximately $12,500 less than the amounts reported in the
accompanying consolidated financial statements.
For federal income tax purposes, 1998 distributions amounted to $1.09 per
common share, two percent of which is considered a return of capital.
Fair Value of Financial Instruments. The value of interest rate cap
agreements fluctuates with interest rates. As of December 31, 1997, 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. There were no such agreements as of December 31, 1998. Due to
banks consists of a line of credit and a demand note, both of which reprice
periodically to allow for the fair value to equal the carrying value. Long-term
debt consists of a fixed rate note which approximates fair 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, 1998, bank account balances
exceeded federal depository insurance limits by approximately $987.
Reclassifications. Certain reclassifications have been made to the 1996 and
1997 financial statements to conform with the 1998 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.
Estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the balance sheet
dates and the reported amounts of revenues and expenses during the periods
reported. Actual results could differ from those estimates.
3. HOTEL PROPERTIES:
The Company owned 51 hotels, consisting of 6,904 rooms, as of December 31,
1998. The Company's acquisition of hotel properties for the years 1998, 1997 and
1996 are summarized as follows:
NUMBER OF NUMBER OF
YEAR PURCHASE COST HOTEL PROPERTIES ROOMS/SUITES
---- ------------- ---------------- ------------
1996* $ 73,200 10 1,322
1997 62,625 7 1,096
1998 140,794 13 1,803
-------- ------ ------
Total $276,619 30 4,221
======== ====== ======
* 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.
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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 acquisitions
were acquired as of the later of January 1, 1997 or their date of opening and
the 1997 Preferred Stock offerings took place on January 1, 1997:
PRO FORMA FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
Percentage lease and other revenue $ 56,650 $ 47,949
----------- -----------
Expenses:
Real estate taxes and property and
casualty insurance 5,257 4,094
General and administrative 3,701 2,094
Interest expense 8,912 4,060
Depreciation 16,720 12,458
Amortization 658 627
----------- -----------
Total expense 35,248 23,333
----------- -----------
Income before allocation to minority interest 21,402 24,616
Income allocation to minority interest 1,400 1,975
Preferred stock distribution 6,938 6,938
----------- -----------
Net income applicable to common shareholders $ 13,064 $ 15,703
=========== ===========
Net income per common share $ 0.80 $ 0.98
=========== ===========
Net income per common share assuming dilution $ 0.80 $ 0.98
=========== ===========
Weighted average number of common shares 16,288,458 15,990,042
=========== ===========
Weighted average number of common shares assuming dilution 18,041,765 17,990,135
=========== ===========
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4. DEFERRED EXPENSES:
At December 31, 1998 and 1997 deferred expenses consist of:
1998 1997
-------- -------
Franchise fees $ 1,617 $ 1,254
Debt facility fees 2,125 658
Interest rate caps -- 69
Registration costs 30 --
Acquisition costs -- 86
-------- -------
3,772 2,067
Less accumulated amortization 396 664
-------- -------
Deferred expenses, net $ 3,376 $ 1,403
======== =======
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.
During 1997, the Company entered into interest rate cap agreements to eliminate
the exposure to increases in 90-day LIBOR over 6.25%, and therefore from its
exposure to interest rate increases over 8.00% under its line of credit, on a
principal balance of $40 million for the period June 4, 1997 through June 4,
1998.
5. DEBT:
The Company's outstanding debt balance as of December 31, 1998 consisted of
amounts due under three separate debt facilities.
On October 30, 1998, the Company signed a $45,000 revolving demand note with
Wachovia Bank, N.A. Interest accrued on the note at the prime rate (7.75% as of
December 31, 1998). Six of the Company's Current Hotels served as collateral for
the note. The outstanding balance on the note as of December 31, 1998 totaled
$34,385.
On November 3, 1998, the Company closed a $71,000 loan with GE Capital
Corporation. The 25-year loan bears interest at a fixed rate of 7.375% for the
first 10 years. 14 of the Company's Current Hotels, with a carrying value of
$128,239, serve as collateral for the loan. As of December 31, 1998, the entire
$71,000 balance was outstanding. The first principal payment was made January 1,
1999. The Company used the net proceeds from the loan to pay down the then
existing line of credit balance. The loan agreement with GE Capital Corporation
requires the Company to establish escrow reserves for the purposes of debt
service, capital improvements and property taxes and insurance. These reserves,
which are held by GE Capital Corporation, totaled $2,202 as of December 31, 1998
and are included in prepaid expenses and other assets on the accompanying
consolidated balance sheets.
As of December 31, 1998 and 1997 the Company's outstanding debt balance under
its previous $125,000 line of credit (the "Previous Line") totaled $67,700 and
$44,081, respectively. Interest on borrowings was generally at LIBOR plus 1.75%
and was payable monthly in arrears. As of December 31, 1998 and 1997 the
weighted average interest rate on the outstanding balance under the Previous
Line was 7.56% and 7.55%, respectively. A commitment fee of 0.0625% was also
paid quarterly on the unused portion of the Previous Line. Prior to the closing
of the $71,000 GE Capital loan mentioned above, 28 of the Company's Current
Hotels served as collateral for the Previous Line. Upon closing of the GE
Capital loan, nine of these properties were removed as collateral on the
Previous Line and were transferred as part of the 14 Current Hotels which
currently serve as collateral for the $71,000 GE Capital loan. During the years
ended December 31, 1998, 1997 and 1996, the Company capitalized interest of
$1,513, $1,284 and $148, respectively, related to hotels under development or
major renovation.
On February 1, 1999, the Company entered into a new three-year $140,000 line of
credit agreement (the "New Line") with a group of banks led by Wachovia Bank of
North America, N.A. This New Line replaces the Company's Previous Line. The New
Line bears interest at rates from LIBOR plus 1.45% to prime, based on the
Company's level of total indebtedness. The Company's current rate is LIBOR plus
1.45%. A commitment fee of 0.05% is also payable quarterly on the unused portion
of the New Line. The Company used the proceeds from the New Line to pay off the
outstanding balances under the Previous Line and under the $45,000 revolving
demand note mentioned above. The Company has collateralized the New Line with 29
of its Current Hotels, with a carrying value of $223,400 as of January 31, 1999.
Included within these 29 hotels are six of the Current Hotels which served as
collateral for the
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$45,000 revolving demand note, 19 of the Current Hotels which served as
collateral for the Previous Note, as well as four other Current Hotels.
6. CAPITAL STOCK:
On September 11, 1997, the Company issued 3,000,000 shares of 9.25% Series A
Cumulative Preferred Stock ($25 liquidation preference per share plus unpaid
cumulative distributions). Except in the event of certain occurrences, the
preferred shares are not redeemable prior to September 28, 2001. The Company
used the net proceeds from the offering of approximately $71,500 to pay down
most of the then outstanding debt under its line of credit, and thereby created
additional borrowing capacity to finance the acquisition and development of
additional hotel properties.
Pursuant to the Partnership Agreement of the Partnership, the holders of
limited partnership units have certain redemption rights (the "Redemption
Rights") which enable them to cause the Partnership to redeem their units in the
Partnership in exchange for shares of Common Stock on a one-for-one basis or, in
certain circumstances, for cash. The number of shares issuable upon exercise of
the Redemption Rights will be adjusted upon the occurrence of stock splits,
mergers, consolidations or similar pro-rata share transactions, which otherwise
would have the effect of diluting the ownership interests of the limited
partners or the shareholders of WHI. As of December 31, 1998, the Partnership
had 18,052,560 units outstanding, of which 16,313,980 units were held by WHI.
WHI issued 7,500 shares to each of its five initial independent directors
which shares vested at a rate of 1,500 shares per year beginning on June 2,
1994. These shares became fully vested on May 5, 1998. WHI also issued 5,687
shares to a new independent director on January 2, 1998. These shares vest 20%
on the date of grant and 20% on each anniversary thereafter. Any unvested shares
are subject to forfeiture if the director does not remain a director of WHI.
Each director is entitled to vote and receive distributions paid on such shares
prior to vesting.
7. EARNINGS PER SHARE:
The following is a reconciliation of the net income applicable to common
shareholders used in the net income per common share calculation to the income
before allocation to minority interest used in the net income per common share -
assuming dilution:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
Net income $19,526 $16,744 $13,002
Less: preferred shares distribution 6,938 2,100 --
------- ------- -------
Net income applicable to common shareholders 12,588 14,644 13,002
Plus: income allocation to minority interest 1,349 1,329 786
------- ------- -------
Net income assuming dilution $13,937 $15,973 $13,788
======= ======= =======
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:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Weighted average number of common shares 16,286,233 15,990,096 12,921,552
Units with redemption rights 1,746,791 1,493,306 813,831
Stock options 7,214 71,376 32,617
---------- ---------- ----------
Weighted average number of common shares
assuming dilution 18,040,238 17,554,778 13,768,000
========== ========== ==========
8. STOCK OPTION PLAN:
During 1998, the Company amended the Winston Hotels, Inc. Stock Incentive
Plan (the "Plan"). The amendment increased the number of shares of Common Stock
that may be issued under the Plan to 1,600,000 shares plus an annual increase to
be added as of January 1 of each year, beginning January 1, 1999, equal to the
lesser of (i) 500,000 shares; (ii) 8.5% of any increase in the number of
authorized and issued shares (on a fully diluted basis) since the immediately
preceding January 1; or (iii) a lesser number determined by the Board of
Directors. Incentive stock options under the Plan may not exceed 350,000 without
shareholder approval. The Plan
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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 generally
contain vesting requirements over a period of 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 1998 net income and net income
per Common Share would have been a decrease of $789 and $0.05 per share,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998, 1997 and 1996: dividend yield of 9%;
expected volatility of 30%; risk-free interest rate of 5.5%; and an expected
life of five years for all options.
A summary of the status of the Plan as of December 31, 1998, 1997 and 1996,
and changes during the years ended on those dates, is presented below:
1998 1997 1996
-------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- -------------- ------ --------------
Outstanding at beginning of year 436,000 11.34 401,000 $ 10.93 376,000 $ 10.80
Granted 450,000 13.10 55,000 13.88 25,000 12.88
Exercised (58,000) 10.33 (20,000) 10.00 -- --
Forfeited (30,000) 11.38 -- -- -- --
-------- ------- ------- ------- ------- -------
Outstanding at end of year 798,000 $ 12.40 436,000 $ 11.34 401,000 $ 10.93
======== ======= ======= ======= ======= =======
Options exercisable at year-end 309,250 254,750 206,000
======== ======= =======
The following table summarizes information about the Plan at December 31,
1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE AVERAGE REMAINING
EXERCISE PRICES AT 12/31/98 AT 12/31/98 CONTRACTUAL LIFE (YEARS)
--------------- ------------------- ------------------- ------------------------
$10.00 50,000 50,000 1.0
$10.00 28,000 28,000 5.4
$11.00 50,000 50,000 0.4
$11.31 50,000 50,000 6.8
$11.38 90,000 45,000 7.0
$12.38 50,000 10,000 9.4
$12.88 25,000 12,500 7.8
$13.19 400,000 50,000 9.0
$13.88 55,000 13,750 8.8
9. COMMITMENTS:
The Company has future lease commitments from the lessees through 2012.
Minimum future rental payments contractually due to the Company under these
non-cancelable operating leases are as follows:
AMOUNT
Year ended December 31: --------
1999 $ 33,468
2000 33,468
2001 33,468
2002 33,468
2003 33,468
2004 and thereafter 290,825
--------
Total $458,165
========
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Under the terms of the Percentage Leases, the lessees are obligated to pay
the Company the greater of base rents or percentage rents. The Company earned
minimum base rents of $28,033, $16,114 and $11,426 for the years ended December
31, 1998, 1997, and 1996, respectively, and percentage rents of $26,667, $19,754
and $15,185 for the years ended December 31, 1998, 1997, and 1996, respectively.
The percentage rents are based on percentages of gross room revenue and certain
food and beverage revenues of the lessees. MeriStar Hospitality Corporation, an
affiliate of CapStar Winston, has guaranteed amounts due and payable to the
Company under the 49 properties leased by CapStar Winston up to $20,000. The
lessees operate the hotel properties pursuant to franchise agreements, which
require the payment of fees based on a percentage of hotel revenue. These fees
are paid by the lessees.
Pursuant to the Percentage Leases, the Company reserves 5% of room revenues
(7% of gross room, food and beverage revenues from one of its full-service
hotels) to fund periodic improvements to the buildings and grounds, and the
periodic replacement and refurbishment of furniture, fixtures and equipment.
For one of the Current Hotels, the Company leases the land under an
operating lease which expires December 31, 2062. Expenses incurred in 1998
related to this land lease totaled $245. Minimum future rental payments
contractually due by the Company under this lease are as follows: 1999 - $110,
2000 - $110, 2001 - $110, 2002 - $110, 2003 - $110, 2004 and thereafter -
$7,040.
10. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly results of operations for the years ended
December 31, 1998 and 1997 are as follows:
1998
FIRST SECOND THIRD FOURTH
-------- ------- ------- -------
Total revenue $10,122 $15,064 $16,305 $13,458
Total expenses 5,448 8,406 10,204 10,016
------- ------- ------- -------
Income before minority interest 4,674 6,658 6,101 3,442
Income allocation to minority interest 297 469 420 163
------- ------- ------- -------
Income after minority interest 4,377 6,189 5,681 3,279
Preferred share distribution 1,734 1,734 1,735 1,735
------- ------- ------- -------
Net income applicable to common shareholders
$ 2,643 $ 4,455 $ 3,946 $ 1,544
======= ======= ======= =======
Earnings per share:
Net income per common share $ 0.16 $ 0.27 $ 0.24 $ 0.09
======= ======= ======= =======
Net income per common share
assuming dilution $ 0.16 $ 0.27 $ 0.24 $ 0.09
======= ======= ======= =======
1997
FIRST SECOND THIRD FOURTH
------ ------ ------- ------
Total revenue $7,178 $9,646 $10,406 $8,872
Total expenses 4,012 4,468 5,027 4,522
------ ------ ------- ------
Income before minority interest 3,166 5,178 5,379 4,350
Income allocation to minority interest 230 381 490 228
------ ------ ------- ------
Income after minority interest 2,936 4,797 4,889 4,122
Preferred share distribution -- -- 366 1,734
====== ====== ======= ======
Net income applicable to common shareholders
$2,936 $4,797 $ 4,523 $2,388
====== ====== ======= ======
Earnings per share:
Net income per common share $ 0.19 $ 0.30 $ 0.28 $ 0.15
====== ====== ======= ======
Net income per common share
assuming dilution
$ 0.18 $ 0.30 $ 0.28 $ 0.15
====== ====== ======= ======
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WINSTON HOTELS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1998
($ IN THOUSANDS)
-------------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
- ----------------------------------------------------------------------------------------------------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------------------------------------------------------------------------------------------------------------
Hampton Inn
Boone, NC * $ 264 $ 2,750 $ -- $ 361 $ 264 $ 3,111 $ 3,375
Hampton Inn
Brunswick, GA * 716 3,887 -- 355 716 4,242 4,958
Hampton Inn
Cary, NC * 613 4,596 -- 348 613 4,944 5,557
Hampton Inn
Charlotte, NC # 833 3,609 -- 116 833 3,725 4,558
Hampton Inn
Chester, VA * 461 2,238 -- 60 461 2,298 2,759
Hampton Inn
Duncanville, TX * 480 2,689 25 522 505 3,211 3,716
Hampton Inn
Durham, NC 634 4,582 -- 613 634 5,195 5,829
Hampton Inn & Suites
Gwinnett, GA # 557 6,959 -- 1 557 6,960 7,517
Hampton inn
Hilton Head, SC * 310 3,969 -- 558 310 4,527 4,837
Hampton Inn
Jacksonville, NC * 473 4,140 -- 328 473 4,468 4,940
Hampton Inn
Las Vegas, NV * 856 7,945 -- -- 856 7,945 8,801
Hampton Inn
Perimeter , GA # 914 6,293 -- 41 914 6,334 7,248
Hampton Inn
Raleigh, NC # 697 5,955 -- 966 697 6,921 7,618
Hampton Inn
Southern Pines, NC * 614 4,280 -- 663 614 4,943 5,557
Hampton Inn
Southlake, GA * 680 4,065 -- 393 680 4,458 5,138
Hampton Inn
W. Springfield, MA # 916 5,253 -- 515 916 5,768 6,684
Hampton Inn
White Plains, NY # 1,382 10,763 -- 211 1,382 10,974 12,357
Hampton Inn
Wilmington, NC * 460 3,208 2 341 462 3,549 4,012
Comfort Inn
Augusta, GA 404 3,541 -- 325 404 3,866 4,270
Comfort Inn
Charleston, SC # 438 5,853 -- 774 438 6,627 7,065
Comfort Inn
Chester, VA * 661 6,447 -- 230 661 6,677 7,338
Comfort Inn
Clearwater, FL * 532 3,436 -- 661 532 4,097 4,629
---------------------------------------------------------------
Accumulated Life Upon Which
Depreciation Net Book Value Depreciation in
Buildings Land, Buildings Latest Income
and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- -----------------------------------------------------------------------------------------------
Hampton Inn
Boone, NC $ 586 $ 2,790 6/2/94 30
Hampton Inn
Brunswick, GA 686 4,272 6/2/94 30
Hampton Inn
Cary, NC 862 4,696 6/2/94 30
Hampton Inn
Charlotte, NC 614 3,943 6/2/94 30
Hampton Inn
Chester, VA 308 2,451 11/29/94 30
Hampton Inn
Duncanville, TX 308 3,408 5/7/96 30
Hampton Inn
Durham, NC 870 4,960 6/2/94 30
Hampton Inn & Suites
Gwinnett, GA 561 6,956 7/18/96 30
Hampton inn
Hilton Head, SC 676 4,161 11/29/94 30
Hampton Inn
Jacksonville, NC 743 4,197 6/2/94 30
Hampton Inn
Las Vegas, NV 154 8,646 5/20/98 30
Hampton Inn
Perimeter , GA 509 6,739 7/19/96 30
Hampton Inn
Raleigh, NC 959 6,658 5/18/95 30
Hampton Inn
Southern Pines, NC 818 4,739 6/2/94 30
Hampton Inn
Southlake, GA 755 4,383 6/2/94 30
Hampton Inn
W. Springfield, MA 289 6,395 7/14/97 30
Hampton Inn
White Plains, NY 425 11,932 10/29/97 30
Hampton Inn
Wilmington, NC 649 3,362 6/2/94 30
Comfort Inn
Augusta, GA 509 3,762 5/18/95 30
Comfort Inn
Charleston, SC 854 6,210 5/18/95 30
Comfort Inn
Chester, VA 963 6,375 11/29/94 30
Comfort Inn
Clearwater, FL 551 4,078 5/18/95 30
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-------------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
- ----------------------------------------------------------------------------------------------------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------------------------------------------------------------------------------------------------------------
Comfort Inn
Durham, NC * 947 6,208 -- 317 947 6,525 7,472
Comfort Inn
Fayetteville, NC 1,223 8,047 -- 668 1,223 8,715 9,938
Comfort Inn
Greenville, SC 871 3,551 -- 1,296 871 4,847 5,718
Comfort Suites
London, KY 345 2,170 -- 432 345 2,602 2,947
Comfort Inn
Raleigh, NC 459 4,075 8 584 467 4,659 5,126
Comfort Inn
Wilmington, NC 532 5,889 -- 583 532 6,472 7,004
Comfort Suites
Orlando, FL # 1,357 10,180 -- 215 1,357 10,395 11,752
Homewood Suites
Alpharetta, GA * 985 6,621 -- 213 985 6,834 7,820
Homewood Suites
Cary, NC # 1,010 12,367 8 12 1,018 12,379 13,397
Homewood Suites
Clear Lake, TX # 879 5,978 -- 15 879 5,993 6,872
Homewood Suites
Durham, NC * 1,074 6,136 -- -- 1,074 6,136 7,210
Homewood Suites
Lake Mary, FL * 871 6,987 -- -- 871 6,987 7,858
Homewood Suites
Phoenix, AZ * 1,402 9,763 -- -- 1,402 9,763 11,164
Homewood Suites
Raleigh, NC * 1,008 10,076 -- 11 1,008 10,087 11,095
Holiday Inn Express
Abingdon, VA 918 2,263 -- 387 918 2,650 3,567
Holiday Inn Express
Clearwater, FL * 510 5,854 -- 707 510 6,561 7,071
Holiday Inn Select
Dallas, TX * 1,060 13,615 -- 2,413 1,060 16,028 17,088
Holiday Inn
Secaucus, NJ * -- 13,699 -- -- -- 13,699 13,699
Holiday Inn
Tinton Falls, NJ * 1,261 4,337 -- 1,158 1,261 5,495 6,756
Courtyard by Marriott
Ann Arbor, MI # 902 9,850 -- 807 902 10,657 11,559
Courtyard by Marriott
Houston, TX * 1,211 9,154 -- 1,439 1,211 10,593 11,804
Courtyard by Marriott
Wilmington, NC # 742 5,907 -- 5 742 5,912 6,655
Courtyard by Marriott
Winston-Salem, NC * 915 5,202 -- 76 915 5,278 6,193
---------------------------------------------------------------
Accumulated Life Upon Which
Depreciation Net Book Value Depreciation in
Buildings Land, Buildings Latest Income
and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- -----------------------------------------------------------------------------------------------
Comfort Inn
Durham, NC 916 6,556 11/29/94 30
Comfort Inn
Fayetteville, NC 1,331 8,607 11/29/94 30
Comfort Inn
Greenville, SC 491 5,227 5/6/96 30
Comfort Suites
London, KY 268 2,679 5/7/96 30
Comfort Inn
Raleigh, NC 707 4,419 8/16/94 30
Comfort Inn
Wilmington, NC 1,078 5,925 6/2/94 30
Comfort Suites
Orlando, FL 578 11,174 5/1/97 30
Homewood Suites
Alpharetta, GA 151 7,669 5/22/98 30
Homewood Suites
Cary, NC 1,034 12,363 7/9/96 30
Homewood Suites
Clear Lake, TX 466 6,407 9/13/96 30
Homewood Suites
Durham, NC 34 7,176 11/14/98 30
Homewood Suites
Lake Mary, FL 146 7,712 11/4/98 30
Homewood Suites
Phoenix, AZ 190 10,975 6/1/98 30
Homewood Suites
Raleigh, NC 273 10,822 3/9/98 30
Holiday Inn Express
Abingdon, VA 202 3,365 5/7/96 30
Holiday Inn Express
Clearwater, FL 295 6,776 8/6/97 30
Holiday Inn Select
Dallas, TX 1,412 15,676 5/7/96 30
Holiday Inn
Secaucus, NJ 266 13,433 5/27/98 30
Holiday Inn
Tinton Falls, NJ 106 6,650 4/21/98 30
Courtyard by Marriott
Ann Arbor, MI 449 11,110 9/30/97 30
Courtyard by Marriott
Houston, TX 519 11,285 7/14/97 30
Courtyard by Marriott
Wilmington, NC 394 6,260 12/19/96 30
Courtyard by Marriott
Winston-Salem, NC 30 6,163 10/3/98 30
47
48
-------------------------------------------------------------------------------------
Cost Capitalized Gross Amounts
Subsequent to Carried
Initial Cost Acquisition at Close of Period
- ----------------------------------------------------------------------------------------------------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------------------------------------------------------------------------------------------------------------------------
Hilton Garden Inn
Albany, NY * 1,168 11,236 -- -- 1,168 11,236 12,404
Hilton Garden Inn
Alpharetta, GA * 1,425 11,719 -- -- 1,425 11,719 13,144
Hilton Garden Inn
Raleigh, NC * 1,901 9,209 -- -- 1,901 9,209 11,110
Quality Suites
Charleston, SC # 912 11,224 -- 720 912 11,944 12,855
Residence Inn
Phoenix, AZ # 2,076 13,311 5 61 2,081 13,371 15,452
Fairfield Inn
Ann Arbor, MI * 542 3,743 -- 477 542 4,221 4,763
------- --------- ------ ------- -------- -------- --------
$42,401 $ 334,829 $ 48 $20,978 $ 42,449 $355,807 $398,256
======= ========= ====== ======= ======== ======== ========
---------------------------------------------------------------
Accumulated Life Upon Which
Depreciation Net Book Value Depreciation in
Buildings Land, Buildings Latest Income
and and Date of Statement is
Description Improvements Improvements Acquisition Computed
- -----------------------------------------------------------------------------------------------
Hilton Garden Inn
Albany, NY 250 12,154 5/8/98 30
Hilton Garden Inn
Alpharetta, GA 325 12,818 3/17/98 30
Hilton Garden Inn
Raleigh, NC 179 10,931 5/8/98 30
Quality Suites
Charleston, SC 1,488 11,369 5/18/95 30
Residence Inn
Phoenix, AZ 371 15,082 3/3/98 30
Fairfield Inn
Ann Arbor, MI 176 4,586 9/30/97 30
------- --------
$27,774 $370,482
======= ========
* Property serves as collateral for the $140,000 line of credit which closed
on February 1, 1999 (see Note 5).
# Property serves as collateral for the $71,000 note through GE Capital
Corporation (see Note 5).
WINSTON HOTELS, INC.
NOTES TO SCHEDULE III
1998 1997
--------- ---------
(a) Reconciliation of Real Estate:
Balance at beginning of period $ 256,973 $ 189,782
Acquisitions during period 131,183 61,619
Additions during period 10,100 5,572
--------- ---------
Balance at end of period $ 398,256 $ 256,973
========= =========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of period 16,281 8,973
Depreciation for period 11,493 7,308
--------- ---------
Balance at end of period $ 27,774 $ 16,281
========== =========
(c) The aggregate cost of land, buildings and furniture and equipment for
federal income tax purposes is approximately $425,800.
(d) Refer to Notes 1 and 3 to the financial statements of Winston Hotels, Inc.
for transactions with affiliates.
48
49
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Winston Hospitality, Inc.
We have audited the accompanying balance sheet of Winston Hospitality, Inc.
as of October 31, 1997 and the related statements of income, shareholders'
equity and cash flows for the ten months ended October 31, 1997 and the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Winston Hospitality, Inc. as
of October 31, 1997 and the results of its operations and its cash flows for the
ten months ended October 31, 1997 and the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 6, 1998
49
50
WINSTON HOSPITALITY, INC.
BALANCE SHEET
AS OF OCTOBER 31, 1997
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1997
-------
Current assets:
Cash and cash equivalents $ 6,926
Accounts receivable:
Trade 2,303
Lessor 768
Affiliates 125
Prepaid expenses and other assets 182
-------
Total current assets 10,304
-------
Furniture, fixtures and equipment:
Furniture and equipment 399
Leasehold improvements 113
-------
512
Less accumulated depreciation and amortization 245
-------
Net furniture, fixtures and equipment 267
-------
$10,571
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,918
Percentage lease payable to Lessor 3,882
Accrued salaries and wages 1,204
Accrued sales and occupancy taxes 814
Other current liabilities 842
-------
Total current liabilities 8,660
-------
Commitments (Note 3)
Shareholders' equity:
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding 1
Additional paid-in capital 49
Retained earnings 1,861
-------
Total shareholders' equity 1,911
-------
$10,571
=======
The accompanying notes are an integral part of the financial statements.
50
51
WINSTON HOSPITALITY, INC.
STATEMENTS OF INCOME
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND
THE YEAR ENDED DECEMBER 31, 1996
($ IN THOUSANDS)
TEN MONTHS ENDED
OCTOBER 31, YEAR ENDED
-------------------- DECEMBER 31,
1997 1996 1996
------- ------- -------
(unaudited)
Revenue:
Room $67,145 $49,633 $58,956
Food and beverage 2,419 1,240 1,685
Other operating, net 1,373 1,068 1,191
Interest income 152 82 93
------- ------- -------
Total revenue 71,089 52,023 61,925
------- ------- -------
Expenses:
Property and operating 24,112 17,388 21,550
Property repairs and maintenance 3,193 2,614 3,181
Food and beverage 1,715 924 1,281
General and administrative 2,090 1,603 2,050
Franchise costs 6,167 4,327 5,361
Management fees 1,015 1,109 1,126
Percentage lease payments 30,980 22,800 26,611
------- ------- -------
Total expenses 69,272 50,765 61,160
------- ------- -------
Net income $ 1,817 $ 1,258 $ 765
======= ======= =======
The accompanying notes are an integral part of the financial statements.
51
52
WINSTON HOSPITALITY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
($ IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
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
Net income -- -- -- 1,817 1,817
Distributions -- -- -- (600) (600)
----- ------- ------ -------- -------
Balances at October 31, 1997 100 $ 1 $ 49 $1,861 $1,911
===== ======= ====== ======== ======
The accompanying notes are an integral part of the financial statements.
52
53
WINSTON HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996
AND THE YEAR ENDED DECEMBER 31, 1996
($ IN THOUSANDS)
YEAR ENDED
TEN MONTHS ENDED OCTOBER 31, DECEMBER 31,
1997 1996 1996
------- ------- ------------
(unaudited)
Cash flows from operating activities:
Net income $ 1,817 $ 1,258 $ 765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67 65 83
Changes in assets and liabilities:
Accounts receivable - trade (1,137) (1,525) (330)
Prepaid expenses and other assets 38 (137) (103)
Accounts payable - trade 659 547 666
Percentage lease payable to Lessor (729) 532 2,064
Accrued expenses and other liabilities 906 1,045 914
------- ------- -------
Net cash provided by operating
activities 1,621 1,785 4,059
------- ------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (76) (107) (144)
Repayments from (advances to) Lessor, affiliates and
shareholders, net
518 (265) (145)
------- ------- -------
Net cash provided by (used in)
investing activities 442 (372) (289)
------- ------- -------
Cash flows from financing activities:
Distributions to shareholders (600) (485) (556)
------- ------- -------
Net cash used in financing activities (600) (485) (556)
------- ------- -------
Net increase in cash and cash equivalents 1,463 928 3,214
Cash and cash equivalents at beginning of the period 5,463 2,249 2,249
------- ------- -------
Cash and cash equivalents at end of the period $ 6,926 $ 3,177 $ 5,463
======= ======= =======
The accompanying notes are an integral part of the financial statements.
53
54
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION:
Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston Hotels,
Inc. ("WHI") (collectively, the "Company"). Approximately 90.37% of the
Partnership was owned by WHI as of December 31, 1998. The two shareholders of
Hospitality (Robert W. Winston, III and John B. Harris, Jr.) are also
shareholders of WHI and/or partners in the Partnership. The Company owned 21
hotels as of December 31, 1995, 31 hotels as of December 31, 1996 and 38 hotels
as of October 31, 1997 (collectively, all 38 hotels are the "Current Hotels").
Each hotel was separately leased by the Company to Hospitality under a
Percentage Lease Agreement. These leases required minimum base rental payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue and certain food and
beverage revenues.
Twenty-eight of the 38 hotels are limited-service hotels, five are
extended-stay hotels and five are full-service hotels. All 38 hotels are
operated under franchise agreements with Promus Hotels, Inc., Choice Hotels
International, Inc., Holiday Inns Franchising, Inc. and Marriott International,
Inc. The cost of obtaining the franchise licenses was paid by the Company and
the on-going franchise fees were paid by Hospitality.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Cash Equivalents. All highly liquid investments with a maturity date of
three months or less when purchased are considered to be cash equivalents.
Hospitality places cash deposits with federally insured depository institutions.
At October 31, 1997, bank account balances exceeded federal depository insurance
limits by approximately $6,252.
Fair Value of Financial Instruments. Hospitality's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity. Hospitality'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 Hospitality and are charged to expense as incurred.
Income Taxes. Hospitality has made an election under Subchapter S of the
Internal Revenue Code of 1986, as amended. Any taxable income or loss is
recognized by the shareholders and, therefore, no provision for income taxes has
been provided in the accompanying financial statements.
Reclassifications. Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
Unaudited October 31, 1996 operating results. Operating results for the 10
months ended October 31, 1996, presented for comparison purposes, are unaudited.
The unaudited financial statements for the period ended October 31, 1996
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the financial statements. All such adjustments are normal and
recurring in nature.
54
55
3. COMMITMENTS:
Under the terms of the Percentage Lease Agreements, Hospitality had future
lease commitments to the Company through 2006. As disclosed in Note 6 below, all
Percentage Leases were sold as of November 24, 1997.
Hospitality incurred minimum base rents of $13,535 and $11,154 as well as
percentage rents of $17,445 and $15,457 for the ten months ended October 31,
1997 and the year ended December 31, 1996, respectively.
Hospitality had entered into separate contracts with unrelated parties for
the management of 10 of the hotels. The terms of these agreements provided for
management fees to be paid based on predetermined formulas for a period of ten
years through 2006. The contracts were cancelable under certain circumstances as
outlined in the agreements. As disclosed in Note 6 below, all such contracts
were sold as of November 24, 1997.
Various legal proceedings against Hospitality have arisen from time to time
in the normal course of business. Management believes liabilities arising from
these proceedings, if any, will have no material adverse effect on the financial
positions or results of operations of Hospitality.
4. DISTRIBUTIONS:
Beginning with the year ended December 31, 1996, the shareholders agreed to
limit distributions by Hospitality to amounts necessary to pay their income
taxes on the net income derived from Hospitality until such time as the tangible
net worth of Hospitality reached $4,000. Thereafter, they agreed to invest at
least 75% of their after-tax distributions of net income from Hospitality in
Common Stock of the Company. These agreements terminated effective November 24,
1997, due to the sale of the leases to CapStar.
5. PROFIT SHARING PLAN:
On January 1, 1996, Hospitality adopted the Winston 401(k) Plan (the "Plan")
for substantially all employees, (except any highly compensated employee, as
defined in the Plan), who had attained the age of 21 and completed one year of
service. Under the Plan, employees were able to contribute from 1% to 15% of
compensation, subject to an annual maximum as determined under the Internal
Revenue Code. Hospitality made matching contributions of a specified percentage
of the employee's contribution. Hospitality contributed $54, $50 (unaudited) and
$61 during the 10-month periods ended October 31, 1997 and 1996, and the year
ended December 31, 1996, respectively.
6. SUBSEQUENT EVENT:
On November 24, 1997, Hospitality completed the sale of substantially all of
its assets and all 38 existing Percentage Leases to CapStar Management Company,
L.P. ("CMC") for total consideration of $34,000. The $34,000 sale price
consisted of $10,000 in cash and 674,236 CMC Partnership Units.
55
56
INDEPENDENT AUDITORS' REPORT
The Members
CapStar Winston Company, L.L.C.:
We have audited the accompanying balance sheets of CapStar Winston Company,
L.L.C. (the "Company") as of December 31, 1998 and 1997 and the related
statements of operations, members' capital (deficit), and cash flows for the
year ended December 31, 1998 and the period from October 15, 1997 (date of
inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Winston Company,
L.L.C. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the year ended December 31, 1998 and the period from October
15, 1997 (date of inception) through December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Washington, D.C.
February 23, 1999
56
57
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
($ IN THOUSANDS)
ASSETS
1998 1997
------- -------
Current assets:
Cash and cash equivalents $ 2,075 $ 3,393
Accounts receivable, net of allowance for doubtful accounts of
$111 and $0 3,230 1,614
Due from Winston Hospitality, Inc. -- 1,636
Due from affiliates 5,392 385
Deposits and other assets 355 197
------- -------
Total current assets 11,052 7,225
------- -------
Furniture, fixtures and equipment, net of accumulated depreciation of
$68 and $5 290 241
Intangible assets, net of accumulated amortization of $1,015 and $93 33,253 34,088
Deferred franchise costs, net of accumulated amortization of $72 and $7 536 601
Restricted cash 204 --
------- -------
$45,335 $42,155
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,606 $ 1,459
Accrued expenses 3,390 2,920
Percentage lease payable to Winston Hotels, Inc. 7,601 5,682
Advance deposits 183 135
------- -------
Total current liabilities 12,780 10,196
------- -------
Commitments (Note 6)
Members' capital 32,555 31,959
------- -------
$45,335 $42,155
======= =======
See accompanying notes to financial statements.
57
58
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
($ IN THOUSANDS)
1998 1997
-------- --------
Revenue:
Rooms $113,451 $ 8,197
Food and beverage 6,793 462
Telephone and other operating departments 5,389 384
-------- -------
Total revenue 125,633 9,043
-------- -------
Operating costs and expenses:
Rooms 25,664 2,158
Food and beverage 5,027 308
Telephone and other operating departments 2,636 211
Undistributed expenses:
Lease expense 52,720 3,242
Administrative and general 12,020 1,069
Sales and marketing 4,859 415
Franchise fees 8,311 595
Repairs and maintenance 6,051 515
Energy 5,069 431
Other 1,630 55
Depreciation and amortization 1,050 105
-------- -------
Total expenses 125,037 9,104
-------- -------
Net income (loss) $ 596 $ (61)
======== =======
See accompanying notes to financial statements.
58
59
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENTS OF MEMBERS' CAPITAL (DEFICIT)
YEAR ENDED DECEMBER 31, 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
($ IN THOUSANDS)
CapStar EquiStar MeriStar H&R MeriStar
Management Acquisition Operating Hotels and
Company, L.P. Corporation Company, L.P. Resorts, Inc. Total
------------- ----------- ------------- ------------- --------
Member contributions made since
October 15, 1997 (date of inception) $ 32,020 $ -- $ -- $ -- $ 32,020
Net loss (60) (1) -- -- (61)
-------- -------- -------- -------- --------
Balance, December 31, 1997 $ 31,960 $ (1) -- -- 31,959
Net income through August 2, 1998 696 7 -- -- 703
Transfer of members' capital (32,656) (6) 32,656 6 --
Net loss from August 3, 1998 through
December 31, 1998 -- -- (106) (1) (107)
-------- -------- -------- -------- --------
Balance, December 31, 1998 $ -- $ -- $ 32,550 $ 5 $ 32,555
======== ======== ======== ======== ========
See accompanying notes to financial statements.
59
60
CAPSTAR WINSTON COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
($ IN THOUSANDS)
1998 1997
------- --------
Cash flows from operating activities:
Net income (loss) $ 596 $ (61)
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,050 105
Loss on sale of fixed assets 3 --
Change in operating assets and liabilities:
Accounts receivable, net (1,616) 235
Due from Winston Hospitality, Inc. 1,636 (1,636)
Due from affiliates (5,007) (635)
Deposits and other assets (158) (135)
Restricted cash (204) --
Accounts payable and accrued expenses 617 4,063
Percentage lease payable to Winston Hotels, Inc. 1,919 1,463
Advance deposits 48 26
------- --------
Net cash (used in) provided by operating activities (1,116) 3,425
------- --------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (131) (3)
Proceeds from sale of fixed assets 16 --
Additions to intangible assets (87) (100)
------- --------
Net cash used in investing activities (202) (103)
------- --------
Cash flows from financing activities - contributions by members -- 71
------- --------
Net change in cash and cash equivalents (1,318) 3,393
Cash and cash equivalents at beginning of period 3,393 --
------- --------
Cash and cash equivalents at end of period $ 2,075 $ 3,393
======= ========
Supplemental Disclosure of Cash Flow Information:
Assets contributed (liabilities assigned) to the Company by CapStar
Management Company, L.P.:
Accounts receivable $ -- $ 1,849
Deposits and other assets -- 62
Furniture, fixtures and equipment -- 243
Intangible assets -- 34,081
Deferred franchise costs -- 608
Accounts payable and accrued expenses -- (316)
Percentage lease payable to Winston Hotels, Inc. -- (4,219)
Advance deposits -- (109)
Due to CapStar Management Company, L.P. -- (250)
------- --------
Non-cash financing activity - contribution by member -- 31,949
======= ========
See accompanying notes to financial statements.
60
61
CAPSTAR WINSTON COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION:
CapStar Winston Company, L.L.C. (the "Company") was formed on October 15,
1997, pursuant to a limited liability company agreement ("Agreement"), subject
to the Limited Liability Act of the State of Delaware, between CapStar
Management Company, L.P. ("CMC") and EquiStar Acquisition Corporation
("EquiStar"), both wholly-owned subsidiaries of CapStar Hotel Company
("CapStar"), to lease and operate certain hotels owned by WINN Limited
Partnership and Winston Hotels, Inc. (collectively, "Winston"). Generally,
members of a limited liability company are not personally responsible for debts,
obligations and other liabilities of the Company. The Agreement defines the
termination of the Company as upon the consent of the members.
During November 1997, CMC purchased substantially all of the assets and
assumed certain liabilities of Winston Hospitality, Inc. ("WHI"), including 38
hotel leases, certain operating assets and liabilities, and goodwill and other
intangible assets. Concurrent with the purchase, CMC contributed/assigned the
assets purchased and liabilities assumed in the transaction to the Company.
On August 3, 1998, MeriStar Hotels & Resorts, Inc. ("MeriStar") was spun off
(the "Spin-Off") by CapStar to become the lessee, manager and operator of
various hotel assets, including those of which were previously owned, leased and
managed by CapStar and certain of its affiliates. Pursuant to the Spin-Off, CMC
and Equistar transferred their capital and interests in the Company to MeriStar
H&R Operating Company, L.P. ("MHOC") and MeriStar, respectively. The transfer is
recorded at its net book value.
Currently, the Company leases 49 hotels, 28 of which are limited-service
hotels, 11 of which are extended-stay hotels and ten of which are full-service
hotels. The hotels, which contain 6,636 rooms, are operated under various
franchise agreements, and are located in Arizona, Florida, Georgia, Kentucky,
Massachusetts, Michigan, North Carolina, New Jersey, South Carolina, Texas, New
York and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Members' Capital and Allocation of Profits and Losses. As defined in the
Agreement, until the Spin-Off, CMC had a 99% ownership interest and EquiStar had
a 1% interest in the Company. In general, the allocation of income and losses
and contributions and distributions were made to the members in proportion to
their respective ownership interest. Subsequent to the Spin-Off, MHOC has a 99%
ownership interest and MeriStar has a 1% ownership interest in the Company.
Cash Equivalents. The Company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents.
Restricted Cash. Restricted cash represents amounts required to be
maintained in escrow to comply with terms of certain state beverage license
agreements.
Furniture, Fixtures and Equipment. Furniture, fixtures and equipment are
recorded at cost or fair market value in the case of assets contributed and are
depreciated using the straight-line method over estimated useful lives of five
to seven years.
Intangible Assets. Lease contracts represent the estimated present value of
net cash flows expected to be received from the leases originally acquired by
CMC and contributed to the Company. Lease contracts are amortized on a
straight-line basis over 30 years.
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets originally acquired by CMC and contributed to the
Company. Goodwill is amortized on a straight-line basis over 40 years.
Licensing costs represent the cost of beverage licenses mandated by state
statutes. Licensing costs are amortized on a straight-line basis over five
years.
The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability is measured by comparing the carrying amount of the
intangible assets to the projected future cash flows of the Company. If such
assets are considered to be impaired, the impairment to be recognized is the
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amount by which the carrying amounts of the intangible assets exceed the
Company's net discounted cash flows. No impairment loss was recorded in 1998 or
1997.
Deferred Franchise Costs. Franchise costs are deferred and are amortized on
a straight-line basis over the terms of the franchise agreements, which range
from 18 months to 20 years.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes. No provision has been made for income taxes since any such
liability is the liability of the individual members.
3. INTANGIBLE ASSETS:
Intangible assets consist of the following:
1998 1997
-------- -------
Lease contracts $ 6,576 $ 6,576
Goodwill 27,605 27,605
Organization costs 87 --
-------- -------
34,268 34,181
Less: accumulated amortization (1,015) (93)
-------- -------
$ 33,253 $34,088
======== =======
4. MANAGEMENT AGREEMENTS:
The Company manages 39 of the 49 leased hotels and has entered into separate
contracts with third parties to manage 10 of the hotels. The terms of these
third-party management agreements provide for management fees to be paid on a
monthly basis based on budgeted gross operating profit, as defined in the
agreements, with year-end adjustments, for actual operating results. The term of
nine of the management agreements extends to 2006 and one extends to 2012. The
agreements are cancelable before expiration under certain circumstances.
Management fees incurred during 1998 and 1997 were $1,001 and $17, respectively
and are included in other expenses.
5. TRANSACTIONS WITH RELATED PARTIES:
Prior to the Spin-Off, the Company advanced amounts to CMC and received
amounts from CMC in the normal course of business. At December 31, 1997, CMC
owed the Company a net amount of $385. Subsequent to the Spin-Off, the Company
and MHOC advanced amounts to each other in the normal course of business. At
December 31, 1998, MHOC owed the Company a net amount of $5,392.
6. COMMITMENTS:
Each of the Company's hotels is leased under a separate lease agreement.
These leases in existence at the date CMC purchased the initial 38 hotel leases
were collectively amended on November 17, 1997 and November 24, 1997 and extend
through November 30, 2012; subsequent leases extend through 2013. The leases
require monthly minimum base rental payments to Winston and additional
quarterly payments of percentage rent, based on revenues generated by the hotel
properties in excess of varying amounts. The leases are non-cancelable except
upon the sale of a hotel. Winston is required to make a termination payment to
the Company, as defined in the lease agreements, upon cancellation of a lease.
MeriStar Hospitality Corporation, an affiliate of the Company, has guaranteed
amounts due and payable by the Company under the leases up to $20,000. Minimum
future base rental payments under these non-cancelable operating leases are as
follows:
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Year ended December 31:
1999 $ 30,479
2000 30,479
2001 30,479
2002 30,479
2003 30,479
2004 and thereafter 277,627
--------
Total $430,022
========
The Company incurred minimum base rents of $26,378 and $2,731, and
percentage rents of $26,342 and $511 during 1998 and 1997, respectively.
7. DUE FROM WHI:
Due from WHI represents amounts received by WHI on behalf of the Company and
amounts paid by the Company on behalf of WHI. These amounts due from WHI were
collected in March and April 1998.
8. BUSINESS CONCENTRATION:
Winston owns all of the Company's leased hotels. Therefore, the Company's
financial position and results of operations would be adversely and materially
impacted if Winston sells the hotels and terminates the leases. Management
believes that Winston has no intention of or cause for terminating the hotel
leases.
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Exhibit Description
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3.1(12) Restated Articles of Incorporation
3.2(1) Amended and Restated Bylaws
4.1(1) Specimen certificate for Common Stock, $0.01 par value per share
4.2(8) Form of Stock Certificate for 9.25% Series A Cumulative Preferred Stock
4.3(10) Restated Articles of Incorporation as amended (see Exhibits 3.1 and 3.2)
4.4(10) Amended and Restated Bylaws (see Exhibit 3.2)
10.1(6) Second Amended and Restated Agreement of Limited Partnership of WINN Limited Partnership
10.2(8) Amendment No. 1 dated September 11, 1997 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership
10.3(10) Amendment No. 2 dated December 31, 1997 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership
10.4(2) Form of Percentage Leases
10.5(9) First Amendment to Lease dated November 17, 1997 between WINN Limited Partnership and
CapStar Winston Company, L.L.C.
10.6(9) First Amendment to Lease dated November 24, 1997 between WINN Limited Partnership and
CapStar Winston Company, L.L.C.
10.7(1) Winston Hotels, Inc. Directors' Stock Incentive Plan
10.8(2) Limitation of Future Hotel Ownership and Development Agreement
10.9(3) Memorandum of Understanding, dated March 15, 1996, among Winston Hotels, Inc., Winston
Hospitality, Inc. and Promus Hotels, Inc.
10.10(3) Stock Purchase Agreement, dated April 24, 1996, between Promus Hotels, Inc. and Winston
Hotels, Inc.
10.11(3) 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.
10.12(3) Option to Purchase Additional Hotels, dated April 24, 1996, between WINN Limited
Partnership and Promus Hotels, Inc.
10.13(4) 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.
10.14(4) 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.
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10.15(4) 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.
10.16(5) 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 "1996
Credit Agreement")
10.17(5) 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 1996 Credit Agreement
10.18(5) 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 1996 Credit Agreement
10.19(5) 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 1996 Credit Agreement
10.20(5) 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 1996 Credit Agreement
10.21(5) Form of Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement
used to secure certain obligations under the 1996 Credit Agreement (not including
certain variations existing in the different states where the properties are located)
10.22(7) Redemption and Registration Rights Agreement, dated as of July 14, 1997 by and among
WINN Limited Partnership, Winston Hotels, Inc., certain partnerships listed and
certain partners or designees thereof listed therein
10.23(9) Guaranty dated November 17, 1997 between CapStar Hotel Company, WINN Limited Partnership
and Winston Hotels, Inc.
10.24(9) Investment Agreement dated November 17, 1997 between Winston Hotels, Inc., Robert W.
Winston, III and John B. Harris, Jr.
10.25(9) First Amendment to Credit Agreement dated November 17, 1997 between Winston Hotels, Inc.,
WINN Limited Partnership, Wachovia Bank, N.A., Branch Banking and Trust Company,
NationsBank, N.A., and SouthTrust Bank, N.A.
10.26(10) Employment Agreement, dated July 31, 1997, by and between Kenneth R. Crockett and Winston
Hotels, Inc.
10.27(11) Winston Hotels, Inc. Stock Incentive Plan as amended May 1998
10.28(12) Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated
November 3, 1998
10.29(12) Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital
Company, LLC
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10.30 Winston Hotels, Inc. Executive Deferred Compensation Plan
10.31 Credit Agreement, dated as of January 15, 1999, among Wachovia Bank, N.A., Branch Banking
and Trust Company, SouthTrust Bank, N.A., Centura Bank, Winston Hotels, Inc.,
WINN Limited Partnership and Wachovia Bank, N.A. as Agent (the "Credit Agreement")
10.32 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Wachovia Bank, N.A. for the principal sum of $60,000,000 pursuant to
the Credit Agreement
10.33 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Branch Banking and Trust Company for the principal sum of $40,000,000
pursuant to the Credit Agreement
10.34 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to SouthTrust Bank, N.A. for the principal sum of $25,000,000 pursuant to
the Credit Agreement
10.35 Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
Partnership to Centura Bank for the principal sum of $15,000,000 pursuant to the
Credit Agreement
10.36 Form of Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement
used to secure certain obligations under the Credit Agreement (not including certain
variations existing in the different states where the properties are located)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants (PricewaterhouseCoopers LLP)
23.2 Accountants' Consent (KPMG LLP)
24 Powers of Attorney
27.1 Financial Data Schedule to the Company's Form 10-K for the year ended December 31, 1998
(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 Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on May 14, 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 August 14, 1996 and incorporated
herein by reference.
(5) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1997 and incorporated
herein by reference.
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(6) Exhibit to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on July 24, 1997 and incorporated herein by
reference.
(7) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 8, 1997 and incorporated
herein by reference.
(8) Exhibits to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on September 15, 1997 and incorporated herein by
reference.
(9) Exhibits to the Company's report on Form 8-K as filed with the Securities
and Exchange Commission on December 10, 1997 and incorporated herein by
reference.
(10) Exhibits to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 27, 1998 and as amended by Form
10-K/A filed with the Securities and Exchange Commission on April 1, 1998.
(11) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission (Registration No. 333-60079) and
incorporated herein by reference.
(12) Exhibits to the Company's Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 16, 1998 and as amended on
Form 10-Q/A filed with the Securities and Exchange Commission on February
23, 1999 and incorporated herein by reference.
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