<PAGE> 1
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 June 30, 1996 Commission file number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1872141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2209 CENTURY DRIVE
RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices)
(Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding on August 8,
1996 was 15,663,217.
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WINSTON HOTELS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC. (unaudited)
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income - For the three months ended
June 30, 1996, three months ended June 30, 1995, six months
ended June 30, 1996 and six months ended June 30, 1995 4
Consolidated Statements of Cash Flows - For the six months ended
June 30, 1996 and the six months ended June 30, 1995 5
Notes to consolidated financial statements 6
WINSTON HOSPITALITY, INC. (unaudited)
Balance Sheets - June 30, 1996 and December 31, 1995 8
Statements of Income - For the three months ended June 30, 1996,
three months ended June 30, 1995, six months ended June 30,
1996 and six months ended June 30, 1995 9
Statements of Cash Flows - For the six months ended June 30, 1996
and six months ended June 30, 1995 10
Notes to financial statements 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature Page 23
</TABLE>
2
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WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land $ 16,910 $ 13,879
Buildings 126,929 103,264
Furniture, equipment and building improvements 10,908 5,753
-------- --------
154,747 122,896
Less accumulated depreciation 7,641 5,033
-------- --------
Net investment in hotel properties 147,106 117,863
Cash and cash equivalents 7,982 2,496
Lease revenue receivable 5,163 2,547
Deferred expenses, net 1,593 841
Prepaid expenses and other assets 508 222
-------- --------
$162,352 $123,969
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 11,475 $ 34,000
Accounts payable and accrued expenses 1,556 1,574
Distributions payable 4,105 2,785
Amounts due to Lessee 2,517 1,187
Minority interest in Partnership 3,856 3,551
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued and
outstanding 0 0
Common stock, $.01 par value, 50,000,000
shares authorized, 15,663,217 and 9,880,114
shares issued and outstanding 157 99
Additional paid-in capital 141,932 82,988
Unearned directors' compensation (219) (256)
Deficit (3,027) (1,959)
-------- --------
Total shareholders' equity 138,843 80,872
-------- --------
$162,352 $123,969
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Percentage lease revenue $ 6,792 $ 4,639 $ 11,332 $ 7,674
Interest and other income 21 27 37 53
---------- --------- ---------- ---------
Total revenue 6,813 4,666 11,369 7,727
---------- --------- ---------- ---------
Expenses:
Real estate taxes and property and
casualty insurance 375 318 695 534
General & administrative 473 304 897 531
Interest expense 900 604 1,574 1,142
Depreciation 1,442 903 2,609 1,648
Amortization 36 29 67 55
---------- --------- ---------- ---------
Total expenses 3,226 2,158 5,842 3,910
---------- --------- ---------- ---------
Income before allocation to
minority interest 3,587 2,508 5,527 3,817
Income allocation to minority interest 150 129 230 208
---------- --------- ---------- ---------
Net income applicable to
common shareholders $ 3,437 $ 2,379 $ 5,297 $ 3,609
========== ========= ========== =========
Net income per common share $ 0.34 $ 0.29 $ 0.53 $ 0.48
========== ========= ========== =========
Cash distributions per share $ 0.255 $ 0.22 $ 0.495 $ 0.44
========== ========= ========== =========
Weighted average number of common
shares and common share equivalents 10,672,165 8,730,874 10,526,428 7,984,345
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,297 $ 3,609
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority Interest 230 208
Depreciation 2,609 1,648
Amortization recorded as interest expense 113 29
Amortization of franchise fees 30 17
Unearned compensation amortization 37 38
Write-off of deferred acquisition costs 0 12
Changes in assets and liabilities:
Lease revenue receivable (2,616) (2,043)
Prepaid expenses and other assets (22) 39
Current liabilities 31 589
------- -------
Net cash provided by operating activities 5,709 4,146
------- -------
Cash flows used in investing activities:
Franchise fees paid (404) (216)
Deferred acquisition costs (881) (89)
Investment in hotel properties (30,508) (34,332)
------- -------
Net cash used in investing activities (31,793) (34,637)
------- -------
Cash flows used in financing activities:
Purchase of interest rate cap agreements 0 (261)
Fees paid to increase and extend the line of credit (13) (130)
Net proceeds from public offering 59,368 27,922
Payment of distributions to common shareholders (5,039) (2,913)
Payment of distributions to minority interest (221) (187)
Increase/(decrease) in line of credit borrowing (22,525) 5,000
------- -------
Net cash provided by financing activities 31,570 29,431
------- -------
Net increase/(decrease) in cash and cash equivalents 5,486 (1,060)
Cash and cash equivalents at beginning of period 2,496 1,114
------- -------
Cash and cash equivalents at end of period $ 7,982 $ 54
------- -------
Supplemental disclosure:
Cash paid for interest $ 1,392 $ 1,015
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
Winston Hotels, Inc. (the "Company") operates so as to qualify as a real
estate investment trust ("REIT") for federal income tax purposes. The
accompanying unaudited consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
the interim financial statements. All such adjustments are of a normal and
recurring nature. Due to the seasonality of the hotel business, the
information for the three and six month periods ended June 30, 1996 and 1995
are not necessarily indicative of the results for a full year.
2. ACQUISITIONS
In May 1996 the Company acquired five hotel properties for purchase
prices totaling $28 million with borrowings under its existing line of
credit and an interim unsecured line of credit. On June 26, 1996 the Company
completed a follow-on offering of 5.75 million shares. The net proceeds of
$59.4 million were used to repay the interim indebtedness relating to the May
acquisitions and certain other indebtedness.
3. PRO FORMA FINANCIAL INFORMATION
These unaudited pro forma condensed statements of income of the Company
are presented as if both the May 1995 and the June 1996 follow-on offerings
had occurred January 1, 1995 and the Company had acquired the five hotels it
acquired in May 1996 and the five hotels it acquired in May 1995 as of
January 1, 1995, thereby owning all 26 current hotels for the six month
periods ended June 30, 1996 and 1995. These unaudited pro forma condensed
statements of income are not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed as of January 1, 1995, nor does it purport to represent the results
of operations for future periods:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------- ----------------
<S> <C> <C>
Percentage lease revenue $12,793 $11,707
Net income applicable to common shareholders $ 7,145 $ 6,893
Net income per common share $ 0.46 $ 0.44
Weighted average number of common shares
and common share equivalents 16,097,173 16,085,114
</TABLE>
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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. SUMMARIZED NONCASH FINANCING AND INVESTING ACTIVITIES FOR THE PERIOD
The following summarizes the noncash financing and investing activities
for the six month period ended June 30, 1996 and 1995:
Included in accounts payable and accrued expenses and amounts due to Lessee
at June 30, 1996 are 1996 additions to investment in hotel properties of
$1,180 due to the Lessee, and $510 related to the acquisition of hotel
properties during the second quarter of 1996 as well as acquisitions that
occurred during the third quarter of 1996. On May 28, 1996, the Company
declared a $0.255 per share cash distribution of $4,105 which was paid on
July 16, 1996. In connection with the follow-on offering in June 1996 and
the related investment by Winston Hotels, Inc. into the Partnership, minority
interest in Partnership was increased and additional paid-in capital was
reduced by approximately $290. Included in accounts payable and accrued
expenses at December 31, 1995 was $409 for an Incentive Fee due to Advisor,
for which 33,103 shares of Common Stock were issued in April 1996.
Included in accounts payable and accrued expenses and amounts due to Lessee
at June 30, 1995 are additions to investment in hotel properties of $699 due
to the Lessee, and $119 related to the acquisition of hotel properties
occurring on May 18, 1995 and $511 of deferred expenses related to the May
1995 follow-on offering. On June 27, 1995, the Company declared a $.22 per
share cash distribution of $2,269 that was paid on July 18, 1995.
5. SUBSEQUENT EVENTS
In July 1996, the Company acquired three hotel properties for purchase
prices totaling $30.8 million which included the assumption of debt and
the issuance of approximately 786,000 partnership units by WINN Limited
Partnership.
7
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WINSTON HOSPITALITY, INC.
BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<Caption
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,767 $2,249
Accounts receivable:
Trade 1,552 836
Lessor 2,517 1,187
Affiliates 133 79
Prepaid expenses and other assets 73 117
------ ------
Total current assets 9,042 4,468
------ ------
Furniture, fixtures and equipment:
Furniture and equipment 241 186
Leasehold improvements 110 106
------ ------
351 292
Less accumulated depreciation and amortization 130 95
------ ------
221 197
------ ------
$9,263 $4,665
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $1,093 $ 450
Percentage lease payable 5,163 2,547
Accrued salaries and wages 652 607
Accrued sales and occupancy taxes 549 219
Other current liabilities 1,083 357
------ ------
8,540 4,180
------ ------
Shareholders' equity:
Common stock, $.01 par value, 100 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 49 49
Retained earnings 673 435
------ ------
Total shareholders' equity 723 485
------ ------
$9,263 $4,665
====== ======
</TABLE>
The accompanying note is an integral part of the financial statements.
8
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WINSTON HOSPITALITY, INC.
STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Room $14,719 $10,321 $25,427 $17,694
Food and beverage 401 28 440 60
Other revenue, net 285 250 554 432
Interest income 27 5 46 15
------- ------- ------- -------
Total revenue 15,432 10,604 26,467 18,201
------- ------- ------- -------
Expenses:
Property operating expenses 5,000 3,353 8,956 6,022
Repairs and maintenance 801 435 1,325 763
Food and beverage 293 38 351 44
General and administrative 510 355 994 697
Franchise costs 1,323 891 2,228 1,514
Management fees 377 272 693 427
Percentage lease payments 6,792 4,639 11,332 7,674
------- ------- ------- -------
Total expenses 15,096 9,983 25,879 17,141
------- ------- ------- -------
Net income $ 336 $ 621 $ 588 $ 1,060
======= ======= ======= =======
</TABLE>
The accompanying note is an integral part of the financial statements.
9
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WINSTON HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 588 $1,060
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 35 29
Changes in assets and liabilities:
Accounts receivable (716) (600)
Prepaid expenses and other assets 44 (1)
Accounts payable - trade 643 319
Percentage lease payable 2,616 2,043
Accrued expenses and other liabilities 1,101 476
------- ------
Net cash provided by operating activities 4,311 3,326
------- ------
Cash flows used in investing activities:
Sale/(purchases) of furniture, fixture & equipment (59) 3
Advances to lessor and affiliates (1,384) (760)
------- -----
Net cash used in investing activities (1,443) (757)
------- -----
Cash flows used in financing activities:
Distributions to shareholders (350) (456)
------- ------
Net cash used in financing activities (350) (456)
------- ------
Net increase in cash and cash equivalents 2,518 2,113
Cash and cash equivalents at beginning of period 2,249 2,120
------- ------
Cash and cash equivalents at end of period $ 4,767 $4,233
======= ======
</TABLE>
The accompanying note is an integral part of the financial statements.
10
<PAGE> 11
WINSTON HOSPITALITY, INC.
NOTE TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature.
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statistics and statements of income of the Lessee are
presented as if leases and the operation of the Current Hotels and the Acquired
Hotels had commenced on January 1, 1995. The unaudited pro forma statistics
and statements of income are not necessarily indicative of what actual results
of operations of the Lessee would have been assuming such operations had
commenced as of January 1, 1995, nor do they purport to represent the results
of operations for future periods ($ in thousands, except Average Daily Rate and
REVPAR).
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Occupancy 84.3% 86.0% 80.2% 82.6%
Average Daily Rate $ 60.27 $ 55.29 $ 58.18 $ 53.27
REVPAR $ 50.82 $ 47.54 $ 46.67 $ 44.02
Revenue
Room $15,739 $14,712 $28,887 $27,097
Food and beverage 685 535 1,229 1,022
Other revenue, net 369 359 729 710
------- ------- ------- -------
Total revenue 16,793 15,606 30,845 28,829
------- ------- ------- -------
Expenses:
Property operating expenses 7,465 6,529 14,070 12,703
Repairs and maintenance 882 849 1,522 1,425
Food and beverage 557 433 983 809
General and administrative 483 465 970 917
Percentage lease payments 7,216 6,626 12,793 11,707
------- ------- ------- -------
Total expenses 16,603 14,902 30,338 27,561
------- ------- ------- -------
Net income $ 190 $ 704 $ 507 $ 1,268
======= ======= ======= =======
</TABLE>
11
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ AMOUNTS IN THOUSANDS)
OVERVIEW
Winston Hotels, Inc. (the "Company"), which consummated an underwritten initial
public offering in June, 1994, a follow-on offering in May 1995, and a second
follow-on offering in June 1996 operates as a real estate investment trust to
invest in hotel properties. The Company acquired ten hotels in conjunction with
its initial public offering, six hotels during the remainder of 1994, five
hotels in May 1995 in connection with the May 1995 follow-on offering
(collectively, all twenty-one hotels are the "Current Hotels") and five hotels
in May 1996 (the "Acquired Hotels"). It currently leases 26 hotels to Winston
Hospitality, Inc., (the "Lessee") under percentage lease agreements (the
"Percentage Leases") through which it receives its principal source of revenue.
RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 1996 and 1995, the
differences in operating results are primarily attributable to the fact that
the Company owned 21 hotels for the entire three and six month periods ended
June 30, 1996 and 26 Hotels for 54 days of the three and six month periods
ended June 30, 1996, as compared to 16 hotels for the entire three and six
month periods ended June 30, 1995 and 21 hotels for 43 days of the three and
six month periods ended June 30, 1995. In order to present a more meaningful
comparison of operations, in addition to the comparison of actual results for
the three and six months ended June 30, 1995 versus actual results for the
three and six months ended June 30, 1996, below are analyses of the pro forma
results for the three and six month periods ended June 30, 1996 versus pro
forma results for the three and six month periods ended June 30, 1995 as if the
follow-on offerings, the May 1996 and the May 1995 acquisitions had occurred on
January 1, 1995.
THE COMPANY
ACTUAL - THREE MONTHS ENDED JUNE 30, 1996 VS ACTUAL - THREE MONTHS ENDED JUNE
30, 1995
The Company had revenues of $6,813 in 1996, consisting of $6,792 of Percentage
Lease revenues and $21 of interest and other income. Percentage Lease revenues
increased by $2,153, or 46%, in 1996 from $4,639 in 1995. This increase was
comprised of: (i) $525 for the 16 Current Hotels that were owned for the second
three months of 1996 and 1995, which was due to the rent formulas of the
Percentage Leases increasing rent payments by the Lessee by an average of 33%
of the $146 in increased room revenues attributable to inflation, and by an
average of 67% of the $712 in increased room revenues attributable primarily to
higher rates, (ii) $868 for the five Current Hotels that were acquired in May
1995, and (iii) $760 for the five Acquired Hotels.
Real estate taxes and property insurance costs incurred in 1996 were $375, an
increase of $57 from $318 in 1995. This increase was primarily attributable to
the five hotels acquired in 1995 that were owned for the entire six month
period in 1996. General and administrative expenses increased $169 to $473 in
1996 from $304 in 1995. The increase was attributable to: (i) costs
attributable to the increase in size and activities of the Company in 1996 over
1995; (ii) the Company becoming self-administered in 1996 and incurring costs
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<PAGE> 13
associated therewith, offset in part by savings from costs not incurred under
its previous advisory agreement; (iii) inflationary cost increases; and (iv)
the write-off of $49 in costs related to acquisition projects abandoned in
1996. Interest expense increased by $296 to $900 in 1996 from $604 in 1995,
primarily due to additional interest of $276 related to borrowings for the
purchase of the Acquired Hotels, and to the increase in amortization of
interest rate cap agreement costs in 1996. Depreciation increased $539 to
$1,442 in 1996 from $903 in 1995, primarily due to depreciation related to the
five hotels acquired in 1995 and the additional depreciation on renovations
completed during 1995 and 1996.
PRO FORMA - THREE MONTHS ENDED JUNE 30, 1996 VS PRO FORMA - THREE MONTHS ENDED
JUNE 30, 1995
The Company had pro forma revenues of $7,237 for the three months ended June
30, 1996, consisting of $7,216 of pro forma Percentage Lease revenues and $21
of pro forma interest and other income. Pro forma Percentage Lease revenues
increased by $590, or 9%, to $7,216 in 1996 from $6,626 in 1995. This increase
was due to the rent formulas of the Percentage Leases increasing pro forma rent
payments by the Lessee by an average of: (i) 35% of the $299 in increased pro
forma room revenues attributable to inflation and 65% of the $727 in increased
pro forma room revenues attributable primarily to higher rates, and (ii) 5% of
the $6 in increased food and beverage revenue attributable to inflation and 10%
of the $78 in increased food and beverage revenues.
Pro forma real estate taxes and property insurance costs incurred in 1996 were
$413, a decrease of $16 from $429 in 1995. This decrease was attributable
primarily to decreased insurance premiums in 1996. Pro forma general and
administrative expenses increased $195 to $479 in 1996 from $284 in 1995. The
increase was attributable to the Company becoming self-administered in 1996,
the timing of additional costs incurred therewith, and inflationary cost
increases, offset in part by savings from costs not incurred under its previous
advisory agreement. Pro forma interest expense remained consistent between 1995
and 1996, resulting from lower interest costs due to lower interest rates in
1996 than in 1995, and offset by an increase in amortization of interest rate
cap agreement costs in 1996. Pro forma depreciation increased $246 to $1,585 in
1996 from $1,339 in 1995 primarily due to additional depreciation on
renovations completed during 1995 and 1996.
ACTUAL - SIX MONTHS ENDED JUNE 30, 1996 VS ACTUAL - SIX MONTHS ENDED JUNE 30,
1995
The Company had revenues of $11,369 in 1996, consisting of $11,332 of
Percentage Lease revenues and $37 of interest and other income. Percentage
Lease revenues increased by $3,658, or 48%, in 1996 from $7,674 in 1995. This
increase was comprised of: (i) $860 for the 16 Current Hotels that were owned
for the first six months of 1996 and 1995, which was due to the rent formulas
of the Percentage Leases increasing rent payments by the Lessee by an average
33% of the $322 in increased room revenues attributable to inflation and by an
average of 67% of the $1,130 in increased room revenues attributable primarily
to higher rates, (ii) $2,038 for the five Current Hotels that were acquired in
May 1995 and (iii) $760 for the Acquired Hotels purchased in May 1996.
Real estate taxes and property insurance costs incurred in 1996 were $695, an
increase of $161 from $534 in 1995. This increase was primarily attributable to
the five hotels acquired in May 1995 that were owned for the entire six month
period in 1996. General and administrative expenses increased $366 to $897 in
1996 from $531 in 1995. The increase was attributable to: (i) costs
attributable to the increase in size and activities of the Company in 1996 over
1995; (ii) the Company becoming self-administered in 1996 and incurring costs
associated therewith, offset in part by savings from costs not incurred under
its previous advisory agreement;
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<PAGE> 14
(iii) inflationary cost increases; and (iv) the write-off of $71 in costs
related to acquisition projects abandoned in 1996. Interest expense increased
by $432 to $1,574 in 1996 from $1,142 in 1995, due to: (i) additional interest
of $276 related to borrowings for the purchase of the Acquired Hotels, (ii)
increase of $73 in amortization of interest rate cap agreements and other line
of credit costs in 1996 and (iii) average increase of $83 in interest expense
on the increase in other borrowings from 1995 to 1996. Depreciation increased
$961 to $2,609 in 1996 from $1,648 in 1995, primarily due to depreciation
related to the five hotels acquired in May 1995 and the additional depreciation
on renovations completed during 1995 and 1996.
PRO FORMA - SIX MONTHS ENDED JUNE 30, 1996 VS PRO FORMA - SIX MONTHS ENDED JUNE
30, 1995
The Company had pro forma revenues of $12,831 for the six months ended June 30,
1996, consisting of $12,793 of pro forma Percentage Lease revenues and $38 of
pro forma interest and other income. Pro forma Percentage Lease revenues
increased by $1,086, or 9%, to $12,793 in 1996 from $11,707 in 1995. This
increase was due to the rent formulas of the Percentage Leases increasing pro
forma rent payments by the Lessee by an average of: (i) 33% of the $341 in
increased pro forma room revenues attributable to inflation and 66% of the
$1,449 in increased pro forma room revenues attributable primarily to higher
rates, and (ii) 5% of the $9 in increased food and beverage revenue
attributable to inflation and 10% of the $135 in increased food and beverage
revenues attributable primarily to higher prices.
Pro forma real estate taxes and property insurance costs incurred in 1996 were
$820, a decrease of $16 from $836 in 1995. This decrease was attributable
primarily to the decrease in insurance premiums in 1996. Pro forma general and
administrative expenses increased $351 to $915 in 1996 from $564 in 1995. The
increase was attributable to the Company becoming self-administered in 1996,
the timing of additional costs incurred therewith, and inflationary cost
increases, offset in part by savings from costs not incurred under its previous
advisory agreement. Pro forma interest expense remained consistent between 1995
and 1996, resulting from lower interest costs due to lower interest rates in
1996 than in 1995, offset by an increase in amortization of interest rate cap
agreement costs in 1996. Pro forma depreciation increased $442 to $3,116 in
1996 from $2,674 in 1995 primarily due to additional depreciation on
renovations completed during 1995 and 1996.
THE LESSEE
ACTUAL - THREE MONTHS ENDED JUNE 30, 1996 VS ACTUAL - THREE MONTHS ENDED JUNE
30, 1995
Total revenue increased $4,828, or 46%, to $15,432 in 1996 from $10,604 in
1995. This increase is primarily attributable to an increase in room revenues
of $4,398, or 43%, to $14,719 in 1996 from $10,321 in 1995. The increase in
room revenues was due to: (i) an increase in room revenues of $858, or 10%, for
the 16 Current Hotels that were owned for the three month periods ended June
30, 1996 and 1995, (ii) room revenues of $3,302 in the three months ended June
30, 1996, up $1,865, or 130% from $1,437 in 1995 for the five Current Hotels
that were acquired in May 1995, and (iii) room revenues for the three months
ended June 30, 1996 in the amount of $1,675 for the Acquired Hotels. Food and
beverage revenue increased $373, to $401 in 1996 from $28 in 1995. This
increase is primarily attributable to one of the Acquired Hotels being a full
service hotel.
The Lessee had total expenses in 1996 of $15,096, up $5,113 from $9,983 in
1995. This increase was primarily attributable to the operation of a greater
number of hotels for the three months ended June 30, 1996 as compared with the
same period of 1995.
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<PAGE> 15
In general, the net income of the Lessee was negatively impacted during the
three months ended June 30, 1996 by the following non-recurring conditions: (i)
the renovation of the Comfort Inn hotel in Charleston, South Carolina, (ii) one
time general and administrative costs incurred in anticipation of managing 10
additional hotels and (iii) a short term management contract for the full
service hotel in Garland, Texas. Furthermore, the Lessee incurred incremental
on-going general and administrative costs during the three months ended June
30, 1996 in preparation for managing the 10 additional hotels, while only
receiving the benefit of operating profits of five hotels for approximately two
months. As of June 30, 1996, only five of the hotels (the Acquired Hotels) had
been leased and were operated for less than two months during the period.
PRO FORMA - THREE MONTHS ENDED JUNE 30, 1996 VS PRO FORMA - THREE MONTHS ENDED
JUNE 30, 1995
Pro forma total revenue increased $1,187, or 8%, to $16,793 in 1996 from
$15,606 in 1995. This increase is primarily attributable to an increase in pro
forma room revenues of $1,027, or 7%, to $15,739 in 1996 from $14,712 in 1995.
Pro forma food and beverage revenue increased $150 to $685 in 1996 from $535 in
1995 as a result of more aggressive marketing of food and beverage products to
guests primarily at the full-service Holiday Inn Select in Garland, Texas.
The Lessee had pro forma property and operating expenses of $7,465 in 1996
representing 47% of pro forma room revenue as compared to $6,529 or 44% of pro
forma room revenue in 1995. This increase is primarily attributable to the
Lessee offering greater amenities and providing additional services to guests
in an effort to add additional value to our product line in anticipation of new
competition. Pro forma Percentage Lease payments totaled $7,216 in 1996
representing 46% of pro forma room revenue as compared to $6,626 or 45% of pro
forma room revenue in 1995. This increase is due to the nature of the
Percentage Lease agreements. Other expenses on a pro forma basis experienced
increases attributable to inflation and the increases in pro forma room, food
and beverage revenue.
In general, net income on a pro forma basis for the Acquired Hotels reflects
the operations of the prior owners which were at lower operating margins during
1996 and 1995 than the Current Hotels. The Percentage Lease terms for the
Acquired Hotels reflect the assumption that the Acquired Hotels will be
operated at operating margins generally comparable to the Current Hotels. These
factors contributed to the lower pro forma net income in 1996 and 1995.
ACTUAL - SIX MONTHS ENDED JUNE 30, 1996 VS ACTUAL - SIX MONTHS ENDED JUNE 30,
1995
Total revenue increased $8,266, or 47%, to $26,467 in 1996 from $18,201 in
1995. This increase is primarily attributable to an increase in room revenues
of $7,733, or 44%, to $25,427 in 1996, from $17,694 in 1995. The increase in
room revenues was due to: (i) an increase in room revenues of $1,452, or 9%,
for the 16 Current Hotels that were owned for the first six months of both 1996
and 1995, (ii) room revenues of $6,043 in 1996, up $4,606 or 321%, from $1,437
in 1995 for the five Current Hotels that were acquired in May 1995, and (iii)
room revenues for the six months ended June 30, 1996 in the amount of $1,675
for the Acquired Hotels. Food and beverage revenue increased $380, or 633%, to
$440 in 1996 from $60 in 1995. This increase is primarily attributable to one
of the Acquired Hotels being a full service hotel.
15
<PAGE> 16
The Lessee had total expenses in 1996 of $25,879, up $8,738 from $17,141 in
1995. This increase was primarily attributable to the operation of a greater
number of hotels for the six months ended June 30, 1996 as compared with the
same period of 1995.
In general, the net income of the Lessee was negatively impacted during the six
months ended June 30, 1996 by the following non-recurring conditions: (i) the
unseasonably cold weather experienced during the first quarter of 1996, (ii)
renovation of the Comfort Inn hotel in Charleston, South Carolina, (iii) one
time general and administrative costs incurred in anticipation of managing 10
additional hotels, while only receiving the benefit of operating profits of five
hotels for approximately two months and (iv) a short term management contract
for the full service hotel in Garland, Texas. Furthermore, the Lessee incurred
incremental on-going general and administrative costs during the six months
ended June 30, 1996 in preparation for managing the 10 additional hotels. As of
June 30, 1996, only five of the hotels (the Acquired Hotels) had been leased and
were operated for less than two months during the period.
PRO FORMA - SIX MONTHS ENDED JUNE 30, 1996 VS PRO FORMA - SIX MONTHS ENDED JUNE
30, 1995
Pro forma total revenue increased $2,016, or 7%, to $30,845 in 1996 from
$28,829 in 1995. This increase is primarily attributable to an increase in pro
forma room revenues of $1,790, or 7%, to $28,887 in 1996 from $27,097 in 1995.
Pro forma food and beverage revenue increased $207 to $1,229 in 1996 from
$1,022 in 1995 as a result of more aggressive marketing of food and beverage
products to guests primarily at the full-service Holiday Inn Select in Garland,
Texas.
The Lessee had pro forma property and operating expenses of $14,070 in 1996
representing 49% of pro forma room revenue as compared to $12,703 or 47% of pro
forma room revenue in 1995. This increase is primarily attributable to the
Lessee offering greater amenities and providing additional services to guests
in an effort to add additional value to its product line in anticipation of new
competition. Pro forma Percentage Lease payments totaled $12,793 in 1996
representing 44% of pro forma room revenue as compared to $11,707 or 43% of pro
forma room revenue in 1995. This increase is due to the nature of the
Percentage Lease agreements. Other expenses on a pro forma basis were
consistent with increases in the rate of inflation and the increases in pro
forma room, food and beverage revenue.
In general, net income on a pro forma basis for the Acquired Hotels reflects
the operations of the prior owners which were at lower operating margins during
1996 and 1995 than the Current Hotels. The Percentage Lease terms for the
Acquired Hotels reflect the assumption that the Acquired Hotels will experience
operating margins generally comparable to the Current Hotels. These factors
contributed to the lower pro forma net income in 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the six months ended June 30,
1996, cash flow provided by operating activities was $5,709 and funds from
operations, which is equal to net income before minority interest plus
depreciation, was $8,136. Under Federal income tax law provisions applicable to
REITs, the Company is required to distribute at least 95% of its taxable income
to maintain its tax status as a REIT. In the second quarter of 1996, the Company
16
<PAGE> 17
declared distributions of $3,994 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 six months ended
June 30, 1996 totaled $31,793, primarily relating to the purchase of the
Acquired Hotels. Further, the Company incurred $262 in other costs related to
five additional hotel properties which, as of June 30, 1996, were under
contract to be purchased, and $2.0 million in renovation costs in connection
with previously acquired hotels. It also anticipates spending an additional
$7.0 million during 1996 to complete the refurbishment of its hotels. These
expenditures are in addition to reserves of 3% of room revenues for the first
year and 5% for the years thereafter which the Company is required to set aside
under its Percentage Leases for periodic capital improvements and the
refurbishment and replacement of furniture, fixtures and equipment at all of
its Current Hotels. For new acquisitions, the Company will be required to set
aside 5% of room revenues from limited-service hotels, and 7% of gross room,
food and beverage revenues from full-service hotels. In the six months ended
June 30, 1996 the Company set aside $1,219 for such reserves. These reserves
are expected to be funded from operating cash flow, and possibly also from
borrowings under the Company's line of credit, which sources are expected to be
adequate to fund such capital requirements. These reserves are in addition to
amounts spent on normal repairs and maintenance which have approximated 5.2%
and 4.3% of room revenues in 1996 and 1995, respectively, and are paid by the
Lessee.
The Company's net cash provided by financing activities in the six months ended
1996 totaled $31,570. Net cash provided included $59,368 of net proceeds from a
follow-on offering in June, 1996, offset by: i) a decrease of $22,525 in line of
credit borrowings, ii) the payment of distributions to shareholders of $5,039,
iii) the payment of distributions to minority interest of $221 and iv) the
payment of fees of $13 in connection with the New Line discussed below.
The Company has a $50 million line of credit with Wachovia Bank ("Existing
Line"), which expires in June 1997. Borrowings under the Existing Line
generally bear interest at LIBOR plus 1.25%. The Company's Articles of
Incorporation limit its total amount of indebtedness to 45% of the purchase
prices paid by the Company for its investments in hotel properties (the "Debt
Limitation"). As of June 30, 1996 the Company had $38,525 available under the
Existing Line, and approximately $121 million of additional borrowing capacity
under the Debt Limitation, assuming it invests all of its borrowings in
additional hotels.
In April 1996, a commitment was received from a group of banks led by
Wachovia Bank, under which the Existing Line would be amended and restated to
provide for an increase in the total commitment to $125 million, and an
extension of the term to June 1998 ("New Line"). Upon closing of the New Line
(expected to be in August 1996) the Company will secure it with certain hotel
properties, which will provide borrowing availability ("Line Availability").
Initially 26 of the 29 hotels owned by the Company as of August 8, 1996 will
secure the New Line, and are expected to provide Line Availability of
approximately $80 million. The Line Availability will be calculated quarterly,
and will increase if cash flow attributable to the collateral hotels increases
and / or the Company adds additional hotels as collateral. The terms of the
New Line permit borrowings for dividends, capital expenditures and working
capital of up to 17% of the Line Availability, and new hotel development of
up to 50% of the Line Availability. The New Line bears interest generally at
LIBOR plus 1.75%. The Company had obtained an interim unsecured line of
credit from its current lenders in the amount of $17 million ("Unsecured
Line") to partially finance the acquisition of the four hotels it
17
<PAGE> 18
acquired on May 7, 1996. This Unsecured Line was repaid from proceeds of the
follow-on offering in June, 1996.
The Company intends to acquire and develop additional hotel properties,
including those described below, that meet its investment criteria and is
continually evaluating acquisition opportunities. It is expected that future
hotel acquisitions will be financed, in whole or in part, from additional
follow-on offerings, from borrowings under the line of credit, from joint
venture agreements, and from the issuance of other debt or equity securities.
There can be no assurances that the Company will make an investment in any
additional hotel properties that meet its investment criteria.
In July 1996, the Company, through the Partnership, acquired three hotel
properties for purchase prices totaling $30.8 million. The Company funded the
purchase prices through the assumption of debt and the issuance of
approximately 786,000 Partnership units. The Company has also contracted to
acquire two additional hotels for an aggregate price of approximately $14.4
million. One of the additional two hotels, the 128-room Courtyard by Marriott -
Wilmington, North Carolina, currently is in the final stage of construction,
and the Company intends to acquire it within 15 days after the later of the
issuance of a certificate of occupancy or the opening of the hotel. The $7.5
million purchase price will be funded through the assumption of debt and the
issuance of approximately $1.0 million of Partnership units. The other hotel,
the 92-room Homewood Suites - Clear Lake (Houston), Texas, will be acquired for
$6.9 million pursuant to an on-going arrangement between the Company and Promus
Hotels, Inc. ("Promus"), the terms of which were agreed to on April 24, 1996
and amended on August 7, 1996. The Company expects to close on the Houston
hotel in August, 1996.
Under the arrangement with Promus, as amended, the Company will acquire the
Houston hotel, has a contingent purchase agreement to acquire a Homewood Suites
hotel being developed by Promus in Richmond, Virginia, has an option to
purchase a limited number of additional Promus-developed Homewood Suites hotels
(which are as yet unidentified) that Promus is obligated to offer the Company
in the future, and will require its lessee to retain Promus to manage the
hotels acquired from it. In addition to offering the Company the right to
acquire a limited number of hotels, Promus has agreed to invest up to $15
million in the Company's common stock (at the then-current market price per
share) as the Company acquires hotels from Promus, beginning with $1.5 million
upon the Company's acquisition of the Houston Homewood Suites hotel and $15,000
per room upon the acquisition of the other hotels from Promus. Promus also has
an option ("Promus Stock Option") expiring December 1996 to invest $7.5 million
(or any portion of it) of its potential $15 million investment at $11.00 per
share. The Company has agreed to use its best efforts to spend up to $100
million toward the acquisition or development of Promus-brand hotels, including
the Homewood Suites hotels in Houston and Richmond, any hotels acquired in the
future from Promus under the arrangement, and the three development hotels
described below. In July, 1996, the Company exercised its rights to terminate
agreements to purchase two Homewood Suites hotels being developed by Promus.
In connection with the August 7 amendments to the Promus arrangement, the
Company agreed to reduce from $3 million to $1.5 million the amount Promus is
required to invest upon the closing of the Houston hotel, Promus agreed to
reduce the maximum amount of common stock that it can buy under the Promus
Stock Option at $11.00 per share from $15 million to $7.5 million, and the
Company agreed to reduce the number of additional Promus-developed hotels that
Promus is required to offer the Company in the future.
18
<PAGE> 19
The Company expects to acquire the Homewood Suites - Richmond, Virginia upon
its completion, which Promus estimates will occur within the next year, for a
purchase price which will approximate Promus' development cost. Conditions to
the Company's obligation to purchase include its approval of the building
specifications and Promus' completion of construction within certain cost
limitations and by a specified delivery date.
The Company has entered into contracts to purchase an approximately 5.3 acre
site for development of a 137-suite Homewood Suites hotel near the Crabtree
Valley Mall in Raleigh, North Carolina and an approximately 2.7 acre site for
the development of a 112-suite Homewood Suites hotel in Alpharetta, Georgia. In
addition, the Company plans to develop a 96-suite Homewood Suites hotel on a
3.9 acre site owned in Durham, North Carolina. Total development costs are
expected to approximate $12.0 million, $10.0 million and $9 million,
respectively, for these projects. The construction period for each hotel is
tentatively expected to require approximately twelve months to complete, with
commencement during the third quarter of 1996 for the Raleigh and Alpharetta
hotels, and during the first quarter of 1997 for the Durham hotel. However,
there is no assurance that such development will be undertaken, or if
commenced, that it will be completed on schedule.
SEASONALITY
The hotels' operations historically have been seasonal in nature, reflecting
higher REVPAR during the second and third quarters. This seasonality and the
structure of the Percentage Leases, which provide for a higher percentage of
room revenues above 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.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1996, the Annual Meeting of Shareholders was held
and the following matters were submitted to the shareholders
for a vote. There were 8,994,805 shares either present or
evidenced by proxy. Set forth below is a brief description of
the matters voted on and the number of votes cast for, against
or withheld, as well as the number of abstentions and broker
non-votes.
Election of Directors:
<TABLE>
<CAPTION>
Number of
Votes Against Broker
Name Votes For or Withheld Non-votes Totals
---- --------- ---------- --------- ------
<S> <C> <C> <C> <C>
Charles M. Winston 8,932,716 62,089 0 8,994,805
Robert W. Winston 8,932,416 62,389 0 8,994,805
James H. Winston 8,932,716 62,089 0 8,994,805
Paul Fulton 8,930,870 63,935 0 8,994,805
Thomas F. Darden 8,932,870 61,935 0 8,994,805
Richard L. Daugherty 8,932,520 62,285 0 8,994,805
Edwin B. Borden 8,933,120 61,685 0 8,994,805
</TABLE>
Amendment to the Company's Stock Incentive Plan to increase
the number of authorized shares available to be issued:
<TABLE>
<S> <C>
Votes for: 7,929,961
Votes against or withheld: 1,011,967
Votes abstained: 52,877
Broker non-votes: 0
---------
Total 8,994,805
</TABLE>
Ratification of the accounting firm Coopers & Lybrand L.L.P.
as external auditors:
<TABLE>
<S> <C>
Votes for: 8,961,993
Votes against or withheld: 8,804
Votes abstained: 24,008
Broker non-votes: 0
---------
Total 8,994,805
</TABLE>
20
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 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. (Exhibit 10.2 to the Company's Form 10-Q filed on
May 14, 1996)
10.2 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. (Exhibit
10.3 to the Company's Form 10-Q filed on May 14, 1996)
10.3 Amendments to Agreement of Purchase and Sale dated May
21, 1996 and August 7, 1996 by and between WINN Limited
Partnership and Promus Hotels, Inc. amending the Agreement of
Purchase and Sale dated April 24, 1996 by and between WINN
Limited Partnership and Promus Hotels, Inc. relating to a
hotel property located in Clear Lake, Texas, (Exhibit 10.4 to
the Company's Form 10-Q filed on May 14, 1996)
10.4 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. (Exhibit 10.5 to
the Company's Form 10-Q filed on May 14, 1996)
10.5 Winston Hotels, Inc. Stock Incentive Plan, as amended
and restated on May 28, 1996
27.1 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K, dated May 21, 1996
listing the acquisition of one hotel on May 6, 1996 under Item
5 and four hotels on May 7, 1996 under Item 2 of the Form 8-K.
The financial statements required by the Form 8-K for the
properties described in Item 2 which were filed by
incorporation by reference are as follows:
21
<PAGE> 22
Impac Acquisition Hotels
------------------------
Report of Independent Accountants
Combined Balance Sheet as of December 31, 1995
Combined Statement of Income for the year ended
December 31,1995
Combined Statement of Equity for the year ended
December 31, 1995
Combined Statement of Cash Flows for the year ended
December 31, 1995
Notes to Combined Financial Statements
The Company filed a report on Form 8-K/A, dated July 18, 1996
amending the May 21, 1996 Form 8-K to include additional
financial statements unavailable on May 21, 1996 related to
the acquisition of four hotel properties on May 7, 1996. The
financial statements are as follows:
Impac Acquisition Hotels
------------------------
Report of the Independent Accountants
Combined Balance Sheets at December 31, 1995 and
March 31, 1996 (unaudited)
Combined Statements of Income for the year ended
December 31, 1995 and the three months Ended March 31, 1995
(unaudited) and 1996 (unaudited)
Combined Statements of Equity for the year ended December 31,
1995 and for the three months ended March 31, 1996
(unaudited)
Combined Statements of Cash Flows for the year ended December
31, 1995 and the three months ended March 31, 1995
(unaudited) and 1996 (unaudited)
Notes to the Financial Statements
Pro Forma Financial Statements
------------------------------
Winston Hotels, Inc. Pro Forma Consolidated Statements of
Income for the year ended December 31, 1995 and the three
months ended March 31, 1996 (unaudited)
Winston Hotels, Inc. Pro Forma Balance Sheet as March 31, 1996
(unaudited)
Winston Hospitality, Inc. Pro Forma Statements of Income for
the year ended December 31, 1995 and the three months ended
March 31, 1996 (unaudited)
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WINSTON HOTELS, INC.
Date August 14, 1996 /s/ Robert W. Winston, III
------------------------- -----------------------------
Robert W. Winston, III
Chief Executive Officer
and President
Date August 14, 1996 /s/ Philip R. Alfano
-------------------------- -----------------------------
Philip R. Alfano
Senior Vice President and
Chief Financial Officer
23
<PAGE> 24
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended June 30, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
10.1 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. (Exhibit 10.2 to the Company's Form 10-Q filed on May 14, 1996)
10.2 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. (Exhibit 10.3 to the Company's Form 10-Q filed on May 14, 1996)
10.3 Amendments to Agreement of Purchase and Sale dated May 21, 1996 and August 7, 1996 by and between WINN Limited
Partnership and Promus Hotels, Inc. amending the Agreement of Purchase and Sale dated April 24, 1996 by and
between WINN Limited Partnership and Promus Hotels, Inc. relating to a hotel property being located in Clear
Lake, Texas, (Exhibit 10.4 to the Company's Form 10-Q filed on May 14, 1996)
10.4 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. (Exhibit 10.5 to the Company's Form 10-Q
filed on May 14, 1996)
10.5 Winston Hotels, Inc. Stock Incentive Plan, as amended and restated on May 28, 1996
27.1 Financial Data Schedule (For SEC use only)
</TABLE>
24
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1 TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT (the "Amendment") is
made and entered as of this th day of August, 1996, by and between PROMUS
HOTELS, INC. ("Promus"), a Delaware corporation, and WINSTON HOTELS, INC. (the
"Company"), a North Carolina corporation.
RECITALS
WHEREAS, the Company and Promus entered into a Stock Purchase
Agreement dated April 24th, 1996 (the "Stock Purchase Agreement").
WHEREAS, the Company and Promus now desire to amend certain parts of
the Stock Purchase Agreement.
WHEREAS, all capitalized terms used but not otherwise defined herein
shall have the meaning assigned to such terms in the Stock Purchase Agreement.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
1. DEFINITION OF DEVELOPMENT HOTEL
The definition of "Development Hotels" set forth in the Recitals
section of the Stock Purchase Agreement is hereby restated in the singular and
is amended for purposes of both the Stock Purchase Agreement and the Amendment
such that "Development Hotel" shall mean the Homewood Suites Hotel currently
under construction in Richmond, Virginia.
2. AMENDMENT OF PARAGRAPH 1(A)(I)(A) OF THE STOCK PURCHASE AGREEMENT
Paragraph 1(a)(i)(a) of the Stock Purchase Agreement shall be deleted
in its entirety and the following provision shall be inserted in lieu thereof:
(a) One Million Five Hundred Thousand Dollars ($1,500,000), at
the per share Purchase Price determined in accordance with Section 2 below, on
the date on which the Partnership acquires the Developed Hotel, and
<PAGE> 2
3. AMENDMENT OF PARAGRAPH 1(A)(I)(B) OF THE STOCK PURCHASE AGREEMENT
Paragraph 1(a)(i)(b) of the Stock Purchase Agreement shall be deleted
in its entirety and the following provision shall be inserted in lieu thereof:
(b) the product of Fifteen Thousand Dollars ($15,000) and the
number of guest rooms in the Development Hotel or an Additional Hotel, at the
per share Purchase Price determined in accordance with Section 2 below, on the
date on which the Partnership acquires the Development Hotel or Additional
Hotel.
4. AMENDMENT OF PARAGRAPH 1(C) OF THE STOCK PURCHASE AGREEMENT
Paragraph 1(c) of the Stock Purchase Agreement shall be deleted in its
entirety and the following provision shall be inserted in lieu thereof:
(c) AGGREGATE SUBSCRIPTION LIMIT. Promus' agreement herein to purchase
Common Stock shall not exceed at any time the amount (the "Aggregate
Subscription Limit") equal to the lesser of (i) Fifteen Million Dollars
($15,000,000) or (ii) the sum of One Million Five Hundred Thousand Dollars
($1,500,000) and the aggregate Closed Hotel Amount. The "Closed Hotel Amount"
shall equal the product of (A) Fifteen Thousand Dollars ($15,000) and (B) the
number of guest rooms in the Development Hotel or Additional Hotel purchased by
the Partnership pursuant to the Acquisition Documents or any documents executed
subsequently by the parties pursuant to the Acquisition Documents regarding the
Partnership's acquisition of Additional Hotels.
5. AMENDMENT OF PARAGRAPH 2 OF THE STOCK PURCHASE AGREEMENT
Paragraph 2 of the Stock Purchase Agreement shall be deleted in its
entirety and the following provision shall be inserted in lieu thereof:
2. PURCHASE PRICE. The number of shares of Common Stock received by
Promus at each closing of its purchase of Common Stock hereunder shall be equal
to the gross purchase price paid by Promus at such closing divided by, (i) with
respect to up to 681,818 shares of Common Stock acquired within six months
after the Public Offering, $11.00 per share of Common Stock, and, (ii) with
respect to all other Common Stock, an amount equal to the Market Price of a
share of Common Stock on the date of acquisition. For purposes of this
Agreement, "Market Price" shall mean, for any date, the average of the high and
low sales prices of the Company's Common Stock as quoted on the Nasdaq Stock
Market for the 10 consecutive business days ending on the second business day
preceding such date.
2
<PAGE> 3
6. Except as expressly amended hereby, all terms and conditions of this
Agreement shall continue to be in full force and effect.
7. This Amendment shall be governed by, and interpreted in accordance
with the laws of the State of North Carolina.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on and as
of the date first above written.
PROMUS HOTELS, INC.,
a Delaware corporation
By:
Name:
Title:
WINSTON HOTELS, INC.,
a North Carolina corporation
By:
Name:
Title:
3
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO AGREEMENT
OF PURCHASE AND SALE
THIS AMENDMENT TO AGREEMENT OF PURCHASE AND SALE ("Amendment") is made
and entered into by and between WINN Limited Partnership, a North Carolina
limited partnership ("Purchaser") and Promus Hotels, Inc., a Delaware
corporation ("Seller");
WITNESSETH THAT:
WHEREAS, Purchaser and Seller entered into that certain agreement of
purchase and sale dated April 24, 1996 relative to the purchase and sale of
three (3) hotels to be developed by Seller located in Richmond, Virginia, BWI
Baltimore, Maryland and Dallas-Market Center, Texas ("the Agreement"); and
WHEREAS, all capitalized terms defined in the Agreement shall have the
same meanings as defined therein when used herein; and
WHEREAS, subsequent to the execution of the Agreement, Purchaser and
Seller have agreed to certain amendments thereto as expressly set forth
hereinafter;
NOW, THEREFORE, in consideration of the premises, the sum of Ten
Dollars in hand paid and other good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, Purchaser and Seller
hereby covenant and agree that the Agreement is and shall be amended as
follows:
1. Tract 2 and Tract 3 are hereby deleted from the Real Property
and the Premises and by virtue thereof, the Real Property and the Premises
shall pertain solely to the Hotel to be developed on Tract 1 (Richmond,
Virginia).
2. The Feasibility Period as previously extended to August 1,
1996 is hereby amended and extended to and including September 15, 1996.
3. Article II of the Agreement is amended by virtue of the
deletion from the first paragraph thereof of the sentence which reads as
follows: If Seller's actual development and building costs for a Hotel, which
shall not include fees paid to Seller or its affiliates, are less than the
Purchase Price, less fees included therein which are payable to Seller or its
affiliates, the Purchase Price shall be reduced by an amount equal to 100% of
cost savings in excess of 4% of the Purchase Price.
1
<PAGE> 2
4. The provisions set forth as (ii), (iii) and (iv) of Article
III, Paragraph B of the Agreement are hereby expressly deleted.
5. Article III, Paragraph D is amended by deletion of the
reference to $12,500 and the replacement thereof with $15,000.
This Amendment is executed in accordance with Article XV, Paragraph A
of the Agreement. Unless expressly amended herein, the terms and provisions of
the Agreement shall remain as expressly set forth therein.
IN WITNESS WHEREOF, Purchaser and Seller have executed this Amendment
as of the 7th day of August, 1996.
Purchaser:
WINN Limited Partnership
By: Winston Hotels, Inc.,
Sole General Partner
By: /s/ Robert W. Winston, III (SEAL)
-----------------------------
Robert W. Winston, III, President
Seller:
Promus Hotels, Inc.
By: /s/ Thomas Keltner (SEAL)
-----------------------------
Thomas Keltner, Senior Vice President
2
<PAGE> 1
EXHIBIT 10.3
August 7, 1996
Thomas Keltner
Senior Vice President
Promus Hotels, Inc.
785 Crossover Lane, Suite 141
Memphis, Tennessee 38117
Re: Agreement of Purchase and Sale between WINN Limited Partnership
("Purchaser") and Promus Hotels, Inc. ("Seller") dated April
24, 1996, as amended by letter agreement dated May 21, 1996,
agreed to by Seller on May 29, 1996 (collectively "the
Agreement") relative to the Purchase and Sale of that certain
Homewood Suites hotel located on Bay Area Boulevard, Houston,
Texas ("the Property")
Dear Mr. Keltner:
This letter shall serve as an amendment to the Agreement. All
capitalized terms defined in the Agreement shall have the same meanings as
defined therein when used herein. The Stock Purchase Agreement has been or will
be amended such that on the Closing Date Seller shall purchase common stock
directly from Winston Hotels, Inc., the general partner of Purchaser, in the
amount of $1,500,000.00, rather than $3,000,000.00 as originally stated in the
Agreement. Article III, Paragraph B of the Agreement is hereby expressly
amended in accordance with the foregoing.
1
<PAGE> 2
Upon the execution hereof by Purchaser and Seller at the places
indicated below, this shall constitute an amendment to the Agreement in
accordance with Article XV, Paragraph A thereof.
Sincerely,
BROWN & BUNCH
William W. Bunch, III
WWB/jbe
Agreed to as expressly set forth above.
Purchaser:
WINN Limited Partnership
By: Winston Hotels, Inc.,
Sole General Partner
By: /s/ Robert W. Winston, III (SEAL)
----------------------------
Robert W. Winston, III, President
Seller:
Promus Hotels, Inc.
By: /s/ Thomas Keltner (SEAL)
----------------------------
Thomas Keltner, Senior Vice President
2
<PAGE> 3
[BROWN & BUNCH LETTERHEAD]
May 21, 1996
Federal Express
Ronald Halpern, Esquire
Promus Hotels, Inc.
Deputy General Counsel, Vice President
785 Crossover Lane, Suite 141
Memphis, Tennessee 38117
Re: Agreement of Purchase and Sale dated April 24, 1996
between WINN Limited Partnership ("Purchaser") and
Promus Hotels, Inc. ("Seller") relative to the purchase
and sale of the Homewood Suites Hotel located at 401
Bay Area Boulevard, Houston, Texas ("the Houston
Contract")
and
Agreement of Purchase and Sale dated April 24, 1996
between WINN Limited Partnership ("Purchaser") and
Promus Hotels, Inc. ("Seller") relative to the purchase
and sale of Homewood Suites Hotels to be constructed
in Richmond, Virginia, BWI, Baltimore, Maryland and
Dallas-Market Center, Texas ("the Development Hotels
Contract")
Dear Ron:
This letter is to confirm our telephone conversation of earlier this
morning and to amend the Houston Contract and the Development Hotels Contract as
expressly set forth hereinafter. As you are aware, I represent the Purchaser
relative to the Houston Contract and the Development Hotels Contact and I have
express authorization from the Purchaser to enter into this amendment to such
contracts on behalf of the Purchaser.
This is to confirm that the Purchaser and Seller have agreed that the
Feasibility Period defined in the Houston Contract is hereby amended and
extended until and through July 1, 1996 and that the Feasibility Period defined
in the Development Hotels Contract is hereby amended and extended until and
through August
<PAGE> 4
May 21, 1996
Page 2
1, 1996. Upon execution of this letter by an authorized officer of Promus
Hotels at the place indicated below, the Houston Contract and the Development
Hotels Contract shall be amended in accordance with the immediately preceding
sentence.
I have enclosed duplicate originals of this letter for execution by
Promus Hotels, Inc. Please return an original of this letter agreement
executed by Promus Hotels, Inc. to me as soon as possible. Thank you for your
assistance in this matter.
Sincerely,
BROWN & BUNCH
/s/ William W. Bunch, III
-------------------------------
William W. Bunch, III
Agreed to by Promus Hotels, Inc. for the purpose of amending the
Houston Contract and the Development Hotels Contract and extending the
Feasibility Period under each such contract as expressly set forth
hereinbefore. This is the 29th day of May, 1996.
Promus Hotels, Inc.
By: /s/ Terry O'Malley
---------------------------
Name: Terry O'Malley
Title: Vice President, Development
cc: Joe Green
Mark Murphy, Esquire
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENT TO OPTION
TO PURCHASE ADDITIONAL HOTELS
THIS FIRST AMENDMENT TO OPTION TO PURCHASE ADDITIONAL HOTELS ("First
Amendment") is made and entered into by and between Promus Hotels, Inc., a
Delaware corporation ("Seller") and WINN Limited Partnership, a North Carolina
limited partnership ("Purchaser");
WITNESSETH THAT:
WHEREAS, Purchaser and Seller entered into that certain Option to
Purchase Additional Hotels dated April 24, 1996 ("the Option"); and
WHEREAS, all capitalized terms defined in the Option shall have the
same meanings as defined therein when used herein; and
WHEREAS, subsequent to the execution of the Option, Purchaser and
Seller have agreed to certain amendments thereto as expressly set forth
hereinafter;
NOW, THEREFORE, in consideration of the premises, the sum of Ten
Dollars in hand paid and other good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, Purchaser and Seller
hereby covenant and agree that the Option is and shall be amended as follows:
1. Notwithstanding anything contained in the Option to the
contrary, the two (2) Development Hotels referred to in the Option which are to
be developed by Seller at BWI Baltimore, Maryland and Dallas-Market Center,
Texas shall be deemed and considered Additional Hotels offered by Seller to
Purchaser for the twelve (12) month period beginning April 1, 1996. It is
expressly acknowledged and agreed that Purchaser has elected not to acquire
either of such Additional Hotels.
2. Paragraph 3 (c) of the Option is hereby expressly deleted.
3. The Agreement shall mean and refer to the Agreement as amended
by and through the amendment thereto of even date herewith.
This First Amendment is executed in accordance with Paragraph 6 of the
Option. Unless expressly amended herein, the terms and provisions of the
Option shall remain as expressly set forth therein.
1
<PAGE> 2
IN WITNESS WHEREOF, Purchase and Seller have executed this First
Amendment as of the 7th day of August, 1996.
Purchaser:
WINN Limited Partnership
By: Winston Hotels, Inc.,
Sole General Partner
By: /s/ Robert W. Winston, III (SEAL)
-----------------------------
Robert W. Winston, III, President
Seller:
Promus Hotels, Inc.
By: /s/ Thomas Keltner (SEAL)
-----------------------------
Thomas Keltner, Senior Vice President
2
<PAGE> 1
EXHIBIT 10.5
WINSTON HOTELS, INC.
STOCK INCENTIVE PLAN
ARTICLE 1
DEFINITIONS
1.01. Acquiring Person means that (a) a Person, considered alone or together
with all Control Affiliates and Associates of that Person, becomes directly or
indirectly the beneficial owner of securities representing at least twenty
percent (20%) of the Company's outstanding securities entitled to vote
generally in the election of the Board, or (b) a person enters into an
agreement that would result in that Person satisfying the conditions in
subsection (a) or that would result in a Related Entity's failure to be a
Related Entity.
1.02. Administrator means the Committee and any delegate of the Committee
that is appointed in accordance with Article III.
1.03. Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of an award of Performance Shares or a Stock Award, Option or
SAR granted to such Participant.
1.04. Associate, with respect to any Person, is defined in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act. An Associate does not
include the Company or a majority-owned subsidiary of the Company.
1.05. Board means the Board of Directors of the Company.
1.06. Change in Control means that (a) the Company enters into any agreement
with a Person that involves the transfer of ownership of the Company or of more
than fifty percent (50%) of the Company's total assets or earnings power on a
consolidated basis, as reported in the Company's consolidated financial
statements filed with the Securities and Exchange Commission (including an
agreement for the acquisition of the Company by merger, consolidation, or
statutory share exchange - regardless of whether the Company is intended to be
the surviving or resulting entity after the merger, consolidation, or statutory
share exchange - or for the sale of substantially all of the Company's assets
to that Person), (b) any Person is or becomes an Acquiring Person, or (c)
during any period of two consecutive calendar years, the Continuing Directors
cease for any reason to constitute a majority of the Board; provided, however,
that the initial public offering of the Company in 1994 shall not constitute a
Change in Control. For purposes of the preceding sentence, "Continuing
Director" means any member of the Board, while a member of the Board and (a)
who was a member of the Board prior to the adoption of the Plan or (b) whose
subsequent nomination for election or election to the Board was recommended or
approved by a majority of the Continuing Directors.
1.07. Code means the Internal Revenue Code of 1986, as amended and as in
effect from time to time.
<PAGE> 2
1.08. Committee means the Compensation Committee of the Board which shall be
comprised of two or more individuals who allow the Committee to satisfy the
requirements of Securities and Exchange Commission Rule 16b-3(c)(2)(i). The
Committee shall be appointed by the Board.
1.09. Common Stock means the Common Stock of the Company.
1.10. Company means Winston Hotels, Inc.
1.11. Control Affiliate, with respect to any Person, means an affiliate as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.
1.12. Control Change Date means the date on which a Change in Control
occurs. If a Change in Control occurs on account of a series of transactions,
the Control Change Date is the date of the last of such transactions.
1.13. Corresponding SAR means an SAR that is granted in relation to a
particular Option and that can be exercised only upon the surrender to the
Company, unexercised, of that portion of the Option to which the SAR relates.
1.14. Exchange Act means the Securities Exchange Act of 1934, as amended and
as in effect from time to time.
1.15. Fair Market Value means, on any given date, the current fair market
value of the shares of Common Stock as determined pursuant to subsection (a) or
(b) below.
(a) While the Company is a Non-Public Company, Fair
Market Value shall be determined by the Board using any reasonable method in
good faith.
(b) While the Company is a Public Company, Fair Market
Value shall be determined as follows: if the Common Stock is not listed on an
established stock exchange, the Fair Market Value shall be the reported
"closing" price of shares of Common Stock in the New York over-the-counter
market as reported by the National Association of Securities Dealers, Inc. If
the Common Stock is listed on an established stock exchange or exchanges, Fair
Market Value shall be deemed to be the highest closing price of shares of
Common Stock reported on that stock exchange or exchanges or, if no sale of
Common Stock shall be made on any stock exchange on that day, then the next
preceding day on which there was a sale. For purposes of this definition, the
term "Public Company" means a corporation that has sold securities pursuant to
an effective registration statement on Form S-1 filed pursuant to the
Securities Act of 1933, as amended and the term "Non-Public Company" means a
corporation that has never sold securities pursuant to an effective
registration statement on Form S-1 filed pursuant to the Securities Act of
1933, as amended.
1.16. Initial Value means, with respect to a Corresponding SAR, the option
price per share of the related Option and, with respect to an SAR granted
independently of an Option, the Fair Market Value of one share of Common Stock
on the date of grant.
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<PAGE> 3
1.17. Option means a stock option that entitles the holder to purchase from
the Company a stated number of shares of Common Stock at the price set forth in
an Agreement.
1.18. Participant means an employee of the Company or a Related Entity,
including an employee who is a member of the Board and who satisfies the
requirements of Article IV or an individual who provides services to the
Company or a Related Entity and who satisfies the requirements of Article IV
and is selected by the Administrator to receive an award of Performance Shares,
a Stock Award, an Option, an SAR, or a combination thereof.
1.19. Performance Shares means an award which, in accordance with, and
subject to, an Agreement, will entitle the Participant, or his estate or
beneficiary in the event of the Participant's death, to receive cash or a Stock
Award or a combination thereof.
1.20. Plan means the Winston Hotels, Inc. Stock Incentive Plan.
1.21. Related Entity means any "parent" or "subsidiary" corporation in the
controlled group that includes the Company which shall be any corporation in an
unbroken chain of corporations beginning or ending with the Company that, at
the time of an award of Performance Shares or the granting of a Stock Award, an
Option or an SAR, each of the corporations (other than the Company or the last
corporation in the unbroken chain of corporations) owns stock constituting at
least fifty percent (50%) or more of the value of one of the other corporations
in such chain or at least fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
1.22. Restricted Stock means Common Stock awarded to a Participant under
Article IX and that is nontransferable or subject to a substantial risk of
forfeiture, or both. Shares of Common Stock shall cease to be Restricted Stock
when, in accordance with the terms of the applicable Agreement, they become
transferable and free of substantial risks of forfeiture.
1.23. SAR means a stock appreciation right that entitles the holder to
receive, with respect to each share of Common Stock encompassed by the exercise
of such SAR, the amount determined by the Administrator and specified in an
Agreement. In the absence of such a determination, the holder shall be
entitled to receive, with respect to each share of Common Stock encompassed by
the exercise of such SAR, the excess of the Fair Market Value on the date of
exercise over the Initial Value. References to "SARs" include both
Corresponding SARs and SARs granted independently of Options, unless the
context requires otherwise.
1.24. Stock Award means Common Stock awarded to a Participant under Article
IX, including shares that are Restricted Stock, or in accordance with an award
of Performance Shares.
1.25. Ten Percent Shareholder means any individual owning more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or a Related Entity. A Participant shall be considered to own any
voting stock owned (directly or indirectly) by or for his brothers, sisters,
spouse, ancestors or lineal descendants and an individual shall be considered
to own proportionately any voting stock owned (directly or indirectly) by or
for a corporation, partnership, estate or trust of which such individual is a
shareholder, partner or beneficiary.
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<PAGE> 4
ARTICLE II
PURPOSES
The Plan is intended to assist the Company and Related Entities in
recruiting and retaining key employees and service providers by enabling such
persons to participate in the future success of the Company and the Related
Entities and to associate their interests with those of the Company and its
shareholders. The Plan is intended to permit the award of Performance Shares,
the grant of Stock Awards, SARs and the grant of both Options qualifying under
Section 422 of the Code ("incentive stock options") and Options not so
qualifying. No Option that is intended to be an incentive stock option shall
be invalid for failure to qualify as an incentive stock option. The proceeds
received by the Company from the sale of Common Stock pursuant to this Plan
shall be used for general corporate purposes.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Administrator. The
Administrator shall have authority to award Performance Shares and to grant
Stock Awards, Options and SARs upon such terms (not inconsistent with the
provisions of this Plan) as the Administrator may consider appropriate. Such
terms may include conditions (in addition to those contained in this Plan) on
the exercisability of all or any part of an Option or SAR or on the
transferability or forfeitability of a Stock Award or Performance Shares.
Notwithstanding any such conditions, the Administrator may, in its discretion,
accelerate the time at which any Option or SAR may be exercised, or the time at
which a Stock Award may become transferable or nonforfeitable or the time at
which Performance Shares have been earned. In addition, the Administrator
shall have complete authority to interpret all provisions of this Plan; to
prescribe the form of Agreements; to adopt, amend, and rescind rules and
regulations pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of this Plan. The
express grant in the Plan of any specific power to the Administrator shall not
be construed as limiting any power or authority of the Administrator. Any
decision made, or action taken, by the Administrator or in connection with the
administration of this Plan shall be final and conclusive. Neither the
Administrator nor any member of the Committee shall be liable for any act done
in good faith with respect to this Plan or any Agreement, Option, SAR, Stock
Award, or an award of Performance Shares. All expenses of administering this
Plan shall be borne by the Company.
The Committee, in its discretion, may delegate to one or more officers
of the Company all or part of the Committee's authority and duties with respect
to grants and awards to individuals who are not subject to the reporting and
other provisions of Section 16 of the Exchange Act. The Committee may revoke
or amend the terms of a delegation at any time but such action shall not
invalidate any prior actions of the Committee's delegate or delegates that were
consistent with the terms of the Plan.
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<PAGE> 5
ARTICLE IV
ELIGIBILITY
4.01. General. Any employee of the Company or a Related Entity (including a
corporation that becomes a Related Entity after the adoption of this Plan), or
an individual who provides services to the Company or a Related Entity
(including a corporation that becomes a Related Entity after the adoption of
this Plan) is eligible to participate in this Plan if the Administrator, in its
sole discretion, determines that such person has contributed significantly or
can be expected to contribute significantly to the profits or growth of the
Company or a Related Entity. Directors of the Company or a Related Entity may
be selected to participate in this Plan. A Director of the Company or a member
of the Committee may not participate in this Plan during his service on the
Committee or during the period thereafter if his participation would prevent
the Committee from being "disinterested" for purposes of Securities and
Exchange Commission Rule 16b-3 as in effect from time to time.
4.02. Grants. The Administrator will designate individuals to whom an award
of Performance Shares are to be granted and to whom Stock Awards, Options and
SARs are to be granted and will specify the number of shares of Common Stock
subject to each award or grant. An Option may be granted with or without a
related SAR. An SAR may be granted with or without a related Option. Each
award of Performance Shares and all Stock Awards, Options and SARs granted
under this Plan shall be evidenced by Agreements which shall be subject to the
applicable provisions of this Plan and to such other provisions as the
Administrator may adopt. No Participant may be granted incentive stock options
or related SARs (under all incentive stock option plans of the Company or a
Related Entity) which are first exercisable in any calendar year for stock
having an aggregate Fair Market Value (determined as of the date an Option is
granted) that exceeds $100,000. The preceding annual limitation shall not
apply with respect to Options that are not incentive stock options.
ARTICLE V
STOCK SUBJECT TO PLAN
Upon the award of shares of Common Stock pursuant to a Stock Award,
the Company may issue shares of Common Stock from its authorized but unissued
Common Stock. Upon the exercise of any Option or SAR, the Company may deliver
to the Participant (or the Participant's broker if the Participant so directs),
shares of Common Stock from its authorized but unissued Common Stock. The
maximum aggregate number of shares of Common Stock that may be issued under
this Plan is Seven Hundred Thousand (700,000) shares, plus five percent (5%) of
any increase, other than any increase due to the issuance of shares under the
Plan or any other similar plan of the Company, in the number of authorized and
issued shares above Fourteen Million (14,000,000) authorized and issued shares
of Common Stock, provided, however, that at no time shall the aggregate number
of shares of Common
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<PAGE> 6
Stock subject to incentive stock options under this Plan be greater than Three
Hundred Fifty Thousand (350,000) shares without shareholder approval. The
maximum aggregate number of shares of Common Stock that may be issued under
this Plan shall be subject to adjustment as provided in Article XI. If an
Option is terminated, in whole or in part, for any reason other than its
exercise or the exercise of a Corresponding SAR, the number of shares of Common
Stock allocated to the Option or portion thereof may be reallocated to other
Options, SARs, Stock Awards and Performance Shares to be granted under this
Plan. If an SAR is terminated, in whole or in part, for any reason other than
its exercise or the exercise of a related Option, the number of shares of
Common Stock allocated to the SAR or portion thereof may be reallocated to
other Options, SARs, Stock Awards and awards of Performance Shares to be
granted under this Plan. To the extent that an award of Performance Shares is
forfeited, in whole or in part, without the issuance of a Stock Award, the
number of shares of Common Stock allocated to the portion of the forfeited
Performance Share Award may be reallocated to other Options, SARs, Stock Awards
and awards of Performance Shares to be granted under this Plan.
ARTICLE VI
OPTION PRICE
The price per share for Common Stock purchased on the exercise of an
Option shall be determined by the Administrator on the date of grant; provided,
however, that the price per share for Common Stock purchased on the exercise of
an Option that is an incentive stock option shall not be less than the Fair
Market Value on the date of the Option is granted and provided, further,
however, that the price per share shall not be less than 110% of such Fair
Market Value in the case of an incentive stock option granted to a Participant
who is a Ten Percent Shareholder on the date such incentive stock option is
granted.
ARTICLE VII
EXERCISE OF OPTIONS AND SARS
7.01. Maximum Option or SAR Period. The maximum period in which an
Option or SAR may be exercised shall be determined by the Administrator on the
date of grant, except that no Option that is an incentive stock option or its
Corresponding SAR shall be exercisable after the expiration of ten years from
the date such Option or Corresponding SAR was granted. In the case of an
incentive stock option or its Corresponding SAR granted to a Participant who is
a Ten Percent Shareholder, such Option and Corresponding SAR shall not be
exercisable after the expiration of five years from the date of grant. The
terms of any Option that is an incentive stock option or Corresponding SAR may
provide that it is exercisable for a period less than such maximum periods.
7.02. Nontransferability. Any Option or SAR granted under this Plan
shall be nontransferable except by will or by the laws of descent and
distribution. In the event of any such transfer, the Option and any
Corresponding SAR that relates to such Option must be transferred to the same
person or person(s). During the lifetime of the Participant to whom the Option
or SAR is granted, the Option or SAR may be exercised only by the Participant.
No right or interest of a Participant in any Option or SAR shall be liable for,
or subject to, any lien, obligation, or liability of such Participant.
7.03. Change in Control. After a Control Change Date each Option or
SAR shall be fully exercisable, in whole or in part, thereafter in accordance
with the terms of the applicable Agreement.
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<PAGE> 7
ARTICLE VIII
METHOD OF EXERCISE
8.01. Exercise. Subject to the provisions of Articles VII and XII, an
Option or SAR may be exercised in whole at any time or in part from time to
time at such times and in compliance with such requirements as the
Administrator shall determine; provided, however, that a Corresponding SAR that
is related to an incentive stock option may be exercised only to the extent
that the related Option is exercisable and when the Fair Market Value exceeds
the option price of the related Option. An Option or SAR granted under this
Plan may be exercised with respect to any number of whole shares less than the
full number for which the Option or SAR could be exercised. A partial exercise
of an Option or SAR shall not affect the right to exercise the Option or SAR
from time to time in accordance with this Plan and the applicable Agreement
with respect to the remaining shares subject to the Option or related to the
SAR. The exercise of either an Option or Corresponding SAR shall result in the
termination of the other to the extent of the number of shares with respect to
which the Option or Corresponding SAR is exercised.
8.02. Payment. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or a cash equivalent acceptable to the
Administrator. If the Agreement provides, payment of all or part of the Option
price may be made by surrendering shares of Common Stock to the Company. If
Common Stock is used to pay all or part of the Option price, the cash, cash
equivalent and any shares surrendered must have a Fair Market Value (determined
as of the day preceding the date of exercise) that is not less than the Option
price for the number of shares for which the Option is being exercised.
8.03. Determination of Payment of Cash and/or Common Stock Upon Exercise of
SAR. At the Administrator's discretion, the amount payable as a result of the
exercise of an SAR may be settled in cash, Common Stock, or a combination of
cash and Common Stock. A fractional share shall not be deliverable upon the
exercise of an SAR but a cash payment will be made in lieu thereof.
8.04. Shareholder Rights. No Participant shall have any rights as a
stockholder with respect to shares subject to his Option or SAR until the date
of exercise of such Option or SAR.
ARTICLE IX
STOCK AWARDS
9.01. Awards. In accordance with the provisions of Article IV, the
Administrator will designate each individual to whom a Stock Award is to be
made and will specify the number of shares of Common Stock covered by such
awards.
9.02. Vesting. The Administrator, on the date of the award, may, but shall
not be required to, prescribe that a Participant's rights in the Stock Award
shall be forfeitable or otherwise restricted for a period of time set forth in
the Agreement. By way of example and not of limitation, the restrictions may
postpone transferability of the shares or may provide that the shares will be
forfeited if the Participant ceases to be employed by the Company or a Related
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<PAGE> 8
Entity or ceases to provide services to the Company or a Related Entity before
the expiration of a stated term or if the Company, the Company and its Related
Entities or the Participant fail to achieve stated objectives.
9.03. Change in Control. If not sooner transferable and
nonforfeitable, after a Control Change Date each Stock Award will become
transferable and nonforfeitable thereafter in accordance with the terms of the
applicable Agreement.
9.04. Shareholder Rights. In accordance with the terms of the
Agreement, a Participant will have all rights of a shareholder with respect to
a Stock Award (including an award of Restricted Stock), including the right to
receive dividends and vote the shares; provided, however, that (a) a
Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise
dispose of shares of Restricted Stock, (b) the Company shall retain custody of
the certificates evidencing shares of Restricted Stock, and (c) the Participant
will deliver to the Company a stock power, endorsed in blank, with respect to
each award of Restricted Stock. The limitations set forth in the preceding
sentence shall not apply after the shares of Common Stock granted cease to be
Restricted Stock.
ARTICLE X
PERFORMANCE SHARE AWARDS
10.01. Award. In accordance with the provisions of Article IV, the
Administrator will designate individuals to whom an award of Performance Shares
is to be granted and will specify the number of shares of Common Stock covered
by the award.
10.02. Earning the Award. The Administrator, on the date of the grant of a
Performance Share award, may prescribe that the Performance Shares, or portion
thereof, will be earned, and the Participant will be entitled to receive Common
Stock pursuant to a Stock Award only upon the satisfaction of certain
requirements or the attainment of certain objectives. The Administrator shall
have discretion to set these performance standards. By way of example and not
of limitation, the restrictions may provide that Performance Shares will be
forfeited without the issuance of a Stock Award if the Participant ceases to be
employed by the Company or a Related Entity or ceases to provide services to
the Company or a Related Entity before the expiration of a stated term or if
the Company, the Company and its Related Entities, or the Participant fail to
achieve stated objectives.
10.03. Payment. In the discretion of the Administrator, the amount payable
when an award of Performance Shares is earned may be settled in cash, by the
grant of a Stock Award or a combination of cash and a Stock Award. A
fractional share shall not be deliverable when an award of Performance Shares
is earned, but a cash payment will be made in lieu thereof.
10.04. Change in Control. Section 10.02 to the contrary notwithstanding, each
Performance Share shall be earned in its entirety and converted into a Stock
Award as of a Control Change Date. Each such Stock Award will become
transferable and nonforfeitable thereafter as described in Plan section 9.03 in
accordance with the terms of the applicable Agreement.
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<PAGE> 9
10.05. Shareholder Rights. No Participant shall, as a result of receiving an
award of Performance Shares, have any rights as a shareholder until and to the
extent that the award of Performance Shares is earned and a Stock Award is
made. If the Agreement so provides, a Participant may receive a cash payment
equal to the dividends that are payable with respect to the number of shares of
Common Stock covered by the award between the date the Performance Shares are
awarded and the date a Stock Award is made pursuant to the Performance Share
award. A Participant may not sell, transfer, pledge, exchange, hypothecate, or
otherwise dispose of a Performance Share award or the right to receive Common
Stock thereunder other than by will or the laws of descent and distribution.
After an award of Performance Shares is earned and a Stock Award is made, a
Participant will have all the rights of a shareholder as described in Plan
section 9.04.
ARTICLE XI
ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares as to which Options, SARs, Stock Awards
and Performance Shares may be granted under this Plan shall be proportionately
adjusted, and the terms of outstanding awards of Performance Shares, Stock
Awards, Options, and SARs shall be adjusted, as the Committee shall determine
to be equitably required in the event that (a) the Company (i) effects one or
more stock dividends, stock split-ups, subdivisions or consolidations of shares
or (ii) engages in a transaction to which Section 424 of the Code applies or
(b) there occurs any other event which, in the judgment of the Committee,
necessitates such action. Any determination made under this Article XI by the
Committee shall be final and conclusive.
The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services, either upon direct sale or upon the exercise of
rights or warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other securities,
shall not affect, and no adjustment by reason thereof shall be made with
respect to, outstanding awards of Performance Shares, Stock Awards, Options or
SARs.
The Committee may make Stock Awards and may grant awards of
Performance Shares, Options, and SARs in substitution for performance shares,
stock awards, stock options, stock appreciation rights, or similar awards held
by an individual who becomes an employee of the Company or a Related Entity in
connection with a transaction described in the first paragraph of this Article
XI. Notwithstanding any provision of the Plan (other than the limitation of
Article V), the terms of such substituted awards of Performance Shares, Stock
Awards, Option or SAR grants shall be as the Committee, in its discretion,
determines is appropriate.
-9-
<PAGE> 10
ARTICLE XII
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES
No Option or SAR shall be exercisable, no Common Stock shall be
issued, no certificates for shares of Common Stock shall be delivered, and no
payment shall be made under this Plan except in compliance with all applicable
federal and state laws and regulations (including, without limitation,
withholding tax requirements), any listing agreement to which the Company is a
party, and the rules of all domestic stock exchanges on which the Company's
shares may be listed. The Company shall have the right to rely on an opinion
of its counsel as to such compliance. Any share certificate issued to evidence
Common Stock when a Stock Award is granted, or for which an Option or SAR is
exercised may bear such legends and statements as the Administrator may deem
advisable to assure compliance with federal and state laws and regulations. No
Option or SAR shall be exercisable, no Stock Award shall be granted, no Common
Stock shall be issued, no certificate for shares shall be delivered, and no
payment shall be made under this Plan until the Company has obtained such
consent or approval as the Administrator may deem advisable from regulatory
bodies having jurisdiction over such matters.
ARTICLE XIII
GENERAL PROVISIONS
13.01. Effect on Employment and Service. Neither the adoption of this Plan,
its operation, nor any documents describing or referring to this Plan (or any
part thereof) shall confer upon any individual any right to continue in the
employ or service of the Company or a Related Entity or in any way affect any
right and power of the Company or a Related Entity to terminate the employment
or service of any individual at any time with or without assigning a reason
therefor.
13.02. Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that
may at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
13.03. Disposition of Stock. A Participant shall notify the Administrator of
any sale or other disposition of Common Stock acquired pursuant to an Option
that was an incentive stock option if such sale or disposition occurs (a)
within two years of the grant of an Option or (b) within one year of the
issuance of the Common Stock to the Participant. Such notice shall be in
writing and directed to the Secretary of the Company.
-10-
<PAGE> 11
13.04. Rules of Construction. Headings are given to the articles and sections
of this Plan solely as a convenience to facilitate reference. The reference to
any statute, regulation, or other provision of law shall be construed to refer
to any amendment to or successor of such provision of law.
13.05. Employee Status. For purposes of determining the applicability of
Section 422 of the Code (relating to incentive stock options), or in the event
that the terms of any award of Performance Shares, or the grant of any Stock
Award, Option or SAR provide that shares may be issued or become transferable
and nonforfeitable thereunder only after completion of a specified period of
employment or during employment, the Administrator may decide in each case to
what extent leaves of absence for governmental or military service, illness,
temporary disability, or other reasons shall not be deemed interruptions of
continuous employment.
13.06. Tax Withholding. Each Participant shall be responsible for satisfying
any income and employment tax withholding obligation attributable to
participation in this Plan. Unless otherwise provided by the applicable
Agreement, any such withholding tax obligation may be satisfied in cash
(including from any cash payable in settlement of an award of Performance
Shares or an SAR) or a cash equivalent acceptable to the Administrator. If
provided in an Agreement and in accordance with procedures established by the
Administrator, a Participant may surrender shares of Common Stock in
satisfaction of all or part of that tax withholding obligation.
13.07. Limitation on Awards. Notwithstanding any other provision of the Plan,
if any award under this Plan, either alone or together with payments that a
Participant has the right to receive from the Company or a Related Entity would
constitute a "parachute payment" (as defined in section 280G of the Code), all
such payments shall be reduced to the largest amount that will result in no
portion being subject to the excise tax imposed by section 4999 of the Code.
ARTICLE XIV
AMENDMENT
The Board may amend from time to time or terminate the Plan; provided,
however, that no amendment may become effective until shareholder approval is
obtained if the amendment (i) increases the aggregate number of shares that may
be issued under the Plan (other than an adjustment authorized under Article XI)
or (ii) changes the class of individuals eligible to become Participants. No
amendment shall, without a Participant's consent, adversely affect any rights
of such Participant under any outstanding award of Performance Shares or under
any Stock Award, Option or SAR outstanding at the time such amendment is made.
-11-
<PAGE> 12
ARTICLE XV
DURATION OF PLAN
No Performance Shares may be awarded and no Stock Award, Option or SAR
may be granted under this Plan more than ten years after the earlier of the
date that the Plan is adopted by the Board or the date that the Plan is
approved by shareholders as provided in Article XVI. Performance Shares
awarded, and Stock Awards, Options and SARs granted before that date shall
remain valid in accordance with their terms.
ARTICLE XVI
EFFECTIVE DATE OF PLAN
Options and SARs may be granted under this Plan upon its adoption by
the Board, provided that no Option or SAR will be effective unless this Plan is
approved by a majority of the votes entitled to be cast by the Company's
shareholders, voting either in person or by proxy, at a duly held shareholders'
meeting or by the unanimous consent of shareholders within twelve months of
such adoption. Performance Shares may be awarded and Stock Awards may be
granted under this Plan after it is approved by the shareholders in accordance
with the preceding sentence.
-12-
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