WINSTON HOTELS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2003		Commission file number 0-23732

WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)


North Carolina		56-1624289
(State of incorporation)		(I.R.S. Employer Identification No.)

2626 Glenwood Avenue
Raleigh, North Carolina 27608
(Address of principal executive offices)
(Zip Code)

(919) 510-6010
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x No o

The number of shares of Common Stock, $.01 par value, outstanding on October 31, 2003 was 26,230,879.

WINSTON HOTELS, INC.
Index


			Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	WINSTON HOTELS, INC.

		Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002	3

		Unaudited Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002	4

		Unaudited Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002	5

		Unaudited Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2003	6

		Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002	7

		Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		32

Item 4.	Controls and Procedures		33

PART II	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K		34

	SIGNATURES		35

	EXHIBIT INDEX		36

WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)

ASSETS


		September 30, 2003			December 31, 2002

		(unaudited)

Land		$	38,723		$	39,348
Buildings and improvements			343,000			345,511
Furniture and equipment			45,508			44,332

Operating properties			427,231			429,191
Less accumulated depreciation			120,103			109,152

			307,128			320,039
Properties under development			2,544			1,800

	Net investment in hotel properties		309,672			321,839

Assets held for sale			2,100			—
Corporate FF&E, net			692			735
Cash			22,984			1,510
Accounts receivable			3,692			1,958
Notes receivable			5,016			5,016
Investment in joint ventures			9,280			9,117
Deferred expenses, net			2,961			2,954
Prepaid expenses and other assets			8,558			6,988
Deferred tax asset			9,094			7,325

Total assets		$	374,049		$	357,442


LIABILITIES AND SHAREHOLDERS’ EQUITY
Long-term debt		$	65,384		$	66,406
Due to banks			50,954			72,300
Accounts payable and accrued expenses			12,818			11,679
Distributions payable			5,746			4,951
Minority interest in consolidated joint venture			2,090			—

Total liabilities			136,992			155,336


Minority interest in Partnership			7,785			7,591

Shareholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, 3,000,000 shares issued and outstanding (liquidation preference of $76,734)			30			30
Common stock, $.01 par value, 50,000,000 shares authorized, 25,443,379 and 20,148,334 shares issued and outstanding			254			201
Additional paid-in capital			300,569			256,720
Accumulated other comprehensive loss			(86	)		—
Unearned compensation			(607	)		(596	)
Distributions in excess of earnings			(70,888	)		(61,840	)

Total shareholders’ equity			229,272			194,515

Total liabilities and shareholders’ equity		$	374,049		$	357,442

The accompanying notes are an integral part of the consolidated financial statements.

WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)


			Three Months Ended			Three Months Ended
			September 30, 2003			September 30, 2002

Revenue:
	Rooms		$	30,537		$	29,414
	Food and beverage			1,640			1,845
	Other operating departments			1,021			1,182
	Percentage lease revenue			535			8,886
	Interest and other income			407			300

		Total revenue		34,140			41,627

Hotel operating expenses:
	Rooms			7,105			6,949
	Food and beverage			1,337			1,437
	Other operating departments			783			788
Undistributed operating expenses:
	Property operating expenses			6,587			6,271
	Real estate taxes and property and casualty insurance			1,552			1,536
	Franchise costs			2,219			2,092
	Maintenance and repair			1,733			1,609
	Management fees			745			637
	Percentage lease expense			1,216			1,086
	General and administrative			1,094			1,224
	Depreciation			4,293			4,715
	Amortization			224			215
	Lease/management agreement acquisition			1,300			—

		Total operating expenses		30,188			28,559

Operating income				3,952			13,068
	Interest expense			1,883			2,642

Income before allocation to minority interest, allocation to consolidated joint ventures, income taxes, and equity in income of unconsolidated joint ventures				2,069			10,426
	Income allocation to minority interest			132			549
	Income (loss) allocation to consolidated joint ventures			(10	)		—
	Income tax benefit			(1,059	)		(458	)
	Equity in income of unconsolidated joint ventures			499			25

Income from continuing operations				3,505			10,360
Discontinued operations:
	Income (loss) from discontinued operations			(39	)		(24	)
	Loss on sale of discontinued operations			—			(622	)
	Loss on impairment of asset held for sale			(2,366	)		—

	Net income			1,100			9,714
Preferred stock distribution				(1,734	)		(1,734	)

		Net income (loss) applicable to common shareholders	$	(634	)	$	7,980

Income (loss) per common share:
Basic and diluted:
	Income from continuing operations		$	0.09		$	0.43
	Loss from discontinued operations			(0.12	)		(0.03	)

	Net income (loss) per common share		$	(0.03	)	$	0.40

The accompanying notes are an integral part of the consolidated financial statements.

WINSTON HOTELS, INC
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)


			Nine Months Ended			Nine Months Ended
			September 30, 2003			September 30, 2002

Revenue:
	Rooms		$	86,529		$	29,414
	Food and beverage			5,287			1,845
	Other operating departments			3,172			1,181
	Percentage lease revenue			2,083			28,037
	Interest and other income			1,138			998

		Total revenue		98,209			61,475

Hotel operating expenses:
	Rooms			19,968			6,949
	Food and beverage			4,053			1,437
	Other operating departments			2,224			788
Undistributed operating expenses:
	Property operating expenses			18,616			6,271
	Real estate taxes and property and casualty insurance			4,962			4,869
	Franchise costs			6,204			2,092
	Maintenance and repair			5,020			1,609
	Management fees			2,014			637
	Percentage lease expense			3,426			1,086
	General and administrative			4,049			4,094
	Depreciation			13,435			14,174
	Amortization			666			616
	Lease/management agreement acquisition			1,300			17,668

		Total operating expenses		85,937			62,290

Operating income (loss)				12,272			(815	)
	Interest expense			5,758			8,001

Income (loss) before allocation to minority interest, allocation to consolidated joint ventures, income taxes, and equity in income (loss) of unconsolidated joint ventures				6,514			(8,816	)
	Income (loss) allocation to minority interest			232			(445	)
	Income (loss) allocation to consolidated joint ventures			(10	)		—
	Income tax benefit			(1,679	)		(7,172	)
	Equity in income (loss) of unconsolidated joint ventures			553			(26	)

Income (loss) from continuing operations				8,524			(1,225	)
Discontinued operations:
	Income (loss) from discontinued operations			(128	)		97
	Loss on sale of discontinued operations			—			(1,364	)
	Loss on impairment of asset held for sale			(2,366	)		—

	Net income (loss)			6,030			(2,492	)
Preferred stock distribution				(5,203	)		(5,203	)

		Net income (loss) applicable to common shareholders	$	827		$	(7,695	)

Income (loss) per common share:
Basic and diluted:
	Income (loss) from continuing operations		$	0.16		$	(0.33	)
	Loss from discontinued operations			(0.12	)		(0.07	)

	Net income (loss) per common share		$	0.04		$	(0.40	)

The accompanying notes are an integral part of the consolidated financial statements.

WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(in thousands, except per share amounts)


																		Accumulated
	Preferred Stock				Common Stock				Additional						Distributions			Other		Total
									Paid-in			Unearned			In Excess of			Comprehensive		Shareholders'
	Shares		Dollars		Shares		Dollars		Capital			Compensation			Earnings			Loss		Equity

Balances at December 31, 2002		3,000	$	30		20,149	$	201	$	256,720		$	(596	)	$	(61,840	)		—	$	194,515
Issuance of shares — restricted stock		—		—		44		1		351			(352	)		—			—		—
Secondary stock offering		—		—		5,250		52		44,205			—			—			—		44,257
Distributions ($0.45 per common share)		—		—		—		—		—			—			(9,875	)		—		(9,875	)
Distributions ($1.734 per preferred share)		—		—		—		—		—			—			(5,203	)		—		(5,203	)
Unearned compensation amortization		—		—		—		—		—			341			—			—		341
Minority interest equity adjustment		—		—		—		—		(707	)		—			—			—		(707	)
Comprehensive income: