<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-3986
PROSPECTUS
5,000,000 SHARES
WINSTON HOTELS, INC.
COMMON STOCK
[LOGO] (PAR VALUE $.01 PER SHARE)
---------------------
Winston Hotels, Inc. (the "Company") is a self-advised and
self-administered equity real estate investment trust that, either directly or
through WINN Limited Partnership (the "Partnership"), owned 21 hotels having an
aggregate of 2,704 rooms as of March 31, 1996. The Company, through the
Partnership, has contracted to acquire 10 additional hotels with an aggregate of
1,323 rooms for purchase prices aggregating approximately $73.4 million. Upon
completion of the acquisition of such hotels, the Company and the Partnership
will own 31 hotels with an aggregate of 4,027 rooms. In early May 1996, the
Company acquired five of the 10 hotels under contract. The Company expects to
acquire (i) three of the hotels under contract contemporaneously with the
closing of this offering and (ii) the two remaining hotels under contract within
15 days of the completion of construction thereof.
The net proceeds to the Company from this offering will be approximately
$51.2 million. The Company will contribute all of the net proceeds of this
offering to the Partnership and, after such contribution, will own an
approximately 91.1% interest in the Partnership. The net proceeds of the
Offering will be used to complete the acquisition of 10 hotels, to repay certain
indebtedness, to refurbish certain of the Company's hotels and to transfer
franchise licenses.
All of the shares of common stock offered hereby are being sold by the
Company. The last reported sale price of the Company's common stock, which is
quoted under the symbol "WINN" on The Nasdaq Stock Market, on June 20, 1996 was
$11.00 per share. See "Price Range of Common Stock". To ensure compliance with
certain requirements related to qualification of the Company as a real estate
investment trust, the Company's Articles of Incorporation limit the number of
shares of common stock that may be owned by any single person or affiliated
group to 9.9% of the outstanding common stock and restrict the transferability
of shares of Common Stock if the purported transfer would prevent the Company
from qualifying as a real estate investment trust.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.............................. $11.00 $.625 $10.375
Total(3)............................... $55,000,000 $3,125,000 $51,875,000
</TABLE>
- ---------------
(1) The Company and the Partnership have agreed to indemnify the Underwriters
against certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended.
(2) Before deducting estimated expenses of approximately $700,000 payable by the
Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 750,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $63,250,000,
$3,593,750 and $59,656,250, respectively. See "Underwriting".
--------------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the
certificates for the shares will be ready for delivery in New York, New York on
or about June 26, 1996.
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
---------------------
The date of this Prospectus is June 21, 1996.
<PAGE> 2
[Inside Front Cover]
A PHOTOGRAPH OF LOBBY OF CARY (RALEIGH), NORTH CAROLINA, HOMEWOOD SUITES HOTEL
APPEARS BELOW.
A PHOTOGRAPH OF EXTERIOR OF CARY (RALEIGH), NORTH CAROLINA, HOMEWOOD SUITES
HOTEL APPEARS BELOW.
A PHOTOGRAPH OF 1995 HOTEL OF EXCELLENT AWARD OF CARY (RALEIGH), NORTH CAROLINA,
HOMEWOOD SUITES HOTEL APPEARS BELOW.
A MAP SHOWING THE LOCATIONS IN WHICH THE COMPANY OWNS OR WILL OWN HOTELS AFTER
IT ACQUIRES ALL OF THE ACQUISTION HOTELS (AS DEFINED HEREIN) AND THE HOMEWOOD
DEVELOPMENT HOTELS (AS DEFINED HEREIN).
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at regional offices
of the Commission located at 7 World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained by mail from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Common Stock is listed on The Nasdaq Stock
Market and such reports, proxy and information statements and other information
concerning the Company can be inspected and copied at The Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006-1506.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-23732)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1995;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996;
3. The Company's Report on Form 8-K filed with the Commission on May 23,
1996;
4. The description of the Common Stock of the Company included in the
Company's Registration Statement on Form 8-A, dated March 23, 1994;
5. The Financial Statements of the Acquisition Hotels (the five hotels
purchased by the Company in May 1995) for the years ended December
31, 1993 and 1994 included in the Company's Form S-11 Registration
Statement (File No. 33-91230); and
6. All other documents filed with the Commission under the Exchange Act
prior to the termination of the Offering.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into such documents). Requests for such copies should be directed to Winston
Hotels, Inc., 2209 Century Drive, Suite 300, Raleigh, North Carolina 27612,
Attention: Secretary, telephone number (919) 510-6010.
---------------------
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified shall not be deemed to constitute a part of
this Prospectus, except as so modified, and any statement so superseded shall
not be deemed to constitute a part of this Prospectus.
---------------------
i
<PAGE> 4
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH TRANSACTIONS, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING".
ii
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................... 1
The Company.............................. 1
Risk Factors............................. 2
Recent Developments...................... 2
The Hotels............................... 5
The Hotel Industry....................... 8
Distribution Policy...................... 9
Tax Status............................... 10
The Offering............................. 10
Summary Financial Data................... 11
CORPORATE STRUCTURE........................ 16
RISK FACTORS............................... 17
Risk that Pending Acquisitions Will
Not Close.............................. 17
Risks Associated with Homewood
Development Hotels..................... 17
Acquisition of Hotels with Little or No
Operating History...................... 18
Development Risks........................ 18
Risks of Rapid Growth.................... 18
Dependence on Rent Payments under
Percentage Leases; Limited Financial
Resources of the Lessee................ 18
Lack of Control over Operations of
the Hotels............................. 19
Hotel Industry Risks..................... 19
Conflicts of Interest.................... 21
Real Estate Investment Risks............. 21
Risks of Leverage........................ 23
Risks of Operating Hotels Under Franchise
Agreements............................. 24
Effect of Market Interest Rates on Price
of Common Stock........................ 24
Ability of Board of Directors to Change
Certain Policies....................... 24
Limitation on Acquisition and Change in
Control................................ 24
Tax Risks................................ 25
Ownership Limitation..................... 26
Possible Adverse Effects of Shares
Available for Future Sale Upon Prices
of Common Stock........................ 26
ACQUISITIONS............................... 28
Affiliate Acquisition Hotels............. 28
Acquisition from Impac................... 29
Other Acquisitions....................... 29
PROMUS..................................... 29
USE OF PROCEEDS............................ 31
PRICE RANGE OF COMMON STOCK AND
DISTRIBUTIONS............................ 33
CAPITALIZATION............................. 34
SELECTED FINANCIAL INFORMATION............. 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................... 41
Background............................... 41
Results of Operations.................... 42
The Company.............................. 42
The Lessee............................... 44
Liquidity and Capital Resources.......... 46
Seasonality.............................. 49
BUSINESS AND PROPERTIES.................... 50
The Hotel Industry....................... 50
The Current Hotels....................... 50
Growth Strategy.......................... 51
Extended-Stay Hotels..................... 54
Competition.............................. 54
Property Descriptions.................... 54
The Percentage Leases.................... 61
Franchise Agreements..................... 67
Operating Practices...................... 68
Employees................................ 71
Environmental Matters.................... 71
Legal Proceedings........................ 72
MANAGEMENT................................. 73
Directors and Executive Officers......... 73
Committees of the Board of Directors..... 74
Executive Compensation................... 75
Compensation of Directors................ 75
Stock Incentive Plans.................... 76
PRINCIPAL SHAREHOLDERS..................... 78
SHARES AVAILABLE FOR FUTURE SALE........... 80
PARTNERSHIP AGREEMENT...................... 81
Management............................... 81
Transferability of Interests............. 81
Capital Contribution..................... 82
Redemption Rights........................ 82
Registration Rights...................... 82
Tax Matters.............................. 83
Operations............................... 83
Distributions............................ 83
Term..................................... 83
FEDERAL INCOME TAX CONSIDERATIONS.......... 83
Taxation of the Company.................. 84
Requirements for Qualification........... 85
Failure to Qualify....................... 94
Taxation of Taxable U.S. Shareholders.... 94
Taxation of Shareholders on the
Disposition of the Common Stock........ 95
Capital Gains and Losses................. 95
Information Reporting Requirements and
Backup Withholding..................... 96
Taxation of Tax-Exempt Shareholders...... 96
Taxation of Non-U.S. Shareholders........ 96
Other Tax Consequences................... 98
Tax Aspects of the Partnership........... 98
Sale of the Company's or the
Partnership's Property................. 100
UNDERWRITING............................... 102
EXPERTS.................................... 103
LEGAL MATTERS.............................. 103
GLOSSARY................................... 104
INDEX OF FINANCIAL STATEMENTS.............. F-1
</TABLE>
iii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised. References to the
"Company" herein refer to the Company and the Partnership, unless otherwise
indicated or unless the context requires otherwise. The offering of 5,000,000
shares of common stock pursuant to this Prospectus is referred to herein as the
"Offering". See "Glossary" for the definitions of certain terms used in this
Prospectus.
THE COMPANY
The Company is a self-advised and self-administered equity real estate
investment trust ("REIT") that, either directly or through the Partnership,
owned 21 hotels (the "Current Hotels") as of March 31, 1996 and, through the
Partnership, has contracted to acquire 10 additional hotels (the "Acquisition
Hotels" and together with the Current Hotels, the "Hotels"). The Company
acquired (i) ten of the Current Hotels (the "Initial Hotels") in connection with
its initial public offering (the "IPO") of common stock (the "Common Stock") in
May 1994, (ii) six of the Current Hotels from June through November 1994 and
(iii) five of the Current Hotels in connection with the Company's second public
offering (the "Follow-on Offering") of its Common Stock in May 1995. The Company
acquired five of the Acquisition Hotels in early May 1996. The Company intends
to repay a substantial portion of the indebtedness that it incurred in
connection with the acquisition of these five Hotels with a portion of the net
proceeds of the Offering and, therefore, has included the five recently
purchased Hotels in the definition of Acquisition Hotels for the purposes of the
presentation of information in this Prospectus.
Since its inception, the Company has capitalized on the recovery of the
hotel industry through (i) the strategic acquisition and development of
mid-scale and upper-economy hotels in growth markets and (ii) significant
reinvestment in its hotels through an aggressive capital improvement program.
Revenue per available room ("REVPAR") for all 21 of the Current Hotels increased
9.6% from 1994 to 1995, which resulted in a 15.6% increase in the Company's pro
forma revenue from Percentage Leases (as defined herein) in the same period.
Thirteen of the Current Hotels are in the mid-scale market segment and, for the
year ended December 31, 1995, had a consolidated average occupancy, average
daily rate ("ADR") and REVPAR of 84.3%, $56.34 and $47.47, respectively, as
compared to the national average for mid-scale hotels of 64.6%, $58.93 and
$38.06, respectively. Eight of the Current Hotels are in the upper-economy
market segment and, for the year ended December 31, 1995, had consolidated
average occupancy, ADR, and REVPAR of 77.2%, $52.70 and $40.68, respectively, as
compared to the national average for upper-economy hotels of 64.4%, $47.39 and
$30.51, respectively. The Company expects to continue to acquire attractively
priced limited-service hotels in growth markets. In addition, the Company
intends to acquire and develop higher-end, extended-stay hotels in order to take
advantage of the favorable relationship between demand and supply for this
segment.
Since November 30, 1995, the Company has:
- contracted to acquire the 10 Acquisition Hotels with an aggregate of
1,323 rooms for purchase prices aggregating approximately $73.4 million,
which will increase the number of hotels and rooms owned by the Company
by 48% and 49%, respectively;
- acquired five of the 10 Acquisition Hotels in early May 1996;
- committed to make significant investments in higher-end, extended-stay
hotels by:
- contracting to acquire two Homewood Suites extended-stay Acquisition
Hotels (representing an investment of approximately $21.3 million by
the Company);
- capitalizing on the hotel development expertise of the Winston
Affiliates (defined herein) by initiating the development of two
additional Homewood Suites extended-stay hotels (representing an
investment of approximately $21.0 million by the Company); and
- entering into agreements and options with Promus Hotels, Inc.
("Promus") to acquire up to 15 additional Homewood Suites
extended-stay hotels (and executing a stock purchase
<PAGE> 7
agreement, providing for an investment by Promus of up to $15 million
in the Company's Common Stock);
- entered into a memorandum of understanding with an affiliate of Equitable
Real Estate Investment Management, Inc. ("Equitable") to co-invest with
the Company on hotel rehabilitation projects acceptable to Equitable and
the Partnership;
- obtained a commitment to increase the Company's $50 million existing line
of credit (the "Existing Line") to $125 million the ("New Line") with an
initial borrowing capacity of $85 million;
- terminated its advisory agreement with a Winston Affiliate and became
self-advised and self-administered;
- entered into agreements designed to further align the interests of the
Company and Robert W. Winston, III, Chief Executive Officer and President
of the Company, Charles M. Winston, Chairman of the Company, and John B.
Harris, Jr., President of the Lessee (as defined herein), and their
affiliates ("Winston Affiliates"); and
- increased the Company's regular quarterly distribution to shareholders to
$0.255 per share beginning with the distribution for the second quarter
of 1996, representing a 6.3% increase over the Company's $0.24 per share
regular quarterly distribution in effect at the end of 1995; in 1995 the
Company maintained an approximately 70% pay-out ratio (total annual
distributions divided by Funds From Operations) while increasing the
regular quarterly distribution 9.1%, from $0.22 to $0.24, and paying a
special distribution of $0.03 per share; the Company's Board of Directors
declared on May 28, 1996 a quarterly distribution of $.255 per share
payable on July 16, 1996 to all holders of record of the Common Stock on
July 8, 1996.
In satisfaction of a pre-existing arrangement, Robert Winston will purchase
40,000 shares of Common Stock in the Offering. Following the Offering and the
acquisition of the Acquisition Hotels, Winston Affiliates will own 10.2% of the
outstanding Common Stock and Units.
Under the REIT qualification requirements of the Internal Revenue Code of
1986, as amended (the "Code"), REITs generally must lease their hotels to third
party operators. Therefore, the Company and the Partnership lease the Current
Hotels, and the Partnership will lease the Acquisition Hotels, to Winston
Hospitality, Inc. (the "Lessee") under leases which provide for rent payments
based in part on revenues from the Hotels ("Percentage Leases"). The Lessee pays
and will pay the franchise fees, management fees and certain other operating
expenses of the Hotels.
RISK FACTORS
An investment in the Common Stock involves various risks, and investors
should carefully consider the matters discussed under "Risk Factors" beginning
on page 17.
RECENT DEVELOPMENTS
Acquisitions. The Company contracted to acquire the 10 Acquisition Hotels,
and two potential development parcels adjoining two of the Acquisition Hotels,
for purchase prices aggregating approximately $73.4 million. Five of the
Acquisition Hotels (and the two development parcels) were acquired by the
Company in early May 1996. Three of the Acquisition Hotels will be acquired upon
the closing of the Offering. Two of the Acquisition Hotels are in the final
stage of development and will be acquired after their openings, which are
expected to occur in June and July 1996. There is no assurance that the Company
will close the acquisitions of the remaining five Acquisition Hotels as planned.
See "Pending Acquisitions" and "Risk Factors -- Risk that Pending Acquisitions
Will Not Close".
Six of the Acquisition Hotels were open for all of 1995. According to
information provided by the sellers of these six Acquisition Hotels,
consolidated average occupancy, ADR and REVPAR for the year ended December 31,
1995 for such Hotels were 79.0%, $54.61 and $43.12, respectively.
2
<PAGE> 8
Increased Extended-Stay Focus/Hotel Development. The Company expects to
increase substantially its presence in the extended-stay hotel segment. Two of
the Acquisition Hotels that the Company has contracted to acquire are Homewood
Suites extended-stay hotels, representing an investment of approximately $21.3
million. Additionally, the Company has initiated development of two Homewood
Suites hotels representing an estimated total investment of approximately $21
million and entered into agreements and options with Promus to acquire up to 15
additional Homewood Suites hotels. See "-- Promus Agreements" and "Promus".
The Company also intends to pursue suitable hotel development opportunities
as they arise, thereby allowing the Company to capitalize on the development
expertise of its management, who developed eight of the 10 Initial Hotels and
four of the 10 Acquisition Hotels. The Company intends to focus its development
activities primarily on higher-end extended-stay hotels.
The Company has entered into contracts to purchase an approximately 5.3
acre parcel for development of a 136-suite Homewood Suites hotel near the
Crabtree Valley Mall in Raleigh, North Carolina and an approximately 2.7 acre
parcel for the development of a 100-suite Homewood Suites hotel in suburban
Atlanta. The Company believes that total development costs for these projects,
which the Company expects to fund from borrowings under the New Line, will be
approximately $12 million and $9 million, respectively. Construction is
tentatively expected to commence on both of these hotels in the middle of 1996,
with completion tentatively scheduled for the middle of 1997. See "Risk
Factors -- Development Risks". The Company also has been actively reviewing
other development opportunities. The Company owns an approximately 4.0 acre
parcel located adjacent to a Current Hotel in Durham, North Carolina and has
acquired 1.0 acre and 2.2 acre parcels located adjacent to the Comfort Suites-
London, Kentucky Acquisition Hotel and the Holiday Inn Express -- Abingdon,
Virginia Acquisition Hotel, respectively. The Company currently is evaluating
each of these parcels for possible expansions of the adjacent Hotels or the
development of additional hotels, although no proposed timetables have been
determined for development of these parcels.
Promus Agreements. The Company has executed agreements with Promus which
provide for: (1) the acquisition by the Company from Promus of the Homewood
Suites -- Clear Lake (Houston), Texas (one of the Acquisition Hotels) for
approximately $6.9 million, (2) the acquisition during 1997 and 1998 by the
Company from Promus of three Homewood Suites hotels to be developed by Promus
near Baltimore, Maryland, in Dallas, Texas and in Richmond, Virginia (the
"Homewood Development Hotels") for purchase prices generally equal to Promus'
development costs, (3) an option for the Company to purchase up to twelve
additional Homewood Suites hotels which may be developed by Promus over the next
48 months (the "Homewood Option Hotels"), (4) the Company to use its best
efforts to develop or purchase up to $100 million of Promus brand hotels over
the next eight years, including the Homewood Option Hotels and the Homewood
Development Hotels, (5) the purchase by Promus of up to $15 million of the
Company's Common Stock as the Company acquires hotels from Promus (including $3
million in a private placement (the "Private Placement") to be closed upon the
acquisition of the Homewood Suites -- Clear Lake (Houston), Texas) or within six
months of the closing of the Offering and (6) Promus' management of any hotels
that the Company acquires from Promus, pursuant to management agreements with
the Lessee (the "Promus Management Agreements"). See "Promus".
Equitable Agreement in Principle. The Company has reached an agreement in
principle with Equitable to co-invest in hotels acceptable to Equitable and the
Partnership that require significant rehabilitation and, possibly, rebranding.
In the event that suitable projects are found, Equitable will serve as a
potential source of equity capital to fund partially the selective acquisition
and rehabilitation of underperforming hotels. In addition, the relationship with
Equitable may provide the Company with access to additional acquisition
opportunities. The Company believes that such hotels will, upon rehabilitation,
generate attractive returns for the Company and Equitable. After rehabilitation,
the Company may seek to purchase Equitable's ownership interest in the hotels,
and the arrangement provides the Company with the potential to do so on terms
that the Company believes are favorable. The Company intends to offer Equitable
the opportunity to co-invest in the Comfort Inn -- Greenville, South
3
<PAGE> 9
Carolina Acquisition Hotel, which the Company intends to renovate substantially.
See "Business and Properties -- Growth Strategy -- Rehabilitation Strategy".
Line of Credit. The Company has obtained a commitment from a group of
lenders led by Wachovia Bank of North Carolina ("Wachovia") for the $125 million
New Line. Amounts outstanding under the New Line generally will bear interest at
LIBOR plus 1.75%. The amount which may be borrowed under the New Line at any
time ("Line Availability") is based on the cash flow of the Hotels securing the
New Line. The Company initially will secure the New Line with 28 of the Hotels
and the initial Line Availability will be $85 million. The Line Availability
will increase if the Company's cash flow attributable to the collateral hotels
increases and/or the Company adds additional hotels as collateral. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". Following the closing of the
Offering and the acquisition of the Acquisition Hotels, the Company will have
approximately $45.7 million of indebtedness outstanding and, therefore,
remaining borrowing capacity under the initial Line Availability of
approximately $39.3 million.
Terminated Advisory Agreement. As of December 31, 1995, the Company
terminated its advisory agreement (the "Advisory Agreement") with Winston
Advisors, Inc., which is owned by Robert Winston and John B. Harris, Jr., and
became self-advised and self-administered. Contemporaneously with the
termination of the Advisory Agreement, Robert Winston, Philip Alfano, the
Company's Chief Financial Officer, Senior Vice President and Secretary, and
Kenneth Crockett, the Company's Senior Vice President for Development, became
employees of the Company. See "Management".
Investments by Lessee Shareholders. The Lessee is owned by Robert Winston
and John B. Harris, Jr. Messrs. Winston and Harris have agreed that the Lessee
will make no further distributions other than amounts required to pay their
income tax liability associated with the Lessee's net income unless and until
the Lessee has tangible net worth of at least $4 million. After such time,
Messrs. Winston and Harris will invest at least 75% of the Lessee's net income
(after distributions to pay taxes) in Common Stock (or Units, if necessary to
preserve the Company's REIT status). The Common Stock (or Units) will be
acquired either directly from the Company at then-current market prices or in
the open market, at the election of the Company's independent directors (the
"Independent Directors"). Messrs. Winston and Harris have agreed to hold any
such shares of Common Stock (or Units) for at least one year after the date of
purchase. These agreements will remain in effect for so long as Robert Winston
is an officer or director of the Company.
Acquisition of Potentially Competing Hotel Interests of Winston
Affiliates. The Acquisition Hotels include all four of the hotels not owned by
the Company that Winston Affiliates own or in which Winston Affiliates have
ownership interests (the "Affiliate Acquisition Hotels"): the Homewood
Suites -- Cary, North Carolina; the Hampton Inn -- Perimeter (Atlanta), Georgia;
the Courtyard by Marriott -- Wilmington, North Carolina and the Hampton Inn &
Suites -- Duluth (Atlanta), Georgia. Approximately $10.9 million of the purchase
price for these four Hotels will be paid in Units. The Units that the sellers of
the Affiliate Acquisition Hotels will receive as part of the purchase prices for
such Hotels may not be sold, transferred or redeemed for a period of one year
from their date of issuance. The sellers of the three Affiliate Acquisition
Hotels in which Robert Winston has a direct interest have agreed to reduce the
aggregate selling prices for those hotels by up to $9.7 million to the extent
necessary to ensure that the Company's aggregate yield from those hotels for its
first 12-months of ownership is at least 13%. See "Pending
Acquisitions -- Affiliate Acquisition Hotels." Upon the Company's acquisition of
the Affiliate Acquisition Hotels, the Winston Affiliates, so long as they remain
on the board or are officers of the Company or the Lessee, will have no
interests in any hotels not owned by the Company and may not participate in the
hotel business other than through the Company, the Lessee or through ownership
of 5% or less of any publicly-held hotel company.
4
<PAGE> 10
THE HOTELS
Consistent with its strategy to own hotels with nationally recognized
franchise affiliations, upon completion of the Offering and the acquisition of
the Acquisition Hotels, the Company will own hotels with the following brands:
<TABLE>
<CAPTION>
CURRENT NUMBER OF ACQUISITION NUMBER OF TOTAL TOTAL
FRANCHISE AFFILIATION HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
-------------------------------- ------- --------- ----------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Hampton Inn(R)(1)............... 12 1,433 2 250 14 1,683
Comfort Inn(R)(1)............... 8 1,103 1 191 9 1,294
Homewood Suites(R)(2)........... -- -- 2 232 2 232
Comfort Suites(R)(1)............ -- -- 1 62 1 62
Hampton Inn & Suites(R)(1)...... -- -- 1 136 1 136
Holiday Inn Express(R)(1)....... -- -- 1 80 1 80
Holiday Inn Select(R)(3)........ -- -- 1 244 1 244
Quality Suites(R)(1)............ 1 168 -- -- 1 168
Courtyard by Marriott(R)(1)..... -- -- 1 128 1 128
-- ------- -- ------- -- -----
21 2,704 10 1,323 31 4,027
</TABLE>
- ---------------
(1) Limited-service and all-suite limited-service hotels designed for business
and leisure travelers, which generally do not include restaurants or lounges
and offer limited public meeting areas.
(2) Limited-service, extended-stay hotels designed primarily for extended-stay
business travelers, which generally include kitchens and on-site,
limited-inventory food and sundry shops. Does not reflect the acquisition of
any Homewood Development Hotels.
(3) Full-service hotels designed primarily for business and leisure travelers,
which offer room service, restaurants and lounges.
5
<PAGE> 11
The following table sets forth certain unaudited information with respect
to the Hotels (dollar amounts are in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
PRO FORMA
----------------------------
NUMBER LESSEE
OF NET AVERAGE
ROOMS/ YEAR DATE ROOM LEASE INCOME DAILY
SUITES OPENED(1) ACQUIRED REVENUE PAYMENTS(2) (LOSS)(3) OCCUPANCY RATE REVPAR
------ --------- ------------- ------- ----------- --------------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Hampton Inn:
Durham, NC......... 136 1987 May 1994 $2,594 $ 1,175 $ 236 91.6% $56.70 $51.94
Raleigh, NC........ 141 1986(4) May 1995 2,287 1,011 82 80.7 55.06 44.43
Charlotte, NC...... 125 1991 May 1994 2,286 1,047 246 89.5 56.00 50.11
Atlanta, GA........ 124 1990 May 1994 2,205 948 228 84.3 57.79 48.73
Cary, NC........... 130 1989 May 1994 2,175 973 249 83.0 55.20 45.84
Wilmington, NC..... 118 1986(4) May 1994 2,126 912 244 81.9 60.25 49.36
Brunswick, GA...... 127 1991 May 1994 2,033 839 152 90.5 48.46 43.86
Southern Pines,
NC............... 126 1988 May 1994 1,955 820 195 83.6 50.85 42.50
Jacksonville, NC... 120 1989 May 1994 1,831 759 198 86.2 48.51 41.80
Hilton Head, SC.... 125 1988(4) November 1994 1,737 596 80 70.8 53.82 38.12
Boone, NC.......... 95 1987 May 1994 1,557 602 108 82.9 54.16 44.89
Chester (Richmond),
VA............... 66 1994 November 1994 1,259 554 84 91.0 57.46 52.26
Comfort Inn:
Durham/Chapel Hill,
NC............... 138 1991 November 1994 2,518 1,203 152 83.4 59.94 50.00
Fayetteville, NC... 176 1987(4) November 1994 2,432 1,164 138 75.2 50.36 37.85
Wilmington, NC..... 146 1986(4) May 1994 2,322 1,013 152 79.8 54.60 43.58
Chester (Richmond),
VA............... 123 1988 November 1994 2,210 1,059 98 84.1 58.52 49.21
Charleston, SC..... 128 1989 May 1995 2,190 1,003 85 79.5 59.00 46.88
Raleigh, NC........ 149 1984(4) August 1994 1,908 755 195 74.4 47.13 35.08
Augusta, GA........ 123 1989 May 1995 1,418 507 65 70.9 44.57 31.59
Clearwater/St.
Petersburg, FL... 120 1985(4) May 1995 1,382 433 34 70.3 44.84 31.54
Quality Suites:
Charleston, SC..... 168 1989 May 1995 3,706 1,687 195 82.4 73.33 60.44
------ ------- ----------- ------
Subtotal/weighted
average for Current
Hotels............. 2,704 44,131 19,060 3,216 81.4 54.93 44.70
------ ------- ----------- ------
ACQUISITION HOTELS
Hampton Inn:
Perimeter
(Atlanta), GA.... 131 1996(5) (5) -- 574(6) (574)(7) N/A N/A N/A
Duncanville
(Dallas), TX..... 119 1986(4) May 7, 1996 1,370 497 (26) 82.8 37.78 31.29
Comfort Inn:
Greenville, SC..... 191 1975(4) May 6, 1996 1,989 656 165 64.2 44.47 28.53
Homewood Suites:
Cary, NC........... 140 1994 (5) 3,281 (8) 1,977 183 86.1 71.90 61.92
Clear Lake
(Houston), TX.... 92 1995(5) (5) 320 484(6) (389)(7) 41.7 82.57 34.44
Hampton Inn & Suites:
Duluth (Atlanta),
GA............... 136 (5) (5) -- 581(6) (581)(7) N/A N/A N/A
Comfort Suites:
London, KY......... 62 1992(4) May 7, 1996 1,050 483 80 91.4 50.75 46.40
Holiday Inn Select:
Garland (Dallas),
TX............... 244 1974(4)(9) May 7, 1996 6,352 (10) 2,084 (146) 79.7 62.09 49.46
Holiday Inn Express:
Abingdon, VA....... 80 1991(4) May 7, 1996 1,181 535 131 84.3 47.98 40.46
Courtyard by
Marriott:
Wilmington, NC..... 128 (5) (5) -- 525(6) (525)(7) N/A N/A N/A
------ ------- ----------- ------
Subtotal/weighted
average for
Acquisition
Hotels............. 1,323 15,543 8,396 (1,682) 77.9 55.05 42.87
Lessee interest
income not
allocated to the
Hotels above....... 85
Lessee general and
administrative
expenses not
allocated to the
Hotels above....... (1,776)
------ ------- ----------- ------
Consolidated
total/weighted
average for
Hotels............. 4,027 $59,674 $27,456 $ (157) 80.5% $54.96 $44.26
========= ========== =========== ========
</TABLE>
(notes on subsequent page)
6
<PAGE> 12
(1) The average age, as of March 31, 1996, of the Current Hotels, the
Acquisition Hotels opened before March 31, 1996 and the consolidated Hotels
opened before March 31, 1996 is approximately 7.3 years, 9.2 years and 7.8
years, respectively.
(2) Represents lease payments from the Lessee to the Partnership or the Company
(with respect to the one Current Hotel owned by the Company directly),
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases, and for the Acquisition Hotels the rent provisions in
the proposed Percentage Leases, to the historical room revenue for the year
ended December 31, 1995. See "Business and Properties -- The Percentage
Leases" and "Risk Factors -- Risk that Pending Acquisitions Will Not
Close".
(3) Pro forma Lessee net income (loss) is net of the management fees (a) that
are payable by the Lessee under management agreements for 10 of the Current
Hotels, which equals a specified percentage of the Lessee's budgeted gross
operating profit, subject to certain adjustments, (b) which will be payable
by the Lessee under a Promus Management Agreement for the Homewood
Suites -- Clear Lake (Houston), Texas and (c) which will be payable by the
Lessee under a management agreement for the Holiday Inn Select -- Garland
(Dallas), Texas Acquisition Hotel with an affiliate of the seller of the
Hotel. See "Business and Properties -- Operating Practices".
(4) The following Current Hotels have undergone substantial renovation in the
following years: Hampton Inn -- Raleigh, North Carolina in 1996; Hampton
Inn -- Wilmington, North Carolina in 1994; Hampton Inn -- Hilton Head,
South Carolina in 1995; Comfort Inn -- Fayetteville, North Carolina in
1995; Comfort Inn -- Wilmington, North Carolina in 1995; and Comfort
Inn -- Raleigh, North Carolina in 1993. The Company intends to
substantially renovate the following Hotels over the next two years: the
Comfort Inn -- Clearwater, Florida; the Hampton Inn -- Duncanville
(Dallas), Texas; the Comfort Inn -- Greenville, South Carolina; the Comfort
Suites -- London, Kentucky; the Holiday Inn Select -- Garland (Dallas),
Texas; and the Holiday Inn Express -- Abingdon, Virginia. For the purposes
of this footnote, a renovation is defined as a substantial upgrade of guest
rooms and/or public areas.
(5) The Hampton Inn -- Perimeter (Atlanta), Georgia opened in February 1996.
The Hampton Inn & Suites -- Duluth (Atlanta), Georgia and the Courtyard by
Marriott -- Wilmington, North Carolina are expected to open in June 1996
and July 1996, respectively, and under the terms of the related purchase
contracts, the Company is obligated to purchase these Acquisition Hotels
within 15 days of the later of the opening of the hotel or receipt of a
certificate of occupancy. The Hampton Inn -- Perimeter (Atlanta), Georgia;
the Homewood Suites Cary, North Carolina and the Homewood Suites Clear Lake
(Houston), Texas are expected to be acquired by the Company upon the
closing of the Offering. See "Pending Acquisitions".
(6) Represents only the fixed base rent payable under the proposed Percentage
Leases ("Base Rent") for these Acquisition Hotels. No percentage rent
payable under the Percentage Leases ("Percentage Rent") is included for
these Hotels because Percentage Rent is payable based on revenues and these
Hotels were not in operation and had no revenues in 1995 (except for
limited revenues for the Homewood Suites -- Clear Lake (Houston), Texas,
which opened in September 1995).
(7) Lessee net income (loss) for these Acquisition Hotels reflects the payment
by the Lessee of Base Rent in accordance with the proposed Percentage
Leases for the hotels, notwithstanding that three of the hotels were not
open in 1995 and one of the hotels was open for only four months in 1995.
See footnote 6 above.
(8) Includes $117 of food and beverage revenue.
(9) The Holiday Inn Select -- Garland (Dallas), Texas Acquisition Hotel
consists of one five-story building and two three-story buildings which
were built in 1974, 1978 and 1984, respectively.
(10) Includes $1,947 of food and beverage revenue.
7
<PAGE> 13
THE HOTEL INDUSTRY
General. The United States lodging industry is currently experiencing
strong performance, after recovering from an extended period of unprofitable
performance in the late 1980s and early 1990s. The Company expects that the
continuation of this broad industry recovery will contribute to growth in REVPAR
at the Hotels (and hotels subsequently acquired by the Company) and thus to
increases in the Company's Cash Available for Distribution (as defined). The
industry downturn in the late 1980s resulted from a dramatic increase in the
supply of hotel rooms that significantly outpaced growth in demand. The
resulting supply/demand imbalance caused overall hotel occupancy rates to drop
steadily from 70.6% in 1980 to a 20-year low of 60.6% in 1991. The imbalance was
reversed in the early 1990s due mainly to a reduction of new construction and an
improved economy. According to Smith Travel Research ("Smith Travel"), ADR,
occupancy and REVPAR for all U.S. hotels have increased for each year since
1992. According to Smith Travel, in 1995, while demand continued to outpace
supply, the rate of increase in demand slowed relative to the rate of increase
in supply. Supply has been spurred by improving industry performance and
resulting increases in the availability of capital for hotel construction,
particularly in the limited-service sector. The graphs set forth below
illustrate the relationship between supply, demand, occupancy and ADR.
GRAPH
- ---------------
(1) Source: Smith Travel.
The following table reflects percentage changes in occupancy, ADR and
REVPAR in 1993, 1994 and 1995, compared to the respective preceding years, for
(i) the Current Hotels, (ii) the seven Acquisition Hotels that were open in
1995, (iii) the consolidated Current Hotels and Acquisition Hotels open in 1995,
(iv) all Upper Economy Chains, (v) all Midscale Chains, (vi) all Lower Upscale
Chains and (vii) all U.S. Hotels. As illustrated below, growth in REVPAR at the
Current Hotels and the Acquisition Hotels in 1994 and 1995 compares favorably to
REVPAR growth in the hotel industry in the market segments shown.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE OVER PRIOR PERIOD
----------------------------------------------------------------------------
OCCUPANCY ADR REVPAR(3)
---------------------- ---------------------- ----------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Hotels......... 4.9 % 1.4% (0.1)% 4.0 % 6.6% 9.7 % 9.0 % 8.0% 9.6%
Acquisition
Hotels(1)............ n/a 11.5 6.7 n/a 13.0 7.0 n/a 26.0 14.2
Current and Acquisition
Hotels(1)............ n/a 2.4 1.3 n/a 7.7 9.1 n/a 10.4 10.6
Upper Economy
Chains(2)............ 1.4 1.4 0.3 2.4 4.0 5.4 3.9 5.5 5.6
Midscale Chains(2)..... 1.6 1.7 0.8 1.8 3.1 4.7 3.3 4.9 5.6
Lower Upscale
Chains(2)............ 3.1 4.0 0.6 2.2 3.7 5.6 5.3 7.8 6.2
U.S. Hotels(2)......... 2.3 2.7 1.2 3.5 3.9 4.8 5.8 6.7 6.1
</TABLE>
- ---------------
(1) Excludes the Hampton Inn -- Perimeter (Atlanta), Georgia, the Hampton Inn &
Suites -- Duluth (Atlanta), Georgia and the Courtyard by
Marriott -- Wilmington, North Carolina, which were not open in 1995.
(2) Source -- Smith Travel. The "Upper Economy Chains" category includes, among
others Comfort Inn, and Holiday Inn Express hotels. The "Midscale Chains"
category includes, among others, Hampton Inn, Holiday Inn, Quality Suites
and Courtyard by Marriott hotels. The "Lower Upscale Chains" category
includes, among others, Homewood Suites hotels. Smith Travel does not
distinguish between Comfort Inn and Comfort Suites, Hampton Inn and Hampton
Inn & Suites or Holiday Inn and Holiday Inn Select hotels. Smith Travel has
not provided advice regarding any aspect of the Offering and is not
associated with the Offering in any way.
(3) Determined by dividing room revenues by annual available rooms.
8
<PAGE> 14
Extended-Stay Hotels. With the acquisition of two Homewood Suites
Acquisition Hotels, the Company will enter the extended-stay hotel market. The
Company expects to increase substantially its presence in this market and
capitalize on management's acquisition and development experience with (a) the
Company's current plans to develop two Homewood Suites hotels, (b) the future
acquisitions of some or all of the Homewood Development Hotels and Homewood
Option Hotels from Promus and (c) the future acquisitions of extended-stay
hotels from other third parties. Extended-stay hotels, such as Homewood Suites,
are designed to provide customers with the amenities of an apartment along with
the convenience of a hotel. Extended-stay hotels represent a small but growing
segment of the lodging industry, including approximately 360 properties with
approximately 40,000 rooms (approximately 1.2% of the total number of rooms
available in the U.S. lodging industry) as of December 31, 1995. During the
three years ended December 31, 1995, the number of dedicated extended-stay rooms
increased at a compound annual growth rate of approximately 2.7%, compared with
compound annual room growth of approximately 1.4% for the overall industry. Some
standard features of extended-stay hotels include suites with separate living
and sleeping rooms, full kitchens in each suite and laundry facilities on the
premises. The extended-stay segment of the hospitality industry has developed
over the last decade and is principally oriented towards business travelers.
Demand for extended-stay lodging has been stimulated by the economic and social
changes resulting from the increased volume of corporate reorganizations and
trends toward down-sizing and out-sourcing of various functions, the dispersion
of the traditional family, and technological improvements which have allowed
businesses to relocate outside of large metropolitan areas. These changes have
created new accommodation needs for, among others, corporate executives and
trainees, consultants, sales representatives, and people in between jobs or
houses.
Full-Service Hotels. The Holiday Inn Select -- Garland (Dallas), Texas
Acquisition Hotel is a full-service hotel. On a selected basis, the Company will
consider the acquisition of additional full-service hotels as suitable
acquisition opportunities arise.
DISTRIBUTION POLICY
The following table sets forth the cash distributions declared per share
since inception of the Company.
<TABLE>
<S> <C>
1994
Second Quarter (from May 26)....................................................... $.06(1)
Third Quarter...................................................................... .21
Fourth Quarter..................................................................... .21
1995
First Quarter...................................................................... .22
Second Quarter..................................................................... .22
Third Quarter...................................................................... .22
Fourth Quarter (Regular)........................................................... .24
Fourth Quarter (Special)........................................................... .03(2)
1996
First Quarter...................................................................... .24
Second Quarter(3).................................................................. .255(3)
</TABLE>
- ---------------
(1) Represents an approximate pro rata distribution for the period June 2, 1994,
the closing date of the IPO through June 30, 1994 based on an initial
quarterly distribution rate of $.20 per share.
(2) Represents a special distribution made to ensure that the Company
distributed 100% of its 1995 taxable income. See "Federal Tax
Considerations -- Taxation of the Company".
(3) On May 28, 1996 the Company's Board of Directors declared a quarterly
distribution of $.255 per share payable on July 16, 1996 to all holders of
record of the Common Stock on July 8, 1996.
Future distributions will depend upon the Company's actual Cash Available
for Distribution, financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the
9
<PAGE> 15
Code and such other factors as the Company's Board of Directors (the "Board of
Directors") deems relevant. See "Price Range of Common Stock and Distributions".
TAX STATUS
The Company elected to be taxed as a REIT under sections 856 through 860 of
the Code, effective for its short taxable year ended December 31, 1994. As long
as the Company qualifies for taxation as a REIT, the Company generally will not
be subject to federal corporate income tax on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its annual taxable income. Failure to qualify as a
REIT will render the Company subject to federal income tax (including any
applicable minimum tax) on its taxable income at regular corporate rates, and
distributions to the Company's shareholders in any such year will not be
deductible by the Company. Although the Company has not requested a ruling from
the Internal Revenue Service (the "Service") as to its REIT status, the Company
has obtained the opinion of its legal counsel that the Company qualifies as a
REIT, which opinion is based on certain assumptions and representations and is
not binding on the Service or any court. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local taxes
on its income and property. In connection with the Company's election to be
taxed as a REIT, the Company's Articles of Incorporation impose restrictions on
the transfer of shares of Common Stock. The Company has adopted the calendar
year as its taxable year. See "Risk Factors -- Tax Risks," "-- Ownership
Limitation" and "Federal Income Tax Considerations -- Taxation of the Company".
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.. 5,000,000 shares
Common Stock and Units to be
outstanding after the Offering..... 16,611,264 shares(1)
Use of Proceeds...................... To fund a portion of the purchase prices for the
Acquisition Hotels, to repay certain indebtedness, to
fund certain improvements to the Hotels and to pay
certain franchise fees and closing costs.
The Nasdaq Stock Market Symbol....... WINN
</TABLE>
- ---------------
(1) Includes (a) an aggregate of 37,500 restricted shares issued to the
Independent Directors under the Winston Hotels, Inc. Directors' Stock
Incentive Plan (the "Directors' Plan"), which shares vest ratably over four
years (unvested shares being subject to forfeiture if a director does not
remain as a director of the Company), (b) 272,727 shares to be sold to
Promus in the Private Placement, (c) an aggregate of 1,425,320 shares
issuable upon redemption of Units held by limited partners of the
Partnership, including 991,364 Units issued in connection with the
acquisition of the Acquisition Hotels, and (d) 33,103 shares issued to the
shareholders of the Company's advisor in payment of the incentive advisory
fee for 1995. Excludes (i) shares that may be purchased by the shareholders
of the Lessee in the future with proceeds from distributions from the Lessee
(see "Business and Properties -- Operating Practices"), (ii) 376,000 shares
reserved for issuance upon the exercise of options granted under Winston
Hotels, Inc. Stock Incentive Plan (the "Winston Stock Incentive Plan") and
(iii) shares to be purchased by Promus after the Offering to fulfill its
subscription to invest up to an additional $12 million in the Company as the
Company acquires the Homewood Development Hotels and Homewood Option Hotels.
10
<PAGE> 16
SUMMARY FINANCIAL DATA
The following table sets forth historical and unaudited pro forma financial
information for the Company and should be read in conjunction with the
consolidated financial statements and the notes thereto which are contained
elsewhere or incorporated by reference in this Prospectus. The pro forma
Statements of Income and Other Data for the Company is presented as if (i) the
acquisitions of the Current Hotels not owned by the Company as of January 1,
1995 and the Acquisition Hotels (including those not open for all of 1995), (ii)
the closing of the Follow-on Offering, the Offering and the Private Placement,
and (iii) the application of the net proceeds from the Follow-on Offering, the
Offering and the Private Placement had occurred as of the beginning of the
periods presented. Therefore, such information incorporates certain assumptions
that are included in the Notes to the pro forma Consolidated Statements of
Income included elsewhere in this Prospectus. The pro forma Balance Sheet Data
is presented as if the acquisition of the Acquisition Hotels and the
consummation of the Offering and Private Placement and the application of the
net proceeds therefrom had occurred on March 31, 1996. See "Risk Factors -- Risk
that Pending Acquisitions Will Not Close".
11
<PAGE> 17
WINSTON HOTELS, INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA YEAR ENDED DECEMBER 31, 1995
--------------- -----------------------------------------------------------
PERIOD
FROM
JUNE
2, REVISED
1994 CURRENT
THROUGH YEAR ACQUISITION HOTELS
DECEM- ENDED PRO HOTELS AND
BER DECEM- FORMA REVISED -------------------- ACQUISI-
31, BER 31, CURRENT ADJUST- CURRENT OPERATING OTHER TION
1994 1995 HOTELS(2) MENTS(2) HOTELS HOTELS(3) HOTELS(4) HOTELS
------ ------- --------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Percentage Lease revenue(5)...................... $5,116 $17,148 $19,060 $19,060 $ 6,232 $ 2,164 $ 27,456
Interest and other income........................ 92 442 442 442 442
------ ------- --------- ------- --------- --------- --------
Total revenue.............................. 5,208 17,590 19,502 19,502 6,232 2,164 27,898
------ ------- --------- ------- --------- --------- --------
Expenses:
Real estate and personal property taxes and
casualty insurance(6).......................... 362 1,054 1,180 1,180 476 374 2,030
General and administrative(7).................... 339 1,208 1,098 $ (57) 1,041 18 1,059
Interest expense(8).............................. 218 2,555 2,723 481 3,204 691 446 4,341
Depreciation(9).................................. 1,176 3,854 4,552 4,552 1,860 1,197 7,609
Amortization(10)................................. 49 117 126 126 29 5 160
------ ------- --------- -------- ------- --------- --------- --------
Total expenses............................. 2,144 8,788 9,679 424 10,103 3,056 2,040 15,199
------ ------- --------- -------- ------- --------- --------- --------
Income before allocation to minority interest.... 3,064 8,802 9,823 $ (424) $ 9,399 $ 3,176 $ 124 12,699
========= ========= ========= ==========
Income allocation to minority interest(11)....... 187 417 414 1,090
------ ------- --------- --------
Net income applicable to common shareholders... $2,877 $ 8,385 $ 9,409 $ 11,609
======== ========= ========== =========
Weighted average number of common shares and
common share equivalents......................... 7,073 9,211 10,339 16,624(12)
Net income per common share....................... $0.43 $0.96 $0.95 $0.76
Distribution declared per common share............ $0.48 $0.93
<CAPTION>
PRO FORMA THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------
REVISED
HISTORICAL CURRENT
THREE MONTHS ACQUISITION HOTELS
ENDED HOTELS AND
MARCH 31, PRO FORMA REVISED --------------------- ACQUISI-
--------------- ADJUST- CURRENT OPERATING OTHER TION
1995 1996 MENTS(2) HOTELS HOTELS(3) HOTELS(4) HOTELS
------ ------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Percentage Lease revenue(5)...................... $3,035 $ 4,540 $4,540 $ 1,548 $ 668 $ 6,756
Interest and other income........................ 26 16 16 16
------ ------- ------- --------- --- -------
Total revenue.............................. 3,061 4,556 4,556 1,548 668 6,772
------ ------- ------- --------- --- -------
Expenses:
Real estate and personal property taxes and
casualty insurance(6).......................... 216 320 320 127 133 580
General and administrative(7).................... 227 424 424 18 12 454
Interest expense(8).............................. 538 674 $ 114 788 179 114 1,081
Depreciation(9).................................. 745 1,167 1,167 465 299 1,931
Amortization(10)................................. 26 31 31 7 1 39
------ ------- --------- ------- --------- --- -------
Total expenses............................. 1,752 2,616 114 2,730 796 559 4,085
------ ------- --------- ------- --------- --- -------
Income before allocation to minority interest.... 1,309 1,940 $(114) $1,826 $ 752 $ 109 2,687
========== ======== ========= ==========
Income allocation to minority interest(11)....... 79 80 231
------ ------- -------
Net income applicable to common shareholders... $1,230 $ 1,860 $ 2,456
======= ========= =========
Weighted average number of common shares and
common share equivalents......................... 7,217 10,383 16,611
Net income per common share....................... $0.18 $0.19 $0.16
Distribution declared per common share............ $0.22 $0.24
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL MARCH 31, 1996
------------------------------------- ---------------------------
PRO FORMA AS
DECEMBER 31, 1994 DECEMBER 31, 1995 HISTORICAL ADJUSTED(12)
----------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 1,114 $ 2,496 $ 220 $ 251
Investment in hotel properties.... 85,917 122,896 124,283 204,663
Total assets...................... 88,114 123,969 123,973 203,673
Total debt........................ 28,600 34,000 34,500 49,400
Shareholders' equity.............. 53,705 80,872 80,380 136,127
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL YEAR ENDED DECEMBER 31, 1995
--------------------------- ----------------------------------------------------
REVISED
PERIOD FROM CURRENT
JUNE 2, 1994 ACQUISITION HOTELS HOTELS(2)
THROUGH YEAR ENDED REVISED ------------------------- AND
DECEMBER 31, DECEMBER 31, CURRENT OPERATING OTHER ACQUISITION
1994 1995 HOTELS(2) HOTELS(3) HOTELS(4) HOTELS
------------ ------------ --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Lessee room revenue.................... $ 12,474 $ 39,677 $44,131 $15,223(13) $ 320 $ 59,674(13)
Funds From Operations(14).............. 4,240 12,656 13,951 5,036 1,321 20,308
Cash Available for Distribution(15).... 3,866 11,185 11,964 4,148 1,305 17,417
Cash provided (used) by
operating activities(16).............. 3,417 12,628 20,779
investing activities(16).............. (85,973) (36,059) (2,891)
financing activities(16).............. 83,670 24,813 (15,460)
<CAPTION>
PRO FORMA
THREE MONTHS ENDED MARCH 31, 1996
HISTORICAL ---------------------------------------------------
THREE MONTHS REVISED
ENDED CURRENT
MARCH 31, REVISED HOTELS(2)
----------------- CURRENT OPERATING OTHER AND ACQUISITION
1995 1996 HOTELS(2) HOTELS(3) HOTELS(4) HOTELS
------- ------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Lessee room revenue.................... $ 7,373 $10,709 $10,709 $ 3,784 $ 718 $15,211
Funds From Operations(14).............. 2,054 3,107 2,993 1,217 408 4,618
Cash Available for Distribution(15).... 1,833 2,626 2,458 994 372 3,824
Cash provided (used) by
operating activities(16).............. 1,327 2,328 4,764
investing activities(16).............. (288) (2,319) (794)
financing activities(16).............. (1,627) (2,285) (3,987)
</TABLE>
12
<PAGE> 18
- ---------------
(1) The historical information includes the results of the Current Hotels from
their respective dates of acquisition as further described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The pro forma information does not purport to represent what the Company's
financial position or results of operation would actually have been if the
Company and the Partnership had, in fact, owned and leased all of the
Hotels to the Lessee as of or for the periods presented, or to project the
Company's financial position or results of operations at any future date or
for any future period.
(2) The pro forma Current Hotels information for the year ended December 31,
1995 represents the Current Hotels as if they had been owned by the Company
since January 1, 1995, as assumed in Note 8 of the Notes to the
Consolidated Financial Statements of Winston Hotels, Inc., which are
included elsewhere in this Prospectus. The pro forma adjustments reflect
the terms of the New Line as described in footnote 8 below for each period
presented, and the related impact that would have occurred on amounts
payable to Winston Advisors, Inc. for the year ended December 31, 1995.
(3) Operating Hotels includes those Acquisition Hotels that had room revenues
for 12 months in 1995, including the Hampton Inn -- Duncanville (Dallas),
Texas; the Holiday Inn Select -- Garland (Dallas), Texas; the Comfort
Suites -- London, Kentucky; the Holiday Inn Express -- Abingdon, Virginia;
the Comfort Inn -- Greenville, South Carolina; and the Homewood
Suites -- Cary, North Carolina.
(4) Other Hotels includes the four Acquisition Hotels that were not in
operation during the entire year ended December 31, 1995. Other Hotels
includes the Hampton Inn -- Perimeter (Atlanta), Georgia, the Hampton Inn &
Suites -- Duluth (Atlanta), Georgia, and the Courtyard by Marriott --
Wilmington, North Carolina, none of which were open in 1995 (the Hampton
Inn -- Perimeter (Atlanta), Georgia opened in February 1996); and the
Homewood Suites -- Clear Lake (Houston), Texas, which opened in September
1995.
(5) Pro forma amounts represent lease payments from the Lessee to the
Partnership (or the Company, for the one Current Hotel owned by the Company
directly) and are calculated on a pro forma basis by applying the rent
provisions in the Percentage Leases and proposed Percentage Leases: (i) for
the Operating Hotels to their historical room revenues as if they had been
acquired as of the beginning of the period presented, and (ii) for the
Other Hotels to their historical room revenues, if any, and by assuming
Base Rent was paid by the Lessee for the periods in which there was no room
revenue or in which room revenue was insufficient to result in the payment
of Percentage Rent under the proposed Percentage Leases. See "Business and
Properties -- The Percentage Leases" and Note C to the Notes to the pro
forma Consolidated Statements of Income of the Company.
(6) Pro forma amounts as if the Company paid real estate and personal property
taxes and casualty insurance as contemplated by the Percentage Leases.
(7) Pro forma amounts include estimated incremental franchise taxes, legal,
accounting, printing and other expenses for each period presented, and pro
forma amounts payable to Winston Advisors, Inc. under the Advisory
Agreement for the year ended December 31, 1995. The Company became
self-advised and self-administered and terminated the Advisory Agreement as
of December 31, 1995.
(8) Pro forma interest expense was calculated based on a weighted average
interest rate of 7.5%, applied to the pro forma debt balance, assuming this
balance remained constant for each entire period. In addition, pro forma
interest expense includes unused line of credit fees of 0.25%, $314 and $78
for amortization of loan costs and fees and $145 and $29 for amortization
of interest rate cap fees, for the year ended December 31, 1995 and the
three months ended March 31, 1996, respectively.
(9) Depreciation is computed based upon useful lives of 30 years for buildings
and improvements and five years for furniture and equipment. These
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general.
13
<PAGE> 19
(10) Represents amortization of capitalized franchise fees over a 10 year
period, and of deferred directors' fees payable in shares of restricted
stock over the vesting period with respect to the shares granted.
(11) For Current Hotels, calculated as 4.5% of pro forma income before
allocation to minority interest of the Current Hotels (other than the one
Current Hotel owned by the Company directly). For Current and Acquisition
Hotels, calculated as 8.9% of pro forma income before allocation to
minority interest of the Hotels (other than the one Current Hotel owned by
the Company directly).
(12) Adjusted to reflect the sale of 5,000,000 shares of Common Stock by the
Company in the Offering, 272,727 shares of Common Stock to Promus in the
Private Placement and the application of the net proceeds therefrom and the
issuance of 991,364 Units in the Partnership in connection with the
acquisition of the Affiliate Acquisition Hotels.
(13) Includes (i) $1,947 and $490 of food and beverage revenue for the Holiday
Inn Select -- Garland (Dallas), Texas and (ii) $117 and $34 of food and
beverage revenue for the Homewood Suites -- Cary, North Carolina, for the
year ended December 31, 1995 and the three months ended March 31, 1996,
respectively.
(14) The following table computes Funds From Operations under both the
guidelines recently announced by the National Association of Real Estate
Investment Trusts ("NAREIT") and the guidelines previously recommended by
NAREIT and utilized by the Company. Funds From Operations under the
recently announced NAREIT guidelines consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains
or losses from debt restructurings and sales of property, plus depreciation
of real property (including furniture and equipment) and after adjustments
for unconsolidated partnerships and joint ventures. Under the prior NAREIT
guidelines for calculating Funds From Operations, adjustments to net income
also included amortization of unearned directors' compensation and
amortization of franchise fees.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------- PRO FORMA
PERIOD FROM THREE MONTHS THREE
JUNE 2, 1994 ENDED PRO FORMA MONTHS
THROUGH YEAR ENDED MARCH 31, YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, --------------------- DECEMBER 31, MARCH 31,
1994 1995 1995 1996 1995 1996
------------ ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Income before allocation to
minority interest......... $3,064 $ 8,802 $ 1,309 $ 1,940 $ 12,699 $ 2,687
Depreciation................ 1,176 3,854 745 1,167 7,609 1,931
------ ------- -------
Funds From Operations
(recently announced
guidelines)............... 4,240 12,656 2,054 3,107 20,308 4,618
Amortization of unearned
directors' compensation... 44 75 18 18 75 18
Amortization of franchise
fees...................... 5 42 8 13 85 21
------ ------- -------
Funds From Operations (under
previous guidelines)...... $4,289 $ 12,773 $ 2,080 $ 3,138 $ 20,468 $ 4,657
====== ======= =======
Weighted average number of
shares of common shares
and common share
equivalents............... 7,073 9,211 7,217 10,383 16,624 16,611
====== ======= =======
</TABLE>
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. Funds From
Operations does not reflect cash expenditures for capital improvements or
principal repayment of debt.
(15) Represents Funds From Operations, less an amount equal to the amounts
required to be set aside by the Company and the Partnership under each
Percentage Lease, for refurbishment and replacement of furniture, fixtures
and equipment, capital expenditures and other non-routine items as
required by the Percentage Leases. For all Current Hotels acquired before
1995, the amount required to be set aside is 5% of room revenue. For
Current Hotels acquired in 1995, during the
14
<PAGE> 20
first year of the related Percentage Leases the amount required to be set
aside is 3% of room revenues, increasing to 5% thereafter. The Company is
required to set aside 5% of room revenues for all of the Acquisition Hotels
other than the Holiday Inn Select -- Garland (Dallas), Texas, for which 7%
of room, food and beverage revenues is required to be set aside.
(16) Reflects the Company's cash flows and pro forma cash flows from operating,
investing and financing activities. Pro forma cash flows from operating
activities represents net income plus income allocable to minority
interest, depreciation of hotel properties, amortization of deferred
expenses and unearned directors compensation, amortization of line of
credit fees and interest rate caps and the non-cash portion of advisory
fees payable for the year ended December 31, 1995. There are no pro forma
adjustments for changes in working capital items. Pro forma cash used in
investing activities reflects the percentage of hotel revenues which is
required to be set aside by the Company for refurbishment and replacement
of furniture, fixtures and equipment, capital expenditures and other
non-routine items as required by the Percentage Leases. Pro forma cash used
in financing activities includes distributions per share and Unit of $.22
for the quarters ended March 31, June 30 and September 30, 1995, $.27
(including a $0.03 special distribution) for the quarter ended December 31,
1995 and $.24 for the quarter ended March 31, 1996. This unaudited pro
forma cash flow data is not necessarily indicative of what actual cash
flows would have been assuming the transactions had been completed as of
the beginning of each of the periods presented, nor do they purport to
represent cash flows from operating, investing and financing activities for
future periods.
15
<PAGE> 21
CORPORATE STRUCTURE
The Company currently owns one Current Hotel directly and owns the
remaining 20 Current Hotels through its interest in the Partnership. The
Partnership recently acquired five of the Acquisition Hotels and will acquire
the remaining five Acquisition Hotels contemporaneously with or following the
Offering. The Company and the Partnership lease the Current Hotels and five of
the Acquisition Hotels, and the Partnership will lease the remaining Acquisition
Hotels pursuant to the Percentage Leases. The Lessee pays rent to the Company
and the Partnership under the Percentage Leases and, in addition, pays all
franchise fees, management fees and other operating expenses of the Hotels. The
Lessee operates 11 of the Current Hotels and a third party, Interstate
Management and Investment Company ("IMIC"), manages of 10 of the Current Hotels
under management agreements with the Lessee. The Lessee will operate all of the
Acquisition Hotels except for (i) the Homewood Suites -- Clear Lake (Houston),
Texas, which, along with any Homewood Development Hotels or Homewood Option
Hotels acquired by the Company in the future, will be managed by Promus under
the Promus Management Agreements and (ii) the Holiday Inn Select -- Garland
(Dallas), Texas, which is managed by Impac Hotel Group, Inc. ("Impac") -- an
affiliate of the former owner -- under a management agreement with a one-year
term subject to the termination by the Lessee upon 60 days notice. See "Business
and Properties -- Operating Practices".
The diagram below illustrates the relationship among the Company, the
Partnership, the Lessee, IMIC, Promus and Impac after giving effect to (i) the
contribution by the Company to the Partnership of all of the net proceeds of
this Offering and the Private Placement and (ii) the acquisition of the
Acquisition Hotels.
GRAPH
The Company's executive offices are located at 2209 Century Drive, Suite
300, Raleigh, North Carolina 27612, and its telephone number is (919) 510-6010.
16
<PAGE> 22
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing shares of Common Stock in the Offering.
RISK THAT PENDING ACQUISITIONS WILL NOT CLOSE
The Company acquired five of the 10 Acquisition Hotels in early May 1996.
While the Partnership has entered into contracts to purchase the remaining five
Acquisition Hotels and has substantially completed its due diligence with
respect to such Acquisition Hotels, the closings of such Acquisition Hotels are
not scheduled to occur until after the Offering. The purchase contracts relating
to the remaining five Acquisition Hotels to be acquired are subject to customary
closing conditions. If the Partnership does not complete the acquisition of any
or all of such five Acquisition Hotels not currently owned by the Company, for
whatever reason, following the completion of the Offering, net proceeds from the
Offering designated for the purchase of such Acquisition Hotels will be applied
to repay amounts outstanding under an approximately $17.0 million interim
unsecured line of credit and amounts outstanding under the Existing Line.
Immediately prior to the closing of the Offering, the Company expects that there
will be approximately $62.7 million outstanding under the Existing Line and the
interim unsecured line of credit.
The Partnership has incurred approximately $500,000 in due diligence
expenses in connection with investigating the Acquisition Hotels. If the Company
does not close the remaining five Acquisition Hotels, a portion of such due
diligence expenses would be written off (and treated as non-recurring items for
purposes of calculating Funds From Operations).
RISKS ASSOCIATED WITH HOMEWOOD DEVELOPMENT HOTELS
The Company has agreed to acquire the three Homewood Developmental Hotels
from Promus shortly after each such hotel is completed. Under the terms of the
Company's agreement with Promus, each Homewood Development Hotel will be built
to specifications set forth in that agreement. The Company's obligation to
purchase each Homewood Development Hotel is contingent upon the hotel meeting
the applicable construction specifications. Because the Homewood Development
Hotels are currently under development, there can be no assurances that any of
the Homewood Development Hotels will be completed to the specifications to which
the Company has agreed, and therefore, there can be no assurances that the
Company will acquire any or all of the Homewood Development Hotels. In addition,
the Company's agreement to purchase each Homewood Development Hotel is subject
to the hotel's completion by a date specified in the agreement between the
Company and Promus. There can be no assurances that any or all of the Homewood
Development Hotels will be completed by such specified dates, and, therefore,
there can be no assurances that the Company will acquire any or all of the
Homewood Development Hotels. If Promus' actual costs of development exceed its
estimated costs (and, therefore, the Company's purchase price), Promus is not
obligated to sell the hotel to the Company for the contract price. Instead, the
Company will have an option to acquire the hotel at the (higher) price equal to
Promus' actual development costs. There are no assurances that Promus' actual
development costs on any or all of the Homewood Development Hotels will not
exceed its estimated costs or that, upon such occurrences, the Company will
exercise its option to acquire such hotels. Furthermore, there are risks that
the Company could have to purchase a Homewood Development Hotel if it meets the
specifications in the purchase contract, even if the hotel (or its market) is
somehow unsatisfactory to the Company for any other reason at the time of
closing.
17
<PAGE> 23
ACQUISITION OF HOTELS WITH LITTLE OR NO OPERATING HISTORY
Three of the Acquisition Hotels, all of the Homewood Development Hotels,
the Homewood Option Hotels and the two Homewood Suites hotels that the Company
intends to develop have little or no operating history. The Company has
calculated the Percentage Rent formulas for these hotels based on its
projections of occupancy and ADR for the areas in which each of these Hotels are
located. Consequently, the Company will be subject to risks that these Hotels
will not achieve anticipated occupancy or ADR levels. Similarly, during the
start-up period, room revenues may be less than required to result in the
payment of rent at levels that provide the Company with an attractive return on
its investments.
DEVELOPMENT RISKS
The Company intends to develop hotel properties as suitable opportunities
arise and currently plans to develop two Homewood Suites hotels. See "Business
and Properties -- Growth Strategy -- Development Strategy". New project
development is subject to a number of risks, including risks of construction
delays or cost overruns that may increase project costs, and new project
commencement risks such as receipt of zoning, occupancy and other required
governmental permits and authorizations and the incurrence of development costs
in connection with projects that are not pursued to completion. The Company
anticipates that development will be financed with the New Line or other secured
or unsecured financing. The Company intends to begin construction on two
Homewood Suites hotels in the middle of 1996 and complete and open those
projects in the middle of 1997. There can be no assurances, however, that the
Company will begin or complete the development of one or both of the projects or
that the development and construction activities will be completed in a timely
manner or within budget. The Company also intends to rehabilitate existing hotel
properties that the Company believes are underperforming and such rehabilitation
projects will be subject to the same risks as development projects.
RISKS OF RAPID GROWTH
Since the IPO, the number and geographic dispersion of the Company's hotel
properties has increased substantially. The Company's growth strategy
contemplates additional hotel acquisitions that meet its investment criteria,
such as the Acquisition Hotels, the Homewood Development Hotels and Homewood
Option Hotels, as well as hotel development, further increasing the number and
geographic dispersion of the hotel properties in which it owns interests. The
Company's ability to grow is dependent upon the ability of the Lessee and any
third-party manager retained by the Lessee, to manage effectively the Hotels, as
well as any additional hotels in which the Company invests. The Lessee's or
third-party managers' ability to operate additional hotels under Percentage
Leases or under management agreements, with current staffing levels and office
locations, may diminish as the Company acquires additional hotels. Such growth
may require the Lessee to hire additional personnel, engage additional
third-party managers, and to operate in new geographic locations.
DEPENDENCE ON RENT PAYMENTS UNDER PERCENTAGE LEASES;
LIMITED FINANCIAL RESOURCES OF THE LESSEE
The Company must rely on the Lessee, either directly or under contracts
with managers such as IMIC, Promus and Impac, to generate sufficient cash flow
from the operation of the Hotels to enable the Lessee to meet its rent
obligations under the Percentage Leases. Ineffective operation of the Hotels may
result in the Lessee being unable to pay rent as required under the Percentage
Leases to the Company and the Partnership. The obligations of the Lessee under
the Percentage Leases are unsecured. Other than inventory, working capital
sufficient to operate the Current Hotels and the franchise licenses for those
hotels, the Lessee has only nominal assets in addition to its rights and
benefits under the Percentage Leases. See "Risk Factors -- Hotel Industry
Risks -- Competition" "-- Business and Properties, Operating Practices -- The
Lessee."
18
<PAGE> 24
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
Neither the Company nor the Partnership can operate any hotel or
participate in the decisions affecting the daily operations of any hotel. Either
the Lessee under the Percentage Leases, or an operator such as IMIC, Promus and
Impac under management agreements with the Lessee, will control the daily
operations of the Hotels. Neither the Company nor the Partnership has the
authority to require any hotel to be operated in a particular manner, or to
govern any particular aspect of the daily operations of any hotel (e.g., setting
room rates). Thus, even if the Company's management believes the Hotels are
being operated inefficiently or in a manner that does not result in increased
rent payments to the Company or the Partnership under the Percentage Leases,
neither the Company nor the Partnership may require a change to the method of
operation. The Company is limited to seeking redress only if the Lessee violates
the terms of the Percentage Leases, and then only to the extent of the remedies
set forth therein. See "Business and Properties -- The Percentage Leases".
HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are subject to all operating risks common to the hotel industry.
These risks include: competition from other hotels; past over-building in the
hotel industry which has adversely affected occupancy and ADR; increases in
operating costs due to inflation, which increases have not in recent years been,
and may not necessarily in the future be, offset by increased room rates;
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses of travel; and adverse effects of general and local
economic conditions. These factors could adversely affect the Lessee's ability
to make lease payments and, therefore, the Company's ability to make expected
distributions to shareholders. Further, decreases in room revenues of the Hotels
will result in decreased revenues to the Company and the Partnership under the
Percentage Leases and decreased Cash Available for Distribution to the Company's
shareholders.
Competition
Competition for Guests. The hotel industry is highly competitive. The
Hotels compete with other hotel properties in their geographic markets. As
industry conditions continue to improve, new competing hotels may be opened in
the Company's markets and in markets in which the Company may acquire hotels in
the future.
The Upper Economy segment of the hotel industry, which includes Holiday Inn
Express and Comfort Inn hotels, is experiencing a greater percentage increase in
room supply than other segments of the industry. Room supply of Upper Economy
hotels grew 3.7% in 1994 and 5.5% in 1995 as compared to 1.4% in 1994 and 1.6%
in 1995 for all U.S. Hotels. Although growth in demand for Upper Economy hotels
(5.2% in 1994 and 5.7% in 1995) exceeded growth in supply in each of these
periods, respectively, continued increases in supply could result in decreased
ADR, occupancy and REVPAR at the Company's hotels competing in the Upper Economy
segment.
Competition for Acquisitions. The Company competes for acquisition
opportunities with entities that have substantially greater financial resources
than the Company. These entities may generally be able to accept more risk than
the Company can prudently manage, including risks with respect to the
creditworthiness of a hotel operator or the geographic proximity of its
investments. Competition may generally reduce the number of suitable investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell. Further, the Company faces competition for
acquisition opportunities from entities organized for purposes substantially
similar to the Company's objectives. See "Business and
Properties -- Competition".
19
<PAGE> 25
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth 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 revenues from the Percentage Leases. The lease revenues may vary
by season as a result of the tiered, progressive formulas under which Percentage
Rent is calculated. See "Business and Properties -- The Percentage
Leases -- Amounts Payable under the Percentage Leases".
Concentration of Investments; Proximity to Coast
Fourteen of the 31 Hotels are located in the State of North Carolina, with
six of the Hotels located in the Raleigh/Durham, North Carolina area and three
of the Hotels located in Wilmington, North Carolina. See "Business and
Properties -- The Hotels". In the future, the Company could increase the
concentration of its investments in North Carolina and, particularly, in the
Raleigh/Durham area where the Company intends to develop a hotel. The
concentration of the Company's investments in North Carolina could result in
adverse events or conditions which affect those areas particularly, such as a
hurricane or other natural disaster, having a more significant negative effect
on the operation of the Hotels, and ultimately amounts available for
distribution to shareholders of the Company, than if the Company's investments
were more geographically diverse.
In addition to the Company's concentration of investment in North Carolina,
one of the Acquisition Hotels and one Current Hotel are located in the Atlanta,
Georgia area. The Company also currently intends to develop a hotel in suburban
Atlanta. See "Business Properties -- Growth Strategy -- Development Strategy".
The concentration of the Company's investments in one metropolitan area can
result in adverse events or conditions that affect that metropolitan area having
a more significant negative effect on the operations of the Hotels, and
ultimately, amounts available for distribution to shareholders of the Company.
Several of the Hotels are located near the Atlantic Ocean and are exposed
to more severe weather than hotels located inland. These Hotels are also exposed
to salt water and humidity, which result in increased or more rapid wear on the
hotels' weatherproofing and mechanical, electrical and other systems. As a
result, the Company may incur additional expenditures for capital improvements.
Emphasis on Hampton Inn and Comfort Inn Hotels
Fourteen of the 31 Hotels are operated as Hampton Inn hotels, and nine are
operated as Comfort Inn hotels. The Company is subject to risks inherent in
concentrating investments in these two franchise brands, such as a decrease in
business because of adverse publicity related to the brands.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels have an ongoing need for renovations and other capital improvements,
particularly in older structures, including periodic replacement of furniture,
fixtures and equipment. Under the terms of the Percentage Leases, the Company
and the Partnership are obligated to pay the cost of certain capital
expenditures at the Hotels and to pay for furniture, fixtures and equipment. If
these expenses exceed the Company's estimate, the additional cost could have an
adverse effect on Cash Available for Distribution per share of Common Stock. In
addition, the Company intends to invest selectively in hotels that require
significant renovation, either solely or with Equitable. Renovation of hotels
involves certain risks, including the possibility of environmental problems,
construction cost overruns and delays, uncertainties as to market demand or
deterioration in market demand after commencement of renovation and the
emergence of unanticipated competition from hotels.
20
<PAGE> 26
CONFLICTS OF INTEREST
Because of the Winston Affiliates' ownership in and positions with the
Company and the Lessee, there are inherent conflicts of interest in the ongoing
lease and operation of the Hotels, and the interests of the Company's
shareholders may not have been, and in the future may not be, reflected fully in
all decisions made or actions taken by the officers and directors of the
Company.
No Arms Length Bargaining on Percentage Leases and Purchase Contracts for
Hotels Owned by Winston Affiliates
The terms of the Percentage Leases and the contracts pursuant to which the
Partnership will acquire the four Affiliate Acquisition Hotels were not
negotiated on an arms length basis. The Company believes, however, that the
terms of such agreements are fair to the Company. The valuation of the Homewood
Suites -- Cary, North Carolina Acquisition Hotels was based principally on a
capitalization of cash flow, and in the case of the other three Affiliate
Acquisition Hotels, anticipated cash flow. The Independent Directors and the
Company obtained separate, independent appraisals of each Affiliate Acquisition
Hotel, each of which indicated a current fair market value that is greater than
the purchase price of the related Affiliate Acquisition Hotel. The Independent
Directors have determined that the acquisition of the Affiliate Acquisition
Hotels is in the best interests of the Company and its shareholders and have
approved the acquisition of such Hotels. The Company does not own any interest
in the Lessee. The Lessee is owned by Robert Winston, President and director of
the Company, and John B. Harris, Jr., President and director of the Lessee.
Because Mr. Winston is a shareholder of the Lessee, as well as an officer and
director of the Company, there is a conflict of interest with respect to the
enforcement and termination of the Percentage Leases. Mr. Winston's economic
interest in the Lessee may result in decisions relating to the Company's
enforcement of its rights under the Percentage Leases that do not solely reflect
the interests of the Shareholders.
Conflicts Relating to Sale of the Initial Hotels and the Affiliate Acquisition
Hotels
The limited partners of the Partnership other than the Company (the
"Limited Partners"), including Robert and Charles Winston, may have unrealized
gain in their interests in the 10 Initial Hotels and the Affiliate Acquisition
Hotels. The Partnership's sale of any of those Hotels may cause adverse tax
consequences to the Limited Partners. Therefore, the interests of the Company
and the Limited Partners could conflict in connection with the disposition of
one or more of those 14 Hotels. However, decisions with respect to the
disposition of all hotel properties in which the Company invests will be made by
a majority of the Board of Directors, which majority must include a majority of
the Independent Directors when the disposition involves an Initial Hotel or an
Affiliate Acquisition Hotel.
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's real estate investments and the Company's income and ability to
make distributions to its shareholders is dependent upon the ability of the
Lessee, or an operator such as IMIC, Promus or Impac, to operate the Hotels in a
manner sufficient to maintain or increase revenues and to generate sufficient
income in excess of operating expenses to make rent payments under the
Percentage Leases. Income from the Hotels may be adversely affected by adverse
changes in national economic conditions, adverse changes in local market
conditions due to changes in general or local economic conditions and
neighborhood characteristics, competition from other hotel properties, changes
in interest rates and in the availability, cost and terms of mortgage funds, the
impact of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements, particularly in
older structures, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest,
21
<PAGE> 27
acts of God, including earthquakes and other natural disasters (which may result
in uninsured losses), acts of war and adverse changes in zoning laws, many of
which are beyond the control of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. There can be no assurance
that the Company will be able to dispose of an investment when it finds
disposition advantageous or necessary or that the sale price of any disposition
will recoup or exceed the amount of the Company's investment. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. Also, no assurances can be given that the market
value of any of the Hotels will not decrease in the future.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to borrow using such real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws and
common law principles could be used to impose liability for release of and
exposure to hazardous substances, including asbestos-containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances, including ACMs. In connection
with the ownership of the Hotels, the Company, the Partnership, the Lessee or
any third-party manager, as the case may be, may be potentially liable for any
such costs. Phase I environmental site assessments ("ESAs") have been obtained
on all of the Acquisition Hotels and were obtained on all of the Current Hotels
prior to their acquisition. The purpose of Phase I ESAs is to identify potential
sources of contamination for which the Hotels may be responsible and to assess
the status of environmental regulatory compliance. The Phase I ESA reports have
not revealed any environmental condition, liability or compliance concern that
the Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any such
condition, liability or concern. Furthermore, it is possible that these reports
do not reveal all environmental conditions, liabilities or compliance concerns
or that there are material environmental conditions, liabilities or compliance
concerns that arose at a Hotel after the related Phase I ESA report was
completed of which the Company is otherwise unaware.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on
each of the Hotels, including liability, fire and extended coverage. Management
believes such specified coverage is of the type and amount customarily obtained
for or by an owner on real property assets. Leases for subsequently acquired
hotels will contain similar provisions. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes, floods,
hurricanes, and other acts of God, that may be uninsurable or not economically
insurable. The Company's Board of Directors will use their discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Certain factors, including inflation, changes in
building codes and ordinances and environmental considerations, also might make
it infeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the insurance
proceeds
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<PAGE> 28
received by the Company might not be adequate to restore its economic position
with respect to such property.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the Hotels
are substantially in compliance with these requirements, a determination that
the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. If the Company were required
to make expenditures to comply with the ADA, the Company's ability to make
distributions to its shareholders could be adversely affected.
Fluctuations in Property Taxes
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. If property taxes increase, the
Company's ability to make distributions to its shareholders would be adversely
affected. See "Business and Properties -- The Hotels".
RISKS OF LEVERAGE
All indebtedness incurred by the Company under the New Line matures on June
1, 1998 (the "Maturity Date"). There can be no assurance that the Company will
be able to extend or refinance any outstanding indebtedness under the New Line
on the Maturity Date or that the terms of any refinancings or extensions would
be as favorable to the Company as the existing terms of the New Line. The New
Line will initially be secured by 28 Hotels, which will be increased as the
Company elects to fully utilize the $125 million maximum amount available under
the New Line. If the Company is unable to obtain favorable refinancing of its
outstanding indebtedness at the Maturity Date or an extension of the New Line,
it could be required to liquidate one or more Hotels or lose one or more Hotels
to foreclosure, either of which would result in financial loss to the Company.
If the Company's cash flow from the Hotels securing the New Line decreases such
that the Line Availability is less than the amount outstanding under the New
Line, the Company must either (i) provide additional collateral to increase the
Line Availability or (ii) repay the excess of the amounts outstanding under the
New Line over the Line Availability. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
The New Line generally will bear interest at the variable rate of LIBOR
plus 1.75%. Economic conditions could result in higher overall interest rates,
which could increase debt service requirements on variable rate debt and could
reduce the amount of Cash Available for Distribution.
There can be no assurances that the Company, upon the incurrence of debt,
will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets, including
Hotels, to foreclosure. Adverse economic conditions could result in higher
interest rates, which could increase debt service requirements on floating rate
debt and could reduce the amounts available for distribution to shareholders.
The Company may obtain one or more forms of interest rate protection (swap
agreements, interest rate cap contracts, etc.) to hedge against the possible
adverse effects of interest rate fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations -- Liquidity and
Capital Resources". Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its terms
or otherwise, it could be required to liquidate one or more investments in hotel
properties at times which may not permit realization of the maximum return on
such investments.
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<PAGE> 29
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
All of the Hotels are subject to franchise agreements. The Lessee holds the
franchise licenses for the Current Hotels and will hold the franchise licenses
for the Acquisition Hotels. The Partnership guarantees the Lessee's obligations
to make franchise license payments under the franchise licenses for the Current
Hotels and will guarantee the Lessee's franchise obligations under the franchise
licenses for the Acquisition Hotels. Certain franchisors are requiring certain
of the Hotels to be operated under conditional franchise licenses, subject to
completion of certain capital improvements prior to issuance of a permanent
license. Failure to complete the improvements in a manner satisfactory to a
franchisor could result in the cancellation of a franchise agreement. In
addition, hotels in which the Company invests subsequently may be operated
pursuant to franchise agreements. The continuation of the franchises is subject
to specified operating standards and other terms and conditions. Franchisors
typically periodically inspect licensed properties to confirm adherence to
operating standards. The failure of a hotel to maintain such standards or adhere
to such other terms and conditions could result in the loss or cancellation of
the franchise license. It is possible that a franchisor could condition the
continuation of a franchise license on the completion of capital improvements
which the Board of Directors determines are too expensive or otherwise
unwarranted in light of general economic conditions or the operating results or
prospects of the affected hotel. In that event, the Board of Directors may elect
to allow the franchise license to lapse. In any case, if a franchise is
terminated, the Company and the Lessee may seek to obtain a suitable replacement
franchise, or to operate the Hotel independent of a franchise license. The loss
of a franchise license could have a material adverse effect upon the operations
or the underlying value of the hotel covered by the franchise because of the
loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the shares of Common Stock.
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, development, financing, growth, operations, debt capitalization
and distributions are determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time without
a vote of the shareholders of the Company. The Company cannot change its policy
of limiting consolidated indebtedness to 45% of its investment in hotel
properties, at cost, or its policy of seeking to maintain its qualification as a
REIT without the approval of the holders of a majority of the outstanding shares
of Common Stock voting on such matter.
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation, which provides that no shareholder may own,
directly or indirectly, more than 9.9% of any class of the outstanding stock of
the Company, may have the effect of precluding acquisition of control of the
Company by a third party without the approval of the Board of Directors.
Authority to Issue Preferred Stock
The Articles of Incorporation authorize the Board of Directors to issue up
to 10,000,000 shares of preferred stock and to establish the preferences and
rights of any preferred shares issued. Although the Company has no current
intention to issue shares of preferred stock in the foreseeable future, the
issuance of preferred stock could have the effect of delaying or preventing a
change in control of the
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<PAGE> 30
Company even if a change in control were in the shareholders' interest. No
shares of preferred stock will be issued or outstanding as of the close of the
Offering.
North Carolina Anti-Takeover Statutes
As a North Carolina corporation, the Company is subject to various statutes
which impose restrictions and require procedures with respect to certain
takeover offers and business combinations, including, but not limited to,
combinations with interested shareholders and share repurchases from certain
shareholders.
TAX RISKS
Failure to Qualify as a REIT
The Company operates and intends to continue to operate so as to qualify as
a REIT for federal income tax purposes. Although the Company has not requested,
and does not expect to request, a ruling from the Service that it qualifies as a
REIT, it previously has received, and will receive at the closing of the
Offering, an opinion of its counsel that, based on certain assumptions and
representations, it so qualifies. Investors should be aware, however, that
opinions of counsel are not binding on the Service or any court. The REIT
qualification opinion only represents the view of counsel to the Company based
on counsel's review and analysis of existing law, which includes no controlling
precedent. Furthermore, both the validity of the opinion and the continued
qualification of the Company as a REIT will depend on the Company's continuing
ability to meet various requirements concerning, among other things, the
ownership of its outstanding stock, the nature of its assets, the sources of its
income, and the amount of its distributions to its shareholders. See "Federal
Income Tax Considerations -- Taxation of the Company".
If the Company were to fail to qualify as a REIT for any taxable year, the
Company would not be allowed a deduction for distributions to its shareholders
in computing its taxable income and would be subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. As a result, Cash
Available for Distribution would be reduced for each of the years involved.
Although the Company currently operates and intends to continue to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Board of Directors,
with the consent of shareholders holding at least two-thirds of all the
outstanding shares of Common Stock, to revoke the REIT election. See "Federal
Income Tax Considerations".
REIT Minimum Distribution Requirements; Possible Incurrence of Additional Debt
In order to qualify as a REIT, the Company generally is required each year
to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company is subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its capital gain net income for
that year, and (iii) 100% of its undistributed taxable income from prior years.
The Company has made, and intends to continue to make, distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of its share
of the income of the Partnership, and the Company's Cash Available for
Distribution consists primarily of its share of cash distributions from the
Partnership and lease revenue under the Percentage Lease for the Current Hotel
owned by the Company directly. Differences in timing between the recognition of
taxable income and the receipt of Cash Available for Distribution due to the
seasonality of the hospitality industry could require the Company to borrow
funds on a short-term basis to meet the 95% distribution requirement and to
avoid the nondeductible excise tax. For federal income tax
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<PAGE> 31
purposes, distributions paid to shareholders may consist of ordinary income,
capital gains, nontaxable return of capital, or a combination thereof. The
Company will provide its shareholders with an annual statement as to its
designation of the tax characterization of distributions. The requirement to
distribute a substantial portion of the Company's net taxable income could cause
the Company to distribute amounts that otherwise would be spent on future
acquisitions, unanticipated capital expenditures or repayment of debt, which
would require the Company to borrow funds or to sell assets to fund the costs of
such items.
Distributions by the Partnership are determined by the Company's Board of
Directors and are dependent on a number of factors, including the amount of the
Partnership's Cash Available for Distribution, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements".
Failure of the Partnership to be Classified as a Partnership for Federal
Income Tax Purposes;
Impact on REIT Status
The Company has received an opinion of its counsel stating that the
Partnership will be classified as a partnership, and not as a corporation or as
an association taxable as a corporation, for federal income tax purposes. If the
Service were to challenge successfully the tax status of the Partnership as a
partnership for federal income tax purposes, the Partnership would be taxable as
a corporation. In such event, since the Company owns more than 10% of the
outstanding voting interests in the Partnership and the value of the Company's
ownership interest in the Partnership exceeds 5% of the aggregate value of the
Company's assets, the Company likely would cease to qualify as a REIT.
Furthermore, the imposition of a corporate income tax on the Partnership would
reduce substantially the amount of Cash Available for Distribution from the
Partnership to the Company and its shareholders. See "Federal Income Tax
Considerations -- Tax Aspects of the Partnership".
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities). Furthermore, if any shareholder or group of shareholders of the
Lessee owns, actually or constructively, 10% or more of the stock of the
Company, the Lessee could become a related party tenant of the Company and the
Partnership, which likely would result in loss of REIT status for the Company.
For the purpose of preserving the Company's REIT qualification, the Company's
Articles of Incorporation prohibit ownership of more than 9.9% of the
outstanding shares of any class of the Company's stock by any shareholder or
group (including the Winston Affiliates) subject to adjustment as described
below (the "Ownership Limitation"). Generally, the capital stock owned by
related or affiliated stockholders will be aggregated for purposes of the
Ownership Limitation. The Ownership Limitation could have the effect of
delaying, deferring or preventing a takeover or other transaction in which
holders of some, or a majority, of the Common Stock might receive a premium for
their shares. See "Federal Income Tax Considerations -- Requirements for
Qualification".
POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON PRICES OF
COMMON STOCK
Upon completion of the Offering, the Company will have issued, in addition
to the shares issued in connection with the IPO, the Follow-on Offering and the
5,000,000 shares of Common Stock to be sold in the Offering, (i) 272,727 shares
of restricted Common Stock to be issued to Promus in the Private Placement, (ii)
7,500 shares of restricted Common Stock to each director, other than Charles and
Robert Winston, which have vested and will continue to vest at the rate of 1,500
shares per year beginning on the closing date of the IPO and (iii) options to
acquire 376,000 shares of Common Stock issued under the Winston Hotels, Inc.
Stock Incentive Plan (the "Winston Stock Incentive Plan"). The Company may also
elect to issue up to 1,425,320 shares of Common Stock to holders of Units on a
one-for-one
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<PAGE> 32
basis upon the Unitholders' exercise of their Redemption Rights. All of the
Unitholders will have certain registration rights with respect to the shares of
Common Stock received by them upon redemption of their Units. The Company will
also have certain registration obligations with respect to Common Stock
purchased by Promus in the Private Placement or subsequently upon the Company's
acquisition of Homewood Development Hotels and Homewood Option Hotels. See
"Promus -- Promus' Purchase of Common Stock from the Company". No prediction can
be made as to the effect, if any, that future sales of such shares of Common
Stock, the availability thereof for future sale, or the existence of such
registration rights may have upon the market price of the Common Stock, from
time to time, or upon the Company's ability to sell additional shares of Common
Stock in the future.
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<PAGE> 33
ACQUISITIONS
The Company contracted to acquire the 10 Acquisition Hotels and two
potential development parcels adjoining two of the Acquisition Hotels, for
purchase prices aggregating approximately $73.4 million. According to
information provided by the sellers of six of the Acquisition Hotels open in
1995, consolidated occupancy, ADR and REVPAR in 1995 for those six Acquisition
Hotels were 79.0%, $54.61 and $43.12, respectively. Five of the Acquisition
Hotels and two development parcels were acquired in May 1996. There is no
assurance that the Company will close the acquisitions of the remaining
Acquisition Hotels as planned. See "Risk Factors -- Risk that Pending
Acquisitions Will Not Close".
AFFILIATE ACQUISITION HOTELS
The Company has entered into purchase agreements with Winston Affiliates to
acquire the Homewood Suites -- Cary, North Carolina; the Hampton Inn &
Suites -- Duluth (Atlanta), Georgia and the Marriott Courtyard -- Wilmington,
North Carolina. The aggregate purchase prices for these three Affiliate
Acquisition Hotels is approximately $30.2 million, approximately $9.7 million of
which will be paid in Units, approximately $19.8 million of which will be used
to repay indebtedness related to such Hotels immediately after the Company
acquires them (including approximately $250,000 to a Winston Affiliate) and
approximately $781,000 of which will be paid in cash. The Company also has
contracted to acquire the Hampton Inn -- Perimeter (Atlanta), Georgia, which is
owned 33% by Charles Winston and 67% by non-Winston Affiliates, for
approximately $8.2 million, approximately $1.2 million of which will be paid in
Units and approximately $7.0 million of which will be used to repay existing
indebtedness secured by such Hotel immediately after the Company acquires it.
The number of Units to be issued in connection with the acquisition of these
four Affiliate Acquisition Hotels will be based on the average of the closing
prices of the Company's Common Stock for the ten trading days prior to the time
of closing. Each Unit will be redeemable for a cash amount, equal to the
then-recent trading price of a share of Common Stock at the time of redemption,
or, at the Company's election, for one share of Common Stock (the "Redemption
Rights").
The Units that the sellers of the Affiliate Acquisition Hotels will receive
as part of the purchase prices for such Hotels may not be sold, transferred or
redeemed for a period of one year from their date of issuance. The sellers of
the three Affiliate Acquisition Hotels in which Robert Winston has a direct
interest have agreed to reduce the aggregate purchase prices for those hotels by
up to $9.7 million (the value of the Units to be received by the Winston
Affiliates for these Hotels) to the extent necessary to ensure that the
Company's aggregate yield from those hotels in the first 12 months of ownership
is at least 13%. The Company's aggregate yield will equal the Company's total
Percentage Lease revenue from those three hotels, less property taxes and
casualty insurance costs attributable to those three hotels for the first twelve
months of the Company's ownership of each hotel, divided by their aggregate
gross purchase prices (including capital expenditures on the Homewood
Suites -- Cary, North Carolina in the first twelve months of ownership). If the
aggregate yield from those hotels in the first 12 months of ownership is less
than 13%, the sellers will return Units received in partial consideration for
those hotels (and any distributions thereon) as necessary to make the aggregate
yield 13%. See "Business and Properties -- the Percentage Leases" and note 9 to
the table therein.
Upon the Company's acquisition of the Affiliate Acquisition Hotels, the
Winston Affiliates, so long as they remain on the board or are officers of the
Company or the Lessee, will have no interests in any hotels not owned by the
Company and may not participate in the hotel business other than through the
Company, the Lessee or through ownership of 5% or less of any publicly-held
hotel company.
The Company and the Independent Directors obtained separate appraisals on
each of the four Affiliate Acquisition Hotels. Each appraisal indicated a fair
market value for the hotel that is greater than the purchase price to be paid by
the Company. The Independent Directors have determined that the acquisition of
the Affiliate Acquisition Hotels is in the best interests of the Company and its
shareholders and have approved the acquisition of such Hotels.
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<PAGE> 34
The purchase contracts for the Homewood Suites -- Cary, North Carolina and
the Hampton Inn -- Perimeter (Atlanta), Georgia require that closings of the
acquisitions occur within 15 days after the closing of the Offering. The Hampton
Inn & Suites -- Duluth (Atlanta), Georgia and the Courtyard by
Marriott -- Wilmington, North Carolina are in the final stage of construction
and development and are expected to be opened in June 1996 and July 1996,
respectively, and the purchase contracts for these hotels require that the
closings occur within 15 days after the receipt of a certificate of occupancy.
ACQUISITION FROM IMPAC
The following four Acquisition Hotels were acquired from affiliates of
Impac for a cash purchase price of approximately $23.0 million on May 7, 1996.
The Holiday Inn Select -- Garland (Dallas), Texas; the Holiday Inn
Express -- Abingdon, Virginia; the Comfort Suites -- London, Kentucky, and the
Hampton Inn -- Duncanville (Dallas), Texas. The Company acquired these
Acquisition Hotels with borrowings under the Existing Line and an approximately
$17.0 million interim unsecured line of credit, and intends to repay all amounts
outstanding under the interim unsecured line of credit with proceeds of the
Offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Lessee has
contracted with Impac to manage the Holiday Inn Select -- Garland (Dallas),
Texas Acquisition Hotel, which is a full-service hotel, for a transitional
period of up to one year. The management agreement related to the Holiday Inn
Select -- Garland (Dallas), Texas is terminable by the Lessee on 60 days notice.
OTHER ACQUISITIONS
The Company has contracted to purchase the Homewood Suites -- Clear Lake,
Texas from Promus for a cash purchase price of approximately $6.9 million. The
purchase contract requires that the Hotel be purchased within 10 days of the
closing of the Offering.
The Company purchased from unaffiliated sellers the Comfort
Inn -- Greenville, South Carolina for a cash purchase price of approximately
$4.4 million on May 6, 1996. The Company acquired this Acquisition Hotel with
borrowings under the Existing Line.
The Company also purchased 2.2 acre and 1.0 acre potential development
parcels located adjacent to the Holiday Inn Express -- Abingdon, Virginia and
the Comfort Suites -- London, Kentucky, respectively, on May 7, 1996, for cash
purchase prices aggregating $620,000. The Company acquired these parcels with
borrowings under the Existing Line.
PROMUS
Promus is a leading lodging company and the franchisor and an operator of
Hampton Inn, Homewood Suites, Hampton Inn & Suites and Embassy Suites hotels.
There are more than 680 Promus brand hotels with more than 90,000 rooms in the
United States, Canada, Mexico, Costa Rica and Columbia.
Homewood Development Hotels. The Company and Promus have executed purchase
contracts related to the three Homewood Development Hotels. The three Homewood
Development Hotels are expected to be acquired upon their completion by Promus,
which is anticipated to occur at various times through the end of 1997. The
Homewood Development Hotels will be located near Baltimore, Maryland, in Dallas,
Texas and in Richmond, Virginia. The purchase price for each Homewood
Development Hotel approximates Promus' estimate of the development costs of the
hotel. The Company is not obligated to purchase any Homewood Development Hotel
if its actual development costs, not including fees paid to Promus and its
affiliates, exceed the cost estimated in the pre-development budget for the
hotel approved by the Company. In that event, the Company may acquire the hotel
for a price equal to Promus' actual development costs. In the event that the
actual development costs are less than 96% of Promus' budgeted development
costs, the Company will receive the cost savings. The Company is not obligated
to purchase any Homewood Development Hotel that is not completed within a
specified time period. The
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Company's obligation to close the acquisition of each of the Homewood
Development Hotels is subject to satisfactory completion of due diligence and
certain other customary closing conditions.
Homewood Option Hotels. The Company and Promus have executed an agreement
pursuant to which Promus has granted the Company options to purchase up to three
of the Homewood Suites hotels approved for development by Promus in each of the
four twelve-month periods ending April 2000 but in no event more than 40% of the
total number of Homewood Suites hotels approved for development by Promus in
each period. The number of Homewood Option Hotels required to be offered to the
Company in a year may, under certain circumstances, be reduced if the Company
does not agree to purchase all of the Homewood Option Hotels offered to it in a
previous year. The purchase price for each Homewood Option Hotel will be equal
to Promus' budgeted development costs for such hotel. The Company's obligation
to close the acquisition of any Homewood Option Hotel on which it has exercised
its option is subject to satisfactory completion of due diligence and certain
other customary closing conditions. There can be no assurances that Promus will
develop or that the Company will acquire any Homewood Option Hotels.
Promus Management Agreements. The purchase agreements related to the
Company's acquisition of Homewood Suites hotels developed by Promus provide or
will provide for Promus to manage such hotels. Promus will generally receive a
management fee equal to a base fee of 1% of the gross revenues from the related
hotel plus an incentive fee. If the Company and its affiliates have not spent at
least $50 million to purchase Homewood Option Hotels or to develop hotels with
franchises offered by Promus before April 2000, the management fee for each
hotel managed by Promus on that date shall be adjusted upward. Management fees
for a hotel managed by Promus payable for any period in excess of 1% of the
gross revenues of such hotel for the period shall be subordinated to the payment
of rent for such period under the Percentage Lease for the hotel.
Promus' Purchase of the Company's Stock. Promus and the Company have
executed a stock purchase agreement pursuant to which Promus has agreed to
invest up to $15 million in Common Stock over the next four years. Promus has
agreed to purchase $3 million of Common Stock in the Private Placement that will
close contemporaneously with the closing of the Company's acquisition of the
Homewood Suites -- Clear Lake (Houston), Texas, which is expected to occur upon
the closing of the Offering. Thereafter, Promus will purchase directly from the
Company, on or prior to the closing of the Company's purchase of a Homewood
Development Hotel or a Homewood Option Hotel, an amount of Common Stock equal to
$12,500 multiplied by the number of guest rooms in the hotel purchased. Promus
will pay for each share of Common Stock a purchase price equal to (a) for all
purchases made within six months of the closing of the Offering, the Offering
Price and (b) for all other purchases, the average of the closing prices of the
Common Stock on The Nasdaq Stock Market for the 10 trading days prior to and
ending on the second business day immediately preceding the closing date. Promus
may satisfy any or all of its obligation under the stock purchase agreement by
purchasing for a price equal to the Offering Price, at any time within six
months after the Offering, up to $12 million of Common Stock from the Company.
Promus has agreed not to transfer or dispose of any shares of Common Stock that
it acquires under the stock purchase agreement during the 12 months after it
acquires such shares. The Company has agreed that it will file registration
statements with the Commission to register the resale of the Common Stock
purchased by Promus. The Company will bear the expenses associated with the
filing of such registration statements.
Company's Commitment to Acquire or Develop Promus-Franchised Hotels. The
Company has agreed to use its best efforts over the next eight years to spend at
least $100 million to acquire from Promus or develop hotels that will be
franchised by Promus, including the Homewood Development Hotels, the Homewood
Option Hotels and the two Homewood Suites hotels that the Company intends to
develop. The Company's obligation is subject to acceptable market conditions,
the Company's access to capital, the availability of hotels or development lots
acceptable to the Company and such other conditions and criteria as the Company,
in its sole discretion, deems relevant to making a prudent investment in hotel
properties.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering will be approximately
$51.2 million or approximately $59.0 million if the Underwriters' over-allotment
option is exercised in full. The net proceeds from the Private Placement will be
approximately $3.0 million. The Company will contribute the net proceeds of the
Offering and the Private Placement to the Partnership, and, after such
contribution, will own an approximately 91.1% interest in the Partnership. The
Partnership will use the net proceeds of the Offering, the issuance of Units,
borrowings under the New Line, and the proceeds of the Private Placement as set
forth in the table below:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
SOURCES OF PROCEEDS:
Issuance of 5,000,000 shares of Common Stock at a public
offering price of $11.00 per share, net of underwriting
discount and costs of the Offering(1).......................... $ 51.2
Issuance of 991,364 Units, in partial payment of the purchase
prices of the Affiliate Acquisition Hotels, with a value of
$11.00 per Unit................................................ 10.9
Net new borrowings(2)........................................... 16.1
Issuance of 272,727 shares of Common Stock to Promus in the
Private Placement at a price of $11.00 per share............... 3.0
-------
Total Sources.............................................. $ 81.2
===========
USES OF PROCEEDS:
Aggregate prices of the Acquisition Hotels(3)................... $ 73.4
Costs of planned capital improvements to the Acquisition
Hotels......................................................... 6.3
Franchise fees, financing costs and closing costs............... 1.5
-------
Total Uses................................................. $ 81.2
===========
</TABLE>
- ---------------
(1) Assumes that the Underwriters do not exercise their over-allotment option,
the exercise of which would result in net additional proceeds to the Company
of $7.8 million, which would be used by the Company to pay down outstanding
indebtedness.
(2) Calculated to reflect the estimated amount to be outstanding under the New
Line after the closing of the Offering and the acquisition of the
Acquisition Hotels less the amounts outstanding under the Existing Line and
the $17.0 million interim unsecured line of credit immediately before the
Offering. This amount has been estimated for purposes of the presentation
above. Actual net new borrowings will be lower to the extent that cash from
operations is available. See "Management's Discussion and Analysis of
Results of Operations -- Liquidity and Capital Resources".
(3) Includes the repayment of (i) approximately $17.0 million of outstanding
indebtedness that the Company has incurred under an interim unsecured line
of credit in order to fund a portion of the purchase prices for the five
Acquisition Hotels acquired in early May 1996 and (ii) approximately $26.8
million of outstanding indebtedness currently secured by the Affiliate
Acquisition Hotels.
The Existing Line currently bears interest at the blended rate of 6.88% per
annum and matures in June 1997. The Company has obtained an interim unsecured
line of credit to fund a portion of the purchase price of the four Acquisition
Hotels that the Company acquired on May 7, 1996 and that will be repaid with a
portion of the proceeds of the Offering. The unsecured line of credit bears
interest at a rate equal to LIBOR plus 1.75%, which is currently a rate equal to
7.21%. The unsecured line of credit will mature on July 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results
31
<PAGE> 37
of Operations -- Liquidity and Capital Resources". Although the Company
regularly evaluates acquisition opportunities and development and rehabilitation
projects, neither the Company nor the Partnership currently has any agreement or
understanding to invest in any specific property other than the remaining five
Acquisition Hotels, the Homewood Development Hotels, the Homewood Option Hotels
and the two Homewood Suites that the Company intends to develop.
The Company, through the Partnership, has acquired five of the Acquisition
Hotels and has entered into contracts to acquire the remaining five Acquisition
Hotels. These contracts are subject to customary closing conditions. There can
be no assurance that such conditions will be satisfied or that the acquisition
of the remaining five Acquisition Hotels will be completed. See "Risk
Factors -- Risk that Pending Acquisitions Will Not Close", "Business and
Properties -- Growth Strategy" and "Business and Properties -- Acquisition
Strategy".
The Company and the Independent Directors obtained separate appraisals on
each of the four Affiliate Acquisition Hotels. Each appraisal indicated a fair
market value for the hotel that is greater than the purchase price to be paid by
the Company.
Prior to utilization, the net proceeds of the Offering will be invested in
interest-bearing accounts and short-term, interest-bearing securities, which
investments are consistent with the Company's intention to qualify for taxation
as a REIT. Such investments may include, for example, government and government
agency securities, certificates of deposit, interest-bearing bank deposits and
mortgage loan participations.
32
<PAGE> 38
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock trades on The Nasdaq Stock Market under the symbol "WINN".
The following table sets forth for the indicated periods the high and low
closing prices for the Common Stock, as traded through the facilities of The
Nasdaq Stock Market, and the cash distributions declared per share:
<TABLE>
<CAPTION>
PRICE RANGE CASH
------------------- DISTRIBUTIONS
HIGH LOW DECLARED PER SHARE
------ -------- ------------------
<S> <C> <C> <C>
1994
Second Quarter (beginning May 26).......... $12.50 $10.00 $ .06(1)
Third Quarter.............................. 11.50 10.00 .21
Fourth Quarter............................. 10.75 8.75 .21
1995
First Quarter.............................. 10.00 9.00 .22
Second Quarter............................. 10.38 9.25 .22
Third Quarter.............................. 11.63 10.00 .22
Fourth Quarter (Regular)................... 12.00 10.38 .24
Fourth Quarter (Special)................... .03(2)
1996
First Quarter.............................. 13.63 11.63 .24
Second Quarter (through June 20, 1996)..... 13.00 10.88 .255(3)
</TABLE>
- ---------------
(1) Represents an approximate pro rata distribution for the period June 2, 1994,
the closing date of the IPO, through June 30, 1994 based on an initial
quarterly distribution rate of $.20 per share.
(2) Represents a special distribution made to ensure that the Company
distributed 100% of its taxable income. See "Federal Tax
Considerations -- Taxation of the Company".
(3) On May 28, 1996, the Company's Board of Directors declared a quarterly
distribution of $.255 per share payable on July 16, 1996 to all holders of
record of the Common Stock on July 8, 1996.
On June 20, 1996, the last reported sale price of the Common Stock quoted
on The Nasdaq Stock Market was $11.00 per share. As of June 18, 1996, the
Company had 364 shareholders of record and the Company believes that as of the
same date the Company had approximately 4,500 beneficial owners.
Although the declaration of distributions is within the discretion of the
Board of Directors and depends on the Company's results of operations, Cash
Available for Distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Directors, the Company's policy is to make regular
quarterly distributions to its shareholders. The Company's ability to make
distributions will depend on the receipt of distributions from the Partnership
and lease payments from the Lessee with respect to the Hampton Inn -- Cary,
North Carolina, which is owned directly by the Company (the "Company-Owned
Hotel"). The Company intends to cause the Partnership to distribute to its
partners substantially all of the Partnership's Cash Available for Distribution.
The Partnership's primary source of revenue is rent payments under the
Percentage Leases for the Hotels (other than the Company-Owned Hotel). The
Company must rely on the operation of the Hotels to generate sufficient cash
flow to permit the Lessee to meet its rent obligations under the Percentage
Leases. The Lessee has nominal assets and its obligations under the Percentage
Leases are unsecured. See "The Lessee".
Under the federal income tax provisions affecting REITs, the Company must
distribute at least 95% of its taxable income in order to avoid taxation as a
regular corporation. Moreover, the Company must distribute at least 85% of its
ordinary income and 95% of its capital gain net income to avoid certain excise
taxes applicable to REITs. Under certain circumstances, the Company may be
required to make distributions in excess of Cash Available for Distribution in
order to meet such distribution requirements. In such event, the Company would
seek to borrow the amount of the deficiency or sell assets to obtain the cash
necessary to make distributions to retain its qualification as a REIT for
federal income tax purposes.
33
<PAGE> 39
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted to give effect to (i) the sale on such date by
the Company of the shares of Common Stock offered in the Offering and the
Private Placement, (ii) the use of the net proceeds therefrom as described under
"Use of Proceeds" and (iii) the issuance of Units in the Partnership in
connection with the acquisition of the Affiliate Acquisition Hotels.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Due to banks.............................................. $ 34,500 $ 49,400
Minority interest......................................... 3,527 12,850
Shareholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding.........
Common Stock, $.01 par value, 50,000,000 shares
authorized, 9,880,114 shares issued and outstanding
and 15,152,841 shares issued and outstanding, as
adjusted(1).......................................... 99 152
Additional paid-in capital................................ 82,988 138,682
Unearned directors' compensation.......................... (238) (238)
Accumulated deficit....................................... (2,469) (2,469)
-------- -----------
Total shareholders' equity...................... 80,380 136,127
-------- -----------
Total capitalization............................ $118,407 $ 198,377
========= ==========
</TABLE>
- ---------------
(1) Includes 5,000,000 shares to be sold in the Offering, an aggregate of 37,500
restricted shares issued to the Independent Directors under the Directors'
Plan, which shares vest ratably over four years (unvested shares being
subject to forfeiture if a director does not remain as a director of the
Company) and 272,727 shares to be sold to Promus in the Private Placement.
Excludes (i) an aggregate of 1,425,320 shares issuable upon redemption of
Units held by limited partners of the Partnership, including 991,364 Units
to be issued in connection with the acquisition of the Acquisition Hotels,
(ii) 33,103 shares issued in April 1996 to the shareholders of Winston
Advisors, Inc. as payment for services provided to the Company in 1995 (see
"Executive Compensation"), (iii) shares that may be purchased by the
shareholders of the Lessee in the future with proceeds from distributions
from the Lessee (see "Business and Properties -- Operating Practices"), and
(iv) 376,000 shares reserved for issuance upon the exercise of options
granted under the Winston Stock Incentive Plan.
34
<PAGE> 40
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical financial information
and/or selected unaudited pro forma financial information for the Company and
the Lessee.
With respect to the Company, the following tables set forth (i) selected
historical financial information and other data for the period June 2, 1994 (the
date of the closing of the IPO) through December 31, 1994, the year ended
December 31, 1995, and the three months ended March 31, 1995 and 1996, (ii)
selected historical balance sheet data as of December 31, 1994 and 1995 and
March 31, 1996, (iii) selected unaudited pro forma financial information and
other data for the year December 31, 1995, and the three months ended March 31,
1996, and (iv) selected unaudited pro forma balance sheet data as of March 31,
1996. The selected historical financial information for the Company for the
period June 2, 1994 through December 31, 1994, and for the year ended December
31, 1995, and as of December 31, 1994 and 1995 has been derived from the
historical consolidated financial statements of the Company audited by Coopers &
Lybrand L.L.P., independent accountants, whose report with respect thereto is
included elsewhere in this Prospectus.
With respect to the Lessee, the following tables set forth (i) selected
historical financial information for the period from June 2, 1994 (inception of
operations) through December 31, 1994, the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996 and (ii) selected unaudited pro forma
financial information for the year ended December 31, 1995 and the three months
ended March 31, 1996. The selected historical financial information for the
Lessee from June 2, 1994 through December 31, 1994, and for the year ended
December 31, 1995, has been derived from the historical financial statements of
the Lessee audited by Coopers & Lybrand L.L.P., independent accountants, whose
report with respect thereto is included elsewhere in this Prospectus.
The pro forma Statements of Income and Other Data for the Company is
presented as if (i) the acquisitions of the Current Hotels not owned by the
Company as of January 1, 1995 and the Acquisition Hotels, (ii) the closing of
the Follow-on Offering, the Offering and the Private Placement, and (iii) the
application of the net proceeds from the Follow-on Offering, the Offering and
the Private Placement had occurred as of the beginning of each period presented.
Therefore, such information incorporates certain assumptions that are included
in the Notes to the Pro Forma Consolidated Statements of Income included
elsewhere in this Prospectus. The pro forma balance sheet data of the Company is
presented as if the acquisition of the Acquisition Hotels, the consummation of
the Offering and the Private Placement and the issuance of 991,364 Units in the
Partnership in connection with the acquisition of the Affiliate Acquisition
Hotels had occurred on March 31, 1996. See "Risk Factors -- Risk that Pending
Acquisitions Will Not Close".
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and notes thereto included or
incorporated by reference in this Prospectus.
35
<PAGE> 41
WINSTON HOTELS, INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA YEAR ENDED DECEMBER 31, 1995
--------------- -----------------------------------------------------------
PERIOD
FROM
JUNE
2, REVISED
1994 CURRENT
THROUGH YEAR ACQUISITION HOTELS
DECEM- ENDED PRO HOTELS AND
BER DECEM- FORMA REVISED -------------------- ACQUISI-
31, BER 31, CURRENT ADJUST- CURRENT OPERATING OTHER TION
1994 1995 HOTELS(2) MENTS(2) HOTELS HOTELS(3) HOTELS(4) HOTELS
------ ------- --------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Percentage Lease revenue(5)...................... $5,116 $17,148 $19,060 $19,060 $ 6,232 $ 2,164 $ 27,456
Interest and other income........................ 92 442 442 442 442
------ ------- --------- ------- --------- --------- --------
Total revenue.............................. 5,208 17,590 19,502 19,502 6,232 2,164 27,898
------ ------- --------- ------- --------- --------- --------
Expenses:
Real estate and personal property taxes and
casualty insurance(6).......................... 362 1,054 1,180 1,180 476 374 2,030
General and administrative(7).................... 339 1,208 1,098 $ (57) 1,041 18 1,059
Interest expense(8).............................. 218 2,555 2,723 481 3,204 691 446 4,341
Depreciation(9).................................. 1,176 3,854 4,552 4,552 1,860 1,197 7,609
Amortization(10)................................. 49 117 126 126 29 5 160
------ ------- --------- -------- ------- --------- --------- --------
Total expenses............................. 2,144 8,788 9,679 424 10,103 3,056 2,040 15,199
------ ------- --------- -------- ------- --------- --------- --------
Income before allocation to minority interest.... 3,064 8,802 9,823 $ (424) $ 9,399 $ 3,176 $ 124 12,699
========= ========= ========= ==========
Income allocation to minority interest(11)....... 187 417 414 1,090
------ ------- --------- --------
Net income applicable to common shareholders... $2,877 $ 8,385 $ 9,409 $ 11,609
======== ========= ========== =========
Weighted average number of common shares and
common share equivalents......................... 7,073 9,211 10,339 16,624(12)
Net income per common share....................... $0.43 $0.96 $0.95 $0.76
Distribution declared per common share............ $0.48 $0.93
<CAPTION>
PRO FORMA THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------
REVISED
HISTORICAL CURRENT
THREE MONTHS ACQUISITION HOTELS
ENDED HOTELS AND
MARCH 31, PRO FORMA REVISED --------------------- ACQUISI-
--------------- ADJUST- CURRENT OPERATING OTHER TION
1995 1996 MENTS(2) HOTELS HOTELS(3) HOTELS(4) HOTELS
------ ------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Percentage Lease revenue(5)...................... $3,035 $ 4,540 $4,540 $ 1,548 $ 668 $ 6,756
Interest and other income........................ 26 16 16 16
------ ------- ------- --------- --- -------
Total revenue.............................. 3,061 4,556 4,556 1,548 668 6,772
------ ------- ------- --------- --- -------
Expenses:
Real estate and personal property taxes and
casualty insurance(6).......................... 216 320 320 127 133 580
General and administrative(7).................... 227 424 424 18 12 454
Interest expense(8).............................. 538 674 $ 114 788 179 114 1,081
Depreciation(9).................................. 745 1,167 1,167 465 299 1,931
Amortization(10)................................. 26 31 31 7 1 39
------ ------- --------- ------- --------- --- -------
Total expenses............................. 1,752 2,616 114 2,730 796 559 4,085
------ ------- --------- ------- --------- --- -------
Income before allocation to minority interest.... 1,309 1,940 $(114) $1,826 $ 752 $ 109 2,687
========== ======== ========= ==========
Income allocation to minority interest(11)....... 79 80 231
------ ------- -------
Net income applicable to common shareholders... $1,230 $ 1,860 $ 2,456
======= ========= =========
Weighted average number of common shares and
common share equivalents......................... 7,217 10,383 16,611
Net income per common share....................... $0.18 $0.19 $0.16
Distribution declared per common share............ $0.22 $0.24
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL MARCH 31, 1996
------------------------------------- ---------------------------
PRO FORMA AS
DECEMBER 31, 1994 DECEMBER 31, 1995 HISTORICAL ADJUSTED(12)
----------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 1,114 $ 2,496 $ 220 $ 251
Investment in hotel properties.... 85,917 122,896 124,283 204,663
Total assets...................... 88,114 123,969 123,973 203,673
Total debt........................ 28,600 34,000 34,500 49,400
Shareholders' equity.............. 53,705 80,872 80,380 136,127
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, 1995
HISTORICAL ----------------------------------------------------
--------------------------- REVISED
PERIOD FROM CURRENT
JUNE 2, 1994 ACQUISITION HOTELS HOTELS(2)
THROUGH YEAR ENDED REVISED ------------------------- AND
DECEMBER 31, DECEMBER 31, CURRENT OPERATING OTHER ACQUISITION
1994 1995 HOTELS(2) HOTELS(3) HOTELS(4) HOTELS
------------ ------------ --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Lessee room revenue.................... $ 12,474 $ 39,677 $44,131 $15,223(13) $ 320 $ 59,674(13)
Funds From Operations(14).............. 4,240 12,656 13,951 5,036 1,321 20,308
Cash Available for Distribution(15).... 3,866 11,185 11,964 4,148 1,305 17,417
Cash provided (used) by
operating activities(16).............. 3,417 12,628 20,779
investing activities(16).............. (85,973) (36,059) (2,891)
financing activities(16).............. 83,670 24,813 (15,460)
<CAPTION>
PRO FORMA
THREE MONTHS ENDED MARCH 31, 1996
HISTORICAL ---------------------------------------------------
THREE MONTHS REVISED
ENDED CURRENT
MARCH 31, REVISED HOTELS(2)
----------------- CURRENT OPERATING OTHER AND ACQUISITION
1995 1996 HOTELS(2) HOTELS(3) HOTELS(4) HOTELS
------- ------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Lessee room revenue.................... $ 7,373 $10,709 $10,709 $ 3,784 $ 718 $15,211
Funds From Operations(14).............. 2,054 3,107 2,993 1,217 408 4,618
Cash Available for Distribution(15).... 1,833 2,626 2,458 994 372 3,824
Cash provided (used) by
operating activities(16).............. 1,327 2,328 4,764
investing activities(16).............. (288) (2,319) (794)
financing activities(16).............. (1,627) (2,285) (3,987)
</TABLE>
36
<PAGE> 42
WINSTON HOSPITALITY, INC.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA(1)
(IN THOUSANDS)
<TABLE>
<CAPTION> PRO FORMA
HISTORICAL YEAR ENDED DECEMBER 31, 1995
---------------------------- ---------------------------------------------------------
PERIOD FROM
JUNE 2, 1994 CURRENT AND
THROUGH YEAR ENDED CURRENT OPERATING OTHER ACQUISITION
DECEMBER 31, DECEMBER 31, HOTELS HOTELS HOTELS HOTELS
1994 1995 PRO FORMA(2) PRO FORMA(3) PRO FORMA(4) PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue from hotel operation:
Room revenue...................... $ 12,474 $ 39,677 $ 44,131 $ 13,159 $ 320 $ 57,610
Food and beverage revenue......... 2,064 2,064
Other, net........................ 198 1,072 1,208 464 8 1,680
------------ ------------ ------------ ------------ ------------ ------------
Total revenue............... 12,672 40,749 45,339 15,687 328 61,354
------------ ------------ ------------ ------------ ------------ ------------
EXPENSES:
Property and operating expenses... 4,746 14,324 16,181 7,150 179 23,510
Repairs and maintenance........... 608 1,870 1,870 669 25 2,564
General and administrative........ 782 1,526 1,526 150 100 1,776
Franchise costs................... 1,107 3,565 3,967 917 26 4,910
Management fees................... 23 784 960 332 3 1,295
Percentage Lease payments(5)...... 5,116 17,148 19,060 6,232 2,164 27,456
------------ ------------ ------------ ------------ ------------ ------------
Total expenses.............. 12,382 39,217 43,564 15,450 2,497 61,511
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)(17)....... $ 290 $ 1,532 $ 1,775 $ 237 $ (2,169) $ (157)
========== ========== ========== ========== ========== =========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------------------
PRO FORMA
THREE MONTHS -------------------------------------------
ENDED CURRENT AND
MARCH 31, 1995 CURRENT OPERATING OTHER ACQUISITION
CURRENT HOTELS HOTELS HOTELS HOTELS HOTELS
HISTORICAL HISTORICAL PRO FORMA(3) PRO FORMA(4) PRO FORMA
-------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue from hotel operation:
Room revenue...................... $7,373 $ 10,709 $3,260 $ 718 $14,687
Food and beverage revenue......... 213 308 524 832
Other, net........................ 10 19 87 22 128
------ ---------- ------ ------ -----------
Total revenue............... 7,596 11,036 3,871 740 15,647
------ ---------- ------ ------ -----------
EXPENSES:
Property and operating expenses... 2,675 4,015 1,745 260 6,020
Repairs and maintenance........... 328 524 153 29 706
General and administrative........ 341 484 36 24 544
Franchise costs................... 623 905 223 59 1,187
Management fees................... 155 316 87 50 453
Percentage Lease payments(5)...... 3,035 4,540 1,548 668 6,756
------ ---------- ------ ------ -----------
Total expenses.............. 7,157 10,784 3,792 1,090 15,666
------ ---------- ------ ------ -----------
Net income (loss)(17)....... $ 439 $ 252 $ 79 $ (350) $ (19)
=========== ======= ========== ========== =========
</TABLE>
37
<PAGE> 43
- ---------------
(1) The historical information includes the results of the Current Hotels from
their respective dates of acquisition as further described in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations". The pro forma information does not purport to represent
what the Company's or the Lessee's financial position or results of
operation would actually have been if the Company and the Partnership had,
in fact, owned and leased all of the Hotels to the Lessee as of or for the
period presented, or to project the Company's or the Lessee's financial
position or results of operations at any future date or for any future
period.
(2) The pro forma Current Hotels information for the year ended December 31,
1995 represents the Current Hotels as if they had been owned by the
Company and leased to the Lessee since January 1, 1995, as assumed in Note
8 of the Notes to the Consolidated Financial Statements of Winston Hotels,
Inc. and Note 4 of the Notes to the Financial Statements of Winston
Hospitality, Inc., which are included elsewhere in this Prospectus. For
the Company the pro forma adjustments reflect the terms of the New Line as
described in footnote 8 below for each period presented, and the related
impact that would have occurred on amounts payable to Winston Advisors,
Inc. for the year ended December 31, 1995.
(3) Operating Hotels includes those Acquisition Hotels that had room revenues
for 12 months in 1995, including the Hampton Inn -- Duncanville (Dallas),
Texas; the Holiday Inn Select -- Garland (Dallas), Texas; the Comfort
Suites -- London, Kentucky; the Holiday Inn Express -- Abingdon, Virginia;
the Comfort Inn -- Greenville, South Carolina, and the Homewood Suites --
Cary, North Carolina.
(4) Other Hotels includes the four Acquisition Hotels that were not in
operation during the entire year ended December 31, 1995. Other Hotels
includes the Hampton Inn -- Perimeter (Atlanta), Georgia, the Hampton Inn
& Suites -- Duluth (Atlanta), Georgia, and the Courtyard by
Marriott -- Wilmington, North Carolina, none of which were open in 1995
(the Hampton Inn -- Perimeter (Atlanta), Georgia opened in February 1996);
and the Homewood Suites -- Clear Lake (Houston), Texas, which opened in
September 1995.
(5) Pro forma amounts represent lease payments from the Lessee to the
Partnership (or the Company, for the one Current Hotel owned by the
Company directly) and are calculated on a pro forma basis by applying the
rent provisions in the Percentage Leases and proposed Percentage Leases:
(i) for the Operating Hotels to their historical room revenues as if they
had been acquired as of the beginning of the period presented, and (ii)
for the Other Hotels to their historical room revenues, if any, and by
assuming Base Rent was paid by the Lessee for the periods in which there
was no room revenue or in which room revenue was insufficient to result in
the payment of Percentage Rent under the proposed Percentage Leases. See
"Business and Properties -- The Percentage Leases" and Note C to the Notes
to the pro forma Consolidated Statements of Income of the Company.
(6) Pro forma amounts as if the Company paid real estate and personal property
taxes and casualty insurance as contemplated by the Percentage Leases.
(7) Pro forma amounts include estimated incremental franchise taxes, legal,
accounting, printing and other expenses for each period presented, and pro
forma amounts payable to Winston Advisers, Inc. under the Advisory
Agreement for the year ended December 31, 1995. The Company became
self-advised and self-administered and terminated the Advisory Agreement
as of December 31, 1995.
(8) Pro forma interest expense was calculated based on a weighted average
interest rate of 7.5%, applied to the pro forma debt balance, assuming
this balance remained constant for each entire period. In addition, pro
forma interest expense includes unused line of credit fees of 0.25%, $314
and $78 for amortization of loan costs and fees and $145 and $29 for
amortization of interest rate cap fees, for the year ended December 31,
1995 and the three months ended March 31, 1996, respectively.
(9) Depreciation is computed based upon useful lives of 30 years for buildings
and improvements and five years for furniture and equipment. These
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general.
(10) Represents amortization of capitalized franchise fees over a 10 year
period, and of deferred directors' fees payable in shares of restricted
stock over the vesting period with respect to the shares granted.
(11) For Current Hotels, calculated as 4.5% of pro forma income before
allocation to minority interest of the Current Hotels (other than the one
Current Hotel owned by the Company directly). For
38
<PAGE> 44
Current and Acquisition Hotels, calculated as 8.9% of pro forma income
before allocation to minority interest of the Hotels (other than the one
Current Hotel owned by the Company directly).
(12) Adjusted to reflect the sale of 5,000,000 shares of Common Stock by the
Company in the Offering, 272,727 shares of Common Stock to Promus in the
Private Placement and the application of the net proceeds therefrom and
the issuance of 991,364 Units in the Partnership in connection with the
acquisition of the Affiliate Acquisition Hotels.
(13) Includes (i) $1,947 and $490 of food and beverage revenue for the Holiday
Inn Select-Garland (Dallas), Texas and (ii) $117 and $34 of food and
beverage revenue for the Homewood Suites -- Cary, North Carolina for the
year ended December 31, 1995 and the three months ended March 31, 1996,
respectively.
(14) The following table computes Funds From Operations under both the
guidelines recently announced by NAREIT and the guidelines previously
recommended by NAREIT and utilized by the Company. Funds From Operations
under the recently announced NAREIT guidelines consists of net income,
computed in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructurings and sales of property,
plus depreciation of real property (including furniture and equipment) and
after adjustments for unconsolidated partnerships and joint ventures.
Under the prior NAREIT guidelines for calculating Funds From Operations,
adjustments to net income also included amortization of unearned
directors' compensation and amortization of franchise fees.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------- PRO FORMA
PERIOD FROM THREE MONTHS THREE
JUNE 2, 1994 ENDED PRO FORMA MONTHS
THROUGH YEAR ENDED MARCH 31, YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, --------------------- DECEMBER 31, MARCH 31,
1994 1995 1995 1996 1995 1996
------------ ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Income before allocation to
minority interest......... $3,064 $ 8,802 $ 1,309 $ 1,940 $ 12,699 $ 2,687
Depreciation................ 1,176 3,854 745 1,167 7,609 1,931
------ ------- ------- ------- ------- -------
Funds From Operations
(recently announced
guidelines)............... 4,240 12,656 2,054 3,107 20,308 4,618
Amortization of unearned
directors' compensation... 44 75 18 18 75 18
Amortization of franchise
fees...................... 5 42 8 13 85 21
------ ------- ------- ------- ------- -------
Funds From Operations (under
previous guidelines)...... $4,289 $ 12,773 $ 2,080 $ 3,138 $ 20,468 $ 4,657
====== ======= ======= ======= ======= =======
Weighted average number of
shares of common shares
and common share
equivalents............... 7,073 9,211 7,217 10,383 16,624 16,611
====== ======= ======= ======= ======= =======
</TABLE>
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. Funds From
Operations does not reflect cash expenditures for capital improvements or
principal repayment of debt.
(15) Represents Funds From Operations, less an amount equal to the amounts
required to be set aside by the Company and the Partnership under each
Percentage Lease, for refurbishment and replacement of furniture, fixtures
and equipment, capital expenditures and other non-routine items as
required by the Percentage Leases. For all Current Hotels acquired before
1995, the amount required to be set aside is 5% of room revenue. For
Current Hotels acquired in 1995, during the first year of the related
Percentage Leases the amount required to be set aside is 3% of room
revenues, increasing to 5% thereafter. The Company is required to set
aside 5% of room revenues for all of the Acquisition Hotels other than the
Holiday Inn Select -- Garland (Dallas), Texas, for which 7% of room, food
and beverage revenues is required to be set aside.
39
<PAGE> 45
(16) Reflects the Company's cash flows and pro forma cash flows from operating,
investing and financing activities. Pro forma cash flows from operating
activities represents net income plus income allocable to minority
interest, depreciation of hotel properties, amortization of deferred
expenses and unearned directors compensation, amortization of line of
credit fees and interest rate caps and the non-cash portion of advisory
fees payable for the year ended December 31, 1995. There are no pro forma
adjustments for changes in working capital items. Pro forma cash used in
investing activities reflects the percentage of hotel revenues which is
required to be set aside by the Company for refurbishment and replacement
of furniture, fixtures and equipment, capital expenditures and other
non-routine items as required by the Percentage Leases. Pro forma cash
used in financing activities includes distributions per share and Unit of
$.22 for the quarters ended March 31, June 30 and September 30, 1995, $.27
(including a $0.03 special distribution) for the quarter ended December
31, 1995 and $.24 for the quarter ended March 31, 1996. This unaudited pro
forma cash flow data is not necessarily indicative of what actual cash
flows would have been assuming the transactions had been completed as of
the beginning of the periods presented, nor do they purport to represent
cash flows from operating, investing and financing activities for future
periods.
(17) The Lessee has elected status as a Subchapter S corporation for federal
income tax purposes and pays no corporate level tax on its net income.
40
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The Company completed its IPO and the Lessee commenced operations on June
2, 1994. Simultaneously with the closing of the IPO, the Company acquired one of
the Initial Hotels directly and acquired the remaining nine Initial Hotels
through the Partnership. The Initial Hotels collectively have 1,247 rooms and
are located in two states. On August 16, 1994, the Partnership acquired the
149-room Comfort Inn -- Raleigh, North Carolina. On November 29, 1994, the
Partnership acquired, from affiliates of E.L. Pooser, five other Current Hotels
with 628 rooms in three states, and an approximately 4.0 acre lot adjacent to
the Comfort Inn -- Durham, North Carolina. On May 18, 1995, the Company
completed the Follow-on Offering and shortly thereafter, acquired five
additional Current Hotels with an aggregate of 680 rooms (together with the five
Current Hotels acquired in November 1994, the "Acquired Hotels"). The Company
acquired one Acquisition Hotel on May 6, 1996, with 191 rooms and four
Acquisition Hotels on May 7, 1996 with an aggregate of 505 rooms. Immediately
following the closing of this Offering, the Partnership intends to acquire three
of the Acquisition Hotels with an aggregate of 363 rooms. The remaining two
Acquisition Hotels with an aggregate of 264 rooms are currently in the final
stage of construction and the Company intends to acquire them within 15 days
after the later of the issuance of a certificate of occupancy for such hotels or
the opening of such hotels. See "Risk Factors -- Risk That Pending Acquisitions
Will Not Close". Upon completion of the acquisition of the Acquisition Hotels,
the Company will own one Hotel directly and will own 30 Hotels through its
investment in the Partnership.
The acquisition of the Acquisition Hotels will increase the Company's pro
forma Cash Available for Distribution. On a pro forma basis, for the year ended
December 31, 1995, the Company's Cash Available for Distribution from the
Current Hotels was approximately $12.0 million. On a pro forma basis for the
same period, Cash Available for Distribution for all of the Hotels was
approximately $17.4 million. See "Selected Financial Data".
Upon consummation of the Offering, the Company will own an approximately
91.1% interest in the Partnership. Under the REIT qualification requirements of
the Code, REITs generally must lease their hotels to third party operators.
Therefore, the Partnership and the Company lease the Current Hotels and the five
Acquisition Hotels acquired in May 1996, and the Partnership will lease the
remaining five Acquisition Hotels, to the Lessee under separate Percentage
Leases. The Percentage Leases require the Company to set aside reserves for
capital improvements to the Hotels, and the Partnership pays the cost of
obtaining the franchise licenses. The Lessee is obligated under the Percentage
Leases to pay the costs of non-capital repairs and maintenance to the Hotels and
ongoing franchise fees. The Company currently intends that Percentage Leases
with substantially similar terms will be entered into with the Lessee with
respect to the Acquisition Hotels that the Company has not acquired and all
hotel properties in which the Company invests in the future. The Partnership's
and the Company's principal source of revenue is payments by the Lessee under
the Percentage Leases. See "Business and Properties -- The Percentage Leases".
Percentage Rent payable under a Percentage Lease is based on the applicable
Hotel's gross room revenues. The Lessee's ability to make payments to the
Partnership or the Company under the Percentage Leases is dependent on the
ability of the Lessee, or an operator such as IMIC, Promus and Impac, to
generate sufficient cash flow from the operation of the Hotels.
41
<PAGE> 47
RESULTS OF OPERATIONS
For the three months ended March 31, 1996 and the comparable period for
1995, the differences in operating results are primarily attributable to the
fact that the Company owned all 21 of the Current Hotels during the three months
ended March 31, 1996 as compared with only sixteen of the Current Hotels for
three months ended March 31, 1995. For the year ended December 31, 1995 and the
year ended December 31, 1994, the differences in operating results are
attributable primarily to the fact that the Company's operations commenced on
June 2, 1994, and therefore results for 1994 are for a partial year while
results for 1995 are for the entire year. In order to present a meaningful
comparison of operations, the following comparisons are presented for both the
Company and the Lessee:
- actual operating results for the three months ended March 31, 1996 versus
actual results for the three months ended March 31, 1995;
- actual operating results for the three months ended March 31, 1996 versus
actual results for the three months ended March 31, 1995, as adjusted for
the pro forma results of operations for such period as if the acquisition
of the five Acquired Hotels that were acquired in May 1995 and the
Follow-on Offering had occurred as of January 1, 1995;
- actual operating results for the year ended December 31, 1995 versus
actual results for the period from June 2 through December 31, 1994;
- actual operating results for the year ended December 31, 1995 versus
actual operating results for the year ended December 31, 1994, as
adjusted for the pro forma results of operations for the Initial Hotels
for the period January 1 through June 1, 1994, as if the IPO closed and
the Initial Hotels were purchased on January 1, 1994 ("Actual As
Adjusted"); and
- pro forma operating results for the years ended December 31, 1995 and
1994 as if the IPO closed on January 1, 1994 and the Company owned the
Current Hotels throughout the periods.
THE COMPANY
Actual -- Three Months Ended March 31, 1996 vs. Actual -- Three Months Ended
March 31, 1995
The Company had revenues of $4,556 in 1996, consisting of $4,540 of
Percentage Lease revenues and $16 of interest and other income. Percentage Lease
revenues increased by $1,505, or 50%, to $4,540 in 1996 from $3,035 in 1995.
This increase was comprised of (i)(a) $58 from 16 of the Current Hotels that
were owned for the first three months of 1996 and 1995, which was due to the
rent formulas in the Percentage Leases which resulted in rent payments by the
Lessee increasing by an average of 33% of the $176 increased room revenues
attributable to increased rent formulas in the Percentage Leases due to
inflation, plus (b) $277 representing an average of 66% of $418 of increased
room revenues, which were attributable primarily to higher rates, and (ii)
$1,170 for five of the Acquired Hotels that were acquired in May 1995.
Real estate costs and property insurance costs incurred in 1996 were $320,
an increase of $104 from $216 in 1995. This increase was attributable to the
five additional Acquired Hotels in 1996 that were not owned in the same period
in 1995. General and administrative expenses increased $197 to $424 in 1996 from
$227 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 the Advisory
Agreement; (iii) inflationary cost increases; and (iv) increased write-offs of
$15 in costs related to acquisition projects abandoned in 1996. Interest expense
increased by $136 to $674 in 1996 from $538 in 1995, due to: (i) additional
interest of $73 due to borrowings related to the purchase of the five Acquired
Hotels acquired in May 1995; (ii) $34 of amortization of additional fees
incurred in connection with obtaining the $50 million credit line in May 1995;
and (iii) $29 of amortization of interest rate cap agreement costs. Depreciation
increased $422 to $1,167 in 1996 from $745 in 1995, primarily due to
42
<PAGE> 48
depreciation related to the five Acquired Hotels acquired in May 1995 and the
additional depreciation on renovations completed during 1995 and 1996.
Actual -- Three Months Ended March 31, 1996 vs. Pro Forma -- Three Months
Ended March 31, 1995
The Company had revenues of $4,556 for the three months ended March 31,
1996, consisting of $4,540 of Percentage Lease revenues and $16 of interest and
other income. Percentage Lease revenues increased by $357, or 9% to $4,540 in
1996 from $4,183 in 1995. This increase was due to: (i) an average of 27% of the
$111 of increased room revenues at the Current Hotels attributable to increased
rent formulas in the Percentage Leases due to inflation, and (ii) an average of
67% of $491 of increased room revenues at the Current Hotels, which were
primarily attributable to higher rates.
Real estate taxes and property insurance costs incurred in 1996 were $320,
an increase of $16 from $304 in 1995. This increase was attributable primarily
to increased tax rates. General and administrative expenses increased $185 to
$424 in 1996 from $239 in 1995. The increase was attributable to (i) the Company
becoming self-administered in 1996 and the timing of additional costs incurred
therewith, offset in part by savings from costs not incurred under the Advisory
Agreement; (ii) inflationary cost increases, and (iii) increased write-offs of
$15 in costs related to abandoned acquisition projects. Interest expense
decreased by $32 to $674 in 1996 from $706 in 1995, resulting from lower
interest costs due to lower interest rates in 1996 than in 1995, offset in part
by amortization of interest rate cap agreement costs in 1996. Depreciation
increased $35 to $1,167 in 1996 from $1,132 in 1995 primarily due to additional
depreciation on renovations completed during 1995 and 1996.
Actual -- Year Ended December 31, 1995 vs. Actual -- The Period From June 2,
1994
Through December 31, 1994
As noted above, the differences in operations are attributable primarily to
the fact that the Company had only 213 days of operations in 1994, during which
it owned (i) the 10 Initial Hotels throughout the period, (ii) one additional
Current Hotel for 139 days in the period and (iii) five additional Current
Hotels for 33 days in the period. In addition, the Company owned five additional
Current Hotels as of May 1995, which it did not own in 1994. The Company had
revenues of $17,590 in 1995, consisting of $17,148 of Percentage Lease revenues
and $442 of interest and other income. Other income includes approximately $314
in non-recurring commission income. Percentage Lease revenues increased by
$12,032, to $17,148 in 1995 from $5,116 in 1994. Approximately $9,303 of the
increase was attributable to the 16 Hotels owned by the Company as of December
31, 1994, and approximately $2,729 of the increase was attributable to the five
Hotels acquired in May 1995.
The increase in operating expenses was attributable primarily to the fact
that the Company existed for only seven months with fewer hotels in 1994.
Additional analyses of operating expenses are included in the pro forma
comparisons below.
Actual -- Year Ended December 31, 1995 vs. Actual As Adjusted -- Year Ended
December 31, 1994
The Company had revenues of $17,590 in 1995, consisting of $17,148 of
Percentage Lease revenues and $442 of interest and other income. Percentage
Lease revenues increased by $9,122 or 114%, from pro forma Percentage Lease
revenues of $8,026 in 1994. The increase was attributable to an increase of
$1,583 for the Initial Hotels and $7,539 for the additional 11 Current Hotels
acquired after IPO (the "Acquired Hotels"). The increase in Percentage Lease
revenues from the Initial Hotels was due to the structure of the rent formulas
in the Percentage Leases which resulted in rent payments by the Lessee
increasing by an average of 63% of the $2,520 increase in room revenues at the
Initial Hotels. The increased room revenues were attributable primarily to
increased average daily rates. During 1995, the Company also earned
approximately $314 in non-recurring commission income.
Real estate taxes and property insurance costs incurred in 1995 were
$1,054, an increase of $507 from $547 in 1994. This was attributable to an
increase of $75, or 15% of the total increase, for the Initial Hotels and $432
for the Acquired Hotels. The advisory fee paid to Winston Advisors, Inc.
increased $409
43
<PAGE> 49
to $509 in 1995 from $100 in 1994, due to performance incentives for increases
in funds from operation per share payable beginning in 1995. General and
administrative expenses increased $199, to $699 in 1995 from $500 in 1994. This
increase was due to inflationary increases, $65 of costs related to acquisition
projects abandoned in 1995, and other costs attributable to the increase in size
and activities of the Company in 1995 over 1994. Interest expense increased by
$2,337 to $2,555 in 1995 from $218 in 1994. The increase is attributable to
increased borrowings related to the purchase of the Acquired Hotels.
Depreciation and amortization increased $1,697 to $3,971 in 1995 from $2,274 in
1994. This increase primarily relates to depreciation for the Acquired Hotels.
Pro Forma -- Year Ended December 31, 1995 vs. Pro Forma -- Year Ended December
31, 1994 (See Note 8 of the Company's Notes to Consolidated Financial
Statements)
The Company had revenues of $19,502 in 1995, consisting of $19,060 of
Percentage Lease revenues and $442 of interest and other income. Percentage
Lease revenues increased by $2,577 to $19,060 in 1995 from $16,483 in 1994. The
increase in Percentage Lease revenues included (a) an average of 32% of the $276
of increases in room revenues at the Current Hotels attributable to inflation,
and (b) an average of 64% of the $3,891 of increases in room revenues at the
Current Hotels, which were primarily attributable to higher average daily rates.
Real estate taxes and property insurance costs incurred in 1995 were
$1,180, down $12 from $1,192 in 1994 due to a decline in insurance costs in 1995
from 1994. The advisory fees payable to Winston Advisors, Inc. increased $299 to
$399 in 1995 from $100 in 1994, due to performance incentives for increases in
funds from operation per share payable beginning in 1995. General and
administrative expenses increased by $149 to $699 in 1995 from $550 in 1994.
This increase was due to inflationary increases, $65 of costs related to
acquisition projects abandoned in 1995, and other costs attributable to
increases in size and activities of the Company in 1995 over 1994. Interest
expense decreased by $214 to $2,723 in 1995 from $2,937 in 1994. This decrease
was attributable to savings of (i) $111 related to the decline in the weighted
average interest rate to 7.0% in 1995 from 7.30% in 1994, and (ii) $133
attributable to the reduction in pro forma borrowings in 1995 from 1994, which
savings were offset partially by an increase of $30 in interest rate cap costs.
Depreciation increased $116 to $4,552 in 1995 from $4,436 in 1994. This increase
was attributable to additional depreciation on improvements.
THE LESSEE
Actual -- Three Months Ended March 31, 1996 vs. Actual -- Three Months Ended
March 31, 1995
The Lessee had room revenues of $10,709 in 1996, up $3,336, or 45%, from
$7,373 in 1995. The increase in room revenues was due to: (i) an increase in
room revenues of $594, or 8%, for 16 of the Current Hotels that were owned for
the first three-months of both 1996 and 1995, and (ii) room revenues for the
three months ended March 31, 1996 in the amount of $2,742 for five of the
Acquired Hotels that were acquired in May 1995.
The Lessee had property and operating expenses in 1996 of $4,015, up $1,340
from $2,675 in 1995, and repairs and maintenance costs of $524 in 1996, up $196
from $328 in 1995. These increases in expenses were attributable primarily to
the fact that the Lessee operated 21 of the Current Hotels in 1996 as compared
to 16 of the Current Hotels for the three months ended March 31, 1995.
44
<PAGE> 50
Actual -- Three Months Ended March 31, 1996 vs. Pro Forma -- Three Months
Ended March 31, 1995
The Lessee had room revenues of $10,709 in 1996 and $10,107 in 1995, as
further analyzed in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995 % CHANGE
------- ------- --------
<S> <C> <C> <C>
Current Hotels
Room Revenues........................................ $10,709 $10,107 6.0%
Occupancy............................................ 77.4% 80.4% (3.7%)
Average Daily Rate................................... $ 56.26 $ 51.68 8.9%
Revenue Per Available Room........................... $ 43.52 $ 41.52 4.8%
</TABLE>
The Lessee had property and operating expenses of $4,015 in 1996, up $309,
or 8%, from $3,706 in 1995. Repairs and maintenance costs totaled $524 in 1996,
up $69, or 15%, from $455 in 1995, which increase was attributable to the
unseasonably cold weather that was experienced during the first quarter of 1996.
General and administrative costs increased to $484 in 1996, up $143 or 42% from
1995. This increase was attributable to the Lessee's increased activity in
preparation for the operation of additional hotels and to inflation. Management
fees totaled $316 in 1996, up $30 from $286 in 1995. The increase is due to the
participation by the third party manager in the improvement in profits in 1996
over 1995 at ten of the Acquired Hotels. Percentage Lease payments totaled
$4,540 in 1996 compared to $4,183 in 1995, an increase of $357.
Actual -- Year Ended December 31, 1995 vs. Actual -- The Period From June 2,
1994 Through December 31, 1994
The Lessee had room revenues of $39,677 in 1995 compared to $12,474 in
1994, an increase of $27,203. The increase included $20,673, or 76% of the total
increase, for those Current Hotels that were owned by the Company as of December
31, 1994, and $6,530 for those Current Hotels acquired by the Company in 1995.
Other operating revenue totaled $987 in 1995 compared to $185 in 1994, an
increase of $802. This increase was attributable primarily to telephone revenue
increasing by $428, to $533 in 1995 from $105 in 1994, and miscellaneous income
increasing by $191, to $222 in 1995 from $31 in 1994. The increase in telephone
revenue included $332 for those Current Hotels that were owned by the Company as
of December 31, 1994 and $96 for those Current Hotels acquired by the Company in
1995. The miscellaneous income increase for 1995 was made up of $134 for those
Current Hotels that were owned by the Company as of December 31, 1994 and $57
for those Current Hotels acquired by the Company in 1995.
The Lessee had property and operating expenses in 1995 of $16,194, up
$10,840 from $5,354 in 1994. The increase in operating expenses was attributable
primarily to the fact that the Lessee existed for only seven months and leased
fewer hotels in 1994. Additional analyses are included in the pro forma
comparisons below.
Actual -- Year Ended December 31, 1995 vs. Actual As Adjusted -- Year Ended
December 31, 1994
The Lessee had room revenues of $39,677 in 1995, up $19,788, or 99%, from
$19,889 in 1994. The increase was due to additional room revenues of $2,520, or
13% of the total increase, for the Initial Hotels and $17,268 for the Acquired
Hotels. Other operating revenue totaled $987 in 1995 compared to $320 in 1994,
an increase of $667. This increase was comprised of $156 of additional revenue
relating to the Initial Hotels and $511 of additional revenue relating to the
Acquired Hotels.
Property and operating expenses totaled $16,194 in 1995, an increase of
$7,354, or 83%, from $8,840 in 1994. The increase was attributable to additional
property and operating expenses of $266, or 4% of the total increase, for the
Initial Hotels, and $7,088 of additional expenses for the Acquired Hotels.
Franchise costs totaled $3,565 in 1995 compared to $1,753 in 1994, an increase
of $1,812, or 103%. The increase was attributable to additional franchise costs
of $275, or 15% of the total increase, for the
45
<PAGE> 51
Initial Hotels, and $1,537 of additional franchise costs for the Acquired
Hotels. General and administrative expenses amounted to $1,526 in 1995, up $229
from $1,297 in 1994. The increase in general and administrative expenses was due
to the increase in the number of hotels operated during 1995. Management fees
totaled $784 in 1995, up $761 from $23 in 1994. The increase was due to the
payment of fees to outside management for only one month on five Current Hotels
in 1994 compared to twelve months on five Current Hotels and seven and one half
months on an additional five Current Hotels in 1995. Percentage Lease payments
totaled $17,148 in 1995 compared to $8,026 in 1994, an increase of $9,122. This
increase was a result of the increase in room revenues, which was offset
partially by adjustments for inflation, resulting in increased Percentage Lease
payments of $1,583 for the Initial Hotels and $7,539 for the Acquired Hotels.
Pro Forma -- Year Ended December 31, 1995 vs. Pro Forma -- Year Ended December
31, 1994
The Lessee had room revenues of $44,131 in 1995 compared to $39,964 in
1994, an increase of $4,167. The increase from 1994 to 1995 was attributable to
$3,661 from 20 of the Current Hotels and $506 from the Hampton Inn -- Chester,
Virginia, which opened in April, 1994. The primary factor attributing to revenue
growth was a 9.7% overall increase in average daily rates. A breakdown of room
revenue and other related information is presented in the table below. Other
operating revenue totaled $1,123 in 1995 compared to $878 in 1994, an increase
of $245.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 % CHANGE
------- ------- --------
<S> <C> <C> <C>
INITIAL HOTELS:
Room Revenues.......................................... $21,085 $18,558 13.6%
Occupancy.............................................. 85.4% 84.3% 1.3
Average Daily Rate..................................... $ 54.23 $ 48.40 12.0
Revenue Per Available Room............................. $ 46.29 $ 40.81 13.4
ACQUIRED HOTELS:
Room Revenues.......................................... $23,046 $21,406 7.7%
Occupancy.............................................. 78.0% 79.0% (1.3)
Average Daily Rate..................................... $ 55.59 $ 51.61 7.7
Revenue Per Available Room............................. $ 43.34 $ 40.78 6.3
CURRENT HOTELS:
Room Revenues.......................................... $44,131 $39,964 10.4%
Occupancy.............................................. 81.4% 81.4% 0.0
Average Daily Rate..................................... $ 54.93 $ 50.07 9.7
Revenue Per Available Room............................. $ 44.70 $ 40.79 9.6
</TABLE>
Property and operating expenses totaled $18,051 in 1995, an increase of
$452 from $17,599 in 1994. General and administrative expenses increased $229 to
$1,526 in 1995 from $1,297 in 1994, primarily due to higher compensation costs.
Franchise costs increased to $3,967 in 1995, up $450 from $3,517 in 1994, in
direct relation to the increase in room revenue. Management fees increased to
$960 in 1995 from $805 in 1994, up $155. The increase was attributable to the
overall increase in operating profits in 1996 over 1995 at the 10 Acquired
Hotels which were under outside management, as management fees payable on such
hotels are calculated, in part, as a percentage of operating profits on those
hotels. Percentage Lease payments increased to $19,060 in 1995, up $2,577 from
$16,483 in 1994. This increase was due to the overall increase in room revenue,
after adjusting room revenues for the impact of inflation.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the year ended December 31,
1995, cash flow provided by operating activities was $12,628, and Funds From
Operations, which (under recently announced NAREIT guidelines) is
46
<PAGE> 52
equal to net income before minority interest plus depreciation, was $12,656. For
the three months ended March 31, 1996, cash flow provided by operating
activities was $2,328 and Funds From Operations was $3,107. Under federal income
tax law provisions applicable to a REIT, the Company is required to distribute
at least 95% of its taxable income to maintain its tax status as a REIT. 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 declared distributions of $8,507 and $2,370 to
its shareholders during 1995 and the first three months of 1996, respectively.
The Company's use of net cash flow in investing activities for the year
ended December 31, 1995 totaled $36,059, primarily relating to the purchase of
five Acquired Hotels in May 1995. In connection with the 10 Acquired Hotels
purchased between November 1994 and May 1995, the Company spent approximately
$1.9 million in 1995, approximately $1.0 million in 1996 and anticipates
spending an additional $0.2 million during the remainder of 1996 to complete the
refurbishment of those Hotels. These expenditures are in addition to reserves
that the Company is required to set aside under the Percentage Leases for
periodic capital improvements and the refurbishment and replacement of
furniture, fixtures and equipment at all of the Hotels. These reserves are in
addition to amounts spent on normal repair and maintenance which historically
have approximated 4.8% of room revenues and are paid by the Lessee. The
Percentage Leases relating to the Current Hotels obligate the Company to set
aside 3% of room revenues for the first year and 5% for the years thereafter for
periodic capital improvements and the ongoing replacement or refurbishment of
furniture, fixtures and equipment at all of the Current Hotels. The Percentage
Leases or proposed Percentage Leases applicable to the Acquisition Hotels
obligate the Company to set aside 5% of room revenues from limited-service
hotels and 7% of gross room, food and beverage revenues from full-service hotels
for periodic capital improvements and the ongoing replacement or refurbishment
of furniture, fixtures and equipment of the applicable Hotels. The Company set
aside $1,471 and $481 for such reserves in 1995 and the first three months of
1996, respectively. These reserves are expected to be funded from operating cash
flow, and possibly also from borrowings under the New Line, 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 were
approximately 4.7% and 4.9% of room revenues in 1995 and the three months ended
March 31, 1996, respectively, and are paid by the Lessee.
The Company's net cash used in financing activities in the first quarter of
1996 totaled $2,285. Net cash used included a distribution to the Company's
shareholders and minority partners of $2,785. This was offset by additional
borrowing under the Company's line of credit of $500.
On May 6, 1996 the Company acquired one Acquisition Hotel with 191 rooms
for $4.4 million with borrowings from the Existing Line. On May 7, 1996 it
acquired four Acquisition Hotels with an aggregate of 505 rooms for $23.0
million and two parcels of land adjacent to two of the four hotels for $0.6
million, which were financed in part with borrowings under the Existing Line and
with $17.0 million of borrowings from the unsecured line of credit described
below.
The Company has obtained a commitment from a group of lenders led by
Wachovia for the $125 million New Line. Amounts outstanding under the Existing
Line will remain outstanding under the New Line. Amounts outstanding under the
New Line generally will bear interest at LIBOR plus 1.75%. The Company initially
will secure the New Line with 28 of the Hotels and will have Line Availability
initially of $85 million. The initial Line Availability will increase if cash
flow attributable to the collateral hotels increases and/or the Company adds
additional hotels as collateral. Line Availability will be calculated quarterly.
Borrowings under the New Line are available for acquisitions, development (up to
50% of Line Availability) and general corporate purposes (up to 17% of Line
Availability). The Company has also obtained an interim unsecured line of credit
from Wachovia and Branch Banking & Trust Company in the amount of $17.0 million
to finance partially the acquisition of the four Acquisition Hotels acquired on
May 7, 1996. The unsecured line of credit bears interest at a rate equal to
LIBOR plus 1.75% and matures on July 31, 1996.
47
<PAGE> 53
Prior to closing of the Offering, the Company expects to have approximately
$45.7 million outstanding under the Existing Line and approximately $17.0
million outstanding under the interim unsecured line of credit. The Company
intends to repay all amounts outstanding under the interim unsecured line of
credit with proceeds of the Offering, and consequently, the Company will have
approximately $39.3 million remaining borrowing capacity under the initial Line
Availability.
The Company in the future may seek to further increase the amount of the
New Line, negotiate additional credit facilities, or issue corporate debt
instruments, all in compliance with the restrictions on indebtedness contained
in its Articles of Incorporation. Any debt incurred or issued by the Company may
be secured or unsecured, long-term or short-term, fixed or variable interest
rate and may be subject to such other terms as the Board of Directors of the
Company deems prudent.
It is expected that future hotel acquisitions, including the acquisition of
some or all of the Homewood Development Hotels and the Homewood Option Hotels,
and future hotel development, including the two Homewood Suites hotels that the
Company intends to develop, will be financed, in whole or in part, from
additional follow-on offerings, from borrowings under the New Line, from joint
venture arrangements with parties such as Equitable, or from the issuance of
other debt or equity securities. There can be no assurances that the Company
will make an investment in any additional hotel properties that meet its
investment criteria.
The Company has entered into contracts to purchase an approximately 5.3
acre parcel for development of a 136-suite Homewood Suites hotel near the
Crabtree Valley Mall in Raleigh, North Carolina and an approximately 2.7 acre
parcel for the development of a 100-suite Homewood Suites hotel in suburban
Atlanta. The Company believes that total development costs, which the Company
expects to fund from borrowings under the New Line, will be approximately $12
million and $9 million, respectively, for these projects. Construction is
tentatively expected to commence on both of these hotels in the middle of 1996,
with completion tentatively scheduled for the middle of 1997. However, there is
no assurance that such development will be undertaken, or, if commenced, that it
will be completed on schedule.
The Company will invest in additional hotel properties or develop hotels
only as suitable opportunities arise, and the Company will not undertake
investments unless adequate sources of financing are available. The Company's
ability to invest in or develop hotel properties will depend on the availability
of borrowings under the New Line and its ability to obtain additional equity
financing, including proceeds from subsequent issuances of Common Stock or other
securities, or co-investments from other investors in hotel development or
rehabilitation joint ventures. Investments in hotels may also be financed in
whole or in part, from the exchange of Common Stock or Units for hotels, with
operating cash flow, or from borrowings. See "Risk Factors -- Constraints on
Acquisitions and Development". The Company currently intends to limit the
aggregate cost of all hotel development undertaken by the Company at any time to
not more than 20% of the Company's investment in hotel properties, at cost. The
Company's Board of Directors, however, can change the limitation as it deems
appropriate. The Company currently has no agreement or understanding to invest
in any hotel property other than the Acquisition Hotels, the Homewood
Development Hotels, the Homewood Option Hotels and the two Homewood Suites that
the Company plans to develop, and there can be no assurance that the Company
will make any investments in these or any other hotel properties. See "Business
and Properties -- Growth Strategy" and "Business and Properties -- Acquisition
Strategy".
Under the federal income tax law provisions applicable to a REIT, the
Company is required to distribute to shareholders at least 95% of its taxable
income to maintain its tax status as a REIT. 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 under federal income tax law provisions and its
reserve obligations under the Percentage Leases out of cash flow from operating
activities.
The Company expects to fund its principal cash needs for acquisitions,
development, distributions to shareholders and capital improvements to its
hotels from cash flow from financing and operating
48
<PAGE> 54
activities. To the extent that the Company or the Partnership has or does incur
debt to acquire additional hotel properties, to develop hotels, to fund
distributions to shareholders, or for other purposes, the Company is and will be
required to fund debt service from its available sources of cash. Therefore, if
the Company is unable to generate sufficient cash flows from operating
activities to meet its debt service obligations, its distribution requirements
under the Code, requirements under the Percentage Leases to set aside funds or
to fund unanticipated capital expenditures, the Company might be required to
liquidate one or more investments in hotel properties at times that may not
permit realization of an attractive return on such investments or that might
result in a financial loss. See "Risk Factors -- Risks of Leverage". Net cash
provided by operating activities for the period June 2, 1994 to December 31,
1994 and the year ended December 31, 1995 was approximately $3.4 million and
$12.6 million, respectively.
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 certain minimum 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.
49
<PAGE> 55
BUSINESS AND PROPERTIES
THE HOTEL INDUSTRY
In 1992, the United States lodging industry began a recovery from an
extended downturn. From 1980 to 1991, total industry supply increased by 32%,
significantly outpacing growth in demand, in large part due to new development
made possible by financing from a de-regulated banking industry. The industry
downturn was exacerbated by a recession beginning in 1990 which resulted in
lower growth in demand. Occupancy rates fell from 70.6% in 1980 to a twenty-year
low of 60.6% in 1991.
Beginning in 1992, a substantial reduction of financing dramatically
reduced supply growth, which reached a high of 4.8% in 1988 and has averaged
approximately 1.4% since 1992. An improving economy has resulted in heightened
industry demand, as business, international and leisure travel has increased.
Industry demand growth has averaged approximately 3.3% since 1992, significantly
outpacing increases in supply. According to Smith Travel, the industry has
experienced increases in occupancy, ADR and REVPAR for each year since 1992. In
1995, the hotel industry recorded record profits of approximately $5.5 billion.
According to Smith Travel, in 1995, while demand continued to outpace supply,
the rate of increase in demand slowed relative to the rate of increase in
supply. Supply has been spurred by improving industry performance and resulting
increases in the availability of capital for hotel construction, particularly in
the limited-service sector. The graph set forth below illustrates the
relationship between supply, demand and occupancy.
[GRAPH]
THE CURRENT HOTELS
The Company believes that its limited-service hotels will continue to
perform and compete successfully due to (i) high occupancy rates and increasing
ADRs and (ii) the presence of barriers to entry as the costs of new
limited-service construction increase, thereby limiting the flexibility of a new
hotel owner to offer low rates while maintaining competitive economic returns.
Since its inception, the Company has capitalized on the recovery of the
hotel industry through the strategic acquisition and development of mid-scale
and upper-economy hotels in growth markets and by reinvesting in its hotels
through aggressive capital improvement programs. Thirteen of the current hotels
50
<PAGE> 56
are in the mid-scale market segment and, for the year ended December 31, 1995,
had a consolidated average occupancy, ADR and REVPAR of 84.3%, $56.34 and
$47.47, respectively, as compared to the national average for mid-scale hotels
of 64.6%, $58.93 and $38.06, respectively. Eight of the Current Hotels are in
the upper-economy market segment and, for the year ended December 31, 1995, had
a consolidated average occupancy, ADR, and REVPAR of 77.2%, $52.70 and $40.68,
respectively, as compared to the national average for upper-economy hotels of
64.4%, $47.39 and $30.51, respectively. REVPAR for all 21 of the Current Hotels
increased 9.6% from 1994 to 1995, which increase resulted in a 15.6% increase in
the Company's pro forma Percentage Lease revenue in the same period.
GROWTH STRATEGY
The Company's growth strategy is to enhance shareholder value by increasing
Cash Available for Distribution per share of Common Stock through implementation
of the Company's (i) internal growth strategy, (ii) acquisition strategy, (iii)
development strategy and (iv) rehabilitation strategy.
Internal Growth Strategy
The Company's internal growth strategy is to establish and maintain a high
occupancy rate at each Hotel followed by increases in ADR, which in turn
increase Percentage Lease revenues to the Company. The Company believes that it
will continue to achieve growth in ADR and REVPAR in its Current Hotels and
Acquisition Hotels. The Company believes that it has achieved higher occupancies
and ADRs as compared to the industry's average as a result of:
- implementing extensive capital improvement programs;
- achieving high customer satisfaction by providing levels of service and
amenities consistent with high quality hotels;
- focusing on value by providing customers with an excellent product
relative to price; and
- executing aggressive sales and marketing programs.
As part of the Company's capital improvement commitment, the Company has
increased the reserves it sets aside for future expenditures on furniture,
fixtures and equipment from 3% of room revenues in the first year and 5% of room
revenues thereafter to 5% of room revenues in each year for limited-service
hotels and 7% of room, food and beverage revenues in each year for full-service
hotels. At March 31, 1996, the Company had spent approximately $3.7 million to
refurbish certain of the Current Hotels. The Company currently intends to spend
in excess of $7 million to refurbish certain of the Hotels over the next two
years. In addition, the Lessee has demonstrated its commitment to maintain the
Hotels in like-new condition by spending approximately 4.8% of room revenues
from the Current Hotels in 1995 on routine maintenance.
The Company believes that its internal growth strategy has been successful.
The Company participates in any increased room revenue from the Current Hotels,
and will participate in any increased room revenue from the Acquisition Hotels,
through Percentage Leases. See "Business and Properties -- The Percentage
Leases". The Percentage Leases provide that a percentage of room revenues in
specified ranges is paid as Percentage Rent. On a pro forma basis room revenues
for the Current Hotels during the year ended December 31, 1995 were up 10.4%
from those during the year ended December 31, 1994 and Percentage Lease revenues
from the Current Hotels were up 15.6% over the same period. See "Risk
Factors -- Rapid Growth Constraints on Acquisitions and Development".
Acquisition Strategy
The Company's acquisition strategy is to purchase hotels in growth markets
at prices that result in attractive long-term returns. The Company seeks to
acquire properties in locations with relatively high demand for rooms, a
relatively low supply of hotel properties and barriers to easy entry into the
hotel business, such as a scarcity of suitable lots or zoning restrictions. The
Company believes that large,
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<PAGE> 57
limited-service hotels such as the Courtyard by Marriott -- Wilmington, North
Carolina (an Acquisition Hotel) and extended-stay hotels such as Homewood Suites
hotels can be operated at attractive profit margins.
The Company will pursue opportunities to acquire hotel properties with
strong, national franchise affiliations in the lower upscale, mid-scale and
upper-economy market segments, or hotel properties with the potential to obtain
such franchise affiliations.
The following chart sets forth the franchise affiliations of the Current
Hotels and the Acquisition Hotels.
<TABLE>
<CAPTION>
NUMBER OF HOTELS
---------------------------------
CURRENT ACQUISITION NUMBER OF
FRANCHISE AFFILIATION HOTELS HOTELS TOTAL ROOMS
- ---------------------------------------------------- ------- ----------- ----- ---------
<S> <C> <C> <C> <C>
LIMITED-SERVICE HOTELS:
Hampton Inn....................................... 12 2 14 1,683
Comfort Inn....................................... 8 1 9 1,294
Holiday Inn Express............................... -- 1 1 80
Quality Suites.................................... 1 -- 1 168
Comfort Suites.................................... -- 1 1 62
Courtyard by Marriott............................. -- 1 1 128
Hampton Inn & Suites.............................. -- 1 1 136
-- -- -- -----
Sub-total................................. 21 7 28 3,551
EXTENDED-STAY HOTELS:
Homewood Suites................................... -- 2 2 232
-- -- -- -----
Sub-total................................. -- 2 2 232
FULL-SERVICE HOTELS:
Holiday Inn Select................................ -- 1 1 244
-- -- -- -----
Sub-total................................. -- 1 1 244
-- -- -- -----
Total..................................... 21 10 31 4,027
</TABLE>
Hampton Inn Hotels. Fourteen of the Hotels are licensed by Promus to
operate as Hampton Inn hotels. According to Promus, as of December 31, 1995,
there were 525 Hampton Inn hotels operating in the United States, Mexico and
Canada. Hampton Inn was among the first hotel companies to offer guests an
unconditional 100% satisfaction guarantee. Hampton Inn hotels feature
complimentary continental breakfasts, free local telephone and in-room movie
channel, toll-free reservation number, and a special discount program for guests
over 50 years of age.
Comfort Inn Hotels. Nine of the Hotels are licensed by Choice Hotels
International, Inc. ("Choice") to operate as Comfort Inn hotels. According to
Choice, as of December 31, 1995, there were 1,411 Comfort Inn hotels operating
in the United States, France, Canada and many other countries. Comfort Inn
hotels feature complimentary breakfasts and newspapers, a toll-free reservation
number and a special discount program for guests over 50 years of age.
Homewood Suites. Two of the Acquisition Hotels and the three Homewood
Development Hotels are licensed by Promus to operate as Homewood Suites hotels.
In addition, all of the Homewood Option Hotels that may be acquired by the
Company will be licensed by Promus to operate Homewood Suites hotels. According
to Promus, as of December 31, 1995, there were 30 Homewood Suites hotels in
operation, 8 Homewood Suites hotels under construction and 24 Homewood Suites
hotels in the design stage. Homewood Suites hotels feature one and two bedroom
suites with fully equipped kitchens, some with fireplaces, balconies and patios.
Most Homewood Suites hotels have a pool and exercise center and all have an
on-site 24-hour convenience store and meeting room.
52
<PAGE> 58
The Company also may acquire full-service hotels that offer full food and
beverage service such as the Holiday Inn Select -- Garland (Dallas), Texas
Acquisition Hotel.
Development Strategy
The Company intends to capitalize on management's expertise in developing
eight of the 10 Initial Hotels and four of the 10 Acquisition Hotels by pursuing
additional, attractive hotel development opportunities. The Company's
development strategy has two primary objectives: (i) adding high-quality hotels
to its portfolio and (ii) creating long-term returns to the Company that exceed
those that can be achieved through acquisitions.
The Company has entered into contracts to purchase an approximately 5.3
acre lot for development of a 136-suite Homewood Suites hotel near the Crabtree
Valley Mall in Raleigh, North Carolina and an approximately 2.7 acre lot for the
development of a 100-suite Homewood Suites hotel in Alpharetta, Georgia. Total
development costs, which the Company expects to fund from borrowings under the
New Line, are expected to approximate $12 million and $9 million, respectively,
for these projects. Construction is tentatively expected to commence on both of
these hotels in the middle of 1996, with completion tentatively scheduled for
the middle of 1997. However, there is no assurance that such development will be
undertaken, or, if commenced, that it will be completed on schedule. See "Risk
Factors -- "Development Risks."
The Company owns an approximately 4.0 acre lot located adjacent to a
Current Hotel in Durham, North Carolina and has acquired 1.0 acre and 2.2 acre
lots adjacent to the Comfort Suites -- London, Kentucky Acquisition Hotel and
the Holiday Inn Express -- Abingdon, Virginia Acquisition Hotel, respectively.
The Company currently is evaluating each of these lots for possible expansions
of the adjacent hotels or the development of additional hotels, although no
proposed timetables have been determined for development of these lots.
In considering development opportunities, the Company's Board of Directors
will review the availability and pricing of existing hotels for sale in the area
that meet its acquisition criteria, the availability of lots suitable for
development, the costs and risks of developing and the availability of
financing, as well as any other factors the Board of Directors deems relevant.
The Company's current policy is to limit the aggregate cost of all hotel
development undertaken by the Company to not greater than 20% of the Company's
investment in hotel properties, at cost. The Company's Board of Directors,
however, can change the limitation on development as it deems appropriate. Each
Winston Affiliate serving on the Company's or the Lessee's Board of Directors
has agreed that so long as he remains on the board or is an officer of the
Company or the Lessee, neither he nor his affiliates will develop or own
interests in hotel properties except through the Company, or own more than five
percent of any publicly held hotel company.
Rehabilitation Strategy
The Company believes that the development experience of the officers of the
Company enables it to identify underperforming hotel properties that would
benefit substantially from renovation and quality management. The Company,
therefore, may acquire hotel properties that could benefit from renovations,
including hotels requiring complete renovation.
The Company has reached an agreement in principle with Equitable to
co-invest in hotels acceptable to Equitable and the Partnership which require
significant rehabilitation and, possibly, rebranding. In the event that suitable
projects are found, Equitable will serve as a potential source of equity capital
to fund partially the selective acquisition and rehabilitation of
underperforming hotels. In addition, the relationship with Equitable may provide
the Company with access to additional acquisition opportunities. The Company
believes that such hotels will, upon rehabilitation, generate attractive returns
for the Company and Equitable. Co-investment projects would be acquired by joint
ventures owned by the Partnership and Equitable. The agreement in principle
requires that the equity investment required in any project will be contributed
approximately 83% by Equitable and approximately 17% by the Partnership. No more
than
53
<PAGE> 59
45% of the project cost may be funded by debt, which debt must be acceptable to
both the Partnership and Equitable. After rehabilitation, the Company may seek
to purchase Equitable's ownership interest in the hotels, and the arrangement
provides the Company with the potential to do so on terms that the Company
believes are favorable. The joint venture agreements will provide the partners
with certain rights of first refusal and buy-sell rights. The Company is
actively reviewing such "turnaround" candidates, although Equitable has not yet
agreed to co-invest in a specific project. The Company intends to offer
Equitable the opportunity to co-invest in the Comfort Inn -- Greenville, South
Carolina Acquisition Hotel, which the Company intends to renovate substantially.
If Equitable chooses not to co-invest in such Hotel, the Company intends to
complete the renovations itself using borrowings under the New Line.
EXTENDED-STAY HOTELS
With the acquisition of two Homewood Suites hotels soon after the closing
of the Offering, the Company will enter the extended-stay hotel market. The
Company expects to increase substantially its presence in this market and
capitalize on management's acquisition and development experience with (a) the
Company's current plans to develop two Homewood Suites hotels, (b) the future
acquisitions of some or all of the Homewood Development Hotels and Homewood
Option Hotels from Promus and (c) acquisitions from other third parties.
Extended-stay hotels, such as Homewood Suites, are designed to provide customers
with the amenities of an apartment along with the convenience of a hotel.
Extended-stay hotels represent a small but growing segment of the lodging
industry, including approximately 360 properties with approximately 40,000 rooms
(approximately 1.2% of the total number of rooms available in the U.S. lodging
industry) as of December 31, 1995. During the three years ended December 31,
1995, the number of dedicated extended-stay rooms increased at a compound annual
growth rate of approximately 2.7%, compared with compound annual room growth of
approximately 1.4% for the overall industry. Some standard features of
extended-stay hotels include suites with separate living and sleeping rooms,
full kitchens in each suite and laundry facilities on the premises. The
extended-stay segment of the hospitality industry has developed over the last
decade and is principally oriented towards business travelers. Demand for
extended-stay lodging has been stimulated by the economic and social changes
resulting from the increased volume of corporate reorganizations and trends
toward down-sizing and out-sourcing of various functions, the break-up and
geographic dispersion of the traditional family, and technological improvements
which have allowed businesses to relocate outside of large metropolitan areas.
These changes have created new accommodation needs for, among others, corporate
executives and trainees, consultants, sales representatives and people between
jobs or houses.
COMPETITION
The hotel industry is highly competitive. The Hotels compete with other
hotel properties in their geographic markets. Many of the Company's competitors
have substantially greater marketing and financial resources than the Company,
the Lessee, IMIC and Promus. Several of the Hotels are located in areas in which
they may compete with other Hotels for business. The Company competes for
acquisition opportunities with entities that have substantially greater
financial resources than the Company. These entities may generally be able to
accept more risk than the Company can prudently manage, including risks with
respect to the creditworthiness of a hotel operator.
PROPERTY DESCRIPTIONS
The following charts provide certain information regarding the Hotels.
54
<PAGE> 60
THE CURRENT HOTELS
<TABLE>
<CAPTION>
NUMBER OF
GUEST NUMBER OF CORRIDOR LOT YEAR
HOTEL LOCATION ROOMS FLOORS DESIGN ACREAGE BUILT
- ------------------- ----------------------------------- ---------- --------- -------- ------- -----
<C> <S> <C> <C> <C> <C> <C> <C>
1. Hampton Inn Durham, NC 136 5 Interior 2.0 1987
2. Hampton Inn Raleigh, NC 141 4 Interior 1.8 1986(1)
(near Beltline and Interstate-40)
3. Hampton Inn Charlotte, NC 125 6 Interior 2.1 1991
(near Interstate-85)
4. Hampton Inn Atlanta, GA 124 5 Interior 2.5 1990
(near Interstate-75)
5. Hampton Inn Cary, NC 130 5 Interior 2.2 1989
(near US-1 and Interstate-64)
6. Hampton Inn Wilmington, NC 118 2 Exterior 2.9 1986(1)
7. Hampton Inn Brunswick, GA 127 3 Interior/ 2.9 1991
(near Interstate-95) Exterior
8. Hampton Inn Southern Pines, NC 126 2 Exterior 4.2 1988
9. Hampton Inn Jacksonville, NC 120 2 Exterior 3.1 1989
10. Hampton Inn Hilton Head, SC 125 2 Interior 5.0 1988(1)
(near Highway 278)
11. Hampton Inn Boone, NC 95 5 Interior 2.1 1987
12. Hampton Inn Chester, VA 66 2 Interior 5.1 1994
(near Interstate-95 and Route 10)
<CAPTION>
LOCAL POINTS OF
INTEREST/BUSINESSES AMENITIES
- ---- ---------------------------------- ----------------------------------
<C> <S> <C> <C>
1. Duke University, Duke Medical Conference room, complimentary
Center, Research Triangle Park continental breakfast, exercise
room with sauna, executive suites,
outdoor pool, hospital van service
2. Raleigh/Durham International Three meeting rooms, complimentary
Airport, Crabtree Mall, Research continental breakfast, manager's
Triangle Park cocktail reception, sauna and
workout room, health spa with
outdoor pool, adjacent
full-service restaurant, airport
shuttle van
3. Charlotte Motor Speedway, Complimentary continental
University of North Carolina at breakfast, access to health spa,
Charlotte, University Hospital lobby bar, two hospitality suites,
outdoor pool
4. Atlanta Hartsfield International Garden landscaping, lobby
Airport, Fort Gilliam, Fort fountain, outdoor pool,
McPherson complimentary continental
breakfast, two meeting rooms,
access to health spa, airport
shuttle van
5. Raleigh/Durham International Meeting room, outdoor pool,
Airport, Research Triangle Park complimentary health-club
privileges, adjacent full-service
restaurant, complimentary
continental breakfast
6. Wrightsville Beach, Revolutionary Hospitality suite, outdoor pool,
and Civil War historical sites complimentary continental
breakfast, access to health spa,
adjacent full-service restaurant
7. Tourist travel, nearby Golden Complimentary continental
Isles resort beaches, including breakfast, two meeting rooms,
Jekyll Island and St. Simon's exercise room, outdoor pool,
Island adjacent full-service restaurant
8. Pinehurst golfing facilities, Two conference rooms,
professional golf tour events complimentary continental
breakfast, access to health spa,
golf packages
9. Camp LeJeune Marine Corps Base Complimentary continental
breakfast, outdoor pool, access to
health spa, on-site guest laundry,
adjacent full-service restaurant
10. Hilton Head resort area, golf and Complimentary continental
tennis attractions breakfast, suites with whirlpools,
outdoor pool, health spa, shuttle
service, bicycle rentals
11. Appalachian State University, Complimentary continental
North Carolina's Appalachian breakfast, indoor pool, jacuzzi,
Mountains access to health spa, hospitality
suite, adjacent full-service
restaurant
12. Industrial and technical centers Jogging path, on-site guest
for Philip Morris USA, DuPont and laundry, complimentary continental
Allied, Confederate White House, breakfast, local van shuttle
Richmond and Petersburg National
Battlefields, James River
Plantations tour
</TABLE>
- ---------------
(1) The following Current Hotels have undergone substantial renovation (i.e.,
substantial upgrade of guest rooms and public areas) in the following years:
Hampton Inn -- Raleigh, North Carolina in 1996; Hampton Inn -- Wilmington,
North Carolina in 1994 and Hampton Inn -- Hilton Head, South Carolina in
1988.
55
<PAGE> 61
<TABLE>
<CAPTION>
NUMBER OF
GUEST NUMBER OF CORRIDOR LOT YEAR
HOTEL LOCATION ROOMS FLOORS DESIGN ACREAGE BUILT
- ------------------- ----------------------------------- ---------- --------- -------- ------- -----
<C> <S> <C> <C> <C> <C> <C> <C>
13. Comfort Inn Durham/Chapel Hill, NC 138 4 Interior 4.5 1991(1)
(near Interstate-40 and U.S.
15-501)
14. Comfort Inn Fayetteville, NC 176 4 Interior 3.3 1987(1)
(near Interstate-95)
15. Comfort Inn Wilmington, NC 146 6 Interior 2.6 1986
(near Interstate-40)
16. Comfort Inn Chester, VA 123 5 Interior 3.0 1988
(near Interstate-95 and Route 10)
17. Comfort Inn Charleston, SC 128 7 Interior 1.0 1989
18. Comfort Inn Raleigh, NC 149 4 Interior 2.7 1984(1)
(near Raleigh Beltline Highway)
19. Comfort Inn Augusta, GA 123 5 Interior 2.3 1989
(near Interstate-20 and Bobby Jones
Expressway)
20. Comfort Inn Clearwater/St. Petersburg, FL 120 3 Interior 2.8 1985(1)
(near Interstate-75)
21. Quality Suites Charleston, SC 168 suites 5 Interior 3.8 1989
(near Interstate-26)
<CAPTION>
LOCAL POINTS OF
INTEREST/BUSINESSES AMENITIES
- ---- ---------------------------------- ----------------------------------
<C> <S> <C> <C>
13. University of North Carolina at Hospitality suite, meeting room,
Chapel Hill, Duke Hospital, Duke complimentary continental
University breakfast, fitness center with
sauna, outdoor pool with whirlpool
spa, executive suites, adjacent
full-service restaurants
14. Fort Bragg, Home of 82nd U.S. Complimentary continental
Airborne Division, Pope Air Force breakfast, executive suites with
Base wet bar, outdoor pool, access to
health spa, 25-inch televisions,
55 restaurants within three-mile
radius
15. University of North Carolina at Complimentary continental
Wilmington, Wrightsville Beach, breakfast, outdoor pool, social
Revolutionary and Civil War hour, fitness center access and
historical sites three meeting rooms, adjacent
full-service restaurant
16. Nearby industrial and technical Meeting room, complimentary
centers for Philip Morris, Allied, continental breakfast buffet,
DuPont, Confederate White House, boardroom, guest laundry
Richmond & Petersburg National facilities, local van shuttle,
Battlefields, James River outdoor pool, health spa, jogging
Plantations tour path
17. Charleston historic district, Meeting room, complimentary deluxe
nearby marinas, nearby medical continental breakfast, whirlpool
complex suites, exercise center, outdoor
pool, historic district tours,
rooms with view of Ashley River
18. State Capitol, North Carolina Two meeting rooms, deluxe weekday
State University, Research breakfast buffet, complimentary
Triangle Park continental weekend breakfast
buffet, outdoor pool, exercise
area, access to health spa
19. Augusta National Golf Club Deluxe complimentary continental
breakfast, executive suites,
outdoor pool and whirlpool,
meeting room, fully equipped
fitness center
20. Busch Gardens amusement park, golf Meeting room, hospitality suite,
courses, Tampa Bay and Gulf Coast complimentary continental
beaches breakfast, tropically landscaped
outdoor pool and whirlpool in
central courtyard, free-standing
restaurant with room service,
exercise room, airport shuttle van
21. Charleston International Airport, Five-story atrium, complimentary
Charleston's Historic District full service cooked-to-order
breakfast, manager's cocktail
reception, meeting rooms, outdoor
jacuzzi, pool health spa, exercise
room, airport shuttle van
</TABLE>
- ---------------
(1) The following Current Hotels have undergone substantial renovation (i.e.,
substantial upgrade of guest rooms and public areas) in the following years:
Comfort Inn -- Durham/Chapel Hill, North Carolina in 1991; Comfort
Inn -- Fayetteville, North Carolina in 1995; and Comfort Inn -- Raleigh,
North Carolina in 1993. The Company also intends to substantially renovate
the Comfort Inn -- Clearwater, Florida over the next two years.
56
<PAGE> 62
THE ACQUISITION HOTELS
<TABLE>
<CAPTION>
NUMBER NUMBER
OF GUEST OF CORRIDOR LOT
HOTEL LOCATION ROOMS FLOORS DESIGN ACREAGE YEAR BUILT
- ----------------------------- ----------------------------- ---------- ------ --------- ------- -----------
<C> <S> <C> <C> <C> <C> <C> <C>
1. Hampton Inn............. Perimeter (Atlanta), GA 131 4 interior 1.6 1996
(near Interstate 285 and
Georgia 400) (suburban
Atlanta)
2. Hampton Inn............. Duncanville, TX 119 2 exterior 2.5 1986(1)
(near Interstate-20 and LBJ
Freeway)
(suburban Dallas)
3. Comfort Inn............. Greenville, SC 191 2 exterior 3.0 1975(1)
(near Interstate-385)
4. Homewood Suites......... Cary, NC 140 Suites 4 interior 9.1 1994
(Raleigh)
5. Homewood Suites......... Clear Lake (Houston), TX 92 Suites 3 interior 2.6 1995
(near Interstate-45)
(suburban Houston)
6. Hampton Inn & Suites.... Duluth (Atlanta), GA 104 and 4 interior 2.5 1996
(near Interstate-85) 32 suites
(suburban Atlanta)
7. Comfort Suites.......... London, KY 62 suites 3 interior 1.0 1992(1)
(near Interstate-75)
8. Holiday Inn Select...... Garland (Dallas), TX 244 5(1)interior 6.5 1974(1)
(near Interstate-635) 3
(suburban Dallas) 3
9. Holiday Inn Express..... Abingdon, VA 80 3 interior 1.2 1991(1)
(near Interstate 81)
10. Marriott Courtyard...... Wilmington, NC 128 2 interior 3.5 1996
<CAPTION>
LOCAL POINTS OF INTEREST/BUSINESSES AMENITIES
- ---- ------------------------------------- -------------------------------------
<C> <C> <C>
1. Perimeter Mall and Class A office Meeting room, complimentary
space continental breakfast, outdoor
swimming pool, 25-inch televisions,
exercise room
2. The Ballpark at Arlington (Texas Meeting room, complimentary
Rangers Baseball stadium), Six Flags continental breakfast, outdoor pool,
over Texas landscaped exterior
3. Greenville-Spartanburg Metropolitan Meeting room, outdoor swimming pool,
area, BMW assembly plant, Michelin's game room, sports bar
North American headquarters
4. Siemens Medical Systems(2), Research Complimentary full service breakfast,
Triangle Park covered bridge entrance, wooded
setting, business center, 1,200
square-foot meeting room,
fully-equipped in-room kitchens,
fitness room, outdoor swimming pool,
sport court, jacuzzi
5. NASA's Johnson Space Center, Executive business center,
Rockwell's Space Operations Center, complimentary full service breakfast,
Space Center Clear Lake, Martin- fitness facility, sport court, fully-
Marietta, McDonnell-Douglas, Lockheed equipped in-room kitchens, outdoor
swimming pool, exercise room, jacuzzi
6. Gwinnett Mall, Lake Lanier, Stone Meeting room, fully equipped business
Mountain, Chateau Elan center, social hour, complimentary
full-service breakfast, outdoor pool
7. Daniel Boone National Forest, Meeting room, complimentary
Rockcastle River, whitewater sports continental breakfast, indoor
attractions, bass fishing, adjacent swimming pool
multi screen movie theater
8. Suburban Dallas, electronics-related Approximately 9,800 square-foot
industries including E-Systems and conference center, four other meeting
Software Spectrum rooms, 50-person auditorium theater,
full-service restaurant, night club,
outdoor pool, executive fitness
center
9. 20-block historic district, Barter Meeting room, complimentary
Theater (State Theater of Virginia), continental breakfast, outdoor pool
arts and crafts centers, Virginia
Highlands Festival
10. Wrightsville Beach, Revolutionary and Two large meeting rooms, full service
Civil War historical sites breakfast, lobby lounge, outdoor
swimming pool, jacuzzi
</TABLE>
- ---------------
(1) The Holiday Inn Select -- Garland (Dallas), Texas consists of one five-story
building and two three-story buildings which were built in 1974, 1978 and
1984, respectively. The Company intends to remodel substantially the
following Acquisition Hotels over the next two years: The Hampton
Inn -- Duncanville (Dallas), Texas; The Comfort Inn -- Greenville, South
Carolina; the Comfort Suites -- London, Kentucky; the Holiday, Inn
Select -- Garland (Dallas), Texas; and the Holiday Inn Express -- Abingdon,
Virginia.
(2) The Homewood Suites -- Cary, North Carolina, is subject to a lease (the
"Siemens Lease") with Siemens Medical Systems, Inc. ("Siemens Medical"), a
large manufacturer and servicer of medical equipment. Siemens Medical
conducts technician training seminars at a facility that is adjacent to this
hotel. The lease provides that Siemens Medical (i) leases 90 of the 140
suites in the hotel for a minimum of 44 weeks per year and (ii) pays minimum
annual rent payments of approximately $1.7 million with annual increases
based on increases in the C.P.I. The lease terminates on March 31, 2003.
57
<PAGE> 63
The following table sets forth certain historical operating information
with respect to each Current Hotel and on a consolidated basis:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
THE CURRENT HOTELS
HAMPTON INNS:
Durham, NC
Occupancy................ 70.6% 88.6% 91.1% 93.5% 91.6% 90.6% 88.5%
ADR...................... $40.51 $40.92 $43.85 $48.78 $56.70 $52.95 $59.32
REVPAR................... $28.59 $36.26 $39.93 $45.59 $51.94 $47.95 $52.50
Raleigh, NC
Occupancy................ 71.6% 79.3% 82.5% 84.9% 80.7%(1) 87.0% 75.8%
ADR...................... $44.84 $45.61 $46.70 $50.60 $55.06 $53.50 $59.67
REVPAR................... $32.13 $36.18 $38.52 $42.98 $44.43 $46.52 $45.23
Charlotte, NC(2)
Occupancy................ 61.6% 78.1% 81.1% 85.6% 89.5% 84.4% 86.1%
ADR...................... $41.34 $39.17 $42.20 $45.17 $56.00 $51.21 $60.67
REVPAR................... $25.45 $30.57 $34.20 $38.66 $50.11 $43.19 $52.26
Atlanta, GA
Occupancy................ 75.4% 88.3% 90.3% 87.4% 84.3% 90.1% 87.3%
ADR...................... $40.41 $40.88 $45.26 $50.44 $57.79 $54.87 $63.87
REVPAR................... $30.46 $36.07 $40.87 $44.11 $48.73 $49.44 $55.74
Cary, NC
Occupancy................ 75.2% 78.8% 85.0% 83.0% 83.0% 79.1% 78.5%
ADR...................... $42.43 $41.97 $44.38 $48.18 $55.20 $53.76 $58.69
REVPAR................... $31.91 $33.06 $37.72 $39.97 $45.84 $42.55 $46.09
Wilmington, NC
Occupancy................ 59.4% 75.2% 77.8% 79.4% 81.9% 73.5% 75.9%
ADR...................... $42.68 $50.01 $53.26 $56.06 $60.25 $51.81 $55.81
REVPAR................... $25.34 $37.59 $41.41 $44.49 $49.36 $38.10 $42.37
Brunswick, GA(2)
Occupancy................ 45.4% 85.9% 83.2% 84.6% 90.5% 93.8% 85.4%
ADR...................... $34.58 $38.59 $42.09 $43.79 $48.46 $46.92 $54.78
REVPAR................... $15.69 $33.14 $35.01 $37.07 $43.86 $44.03 $46.79
Southern Pines, NC
Occupancy................ 75.7% 80.4% 80.0% 82.4% 83.6% 79.5% 75.1%
ADR...................... $40.22 $41.94 $44.77 $46.19 $50.85 $48.52 $53.40
REVPAR................... $30.46 $33.70 $35.81 $38.04 $42.50 $38.58 $40.12
Jacksonville, NC
Occupancy................ 77.0% 80.0% 84.7% 85.0% 86.2% 85.8% 84.5%
ADR...................... $42.78 $41.52 $42.84 $45.65 $48.51 $44.88 $47.66
REVPAR................... $32.96 $33.21 $36.27 $38.81 $41.80 $38.50 $40.28
Hilton Head, SC
Occupancy................ 61.4% 64.2% 74.6% 78.7% 70.8%(1) 74.9% 68.9%
ADR...................... $42.96 $43.50 $42.71 $44.63 $53.82 $46.69 $50.51
REVPAR................... $26.39 $27.93 $31.87 $35.10 $38.12 $34.97 $34.79
Boone, NC
Occupancy................ 77.8% 75.6% 79.7% 79.3% 82.9% 77.1% 79.8%
ADR...................... $46.77 $46.21 $46.93 $50.27 $54.16 $47.54 $50.34
REVPAR................... $36.39 $34.93 $37.40 $39.87 $44.89 $36.67 $40.18
Chester (Richmond), VA(2)..
Occupancy................ -- -- -- 79.5% 91.0% 86.3% 85.8%
ADR...................... -- -- -- $55.23 $57.46 $55.57 $61.25
REVPAR................... -- -- -- $43.91 $52.26 $47.96 $52.55
COMFORT INNS:
Durham/Chapel Hill, NC(2)
Occupancy................ 47.8% 75.7% 83.1% 86.8% 83.4% 81.0% 79.4%
ADR...................... $43.75 $44.62 $48.17 $52.28 $59.94 $55.62 $61.27
REVPAR................... $20.93 $33.77 $40.04 $45.38 $50.00 $45.06 $48.62
</TABLE>
58
<PAGE> 64
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Fayetteville, NC
Occupancy................ 82.0% 78.7% 78.2% 80.2% 75.2%(1) 73.2% 73.4%
ADR...................... $42.16 $42.89 $44.88 $47.15 50.36 $48.39 $49.05
REVPAR................... $34.55 $33.74 $35.11 $37.83 $37.85 $35.40 $35.99
Wilmington, NC
Occupancy................ 71.4% 71.3% 81.6% 81.4% 79.8%(1) 71.7% 73.7%
ADR...................... $40.40 $41.62 $46.25 $50.47 $54.60 $46.91 $48.90
REVPAR................... $28.83 $29.67 $37.73 $41.08 $43.58 $33.63 $36.06
Chester (Richmond), VA
Occupancy................ 80.3% 81.7% 84.0% 80.9% 84.1% 79.9% 76.2%
ADR...................... $47.95 $49.90 $51.92 $54.55 $58.52 $55.99 $61.53
REVPAR................... $38.49 $40.76 $43.63 $44.14 $49.21 $44.71 $46.89
Charleston, SC
Occupancy................ 72.7% 73.6% 80.3% 82.3% 79.5% 80.0% 62.6%
ADR...................... $55.81 $53.68 $52.13 $55.64 $59.00 $53.15 $51.94
REVPAR................... $40.55 $39.51 $41.84 $45.77 $46.88 $42.55 $32.52
Raleigh, NC(2)
Occupancy................ -- -- 69.0% 73.7% 74.4% 71.9% 62.0%
ADR...................... -- -- $40.57 $43.56 $47.13 $45.53 $47.84
REVPAR................... -- -- $27.98 $32.12 $35.08 $32.73 $29.67
Augusta, GA
Occupancy................ 66.5% 55.1% 68.4% 67.8% 70.9% 74.4% 65.7%
ADR...................... $37.61 $40.40 $39.79 $41.14 $44.57 $39.93 $44.07
REVPAR................... $25.00 $22.28 $27.22 $27.90 $31.59 $29.71 $28.94
Clearwater/St. Petersburg,
FL
Occupancy................ 51.9% 62.8% 68.5% 69.4% 70.3% 84.7% 86.3%
ADR...................... $45.18 $44.14 $45.12 $46.84 $44.84 $54.03 $56.70
REVPAR................... $23.46 $27.73 $30.91 $32.51 $31.54 $45.76 $48.94
QUALITY SUITES:
Charleston, SC
Occupancy................ 75.4% 78.9% 83.9% 82.4% 82.4% 76.0% 81.3%
ADR...................... $66.70 $66.47 $68.14 $70.81 $73.33 $72.22 $74.32
REVPAR................... $50.26 $52.46 $57.17 $58.36 $60.44 $54.89 $60.40
CONSOLIDATED CURRENT HOTELS
Occupancy................ 70.8% 76.6% 80.4% 81.4% 81.4% 80.4% 77.4%
ADR...................... $45.21 $45.22 $46.98 $50.07 $54.93 $51.68 $56.26
REVPAR................... $32.01 $34.63 $37.76 $40.79 $44.70 $41.52 $43.52
</TABLE>
- ---------------
(1) During 1995, the Company renovated these Hotels and substantially all of the
rooms were closed at some time during the period.
(2) The Hampton Inn -- Charlotte, North Carolina, the Hampton Inn -- Brunswick,
Georgia and the Comfort Inn -- Durham/Chapel Hill, North Carolina each
opened in 1991, and the data for such Hotels in that year do not reflect
twelve months of operations. The Hampton Inn -- Chester (Richmond),
Virginia opened in 1994, and the data for such Hotel in that year does not
reflect twelve months of operations. The Comfort Inn -- Raleigh, North
Carolina was acquired in 1993, and the data for such Hotel in that year
does not reflect twelve months of operations.
59
<PAGE> 65
The following table sets forth certain historical information with respect
to each Acquisition Hotel that was operating in 1995 and on a consolidated
basis, and with respect to the Hotels that were operating in 1995 on a
consolidated basis:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
THE ACQUISITION HOTELS(1)
HAMPTON INNS:
Duncanville (Dallas), TX
Occupancy...................................... 65.7% 74.1% 82.8% 86.2% 65.5%
ADR............................................ $40.49 $38.90 $38.18 $35.26 $39.88
REVPAR......................................... $26.58 $28.82 $31.62 $30.41 $26.12
COMFORT INN:
Greenville, SC
Occupancy...................................... 47.6% 53.1% 64.2% 57.2% 61.7%
ADR............................................ $39.68 $40.35 $44.47 $43.51 $45.75
REVPAR......................................... $18.90 $21.42 $28.53 $24.86 $28.23
HOMEWOOD SUITES:
Cary (Raleigh), NC(2)
Occupancy...................................... -- 76.7% 86.1% 87.7% 88.5%
ADR............................................ -- $72.98 $71.90 $64.48 $72.89
REVPAR......................................... -- $56.17 $61.92 $60.04 $64.47
Clear Lake (Houston), TX(2)
Occupancy...................................... -- -- 41.7% -- 74.5%
ADR............................................ -- -- $82.57 -- $90.46
REVPAR......................................... -- -- $34.44 -- $67.36
COMFORT SUITES:
London, KY
Occupancy...................................... 80.8% 89.0% 91.4% 89.1% 78.8%
ADR............................................ $45.93 $47.31 $50.75 $48.09 $49.18
REVPAR......................................... $37.11 $42.09 $46.40 $42.83 $38.75
HOLIDAY INN SELECT:
Garland (Dallas), TX(3)
Occupancy...................................... 75.1% 79.1% 79.7% 80.6% 79.1%
ADR............................................ $54.11 $55.53 $62.09 $59.44 $68.36
REVPAR......................................... $40.65 $43.93 $49.46 $47.90 $54.08
HOLIDAY INN EXPRESS:
Abingdon, VA
Occupancy...................................... 77.2% 81.5% 84.3% 72.8% 72.7%
ADR............................................ $43.87 $45.74 $47.98 $44.44 $47.34
REVPAR......................................... $33.87 $37.28 $40.46 $32.34 $34.40
CONSOLIDATED ACQUISITION HOTELS(1):
Occupancy........................................ 65.5% 73.0% 77.9% 77.1% 74.1%
ADR............................................ $45.50 $51.43 $55.05 $52.26 $61.12
REVPAR......................................... $29.78 $37.53 $42.87 $40.30 $45.32
CONSOLIDATED CURRENT AND
ACQUISITION HOTELS(1):
Occupancy...................................... 77.6% 79.5% 80.5% 79.6% 76.5%
ADR............................................ $46.74 $50.36 $54.96 $51.81 $57.46
REVPAR......................................... $36.26 $40.03 $44.26 $41.24 $43.98
</TABLE>
- ---------------
(1) Excluding the Hampton Inn -- Perimeter (Atlanta), Georgia, Hampton Inn &
Suites -- Duluth (Atlanta), Georgia and Courtyard by Marriott -- Wilmington,
North Carolina, which were not open in 1995. The Hampton Inn -- Perimeter
(Atlanta), Georgia opened in late February 1996. Results for that
Acquisition Hotel for the three months ended March 31, 1996 have not been
presented above because the Company believes the brief period of the hotel's
operation during such period renders such results insignificant.
(2) The Homewood Suites-Cary North Carolina opened in 1994, and the data for
such Hotel in that year do not reflect twelve months of operations. The
Homewood Suites-Clear Lake (Houston), Texas opened in September 1995, and
the data for such Hotel in that year do not reflect twelve months of
operations; that Hotel was not open in the three months ended March 31,
1995.
(3) Includes information from the date of acquisition by Impac in May 1993.
60
<PAGE> 66
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Partnership can operate hotels. Therefore, the Company and the Partnership have
leased the Current Hotels for terms of ten years pursuant to Percentage Leases,
which provide for rent equal to the greater of the Base Rent or the Percentage
Rent. Other than the franchise licenses for the Hotels and working capital
sufficient to operate the Current Hotels, the Lessee has only nominal assets in
addition to its rights and benefits under the Percentage Leases. The Percentage
Leases for the Current Hotels and the five Acquisition Hotels acquired in May
1996 and the proposed Percentage Leases for the remaining five Acquisition
Hotels contain the provisions described below. The Company intends that future
leases with respect to its hotel property investments, including the Homewood
Development Hotels, will contain substantially similar provisions, although the
Company's Board of Directors may, in its discretion, alter any of these
provisions with respect to any particular lease, depending on the purchase price
paid, economic conditions and other factors deemed relevant at the time.
Percentage Lease Terms. Each Percentage Lease for the Current Hotels and
five of the Acquisition Hotels acquired in May 1996 has, and each Percentage
Lease for the remaining five Acquisition Hotels will have, a non-cancelable term
of ten years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Lease (including, particularly, the
provisions described herein under "Damage to Hotels", "Condemnation of Hotels"
and "Termination of Percentage Leases on Disposition of the Hotels").
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is or will be obligated to pay (i) the greater of
Base Rent or Percentage Rent (collectively, the "Rent") and (ii) certain other
Additional Charges. Base Rent accrues and is required to be paid monthly.
Percentage Rent is calculated by multiplying fixed percentages by gross room
revenues for each of the Hotels. Percentage Rent is due quarterly. However, with
respect to eleven of the Current Hotels, the Lessee will not be in default for
non-payment of Percentage Rent due in any calendar year if the Lessee pays,
within 90 days of the end of the calendar year, the excess of Percentage Rent
due and unpaid over the Base Rent paid by the Lessee with respect to such year.
With respect to the other Current Hotels and the Acquisition Hotels, the Lessee
will not be in default for the non-payment of Percentage Rent if it pays, within
30 days of the end of each calendar quarter, the excess of Percentage Rent due
and unpaid over the Base Rent paid year-to-date with respect to such quarter.
The table below sets forth (i) room revenue for each Hotel for the year
ended December 31, 1995; (ii)(a) pro forma lease payments, (b) pro forma Lessee
net income, (c) pro forma Base Rent and (d) pro forma total Rent based on
historical revenues for the year ended December 31, 1995, as if the Company and
the Partnership had owned the Hotels and the Percentage Leases had been in
effect since January 1, 1995; and (iii) annual Percentage Rent formula.
61
<PAGE> 67
The following table sets forth certain unaudited information with respect
to the Hotels and the applicable Percentage Leases (dollar amounts are in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
---------------------------------------
ANNUAL PERCENTAGE PRO FORMA
RENT FORMULA(1) -----------------------------------
--------------------------- (IN THOUSANDS)
NUMBER REVENUE LESSEE
OF BASE BREAK FIRST SECOND ROOM LEASE NET INCOME/
ROOMS RENT POINT TIER TIER REVENUE PAYMENTS(2) LOSS(3)
------ ------- ------- ----- ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS(4)
Hampton Inn:
Durham, NC........................... 136 $ 435 $1,628 33.6 % 65.0% $2,594 $ 1,175 $ 236
Raleigh, NC.......................... 141 472 1,900 40.0 65.0 2,287 1,011 82
Charlotte, NC........................ 125 330 1,323 31.8 65.0 2,286 1,047 246
Atlanta, GA.......................... 124 411 1,450 31.0 66.0 2,205 948 228
Cary, NC............................. 130 407 1,374 30.6 69.0 2,175 973 249
Wilmington, NC....................... 118 505 1,496 34.1 64.0 2,126 912 244
Brunswick, GA........................ 127 364 1,349 28.7 66.0 2,033 839 152
Southern Pines, NC................... 126 366 1,476 34.2 66.0 1,955 820 195
Jacksonville, NC..................... 120 373 1,425 33.6 69.0 1,831 759 198
Hilton Head, SC...................... 125 298 1,375 26.0 66.0 1,737 596 80
Boone, NC............................ 95 254 1,150 29.0 66.0 1,557 602 108
Chester (Richmond), VA............... 66 189 950 37.5 64.0 1,259 554 84
Comfort Inn:
Durham/Chapel Hill, NC............... 138 579 1,975 42.5 67.0 2,518 1,203 152
Fayetteville, NC..................... 176 623 1,975 43.0 69.0 2,432 1,164 138
Wilmington, NC....................... 146 502 1,578 33.1 66.0 2,322 1,013 152
Chester (Richmond), VA............... 123 497 1,775 43.0 68.0 2,210 1,059 98
Charleston, SC....................... 128 441 1,825 41.8 66.0 2,190 1,003 85
Raleigh, NC.......................... 149 328 1,527 34.0 62.0(5) 1,908 755 195
Augusta, GA.......................... 123 294 1,100 27.0 66.0 1,418 507 65
Clearwater/St. Petersburg, FL........ 120 277 1,275 28.5 65.0 1,382 433 34
Quality Suites:
Charleston, SC....................... 168 864 2,900 39.3 68.0 3,706 1,687 195
------ ------- ------- ----------- -----------
Subtotal for Current Hotels........... 2,704 8,809 44,131 19,060 3,216
------ ------- ------- ----------- -----------
ACQUISITION HOTELS
Hampton Inn:
Perimeter (Atlanta), GA.............. 131 $ 574 1,700 42.0 % 70.0 -- 574(6) (574)(7)
Duncanville, TX...................... 119 221 1,250 33.0 70.0 1,370 497 (26)
Comfort Inn:
Greenville, SC....................... 191 309 1,600 (8) 25.0 66.0 1,989 656 165
Homewood Suites:
Cary, NC............................. 140 1,010 1,600 (9) 50.0 70.0 3,281 (10) 1,977 183
Clear Lake (Houston), TX............. 92 484 1,677 35.0 70.0 320 484(6) (389)(7)
Hampton Inn & Suites:
Duluth (Atlanta), GA................. 136 581 1,825 42.3 70.0 -- 581(6) (581)(7)
Comfort Suites:
London, KY........................... 62 165 775 37.5 70.0 1,050 483 80
Holiday Inn Select:
Garland (Dallas), TX................. 244 1,036 3,600 40.0 67.0 6,352 (11) 2,084(12) (146)
Holiday Inn Express:
Abingdon, VA......................... 80 187 900 37.5 70.0 1,181 535 131
Courtyard by Marriott:
Wilmington, NC....................... 128 525 1,325 42.3 70.0 -- 525(6) (525)(7)
------ ------- ------- ----------- -----------
Subtotal for Acquisition Hotels....... 1,323 5,092 15,543 8,396 (1,682)
Lessee interest income not allocated
to the Hotels above.................. 85
Lessee general and administrative
expenses not allocated to the Hotels
above................................ (1,776)
------ ------- ------- ----------- -----------
Consolidated total for Hotels......... 4,027 $13,901 $59,674 $27,456 $ (157)
========= ========= ========== =============== ==============
</TABLE>
(1) All Percentage Rent formulas included in the Percentage Leases are based on
room revenue from the related Hotels. See "Business and Properties -- The
Percentage Leases" and "Risk Factors -- Risk that Pending Acquisitions Will
Not Close". Beginning in the calendar year following the year in which a
Percentage Lease commences, and for each year thereafter, (i) the annual
Base Rent and (ii) the Percentage Rent formulas will be adjusted for
inflation, based on quarterly changes in the CPI. The adjustment in any
quarter may not exceed 2%, which may be less than the change in the CPI for
the quarter.
62
<PAGE> 68
(2) Represents lease payments from the Lessee to the Partnership or the
Company, as applicable, calculated on a pro forma basis by applying the
rent provisions in the Percentage Leases, and for the Acquisition Hotels
the rent provisions in the proposed Percentage Leases, to the historical
room revenue of the Hotels for the year ended December 31, 1995. Under the
terms of the related Percentage Leases, the Company or the Partnership
receives Percentage Rent in an amount equal to the first tier percentage of
all room revenues up to the revenue break point and an amount equal to the
second tier percentage of all room revenues in excess of the revenue break
point.
(3) Pro forma Lessee net income (loss) is net of the management fees (a) that
are payable by the Lessee under management agreements for 10 of the Current
Hotels, which equal specified percentages of its budgeted gross operating
profits from these hotels, subject to certain adjustments, (b) which will
be payable by the Lessee under a Promus Management Agreement for the
Homewood Suites -- Clear Lake (Houston), Texas and (c) which will be
payable by the Lessee under a management agreement for the Holiday Inn
Select -- Garland (Dallas), Texas with an affiliate of the seller of the
Hotel. See "Business and Properties -- Operating Practices".
(4) The following Current Hotels were acquired in May 1995: (i) Hampton
Inn -- Raleigh, North Carolina; (ii) Comfort Inn -- Charleston, South
Carolina; (iii) Comfort Inn -- Clearwater/ St. Petersburg, Florida; (iv)
Comfort Inn -- Augusta, Georgia; and (v) Quality Suites -- Charleston,
South Carolina.
(5) The Comfort Inn -- Raleigh, North Carolina has a third tier percentage rent
of 66% which becomes payable on annual room revenues exceeding $2,036.
(6) Represents only the fixed Base Rent payable under the proposed Percentage
Leases for these Acquisition Hotels. No Percentage Rent payable under the
Percentage Leases is included for these Hotels, since Percentage Rent is
payable based on revenues and these Hotels were not in operation and had no
revenues in 1995 (except for limited revenues for the Homewood Suites --
Clear Lake (Houston), Texas, which opened in September 1995).
(7) Lessee net income (loss) for these Acquisition Hotels reflects the payment
by the Lessee of Base Rent in accordance with the proposed Percentage
Leases for these hotels notwithstanding that three of the hotels were not
open in 1995 and one of the hotels was open for only four months in 1995.
See footnote 6 above.
(8) Decreases to $1,430 in 1998, when the hotel is expected to achieve
stabilization after rehabilitation.
(9) Increases to $1,825 in 1998, to reflect increased operating costs which
will be incurred by the Lessee when 32 of the rooms subject to a long term
lease at the hotel are converted from offices to guest rooms. See "Business
and Properties -- The Acquisition Hotels" and note (2) to the table
therein. The amount included in the Percentage Lease revenue for the
Homewood Suites -- Cary, North Carolina, for the purposes of determining
the Company's aggregate yield from the three Affiliate Acquisition Hotels
in which Robert Winston has a direct interest, will be the reduced revenue
that would be produced if the Percentage Rent formula applicable beginning
in 1998 was applicable for the first twelve months of the Company's
ownership.
(10) Includes $117 of food and beverage revenue.
(11) Includes $1,947 of food and beverage revenue.
(12) Includes $105 of lease payments attributable to food and beverage revenue.
The percentage rent formula with respect to food and beverage revenue is 5%
of annual food and beverage revenue up to $1,800, and 10% of annual food
and beverage revenue in excess of $1,800.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which for the Hotels owned by the Partnership are obligations of the
Partnership and for the Company-Owned Hotel are obligations of the Company, the
Percentage Leases require the Lessee to pay rent, insurance, all costs and
expenses and all utility and other charges incurred in the operation of the
Hotels. The Percentage Leases also provide for rent reductions and abatements in
the event of damage to or destruction or a partial taking of any Hotel as
described under "Damage to Hotels" and "Condemnation of Hotels".
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Maintenance and Modifications. Under the Percentage Leases, the entity
that owns each Hotel, either the Partnership or the Company, is required to
maintain the underground utilities and the structural elements of the
improvements, including exterior walls (excluding plate glass) and the roof of
such Hotel. In addition, the Percentage Leases obligate the Company and the
Partnership to fund periodic capital improvements (in addition to maintenance of
underground utilities and structural elements) to the buildings and grounds
comprising their respective Hotels, and the periodic repair, replacement and
refurbishment of furniture, fixtures and equipment in their respective Hotels,
when and as deemed necessary by the Lessee. The Percentage Leases relating to
the Current Hotels obligate the Company to set aside 3% of room revenues for the
first year and 5% for the years thereafter for periodic capital improvements and
the ongoing replacement or refurbishment of furniture, fixtures and equipment at
all of the hotels. The Percentage Leases applicable to the Acquisition Hotels
and all future hotels will obligate the Company to set aside 5% of room revenues
from limited-service hotels and 7% of room, food and beverage revenues from
full-service hotels for periodic capital improvements and the on-going
replacement or refurbishment of furniture, fixtures and equipment of the
applicable Hotels. These obligations will be carried forward to the extent that
the Lessee has not expended such amounts, and any unexpended amounts will remain
the property of the Company or the Partnership, as the case may be, upon
termination of the Percentage Leases. Except for capital improvements and
maintenance of structural elements and underground utilities, the Lessee will be
required, at its expense, to maintain the Hotels in good order and repair,
except for ordinary wear and tear, and to make non-structural, foreseen and
unforeseen, and ordinary and extraordinary, repairs which may be necessary and
appropriate to keep the Hotels in good order and repair.
The Lessee is not obligated to bear the cost of capital improvements to the
Hotels. With the consent of the Company or the Partnership, as the case may be,
however, the Lessee, at its expense, may make non-capital and capital additions,
modifications or improvements to the Hotels, provided that such action does not
significantly alter the character or purposes of the Hotels or significantly
detract from the value or operating efficiencies of the Hotels. All such
alterations, replacements and improvements shall be subject to all the terms and
provisions of the Percentage Leases and will become the property of the Company
or the Partnership, as the case may be, upon termination of the Percentage
Leases. The Company and the Partnership own or will own substantially all
personal property (other than inventory, linens and other nondepreciable
personal property) not affixed to, or deemed a part of, the real estate or
improvements thereon comprising their respective Hotels, except to the extent
that ownership of such personal property would cause the Rent under the
Percentage Leases not to qualify as "rents from real property" for REIT income
test purposes. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests".
Insurance and Property Taxes. The Partnership and the Company are
responsible for paying real estate and personal property taxes and property and
casualty insurance premiums with respect to their respective Hotels (except to
the extent that personal property associated with the Hotels is owned by the
Lessee). The Lessee is required to pay or reimburse the Company and the
Partnership for all liability insurance on their respective Hotels, with
extended coverage, comprehensive general public liability, workers' compensation
and other insurance appropriate and customary for properties similar to the
Hotels and naming the Company or the Partnership, as the case may be, as an
additional named insured.
Indemnification. Under each Percentage Lease, the Lessee is obligated to
indemnify and hold harmless the Company or the Partnership, as the case may be,
from and against all liabilities, costs and expenses (including reasonable
attorneys' fees and expenses) incurred by, imposed upon or asserted against the
Company or the Partnership on account of, among other things, (i) any accident
or injury to person or property on or about the Hotels, (ii) any misuse by the
Lessee or any of its agents of the leased property, (iii) any environmental
liability caused by acts or grossly negligent failures to act by the Lessee (see
"Business and Properties -- Environmental Matters"); (iv) taxes and assessments
in respect of the Hotels (other than real estate or personal property taxes and
income taxes of the Company or the Partnership on income attributable to the
Hotels); (v) the sale or consumption of alcoholic beverages on or in the real
property or improvements thereon; or (vi) any breach of the
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Percentage Leases by the Lessee; provided, however, that such indemnification
will not be construed to require the Lessee to indemnify the Company or the
Partnership, as the case may be, against the Company's or the Partnership's own
grossly negligent acts or omissions or willful misconduct.
Assignment, Subleasing and Change of Control. The Lessee is not permitted
to sublet all or any part of the Hotels or to assign its interest under any of
the Percentage Leases, other than to an Affiliate of the Lessee, without the
prior written consent of the Company or the Partnership, as the case may be. In
addition, under the terms of proposed Percentage Leases any sale or transfer of
more than 50% of the ownership interests of the Lessee requires the prior
approval of the Company's Independent Directors. No assignment or subletting
will release the Lessee from any of its obligations under the Percentage Leases.
Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance which renders the Hotel unsuitable for the Lessee's use and
occupancy, the Lessee will be obligated to repair, rebuild, or restore the Hotel
or to offer to acquire the Hotel on the terms set forth in the applicable
Percentage Lease. If the Lessee rebuilds the Hotel, the Company or the
Partnership, as the case may be, is obligated to disburse to the Lessee, from
time to time and upon satisfaction of certain conditions, any insurance proceeds
actually received by the Company or the Partnership as a result of such damage
or destruction, and any excess costs of repair or restoration will be paid by
the Lessee. If the Lessee decides not to rebuild and the Company or the
Partnership exercises its right to reject the Lessee's mandatory offer to
purchase the Hotel on the terms set forth in the Percentage Lease, the
Percentage Lease will terminate and the insurance proceeds will be retained by
the Company or the Partnership, as the case may be. If the Company or the
Partnership accepts the Lessee's offer to purchase the Hotel, the Percentage
Lease will terminate and the Lessee will be entitled to the insurance proceeds.
In the event that damage to or destruction of a Hotel which is covered by
insurance does not render the Hotel wholly unsuitable for the Lessee's use and
occupancy, the Lessee generally will be obligated to repair or restore the
Hotel. In the event of damage to or destruction of any Hotel which is not
covered by insurance, the Lessee will be obligated to either repair, rebuild, or
restore the Hotel or to offer to purchase the Hotel on the terms and conditions
set forth in the applicable Percentage Lease. The Percentage Lease shall remain
in full force and effect during the first six months of any period required for
restoration of any damaged or destroyed Hotel, after which time, rent will be
equitably abated.
Condemnation of Hotel. In the event of a total condemnation of a Hotel,
the relevant Percentage Lease will terminate with respect to such Hotel as of
the date of taking, and the Company or the Partnership, as the case may be, and
the Lessee will be entitled to their shares of any condemnation award in
accordance with the provisions of the Percentage Lease. In the event of a
partial taking which does not render the Hotel unsuitable for the Lessee's use,
then the Lessee shall restore the untaken portion of the Hotel to a complete
architectural unit and the Company or the Partnership, as the case may be, shall
contribute to the cost of such restoration that part of the condemnation award
specified for restoration.
Events of Default. Events of Default under the Percentage Leases include,
among others, the following:
(i) the occurrence of an Event of Default under any other Percentage
Lease between the Company or the Partnership and the Lessee or any
Affiliate of the Lessee;
(ii) the failure by the Lessee to pay Base Rent when due and the
continuation of such failure for a period of 15 days;
(iii) the failure by the Lessee to pay the excess of Percentage Rent
over Base Rent within 90 days of the end of the calendar year with respect
to eleven of the Current Hotels and within 30 days after the end of any
calendar quarter for which such payment was due with respect to the
remaining 10 Current Hotels and the Acquisition Hotels;
(iv) the failure by the Lessee to observe or perform any other term of
a Percentage Lease and the continuation of such failure for a period of 30
days after receipt by the Lessee of notice from the
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Company or the Partnership thereof, unless such failure cannot be cured
within such period and the Lessee commences appropriate action to cure such
failure within said 30 days and thereafter acts, with diligence, to correct
such failure within such time as is necessary;
(v) if the Lessee shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law, or shall be adjudicated a bankrupt or shall
make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a
petition or answer proposing the adjudication of the Lessee as a bankrupt
or its reorganization pursuant to any federal or state bankruptcy law or
any similar federal or state law shall be filed in any court and the Lessee
shall be adjudicated a bankrupt and such adjudication shall not be vacated
or set aside or stayed within 60 days after the entry of an order in
respect thereof, or if a receiver of the Lessee or of the whole or
substantially all of the assets of the Lessee shall be appointed in any
proceeding brought by the Lessee or if any such receiver, trustee or
liquidator shall be appointed in any proceeding brought against the Lessee
and shall not be vacated or set aside or stayed within 60 days after such
appointment;
(vi) if the Lessee voluntarily discontinues operations of a Hotel for
more than 30 days, except as a result of damage, destruction, or
condemnation; or
(vii) if the franchise agreement with respect to a Hotel is terminated
by the franchisor as a result of any action or failure to act by the Lessee
or its agents.
If an Event of Default occurs and continues beyond any curative period, the
Company or the Partnership will have the option of terminating the Percentage
Lease or any or all other Percentage Leases by giving the Lessee ten days'
written notice of the date for termination of the Percentage Leases and, unless
such Event of Default is cured prior to the termination date set forth in said
notice, the Percentage Leases shall terminate on the date specified in the
Company's or the Partnership's notice and the Lessee is required to surrender
possession of the affected Hotels.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Company or the Partnership enters into an agreement to sell or
otherwise transfer one or more of its respective Hotels, the Company or the
Partnership, as the case may be, will have the right to terminate the Percentage
Lease with respect to such Hotel upon either (i) paying the Lessee the fair
market value of the Lessee's leasehold interest in the remaining term of the
Percentage Lease to be terminated or (ii) offering to lease to the Lessee a
substitute hotel on terms that would create a leasehold interest in such hotel
with a fair market value equal to or exceeding the fair market value of the
Lessee's remaining leasehold interest under the Percentage Lease to be
terminated.
Franchise License. The Lessee is the licensee under the franchise licenses
on the Current Hotels and will be the licensee under the franchise licenses for
the Acquisition Hotels. Upon the occurrence of certain events of default by the
Lessee under a franchise license, the franchisor has agreed to permit the
operation of the hotel under the franchise license for that hotel by the Company
or the Partnership (or a reasonably acceptable designee of the Company) for up
to twelve months from the date of the default, provided that the default is
cured promptly while an application is made for a new franchise license by the
Company or the Partnership (or its designee). See "-- Franchise Agreements".
Other Lease Covenants. The Lessee has agreed that during the term of the
Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of less than or equal to 40%,
exclusive of capitalized leases. In addition, the Lessee has agreed that it will
not pay fees to any Affiliate of the Lessee.
Breach by Partnership. If the Company or the Partnership, as the case may
be, fails to cure a breach by it under a Percentage Lease, the Lessee may
purchase the relevant Hotel from the Company or the Partnership for a purchase
price equal to the Hotel's then fair market value. Upon notice from the Lessee
that the Lessor has breached the Lease, the Company or the Partnership has 30
days to cure the breach or proceed to cure the breach, which period may be
extended in the event of certain specified, unavoidable delays.
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Inventory. All inventory required in the operation of the Hotels is and
will be purchased and owned by the Lessee at its expense. The Company or the
Partnership, as the case may be, will have the option to purchase all inventory
related to a particular Hotel at its fair market value upon termination of the
related Percentage Lease.
FRANCHISE AGREEMENTS
Twelve of the Current Hotels and two of the Acquisition Hotels are licensed
as Hampton Inn hotels. Two of the Acquisition Hotels are licensed as Homewood
Suites hotels, and one of the Acquisition Hotels is licensed as a Hampton Inn &
Suites hotel. Hampton Inn, Homewood Suites and Hampton Inn & Suites are
registered trademarks of Promus. Promus approved the transfer of franchise
licenses or a grant of a new franchise license to the Lessee when the Company
and the Partnership acquired each Current Hotel that is operated as a Hampton
Inn hotel. The Company expects that Promus will approve the transfer or issuance
of franchise licenses to the Lessee upon the Company's acquisition of the
Acquisition Hotels that are operated as Hampton Inn, Hampton Inn & Suites and
Homewood Suites hotels. The Company's obligation to purchase each of the
Acquisition Hotels that are operated as Hampton Inn, Hampton Inn & Suites and
Homewood Suites hotels is contingent upon the Company's receipt of a franchise
license from Promus.
Ten of the Current Hotels and one of the Acquisition Hotels are licensed as
Comfort Inn hotels. One of the Current Hotels is licensed as a Quality Suites
hotel and one of the Acquisition Hotels is licensed as a Comfort Suites hotel.
Comfort Inn, Quality Suites and Comfort Suites are registered trademarks of
Choice. Choice approved the transfer of a franchise license to the Lessee when
the Partnership acquired the Current Hotels that are operated as Comfort Inn and
Quality hotels. Choice also has agreed to approve the transfer or issuance of
the franchise licenses to the Lessee upon the Partnership's acquisition of the
Acquisition Hotels that are operated as a Comfort Inn hotel and a Comfort Suites
hotel.
One of the Acquisition Hotels is licensed as a Courtyard by Marriott hotel.
Courtyard by Marriott is a registered trademark of Marriott International. The
Company expects that Marriott International will approve the transfer or
issuance of a franchise license to the Lessee upon the Partnership's acquisition
of the Acquisition Hotel that is operated as a Courtyard by Marriott hotel. The
Company's obligation to purchase the Courtyard by Marriott -- Wilmington, North
Carolina Acquisition Hotel is contingent upon the Lessee's receipt of a
franchise license from Marriott International.
One of the Acquisition Hotels is licensed as a Holiday Inn Select hotel,
and one of the Acquisition Hotels is licensed as a Holiday Inn Express hotel.
Holiday Inn Select and Holiday Inn Express are registered trademarks of Holiday
Inns Franchising, Inc. Holiday Inns Franchising, Inc. has agreed to approve the
transfer or issuance of franchise licenses to the Lessee upon the Partnership's
acquisition of the Acquisition Hotels that are operated as a Holiday Inn Select
hotel and Holiday Inn Express hotel.
The franchisors are requiring that the Acquisition Hotels be operated under
conditional franchise licenses, subject to completion of certain improvements,
prior to issuance of a permanent license.
The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise licenses. The Company believes
that the public's perception of quality associated with a franchisor is an
important feature in the operation of a hotel. Franchisors provide a variety of
benefits for franchisees which include national advertising, publicity and other
marketing programs designed to increase brand awareness, training of personnel,
continuous review of quality standards and centralized reservation systems.
The hotel franchise licenses generally specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the Lessee must comply. The franchise licenses obligate
the Lessee to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided, display of signs, and the type,
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quality and age of furniture, fixtures and equipment included in guest rooms,
lobbies and other common areas.
Of the Current Hotels, one of the franchise licenses expires in 2006, four
expire in 2008, one expires in 2009, one expires in 2010, two expire in 2011,
two expire in 2014 and ten expire in 2015. The Lessee expects to receive new
hotel franchise licenses with respect to the Acquisition Hotels. Three of the
franchise agreements related to the Acquisition Hotels will expire in 2006, one
will expire in each of 2010, 2014 and 2015, and four will expire in 2016. The
franchise agreements provide for termination at the franchisor's option upon the
occurrence of certain events, including the Lessee's failure to pay royalties
and fees or perform its other covenants under the license agreement, bankruptcy,
abandonment of the franchise, commission of a felony, assignment of the license
without the consent of the franchisor, or failure to comply with applicable law
in the operation of the respective Hotel. The Lessee is entitled to terminate
the franchise license only by giving at least 12 months' notice and paying a
specified amount of liquidated damages. The license agreements will not renew
automatically upon expiration. The Lessee is responsible for making all payments
under the franchise agreements to the franchisors. Under the franchise
agreements, the Lessee pays a franchise fee of an aggregate of between 3% and 5%
of room revenues, plus additional fees that amount to between 3% and 4% of room
revenues from the Hotels. The Partnership has agreed to guarantee the Lessee's
obligations to make franchise fee payments to franchisors under the franchise
agreements.
Promus, Choice, Marriott International and Holiday Inns Franchising, Inc.
have agreed that in the event of a default by the Lessee under a franchise
agreement with respect to a Hotel (or the Partnership's termination of a
Percentage Lease), upon request by the Company or the Partnership and the curing
of any event of default, the franchisor will allow that Hotel to be operated by
a designee of the Company or the Partnership acceptable to the franchisor for a
reasonable period of time, not to exceed 12 months (except with respect to
Marriott International, in which case such time period shall be 120 days), to
allow the designee of the Company or the Partnership to apply for a new
franchise license. The Company or the Partnership will be obligated to pay the
franchisor's actual costs of investigating the designee. Normal change of
ownership commitment fees will be due when a designee applies for a new
franchise license.
HAMPTON INN(R), HAMPTON INN & SUITES(R) AND HOMEWOOD SUITES(R) ARE
REGISTERED TRADEMARKS OF PROMUS(R); COMFORT INN(R), COMFORT SUITES(R) AND
QUALITY SUITES(R) ARE REGISTERED TRADEMARKS OF CHOICE(R); COURTYARD BY
MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL; AND HOLIDAY INN
SELECT(R) AND HOLIDAY INN EXPRESS(R) ARE REGISTERED TRADEMARKS OF HOLIDAY INN
FRANCHISING, INC. NONE OF PROMUS, CHOICE, MARRIOTT INTERNATIONAL OR HOLIDAY INNS
FRANCHISING, INC. HAS ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON
INN, HAMPTON INN & SUITES, HOMEWOOD SUITES, COMFORT INN, COMFORT SUITES, QUALITY
SUITES, COURTYARD BY MARRIOTT, HOLIDAY INN SELECT OR HOLIDAY INN EXPRESS
FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS, CHOICE,
MARRIOTT INTERNATIONAL OR HOLIDAY INNS FRANCHISING, INC. (OR ANY OF THEIR
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR
APPROVAL OF THE COMMON STOCK OFFERED HEREBY.
OPERATING PRACTICES
The Company's management recognizes the need for aggressive, market driven,
creative management given competitive conditions in the hospitality industry.
The Lessee currently operates 11 of the Current Hotels. IMIC currently manages
10 of the Current Hotels pursuant to management agreements with the Lessee with
respect to each of such Hotels. Promus also currently manages one of the
Acquisition Hotels that it will continue to manage after its acquisition by the
Partnership pursuant to a Promus Management Agreement with the Lessee. Promus
will also manage any Homewood Development Hotels or Homewood Option Hotels that
are acquired by the Company. Impac currently manages one of the Acquisition
Hotels pursuant to a management agreement with the Lessee.
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The Lessee, IMIC, Promus and Impac utilize systems for marketing, rate
achievement, expense management, physical facility maintenance, human resources,
accounting and internal auditing. Each Hotel manager oversees a staff of
supervisors, who in turn oversee each major area of the hotel's operations
(e.g., front desk, sales, maintenance and housekeeping). Each Hotel files daily,
weekly and monthly reports on items such as revenues, ADR, occupancy and
payroll. Expenses are managed by carefully tracking expenses per rented room
pursuant to reports designed to quickly identify unusually high or unexpected
expenses. Managers are trained in all aspects of hotel operations, with
particular emphasis placed on customer service. Managers are trained in
negotiation of prices with corporate and other clients and to be responsive to
marketing requirements in their particular markets. The Lessee, IMIC, Promus and
Impac devote substantial resources to advertising, and employ a mix of marketing
techniques designed for each specific Hotel, which include individual toll-free
lines, cross-marketing of the Hotels' billboards and direct marketing, as well
as taking advantage of national advertising by the franchisors of the Hotels.
The general manager and sales director of each Hotel develop a marketing plan
for each quarter with careful attention given to measurable results. Management
monitors the results for each quarter as compared to the plan.
The Lessee
The Lessee leases the Current Hotels and the five Acquisition Hotels
acquired in May 1996, and will lease the remaining Acquisition Hotels, pursuant
to the Percentage Leases. See "Business and Properties -- The Percentage
Leases". The Lessee operates 11 of the Current Hotels and four of the five
Acquisition Hotels acquired in May 1996 and will operate the remaining
Acquisition Hotels. The Lessee is owned by Robert Winston and John B. Harris,
Jr. Affiliates of the Lessee have managed hotel properties since 1985, including
the Initial Hotels. Messrs. Winston and Harris have agreed that the Lessee will
make no further distributions other than amounts required to pay their income
tax liability associated with the Lessee's net income unless and until the
Lessee has tangible net worth of at least $4 million. After such time, Messrs.
Winston and Harris will invest at least 75% of the Lessee's net income (after
distributions to pay taxes) in Common Stock (or Units, if necessary to preserve
the Company's REIT status). The Common Stock (or Units) will be acquired either
directly from the Company at then-current market prices or in the open market,
at the election of the Company's independent directors (the "Independent
Directors"). Messrs. Winston and Harris have agreed to hold any such shares of
Common Stock (or Units) for at least one year after the date of purchases. These
agreements will remain in effect for so long as Robert Winston is an officer or
director of the Company. See "Shares Available For Resale".
At March 31, 1996, the Lessee employed approximately 350 people in the
operation of the Current Hotels. Under the Percentage Leases, the Lessee
generally is required to perform all operational and management functions
necessary to operate the Hotels. Such functions include accounting, periodic
reporting, ordering supplies, advertising and marketing, maid service, laundry,
and maintenance. The Lessee is entitled to all profits and cash flow from the
Hotels after payment of Rent under the Percentage Leases and other operating
expenses, including, in the case of the Hotels managed by IMIC, Promus or Impac
and Homewood Option Hotels, the management fee payable to IMIC, Promus or Impac,
respectively. The Lessee, its Affiliates, IMIC, Promus and Impac may manage
other hotel properties in addition to hotels owned by the Company, and the
Lessee, IMIC, Promus and Impac are not required to devote all of their
respective time and efforts to the Hotels. The Lessee and its Affiliates have
agreed not to lease or manage any hotel property (other than properties owned by
the Company or the Partnership) located within a 20 mile radius of any hotel
property in which the Company or the Partnership has invested. Upon the
Company's acquisition of the Acquisition Hotels, the Winston Affiliates, so long
as they remain on the board or are officers of the Company or the Lessee, will
have no interests in any hotels not owned by the Company and, to the extent
described above, may not participate in the hotel business other than through
the Company, the Lessee or through ownership of 5% or less of any publicly-held
hotel company.
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IMIC
IMIC is a hotel development and management company founded in 1981. IMIC's
central office staff provides management support to IMIC's on-site hotel
managers in the areas of risk management, human resources, accounting and
finance, purchasing, cash management, sales and marketing, including graphic
design and advertising, facilities management and construction and lounge and
restaurant operations.
IMIC currently manages 22 hotels in five states, including 14
limited-service hotels, seven full-service, convention or resort hotels and one
condominium hotel. Of the 22 hotels that it manages currently (which include 10
of the Current Hotels), IMIC or its Affiliates developed 13 of the hotels.
IMIC manages 10 of the Current Hotels under management agreements with the
Lessee. Based on operating results of two of the Current Hotels managed by IMIC
for the period ended December 31, 1995, the Lessee notified IMIC that it was
terminating the two related management agreements and that it intends to operate
those Hotels. The Lessee has indicated that IMIC disputes the Lessee's right to
terminate the two management agreements. The Lessee has informed the Company
that it believes that it had the right to terminate the agreements, and
discussions between the Lessee and IMIC are ongoing. The existence or
termination of such management agreements does not affect the Lessee's
obligations under the Percentage Leases for those Current Hotels, including the
obligation to pay rent to the Partnership.
Each year, the Lessee pays IMIC a base management fee for each Hotel
managed by IMIC equal to a specified percentage of the budgeted gross operating
profit for that year. The base management fee for a Hotel managed by IMIC will
be reduced or increased for any year by 100% of any difference between actual
and budgeted gross operating profit of the hotel for that year, up to an amount
equal to a specified percentage of the budgeted gross operating profit. In
addition, if actual gross operating profit exceeds budgeted gross operating
profit by a percentage amount that is greater than the specified percentage
referred to above, IMIC will receive an additional management fee equal to 50%
of such excess.
The budgeted gross operating profits for each Hotel managed by IMIC for
1996 were determined by agreement between the parties in the annual budget of
revenues, expenses and profits prepared by IMIC and submitted to the Lessee
before the commencement of 1996. If prior to any year the parties are unable to
agree on a budget, the last approved budget shall apply for the next year, with
all line items being adjusted for any increase in the U.S. consumer price index
in the last year.
IMIC has agreed that each year it will spend a specified percentage of the
gross revenues of each Hotel managed by IMIC on repairs and maintenance of the
hotel. The specified percentage was established by the Lessee based on its
review of IMIC's repair and maintenance budgets in recent years. The annual
budget includes capital and other non-routine items to be undertaken in the next
year. Lessee has retained the right to control the expenditure of funds budgeted
for capital and non-routine items, including, at its discretion, approving plans
and selecting and overseeing contractors and other vendors.
The Lessee pays or reimburses IMIC for all property operating expenses at
the hotels. Each IMIC management agreement is co-terminous with the applicable
Percentage Lease. Each IMIC management agreement may be terminated earlier upon
the occurrence of one or more events of default, as described in the management
agreements.
Promus
Promus is a leading lodging company and the franchisor and an operator of
Hampton Inn, Homewood Suites, Hampton Inn & Suites and Embassy Suites hotels.
There are more than 680 Promus brand hotels with more than 90,000 rooms in the
United States, Canada, Mexico, Costa Rica and Columbia. Promus employs
approximately 1,100 employees at its central office in Memphis, Tennessee. These
employees provide support to all of Promus' hotel brands, franchised and
managed, in various areas including risk management, human resources, accounting
and finance, purchasing, cash management, sales, marketing, reservations,
facilities management and construction.
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Promus currently operates 106 hotels in 29 states including 37
limited-service hotels, 9 extended-stay hotels and 60 full-service upscale,
all-suite hotels. Promus developed 75 of the 106 hotels that it currently
operates (including the Homewood Suites Acquisition Hotel in Clear Lake, Texas.)
Promus will manage one of the Acquisition Hotels and all of the Homewood
Development Hotels and Homewood Option Hotels that the Company may acquire in
the future. The Promus Management Agreements will provide for the payment by the
Lessee to Promus of management fees generally equal to 50% of the Lessee's gross
operating profit from each Hotel managed by Promus, plus to the extent that the
Lessee's gross operating profit exceeds 5% of the gross revenues of such Hotel,
(i) 100% of the Lessee's gross operating profit in excess of 5% of the Hotel's
gross revenues up to an amount equal to 1% of the Hotel's gross revenues and
(ii) 50% of any additional gross operating profit of Lessee.
EMPLOYEES
The Company currently has four officers. All of such officers except
Charles Winston, the Company's Chairman of the Board, are employees of the
Company and work at the Company's headquarters in Raleigh, North Carolina. At
March 31, 1996, the Lessee employed approximately 350 people in operating the
Current Hotels. The Lessee has advised the Company that its relationship with
its employees is good.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
such liability without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment of a hazardous
substance at another property may be liable for the costs of removal or
remediation of hazardous substances released into the environment at that
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to use or
sell such real estate or to borrow using such real estate as collateral. Certain
environmental laws and common law principles could be used to impose liability
for the release of and exposure to hazardous substances, including ACMs into the
air, and third parties may seek recovery from owners or operators of real
properties for personal injury or property damage associated with exposure to
released hazardous substances, including ACMs. In connection with the ownership
and operation of the Hotels, the Company, the Partnership, the Lessee, IMIC or
Promus, as the case may be, may be potentially liable for such costs.
Phase I environmental site assessments ("ESAs") were obtained on all of the
Current Hotels prior to their acquisition, and on the Acquisition Hotels in
connection with the Company's due diligence investigation. The Phase I ESAs were
intended to identify potential sources of contamination for which the Hotels may
be responsible and to assess the status of environmental regulatory compliance.
The Phase I ESAs included historical reviews of the Hotels, reviews of certain
public records, preliminary investigations of the lots and surrounding
properties, screening for the presence of asbestos, polychlorinated biphenyls
("PCBs") and underground storage tanks, and the preparation and issuance of a
written report. The Phase I ESAs did not include invasive procedures, such as
soil sampling or ground water analysis.
The Phase I ESA reports have not revealed any environmental condition,
liability or compliance concern that the Company believes would have a material
adverse effect on the Company's business, assets or results of operations, nor
is the Company aware of any such condition, liability or compliance concern.
Nevertheless, it is possible that these reports do not reveal all environmental
conditions, liabilities or compliance concerns or that there are material
environmental conditions, liabilities or compliance concerns that arose at a
Hotel after the related Phase I ESA report was completed of which the Company is
unaware. Moreover, no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Hotels will not be affected by the
condition of the properties in the vicinity of the Hotels (such as
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<PAGE> 77
the presence of leaking underground storage tanks) or by third parties unrelated
to the Partnership or the Company.
In addition to the ESAs, the Company also obtained Asbestos Surveys for the
Holiday Inn Select -- Garland (Dallas), Texas and the Comfort Inn -- Greenville,
South Carolina. In each of the Asbestos Surveys, the consultant discovered the
presence of ACMs and made recommendations to address the ACMs. The Company
believes that the implementation of the recommended activities would not be
expected to have a material adverse effect on the Company's business, assets or
results of operations.
The Company believes that the Hotels are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances and other environmental matters. Neither
the Company nor, to the knowledge of the Company, any of the current owners of
the Acquisition Hotels has been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental substances in connection with any of its
present or former properties.
LEGAL PROCEEDINGS
Neither the Company nor the Partnership currently is involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Partnership. The Lessee has
advised the Company that they currently are not involved in any material
litigation, other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered by liability
insurance. The current owners of the Acquisition Hotels have represented to the
Partnership that there is no material litigation threatened against or affecting
the Acquisition Hotels.
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<PAGE> 78
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of seven members, four of whom are
Independent Directors. The Company has three executive officers. Certain
information regarding the directors and executive officers of the Company is set
forth below.
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------------------ -------------------------------------------------
<S> <C>
Charles M. Winston.............................. Chairman of the Board
Robert W. Winston, III.......................... Chief Executive Officer, President and Director
Philip R. Alfano................................ Chief Financial Officer, Senior Vice President
and Secretary
Kenneth Crockett................................ Senior Vice President
James H. Winston................................ Director
Paul Fulton..................................... Independent Director
Thomas F. Darden, II............................ Independent Director
Richard L. Daugherty............................ Independent Director
Edwin B. Borden................................. Independent Director
</TABLE>
Charles M. Winston -- Charles Winston (age 66) has been Chairman of the
Board of Directors of the Company since its inception on March 15, 1994. Mr.
Winston is a native of North Carolina and a graduate of the University of North
Carolina at Chapel Hill with an A.B. degree. He was Chairman of the Board of WJS
Management, Inc., the former operator of nine of the Current Hotels, and
President of several corporations, which developed eight of the Current Hotels,
positions he had held since 1987. Mr. Winston has more than 35 years of
experience in developing and operating full service restaurants. Mr. Winston is
President of WJS Associates -- Perimeter II, Inc., a real estate development
company which recently developed the Hampton Inn -- Perimeter (Atlanta), Georgia
Acquisition Hotel. Mr. Winston also is developing the Hampton Inn &
Suites -- Duluth (Atlanta), Georgia Acquisition Hotel. Mr. Winston also serves
on the board of directors of United Carolina Bancshares Corporation.
Robert W. Winston, III -- Robert Winston (age 34), has served as Chief
Executive Officer, President and director of the Company since its inception on
March 15, 1994. Mr. Winston is the son of Charles Winston. Mr. Winston is a
native of North Carolina and a graduate of the University of North Carolina at
Chapel Hill with a B.A. degree in economics. From 1988 to 1991 he was employed
by Hampton Inns Corporation, where he was involved in the management of several
hotels. In 1991, Mr. Winston founded a hotel management company and purchased
the Hampton Inn Hotel in Wilmington, North Carolina. He managed that hotel from
1991 until the closing of the IPO in June 1994. Mr. Winston developed the
Homewood Suites Acquisition Hotel in Cary, North Carolina, which opened in
February 1994, and is developing two of the Acquisition Hotels: the Hampton Inn
& Suites -- Duluth (Atlanta), Georgia and the Courtyard by
Marriott -- Wilmington, North Carolina.
Philip R. Alfano -- Mr. Alfano (age 46) was appointed Chief Financial
Officer, Senior Vice President and Secretary of the Company in October 1994. Mr.
Alfano is a graduate of St. Bonaventure University with a B.B.A. degree in
accounting. Prior to joining the Company, from 1983 until August 1993, Mr.
Alfano was employed by the Ashforth Company, a privately-held real estate
development and service organization, and served on its Executive Committee. In
this position, Mr. Alfano was responsible for all finance and administrative
activities and acted as business advisor to six operating units. Mr. Alfano is a
certified public accountant. From August 1993 through October 1994, Mr. Alfano
was self-employed as a financial consultant.
Kenneth Crockett -- Mr. Crockett (age 39) was appointed Senior Vice
President of the Company in September 1995. Mr. Crockett is a graduate of the
University of North Carolina at Chapel Hill with a B.S. degree in Business
Administration. Prior to joining the Company, Mr. Crockett was an Associate
Partner for project development in commercial real estate at Capital Associates,
a real estate development firm located in the Raleigh, North Carolina area. From
1984 to 1986, Mr. Crockett worked for the Oberlin Company where he was
responsible for the development and operation of nine limited-service hotels.
Prior to 1986, Mr. Crockett worked for several different financial institutions.
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<PAGE> 79
James H. Winston -- James Winston (age 61) has served as a director of the
Company since May 25, 1994. Mr. Winston has been, for at least the past five
years, the President of Omega Insurance Company, a property and casualty
insurance company doing business mainly in the State of Florida and throughout
five southeastern states. He is also President of Citadel Life and Health
Insurance Company and LPMC, Inc., a real estate investment firm. Mr. Winston is
a native of North Carolina, and was graduated Phi Beta Kappa from the University
of North Carolina at Chapel Hill. Mr. Winston serves on the boards of directors
of Pace American Group, Inc., Stein Mart, Inc. and FRP Properties, Inc. and a
number of community organizations in the Jacksonville, Florida area. Mr. Winston
is the brother of Charles Winston and the uncle of Robert Winston.
Paul Fulton -- Paul Fulton (age 61) has served as a director of the Company
since May 25, 1994. Mr. Fulton is the Dean of Kenan-Flagler Business School of
the University of North Carolina at Chapel Hill. Prior to accepting his current
position on January 1, 1994, Mr. Fulton served from 1988 through 1993 with Sara
Lee Corporation, a global packaged food and consumer products company and one of
North Carolina's largest employers. Mr. Fulton's last position with Sara Lee was
President. Mr. Fulton is a graduate of the University of North Carolina at
Chapel Hill. Mr. Fulton serves as a director of Sonoco Products, NationsBank
Corporation and Bassett Furniture Industries, Inc.
Thomas F. Darden II -- Thomas Darden (age 41) has served as a director of
the Company since May 25, 1994. Mr. Darden is the Chairman of Cherokee Sanford
Group, Inc. which manufactures brick products in North Carolina and Maryland,
where he has been employed for more than the past five years. Mr. Darden
graduated with highest honors from the University of North Carolina at Chapel
Hill with a B.A. degree in 1976 and graduated from Yale Law School with a J.D.
degree in 1981. In 1992, Mr. Darden received a Master's Degree in City and
Regional Planning from the University of North Carolina at Chapel Hill. In 1991,
Mr. Darden was appointed by the Governor of North Carolina to the board of the
North Carolina Department of Transportation, and was subsequently appointed to
the Triangle Transit Authority Board of Trustees. Mr. Darden serves or has
served on a variety of community, charitable and college boards, currently
including the Board of Visitors of the University of North Carolina at Chapel
Hill and the Board of Trustees of Shaw University.
Richard L. Daugherty -- Richard Daugherty (age 60) has served as a director
of the Company since May 25, 1994. Mr. Daugherty until 1994 was Vice President
of Worldwide Manufacturing for the IBM PC Company in Research Triangle Park,
North Carolina, where he had been employed for more than five years. Mr.
Daugherty is now a consultant for the IBM PC Company. At the time of his
retirement in 1994, Mr. Daugherty was the senior IBM executive for the State of
North Carolina. He serves on various community and business boards of directors,
including the boards of Wachovia Bank & Trust Company, N.A., North Carolina
State University Institute for Engineering, Technology & Science, Carolina Power
& Light Company and Troxler Electronic Laboratories, Inc.
Edwin B. Borden -- Edwin Borden (age 62) has served as a director of the
Company since May 25, 1994. Mr. Borden is President and Chief Executive Officer
of The Borden Manufacturing Company, Inc. a textile manufacturer, where he has
been employed for at least the past five years. Mr. Borden is a native of North
Carolina and a graduate of the University of North Carolina at Chapel Hill. He
serves on the board of directors of Carolina Power & Light Company,
Jefferson-Pilot Corporation, Triangle Bancorp and Ruddick Corp.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Board of Directors has established an audit
committee, which consists of three Independent Directors: Edwin B. Borden,
Thomas F. Darden, II and Paul Fulton. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of the Company's
internal accounting controls.
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<PAGE> 80
Compensation Committee. The Board of Directors has established a
compensation committee, which currently consists of Messrs. Darden, Borden and
Daugherty. The Compensation Committee administers the 1994 Plan (defined below)
and began determining compensation for the Company's executive officers as of
December 31, 1995 when the Company became self-advised.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Directors.
EXECUTIVE COMPENSATION
During 1994, the Company was advised by Winston Advisors, Inc., a North
Carolina corporation, pursuant to the terms of an advisory agreement (the
"Advisory Agreement"). Under the terms of the Advisory Agreement, Winston
Advisors, Inc. received a cash fee of $100,000 and, beginning in 1995, an
incentive fee, payable in shares of Common Stock, related to increases in Funds
from Operations per share over the prior year. For 1995, the incentive fee was
$409,234, which was paid in 33,103 shares of Common Stock issued by the Company
in April 1996, in accordance with the terms of the Advisory Agreement. The
Company and Winston Advisors, Inc. terminated the Advisory Agreement effective
December 31, 1995. While the Advisory Agreement was in effect, neither the
Company nor the Partnership paid any of the Company's executive officers any
cash compensation, although such officers were eligible to participate in the
Winston Stock Incentive Plan. Effective January 1, 1996, the Company's executive
officers became employees of the Company. In connection with the termination of
the Advisory Agreement effective December 31, 1995, the Compensation Committee
approved payment of annual base salaries, plus incentive bonuses for executive
officers based on the Company's performance. The actual amount of incentive
bonus received by each of the Company's executive officers will be determined by
the Compensation Committee after the end of the applicable year. The base salary
to be received and maximum amount of incentive bonus that could be received by
each executive officer for 1996 is as follows:
<TABLE>
<CAPTION>
MAXIMUM
BASE INCENTIVE
EXECUTIVE OFFICER SALARY BONUS
- ---------------------------------------------------------------------- -------- -------
<S> <C> <C>
Robert W. Winston..................................................... $190,000 $90,000
Chief Executive Officer
and President
Philip R. Alfano...................................................... $135,000 $40,000
Chief Financial Officer,
Senior Vice President
and Secretary
Kenneth Crockett...................................................... $110,000 $55,000
Senior Vice President
</TABLE>
In addition, the Company's executive officers are eligible to participate in the
Winston Stock Incentive Plan.
COMPENSATION OF DIRECTORS
Under the Directors' Plan (as defined below), the Company has issued to
each director, other than Charles and Robert Winston, 7,500 shares of Common
Stock, subject to certain restrictions. The directors' rights in the Common
Stock vest at the rate of 1,500 shares per year beginning on the closing date of
the IPO. Each director is entitled to vote and receive the dividends paid on
such shares of Common Stock prior to vesting. Directors who cease to be
directors will forfeit any shares not previously vested. In addition, the
Company reimburses all directors for their out-of-pocket expenses incurred in
connection with their service on the Board of Directors. Charles and Robert
Winston receive no compensation as directors, other than reimbursement for their
out-of-pocket expenses incurred in connection with their service on the Board of
Directors.
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<PAGE> 81
STOCK INCENTIVE PLANS
The Company has adopted the Winston Stock Incentive Plan and the Winston
Hotels, Inc. Directors Stock Incentive Plan (the "Directors' Plan") for the
purpose of (i) attracting and retaining employees, directors and other service
providers with ability and initiative; (ii) providing incentives to those deemed
important to the success of the Company and related entities; and (iii) aligning
the interests of these individuals with the interests of the Company and its
shareholders through opportunities for increased stock ownership.
The Winston Stock Incentive Plan
The Board of Directors has adopted the Winston Stock Incentive Plan to
provide incentives to attract and retain executive officers and key employees.
The Winston Stock Incentive Plan was approved by the shareholders of the
Company. The Winston Stock Incentive Plan is administered by the Compensation
Committee. The Compensation Committee may delegate its authority to administer
the Winston Stock Incentive Plan to one or more officers of the Company. The
Compensation Committee may not, however, delegate its authority with respect to
grants and awards to individuals subject to Section 16 of the Exchange Act. The
Compensation Committee or its delegate, as appropriate, generally has the
authority, within limitations described in the Winston Stock Incentive Plan, (i)
to establish rules and policies concerning the Winston Stock Incentive Plan,
(ii) to determine the persons to whom stock options, stock appreciation rights
("SARs") and awards of restricted stock and performance shares may be granted,
(iii) to fix the number of shares of Common Stock to be covered by each award,
and (iv) to set the terms and provisions of each award.
In May 1994, in connection with the IPO, Mr. Winston received incentive
stock options covering 50,000 shares of Common Stock, which is exercisable for
five years from the date of grant at a price of $11 per share. At the same time,
Mr. Winston also received a nonqualified stock option covering 25,000 shares of
Common Stock, which expire 10 years from the date of grant and are exercisable
at a price of $10 per share. Mr. Winston received, in January 1996, an option to
acquire 90,000 shares of Common Stock, which become exercisable over a four-year
period beginning in January 1997 at a price of $11.375 per share and expire 10
years from the date of grant. Mr. Alfano received options to acquire 25,000 and
60,000 shares of Common Stock issued in October 1994 and January 1996,
respectively. All of Mr. Alfano's options expire 10 years from the date of
grant. The 25,000 of Mr. Alfano's options that were granted in October 1994 are
presently exercisable at a price of $9.125 and the 60,000 options granted to Mr.
Alfano in January 1996 become exercisable over a four-year period beginning in
January 1997 at a price of $11.375 per share. In October 1995, Mr. Crockett
received options to acquire 50,000 shares of Common Stock which become
exercisable on October 4, 1996 at a price of $11.3125 per share and expire 10
years from the date of grant.
On May 28, 1996, the Company's shareholders approved an increase in the
number of authorized shares of Common Stock issuable pursuant to the Winston
Stock Incentive Plan from 350,000 to 700,000 plus increases in the future equal
to five percent (5%) of any excess in the number of outstanding shares of Common
Stock over 14 million.
The Directors' Plan
The Directors' Plan provides for the award of Common Stock to each eligible
director of the Company. No director who is an employee of the Company is
eligible to participate in the Directors' Plan. Each eligible director who was a
member of the Board as of the closing of the IPO (a "Founding Director") was
awarded 7,500 shares of Common Stock on that date. All other awards of Common
Stock under the Directors' Plan will be made at the first Board Meeting
following an annual meeting of the Company's shareholders (the date of each such
Board meeting, an "Award Date"). Each eligible director who is not a Founding
Director or a Reelected Director, as defined below, (a "Non-Founding
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<PAGE> 82
Director") will receive, on the first Award Date on which he is a member of the
Board, a number of whole shares of Common Stock having a fair market value that
as nearly as possible equals, but does not exceed, $75,000. Any eligible
director who, during the term of the Directors' Plan ceases to be a member of
the Board but is subsequently reelected to the Board (a "Reelected Director")
will receive, on the first Award Date after he is reelected to the Board, a
number of shares of Common Stock having a fair market value on that date that as
nearly as possible equals, but does not exceed, the difference of (i) $75,000
minus (ii) the fair market value of any stock previously awarded to him under
the Directors' Plan that had vested prior to his reelection. For purposes of the
preceding sentence, the fair market value of the previously awarded stock is
determined as of the date such stock was awarded.
A director will be immediately and fully vested in 20% of the shares of
Common Stock awarded to him under the Directors' Plan. On the first Award Date
following the date on which a director is awarded shares of Common Stock, and on
each subsequent Award Date, an additional 20% of the shares issued to that
director will become vested. If, however, a director is not a member of the
Board on any Award Date on which a portion of his shares otherwise would become
vested, no shares will vest on that date, and the director will have no further
right in any shares of Common Stock issued to him under the Directors' Plan that
are not then vested.
A director has the right to vote all shares of Common Stock awarded to him
under the Directors' Plan and receives all dividends paid with respect to the
shares, notwithstanding that a portion of the shares has not vested. Upon a
director's ceasing to be a member of the Board, these rights will immediately
terminate with respect to any share of Common Stock not then vested.
The Directors' Plan provides that a Non-Founding Director or a Reelected
Director receives a cash retainer on each date on which cash dividends are paid
with respect to stock issued under the Directors' Plan. The retainer equals the
difference between (i) the value of the cash dividends paid on such date with
respect to 7,500 shares of Common Stock less (ii) the value of the cash
dividends received by the Non-Founding Director or Reelected Director on the
same date with respect to the Common Stock issued to him under the Directors'
Plan.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of March 31, 1996
regarding the beneficial ownership of Common Stock by (i) each person known by
the Company to hold 5% or more of the outstanding shares of Common Stock of the
Company, (ii) each director of the Company, (iii) each executive officer of the
Company, and (iv) by all directors and executive officers of the Company as a
group. Unless otherwise indicated, all shares are owned directly and the
indicated person has sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED(1) PERCENT OF CLASS
------------------------------ -------------------------
BEFORE AFTER BEFORE AFTER
NAME OF BENEFICIAL OWNER OFFERING OFFERING OFFERING(1) OFFERING(1)
- ---------------------------------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C>
5% SHAREHOLDERS
Franklin Resources, Inc.;......... 771,700 771,700 7.5% 4.7%
Franklin Value Market Funds,
Real Estate Services Fund(2)
777 Mariners Island Blvd.
San Mateo, California 84404
DIRECTORS AND EXECUTIVE OFFICERS
Charles M. Winston................ 303,875(3) 740,996(3)(4) 2.9% 4.5%
Robert W. Winston, III............ 402,500(5)(6) 951,990(6)(7) 3.9% 5.7%
Philip R. Alfano.................. 30,000(8) 30,000(8) * *
Kenneth Crockett.................. 0 0 * *
James H. Winston.................. 15,000(9)(10) 15,000(9)(10) * *
Paul Fulton....................... 7,500(9) 7,500(9) * *
Thomas F. Darden, II.............. 12,500(9) 12,500(9) * *
Richard L. Daugherty.............. 8,500(9) 8,500(9) * *
Edwin B. Borden................... 17,500(9) 17,500(9) * *
Executive officers and directors
as a group (9 persons).......... 797,375 1,783,986 7.7% 10.7%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Common Stock after completion of
the Offering.
(1) Assumes that all Units are redeemed for shares of Common Stock.
(2) Based on information provided by Franklin Resources, Inc. and Franklin
Valuemark Funds, Real Estate Securities Fund.
(3) Includes 105,643 shares issuable to Charles Winston upon exercise of
Redemption Rights with respect to Units issued to him in connection with
the IPO.
(4) Includes 37,273 shares issuable upon redemption of Units to be issued to
the corporation which owns the Hampton Inn -- Perimeter (Atlanta), Georgia
and that is owned 33.33% by Charles Winston; 336,212 shares issuable upon
redemption of Units to be issued to the corporation that owns the Homewood
Suites -- Cary, North Carolina and that is owned 46.66% by Charles Winston
and his wife; 45,454 shares issuable upon redemption of Units to be issued
to the corporation that owns the Hampton Inn & Suites -- Duluth (Atlanta),
Georgia and that is owned 66.66% by Charles Winston and his wife; and
18,182 shares issuable upon redemption of Units to be issued to the
corporation that owns the Courtyard by Marriott -- Wilmington, North
Carolina and that is owned 20% by Charles Winston's daughter.
(5) Does not include 40,000 shares which Robert Winston has agreed to purchase
to satisfy a preexisting commitment by the Winston Affiliates to purchase
shares within one year after the Follow-On Offering.
(6) Includes 297,500 shares issuable upon redemption of Units issued in
exchange for the acquisition of the Hampton Inn -- Wilmington, North
Carolina to a corporation owned by Robert Winston, his wife and trusts for
the benefit of their minor children. Also includes 75,000 shares subject to
presently exercisable options.
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<PAGE> 84
(7) Includes 384,242 shares issuable upon Redemption of Units to be issued to
the corporation which owns the Homewood Suites -- Cary, North Carolina and
is owned 53.33% by Robert Winston and his wife; 22,727 shares issuable upon
redemption of Units to be issued to the corporation that owns the Hampton
Inn & Suites -- Duluth (Atlanta), Georgia and that is owned 33.33% by
Robert Winston; and 72,728 shares issuable upon redemption of Units to be
issued to the Corporation which owns the Courtyard by
Marriott -- Wilmington, North Carolina and which is owned 80% by Robert
Winston, his wife and trusts for the benefit of their children. Also
includes 40,000 shares acquired by Robert Winston in the Offering and
29,793 shares issued to Winston Advisors, Inc. in April 1996 in payment of
its incentive advisory fee for 1995. Robert Winston is the 90% shareholder
of Winston Advisors, Inc.
(8) Includes an aggregate of 25,000 shares subject to presently exercisable
options and 5,000 shares which are held jointly by Mr. Alfano and his wife.
(9) Includes an aggregate of 7,500 shares issued to each director, other than
Charles and Robert Winston, in June 1994 under the Directors' Plan. Such
shares began vesting in 1994 with each director at the rate of 1,500 shares
per year. Any shares not vested when such person ceases to be a director
will be forfeited. Each director is entitled to vote and receive the
dividends paid on such shares prior to vesting. See
"Management -- Compensation of Directors".
(10) Includes 1,000 shares held by James Winston's wife.
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<PAGE> 85
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding (or
reserved for issuance upon redemption of Units or exercise of stock options)
16,987,264 shares of Common Stock. The shares of Common Stock issued in the
Offering will be freely tradeable by persons other than "Affiliates" of the
Company (which includes the Winston Affiliates) under the Securities Act,
subject to certain limitations on ownership set forth in the Articles of
Incorporation.
Pursuant to the Partnership Agreement, the Limited Partners have Redemption
Rights, which enable them to cause the Partnership to redeem their Units in
exchange for shares of Common Stock on a one-for-one basis or, at the option of
the Company or in certain other circumstances, cash. The Redemption Rights
relating to Units received in connection with the acquisition of the Initial
Hotels may be exercised by the applicable Limited Partners, in whole or in part,
at any time. The Redemption Rights relating to the Units to be issued as part of
the purchase price for the Hampton Inn & Suites, Perimeter (Atlanta), Georgia
Acquisition Hotel will be exercisable by the applicable Limited Partners in
whole or in part, at any time. The Redemption Rights relating to the Units to be
issued as part of the purchase price on the remaining three Affiliate
Acquisition Hotels will be exercisable by the applicable Limited Partners, in
whole or in part, any time after the first anniversary of the date of the
Company's acquisition of the related Hotels. Any amendment to the Partnership
Agreement that would (i) affect the Redemption Rights, (ii) adversely affect the
Limited Partners' rights to receive cash distributions, (iii) alter the
Partnership's allocations of income or (iv) impose on the Limited Partners any
obligations to make additional contributions to the capital of the Partnership,
would require the consent of Limited Partners holding at least 66 2/3% of the
Units held by Limited Partners.
Of the Company's 16,611,264 shares of Common Stock that will be issued and
outstanding after the Offering, 2,085,264 shares are or will be "restricted"
securities under the meaning of Rule 144 promulgated under the Securities Act
("Rule 144") and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. These restricted securities include an
aggregate of 354,114 shares outstanding upon completion of the IPO, 433,956
shares of Common Stock issuable to holders of Units issued in connection with
the acquisition of the Initial Hotels upon exercise of Redemption Rights,
991,364 shares of Common Stock issuable to holders of Units issued in connection
with the acquisition of the Affiliate Acquisition Hotels upon exercise of
Redemption Rights, 33,103 shares issued to the shareholders of Winston Advisors,
Inc. as an incentive fee pursuant to the now terminated Advisory Agreement and
272,727 shares of Common Stock to be issued to Promus in the Private Placement.
As described below, the Company has granted certain holders registration rights
with respect to their shares of Common Stock.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three month period a number of shares that does not exceed the
greater of 1% of the number of shares of Common Stock then outstanding or the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 also are subject to certain provisions
relating to the manner of sale, notice requirements and the availability of
current public information about the Company. If three years have elapsed since
the date of acquisition of restricted shares from the Company or from any
"Affiliate" of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an "Affiliate" of the Company at any time during the 90
days preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
The Company has filed a registration statement with the Commission for the
purpose of registering the sale of shares of (i) restricted Common Stock that
was outstanding at the time of the IPO and (ii) Common Stock issuable upon
redemption of Units issued in connection with the acquisition of the Initial
Hotels. That Registration Statement was declared effective on July 10, 1995 by
the Commission
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and will remain effective for two years. In connection with the Partnership's
acquisition of the Affiliate Acquisition Hotels, the Company has agreed to file
upon 60-days prior notice, a registration statement with the Commission for the
purpose of registering the sale of shares of Common Stock issuable to such
holders of Units upon redemption of such Units or restricted shares. The Company
will use its best efforts to have such registration statement declared effective
and to keep it effective for a period of two years. In connection with Promus'
(a) acquisition of Common Stock in the Private Placement and (b) possible
acquisition of up to $12 million of Common Stock in subsequent private
placements, the Company has agreed to file with the Commission, beginning one
year after the closing of the Private Placement, one or more registration
statements as necessary to register the resale of such shares. The Company will
use its best efforts to have any such registration statement declared effective
and to keep it effective until Promus has disposed of the Common Stock covered
thereby or may resell such Common Stock without restriction under the Securities
Act. Upon effectiveness of any such registration statements, those persons who
receive shares of Common Stock upon redemption of Units or Promus, as the case
may be, may sell such shares in the secondary market without being subject to
the volume limitations or other requirements of Rule 144. The Company will bear
expenses incident to its registration requirements, except that such expenses
shall not include any underwriting discounts or commissions, Commission or state
securities registration fees or transfer taxes relating to such shares.
Registration rights may be granted to future sellers of hotel properties to the
Partnership who elect to receive in lieu of cash, Common Stock, Units, or other
securities convertible into Common Stock.
The Common Stock is traded on The Nasdaq Stock Market under the symbol
"WINN". The market price for the Common Stock since trading began has ranged
from a low of $8.75 to a high of $13.38 per share. On June 20, 1996, the last
reported sale price of the Common Stock on The Nasdaq Stock Market was $11.00
per share. No prediction can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, may affect
adversely prevailing market prices of the Common Stock. See "Risk
Factors -- Effect of Market Interest Rates on Price of Common Stock" and
"Partnership Agreement -- Transferability of Interests".
For a description of certain restrictions on transfers of Common Stock held
by certain shareholders of the Company, see "Underwriting".
PARTNERSHIP AGREEMENT
MANAGEMENT
The Partnership is organized as a North Carolina limited partnership and is
governed by the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership (the
"General Partner"), has full, exclusive and complete responsibility and
discretion in the management and control of the Partnership, and the Limited
Partners acting as such have no authority to transact business for, or
participate in the management activities or decisions of, the Partnership.
However, any amendment to the Partnership Agreement that would (i) affect the
Redemption Rights, (ii) adversely affect the Limited Partners' rights to receive
cash distributions, (iii) alter the Partnership's allocations of income or (iv)
impose on the Limited Partners any obligations to make additional contributions
to the capital of the Partnership, would require the consent of Limited Partners
holding at least 66 2/3% of the Units.
TRANSFERABILITY OF INTERESTS
The Company may not withdraw from the Partnership voluntarily or transfer
or assign its interest in the Partnership unless the transaction in which such
withdrawal or transfer occurs results in the Limited Partners' receipt of
property in an amount equal to the amount they would have received had they
exercised their Redemption Rights immediately prior to such transaction, or
unless the successor to the Company contributes substantially all of its assets
to the Partnership in return for an interest in the
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Partnership. The Limited Partners may not transfer their interests in the
Partnership without the consent of the Company, which consent may be withheld in
the Company's sole discretion. The Company may not consent to any transfer that
would cause the Partnership to be treated as a separate corporation for federal
income tax purposes.
CAPITAL CONTRIBUTION
The Company will contribute to the Partnership the proceeds of the Offering
and the proceeds of the Private Placement as a capital contribution in exchange
for Units. After such contribution, the Company will hold an approximately 91.1%
general partnership interest in the Partnership. Conversely, the Limited
Partners' aggregate interest in the Partnership will increase to approximately
8.9%. Upon the Company's contribution of the proceeds of the Offering and the
proceeds of the Private Placement to the Partnership, the property of the
Partnership will be revalued to its fair market value (based on the Offering
Price) and the capital accounts of the partners will be adjusted to reflect the
manner in which the unrealized gain inherent in such property would be allocated
among the partners under the terms of the Partnership Agreement if there were a
taxable disposition of such property for such fair market value on the date of
the revaluation. The Partnership Agreement provides that if the Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Partnership from borrowing or capital contributions, the
Company may borrow such funds from a financial institution or other lender and
lend such funds to the Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Partnership, the Company may contribute the
amount of such required funds as an additional capital contribution to the
Partnership. If the Company so contributes additional capital to the
Partnership, the Company will receive additional Units and the Company's
percentage interest in the Partnership will be increased on a proportionate
basis based upon the amount of such additional capital contributions and the
value of the Partnership at the time of such contributions. Conversely, the
percentage interests of the Limited Partners will be decreased on a
proportionate basis in the event that the Company contributes additional capital
to the Partnership.
REDEMPTION RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners received the
Redemption Rights, which enable them to cause the Partnership to redeem their
Units in exchange for shares of Common Stock or, at the option of the Company,
an equivalent amount of cash. The redemption price will be paid in cash in the
event that the issuance of Common Stock to the redeeming Limited Partner (i)
would cause the Ownership Limitation to be exceeded by such partner or any other
person (unless this condition is expressly waived by the Company for a
particular redemption transaction), or (ii) otherwise would jeopardize the REIT
status of the Company. Redemption Rights relating to Units issued in connection
with the Partnership's acquisition of the Initial Hotels are currently
exercisable by the Limited Partners holding such Units. Redemption Rights
relating to the Units to be issued as part of the purchase price of the
Affiliate Acquisition Hotels will be exercisable by the Limited Partners
receiving such Units, in whole or in part, any time after the first anniversary
of the acquisition of the related Hotel. The aggregate number of shares issuable
upon the exercise of all Redemption Rights will be 1,425,320. The number of
shares issuable upon the exercise of the Redemption Rights will be adjusted upon
the occurrence of stock splits, mergers, consolidations or similar pro rata
share transactions, which otherwise would have the effect of diluting the
ownership interests of the Limited Partners or the shareholders of the Company.
See "Shares Available for Future Sale".
REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Available for Future Sale".
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TAX MATTERS
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Partnership and, as such, has authority to handle tax audits and
to make tax elections under the Code on behalf of the Partnership.
Profit and loss of the Partnership generally will be allocated among the
partners in accordance with their respective interests in the Partnership based
on the number of Units held by the partners.
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT and to avoid any federal income tax liability.
DISTRIBUTIONS
The Partnership Agreement provides that the Partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) quarterly, in amounts determined by the Company
in its sole discretion, to the partners, for any fiscal year of the Partnership,
in accordance with their respective percentage interests in the Partnership.
Upon liquidation of the Partnership, after payment of, or adequate provision
for, debts and obligations of the Partnership, including any loans made by
partners, any remaining assets of the Partnership will be distributed to all
partners with positive capital accounts in accordance with their respective
positive capital account balances. If the Company has a negative balance in its
capital account following a liquidation of the Partnership, it will be obligated
to contribute cash to the Partnership equal to the negative balance in its
capital account.
TERM
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company
(unless the Limited Partners elect to continue the Partnership), (ii) the sale
or other disposition of all the assets of the Partnership (except for such
assets as the Company believes are required to wind up the affairs of the
Partnership), (iii) the redemption of all limited partnership interests in the
Partnership (other than those held by the Company, if any), or (iv) the election
by the General Partner.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Stock. Hunton &
Williams has acted as counsel to the Company and has reviewed this summary and
is of the opinion that it fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Common Stock.
The following discussion does not address all aspects of taxation that may be
relevant to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinions of Hunton & Williams are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
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EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON STOCK, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, AND SALE, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company revoked its election to be taxed as a pass-through entity under
Subchapter S of the Code on the day prior to the closing of the IPO. The Company
made an election to be taxed as a REIT under sections 856 through 860 of the
Code, effective for its short taxable year beginning on the date of revocation
of its S election and ending on December 31, 1994. The Company believes that,
commencing with such taxable year, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that the Company will operate in a manner so as to qualify or remain
qualified as a REIT for federal income tax purposes.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Hunton & Williams has acted as counsel to the Company in connection with
the Offering. In the opinion of Hunton & Williams, the Company qualified to be
taxed as a REIT for its taxable years ended December 31, 1994 and December 31,
1995, and the Company's organization and current and proposed method of
operation will enable it to continue to qualify as a REIT for its taxable year
ended December 31, 1996 and in the future. Investors should be aware, however,
that opinions of counsel are not binding upon the Service or any court. It must
be emphasized that Hunton & Williams' opinion is based on various assumptions
and is conditioned upon certain representations made by the Company as to
factual matters, including representations regarding the nature of the Company's
properties, the Percentage Leases, and the past and future conduct of the
Company's business. Such factual assumptions and representations are described
below in this discussion of "Federal Income Tax Considerations" and are set out
in the federal income tax opinion to be delivered by Hunton & Williams at the
closing of the Offering. Moreover, such qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis, through actual
annual operating results, distribution levels, and stock ownership, the various
qualification tests imposed under the Code discussed below. Hunton & Williams
will not review the Company's compliance with those tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operation for 1996 or any subsequent taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "Federal Income Tax Considerations -- Failure to Qualify".
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" that is held primarily for
sale to customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the
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Company should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), and has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on the net income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income test. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate-level tax) in a transaction in which the basis of the asset in
the Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the date
on which such asset was acquired by the Company, then to the extent of such
asset's "built-in gain" (i.e., the excess of the fair market value of such asset
at the time of acquisition by the Company over the adjusted basis in such asset
at such time), such gain will be subject to tax at the highest regular corporate
rate applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. The ownership of the Common Stock is sufficiently diverse
to allow the Company to satisfy requirements (v) and (vi). In addition, the
Company's Articles of Incorporation provide for restrictions regarding transfers
of the Common Stock that are intended to assist the Company in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above.
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, is not considered an individual and
the beneficiaries of trust are treated as holding shares of a REIT in proportion
to their actuarial interests in such trust for purposes of the 5/50 Rule.
The Company does not currently have any subsidiaries, nor will it have any
subsidiaries immediately after completion of the Offering, although it may have
subsidiaries in the future. Code section 856(i) provides that a corporation that
is a "qualified REIT subsidiary" shall not be treated as a separate corporation,
and all assets, liabilities, and items of income, deduction, and credit of a
"qualified REIT
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subsidiary" shall be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period that such corporation has been in existence. Thus, in
applying the requirements described herein, any "qualified REIT subsidiaries"
acquired or formed by the Company will be ignored, and all assets, liabilities,
and items of income, deduction, and credit of such subsidiaries will be treated
as assets, liabilities, and items of income, deduction, and credit of the
Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets and gross income of the Partnership will be treated as
assets and gross income of the Company for purposes of applying the requirements
described herein.
A REIT cannot qualify as such if, at the close of any REIT taxable year, it
has earnings and profits accumulated in non-REIT taxable years or in non-REIT
taxable years of a predecessor corporation. Because both the Company and the
corporation that was merged into the Company immediately prior to the closing of
the IPO (i) validly elected for all taxable years during the period from their
respective organization to the closing of the IPO to be taxed as pass-through
entities under Subchapter S of the Code and (ii) did not succeed to any earnings
and profits accumulated during a non-REIT taxable year, neither entity had any
earnings and profits immediately prior to the commencement of the Company's
first REIT taxable year and, therefore, the Company does not have any earnings
and profits from non-REIT taxable years.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
three requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, not more than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
The specific application of these tests to the Company is discussed below.
Rent received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the Company, or an owner of 10% or more of the Company, actually
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property". Finally, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an "independent contractor" who is adequately compensated and
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from whom the Company derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent the services provided by the
Company are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant".
Pursuant to the Percentage Leases, the Lessee leases from the Partnership
(or, in the case of the Company-Owned Hotel, the Company) the land, buildings,
improvements, furnishings and equipment comprising the Current Hotels for a
10-year period. The Percentage Leases provide that the Lessee is obligated to
pay to the Partnership (or, in the case of the Company-Owned Hotel, the Company)
(i) the greater of a Base Rent or Percentage Rent and (ii) certain other
Additional Charges. The Percentage Rent is calculated by multiplying fixed
percentages by the gross room revenues for each of the Current Hotels. The Base
Rent accrues and is required to be paid monthly. Although Percentage Rent is due
quarterly, with respect to eleven of the Current Hotels, the Lessee will not be
in default for non-payment of Percentage Rent due in any calendar year if the
Lessee pays, within 90 days of the end of the calendar year, the excess of
Percentage Rent due and unpaid over the Base Rent paid by the Lessee with
respect to such year. With respect to the other Current Hotels and the
Acquisition Hotels, the Lessee will be in default for the non-payment of
Percentage Rent if it fails to pay, within 30 days of the end of each calendar
quarter, the excess of Percentage Rent due and unpaid over the Base Rent paid
year-to-date with respect to such quarter. The Partnership plans to enter into
leases with the Lessee with respect to the Acquisition Hotels that are
substantially similar to the Percentage Leases (the "Acquisition Leases"). For
purposes of this section entitled "Federal Income Tax Considerations," the term
"Percentage Leases" includes the Acquisition Leases and assumes that the terms
of the Acquisition Leases are substantially similar to the terms of the existing
Percentage Leases.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
Hunton & Williams is of the opinion that the Percentage Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the Partnership (or, in the case of the
Company-Owned Hotel, the Company) and the Lessee intend for their relationship
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to be that of a lessor and lessee and such relationship is documented by lease
agreements, (ii) the Lessee has the right to the exclusive possession, use, and
quiet enjoyment of the Hotels during the term of the Percentage Leases, (iii)
the Lessee bears the cost of, and is responsible for, day-to-day maintenance and
repair of the Hotels, other than the cost of maintaining underground utilities
and structural elements, and dictates how the Hotels are operated, maintained,
and improved, (iv) the Lessee bears all of the costs and expenses of operating
the Hotels (including the cost of any inventory used in their operation) during
the term of the Percentage Leases (other than real and personal property taxes,
property and casualty insurance, and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do not exceed the
allowance for such costs provided by the Company or the Partnership, as
applicable, under each Percentage Lease), (v) the Lessee benefits from any
savings in the costs of operating the Hotels during the term of the Percentage
Leases, (vi) in the event of damage to or destruction of a Hotel, the Lessee is
at economic risk because it is obligated either (A) to restore the property to
its prior condition, in which event it will bear all costs of such restoration
in excess of any insurance proceeds, or (B) to offer to purchase the Hotel for
an amount generally equal to the fair market value of the property, less any
insurance proceeds, (vii) the Lessee has indemnified the Partnership (or, in the
case of the Company-Owned Hotel, the Company) against all liabilities imposed on
the Partnership (or, in the case of the Company-Owned Hotel, the Company) during
the term of the Percentage Leases by reason of (A) injury to persons or damage
to property occurring at the Hotels, (B) the Lessee's use, management,
maintenance or repair of the Hotels, (C) any environmental liability caused by
acts or grossly negligent failures to act of the Lessee, (D) taxes and
assessments in respect of the Hotels (other than real estate or personal
property taxes), or (E) any breach of the Percentage Leases or of any sublease
of a Hotel by the Lessee, (viii) the Lessee is obligated to pay substantial
fixed rent for the period of use of the Hotels, (ix) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the Hotels, (x) the Company or the Partnership, as applicable, cannot
use the Hotels concurrently to provide significant services to entities
unrelated to the Lessee, and (xi) the total contract price under the Percentage
Leases does not substantially exceed the rental value of the Hotels for the term
of the Percentage Leases.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of Hunton & Williams with respect to the relationship between the
Partnership (or, in the case of the Company-Owned Hotel, the Company) and the
Lessee is based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the Service or any court, and there can
be no complete assurance that the Service will not assert successfully a
contrary position. If the Percentage Leases are characterized as service
contracts or partnership agreements, rather than as true leases, part or all of
the payments that the Partnership or the Company receives from the Lessee may
not be considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property". In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income test and, as a
result, would lose its REIT status.
In order for the Rent to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel, must not be greater than 15% of the Rent
received under the applicable Percentage Lease. The Rent attributable to the
personal property in a Hotel is the amount that bears the same ratio to total
Rent for the taxable year as the average of the adjusted bases of the personal
property in the Hotel at the beginning and at the end of the taxable year bears
to the average of the aggregate adjusted bases of both the real and personal
property comprising the Hotel at the beginning and at the end of such taxable
year (the "Adjusted Basis Ratio"). The Adjusted Basis Ratio for each Current
Hotel has not exceeded 15%. Management of the Company has obtained appraisals of
the personal property at each Acquisition Hotel that the Partnership will
acquire in exchange for cash or Units indicating that the appraised value of the
personal property at such Hotel is less than 15% of the purchase price of such
Hotel. In addition, the Company anticipates that the additional
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personal property that the Company or the Partnership acquires with a portion of
the proceeds of the Offering likewise will not cause the Adjusted Basis Ratio
with respect to any Hotel to exceed 15%. However, in no event will the
Partnership or the Company acquire additional personal property for a Hotel to
the extent that such acquisition would cause the Adjusted Basis Ratio for that
Hotel to exceed 15%. There can be no assurance, however, that the Service will
not assert that the personal property acquired by the Partnership or the Company
had a value in excess of its appraised value, or that a court will not uphold
such assertion. If such a challenge were successfully asserted, the Company
could fail the 15% Adjusted Basis Ratio as to one or more of the Hotels, which
in turn potentially could cause it to fail to satisfy the 95% or 75% gross
income test and thus lose its REIT status.
Another requirement for qualification of the Rent as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Because the Percentage Rent is based on
fixed percentages of the gross room revenues from the Hotels that are
established in the Percentage Leases, and the Company has represented that the
percentages (i) will not be renegotiated during the term of the Percentage
Leases in a manner that has the effect of basing the Percentage Rent on income
or profits and (ii) conform with normal business practice, the Percentage Rent
should not be considered based in whole or in part on the income or profits of
any person. Furthermore, the Company has represented that, with respect to other
hotel properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross revenues,
as described above).
A third requirement for qualification of the Rent as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of the Lessee. The constructive ownership rules of the Code generally
provide that, if 10% or more in value of the stock of the Company is owned,
directly or indirectly, by or for any person, the Company is considered as
owning the stock owned, directly or indirectly, by or for such person. The
Company does not actually own any stock of the Lessee. Various Winston
Affiliates, which indirectly own interests in the Lessee, may acquire Common
Stock by exercising their Redemption Rights. The Partnership Agreement, however,
provides that if the Winston Affiliates would own, actually or constructively,
10% or more of the Company upon the exercise of their Redemption Rights, the
Company must redeem the Units of the Winston Affiliates in cash rather than
Common Stock. The Articles of Incorporation likewise prohibit the Winston
Affiliates from owning, actually or constructively, 9.9% or more of the Company.
Thus, the Company should never own, actually or constructively, 10% or more of
the Lessee. Furthermore, the Company has represented that, with respect to other
hotel properties that it acquires in the future, it will not lease any property
to a Related Party Tenant. However, because the Code's constructive ownership
rules for purposes of the Related Party Tenant rules are broad and it is not
possible to monitor continually direct and indirect transfers of shares of
Common Stock, no absolute assurance can be given that such transfers or other
events of which the Company has no knowledge will not cause the Company to own
constructively 10% or more of the Lessee at some future date.
A fourth requirement for qualification of the Rent as "rents from real
property" is that neither the Company nor the Partnership can furnish or render
noncustomary services to the tenants of the Hotels, or manage or operate the
Hotels, other than through an independent contractor who is adequately
compensated and from whom the Company does not derive or receive any income.
Provided that the Percentage Leases are respected as true leases, the Company
should satisfy that requirement because the Company and the Partnership do not
perform, and will not perform, any services other than customary
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ones for the Lessee. Furthermore, the Company has represented that, with respect
to each other hotel property that it acquires in the future, it will not perform
noncustomary services with respect to the tenant of the property. As described
above, however, if the Percentage Leases are recharacterized as service
contracts or partnership agreements, the Rent likely would be disqualified as
"rents from real property" because the Company and the Partnership would be
considered to furnish or render services to the occupants of the Hotels and to
manage or operate the Hotels other than through an independent contractor who is
adequately compensated and from whom the Company derives or receives no income.
If a portion of the Rent from a particular Percentage Lease does not
qualify as "rents from real property" because the Rent attributable to personal
property with respect to such Percentage Lease exceeds 15% of the total Rent for
a taxable year, the portion of the Rent that is attributable to personal
property will not be qualifying income for purposes of either the 75% or 95%
gross income test. If the Rent attributable to personal property that is
nonqualifying income, plus any other nonqualifying income, during a taxable year
exceeds 5% of the Company's gross income during such year, the Company would
lose its REIT status. In addition, if the Rent does not qualify as "rents from
real property" because either (i) the Percentage Rent is considered based on the
income or profits of the Lessee, (ii) the Company owns, actually or
constructively, 10% or more of the Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels other than through a qualifying independent contractor, none of the Rent
would qualify as "rents from real property". In that case, the Company likely
would lose its REIT status because it would be unable to satisfy both the 75%
and 95% gross income tests.
In addition to the Rent, the Lessee is required to pay to the Company or
the Partnership, as applicable, the Additional Charges. To the extent that the
Additional Charges represent either (i) reimbursements of amounts that the
Lessee is obligated to pay to third parties or (ii) penalties for nonpayment or
late payment of such amounts, the Additional Charges should qualify as "rents
from real property". To the extent, however, that the Additional Charges
represent interest accrued on the late payment of the Rent or the Additional
Charges, the Additional Charges should not qualify as "rents from real
property," but instead should be treated as interest that qualifies for the 95%
gross income test.
Based on the foregoing, Hunton & Williams is of the opinion that the Rent
and the Additional Charges will qualify as "rents from real property" for
purposes of the 75% and 95% gross income tests, except to the extent that the
Additional Charges represent interest accrued on the late payment of the Rent or
the Additional Charges (which will be qualifying income for the 95% test but not
the 75% test). As described above, the opinion of Hunton & Williams is based
upon an analysis of all the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous, as
well as representations by the Company and assumptions that are described above
and set out in the federal income tax opinion of Hunton & Williams, which is
attached as an Exhibit to the Registration Statement of which this Prospectus is
a part. Opinions of counsel are not binding upon the Service or any court.
Accordingly, there can be no complete assurance that the Service will not assert
successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Furthermore, to the extent that interest from a loan that is based on
the residual cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a
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trade or business. All inventory required in the operation of the Hotels will be
purchased by the Lessee or its designee as required by the terms of the
Percentage Leases. Accordingly, the Company and the Partnership believe that no
asset owned by the Company or the Partnership is held for sale to customers and
that a sale of any such asset will not be in the ordinary course of business of
the Company or the Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular property. Nevertheless, the Company and the Partnership will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business".
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness that such property secured and (ii)
for which such REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to have foreclosed
on a property where such REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except
as a creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property with respect to a REIT on the date that is two years after
the date such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify under the 75% gross income test
or any amount is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to income that does
not qualify under the 75% gross income test, (ii) on which any construction
takes place on such property (other than completion of a building, or any other
improvement, where more than 10% of the construction of such building or other
improvement was completed before default became imminent), or (iii) which is
more than 90 days after the day on which such property was acquired by the REIT
and the property is used in a trade or business that is conducted by the REIT
(other than through an independent contractor from whom the REIT does not derive
or receive any income). As a result of the rules with respect to foreclosure
property, if the Lessee defaults on its obligations under a Percentage Lease for
a Hotel, the Company terminates the Lessee's leasehold interest, and the Company
is unable to find a replacement Lessee for such Hotel within 90 days of such
foreclosure, gross income from hotel operations conducted by the Company with
respect to such Hotel would cease to qualify for the 75% and 95% gross income
tests. In such event, the Company likely would be unable to satisfy the 75% and
95% gross income tests and, thus, would fail to qualify as a REIT.
The Company has entered into interest rate cap agreements to eliminate its
exposure to increases in interest rates under the Line of Credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". In the future, the Company or
the Partnership may, from time to time, enter into other hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts,
and options. To the extent that the Company or the Partnership enters into
interest rate swap or cap contracts, such as the interest rate cap agreements
entered into by the Company in February 1995, to hedge any variable rate
indebtedness incurred to acquire or carry real estate assets, any periodic
income or gain from the disposition of such contracts should be qualifying
income for purposes of the 95% gross income test, but
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not the 75% gross income test. Furthermore, any such contract would be
considered a "security" for purposes of applying the 30% gross income test. To
the extent that the Company or the Partnership hedges with other types of
financial instruments or in other situations, it may not be entirely clear how
the income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of those relief
provisions. As discussed above in "Federal Income Tax Considerations -- Taxation
of the Company," even if those relief provisions apply, a 100% tax would be
imposed with respect to the net income attributable to the excess of 75% or 95%
of the Company's gross income over its qualifying income in the relevant
category, whichever is greater. No such relief is available for violations of
the 30% income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the mortgage balance does
not exceed the value of the associated real property, and shares of stock in
other REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the Partnership or the stock of a subsidiary with respect to which
the Company has held 100% of the stock at all times during the subsidiary's
existence).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership, rather than its general
partnership interest in the Partnership. The Company has represented that, at
all relevant times (including the taxable periods preceding the Offering), (i)
at least 75% of the value of its total assets has been, and will be, represented
by real estate assets, cash and cash items (including receivables), and
government securities and (ii) it has not, and will not, own any securities that
do not satisfy the 75% asset requirement (except for the stock of subsidiaries
with respect to which it has held 100% of the stock at all times during the
subsidiary's existence). In addition, the Company has represented that it will
not acquire or dispose, or cause the Partnership to acquire or dispose, of
assets in the future in a way that would cause it to violate either asset
requirement. Based on the foregoing, Hunton & Williams is of the opinion that
the Company has satisfied, and will continue to satisfy, both asset requirements
for REIT status.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset tests either did not exist immediately after the acquisition of any
particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of
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its assets). If the condition described in clause (ii) of the preceding sentence
were not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the quarter in
which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of its net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment date after such
declaration. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it would be subject to tax on the amount it does
not distribute at regular ordinary and capital gains corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4%
nondeductible excise tax on the excess of such required distribution amount over
the amounts actually distributed. The Company has made, and intends to continue
to make, timely distributions sufficient to satisfy all annual distribution
requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under certain of
the Percentage Leases, the Lessee may defer payment of the excess of the
Percentage Rent over the Base Rent paid by the Lessee for a period of up to 90
days after the end of the calendar year in which such payment was due. In that
case, the Partnership still would be required to recognize as income the excess
of the Percentage Rent over the Base Rent paid by the Lessee in the calendar
year to which such excess relates. Further, it is possible that, from time to
time, the Company may be allocated a share of net capital gain attributable to
the sale of depreciated property that exceeds its allocable share of cash
attributable to that sale. Therefore, the Company may have less Cash Available
for Distribution than is necessary to meet its annual 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, the Company may find it
necessary to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of additional shares of common or preferred
stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding stock. The Company has complied and will
continue to comply with such requirements.
Partnership Anti-Abuse Rule
In 1994, the U.S. Department of the Treasury issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions"), that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and
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recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or availed of in
connection with a transaction (or series of related transactions) a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible economic arrangement that accurately
reflects the partners' economic agreement and clearly reflects the partners'
income without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions. The Anti-Abuse Rule generally is
effective for all transactions relating to a partnership occurring on and after
May 12, 1994.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. Based on
the foregoing, Hunton & Williams is of the opinion that the Anti-Abuse Rule will
not have any adverse impact on the Company's ability to qualify as a REIT.
However, because the Anti-Abuse Rule is extraordinarily broad in scope and is
applied based on an analysis of all of the facts and circumstances, there can be
no assurance that the Service will not attempt to apply the Anti-Abuse Rule to
the Company. If the conditions of the Anti-Abuse Rule are met, the Service is
authorized to take appropriate enforcement action, including disregarding the
Partnership for federal tax purposes or treating one or more of its partners as
nonpartners. Any such action potentially could jeopardize the Company's status
as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of any political subdivision thereof,
or (iii) an estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source.
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Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
the shareholder has held his Common Stock. However, corporate shareholders may
be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Stock, but rather will reduce the
adjusted basis of such stock. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's Common Stock, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Stock has been
held for one year or less) assuming the Common Stock is a capital asset in the
hands of the shareholder. In addition, any distribution declared by the Company
in October, November, or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the shareholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses will be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Stock (or distributions treated as such)
will be treated as investment income only if a shareholder so elects, in which
case such capital gain will be taxed at ordinary income rates. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a shareholder who has held such
stock for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such shareholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of the Common Stock are purchased within
30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The Omnibus Budget Reconciliation Act of 1993 increased
the highest marginal individual income tax rate to 39.6%, but generally did not
change the 28% tax rate on net capital gains applicable to individuals. Thus,
the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual deduction of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides
the Company with a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules. A shareholder who does not provide
the Company with his correct taxpayer identification number also may be subject
to penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company. See
"Federal Income Tax Considerations -- Taxation of Non-U.S. Shareholders".
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling and on the intention of the Company to invest its assets in
a manner that will avoid the recognition of UBTI by the Company, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
the Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the Company's
stock is required to treat a percentage of the dividends from the Company as
UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by
the Company from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies to a pension trust holding
more than 10% of the Company's stock only if (i) the UBTI Percentage is at least
5%, (ii) the Company qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interests in the
pension trust, and (iii) either (A) one pension trust owns more than 25% of the
value of the Company's stock or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's stock collectively owns more
than 50% of the value of the Company's stock.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current
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or accumulated earnings and profits of the Company. Such distributions
ordinarily will be subject to a withholding tax equal to 30% of the gross amount
of the distribution unless an applicable tax treaty reduces or eliminates that
tax. However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a foreign corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the shareholder's
Common Stock, but rather will reduce the adjusted basis of such stock. To the
extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at the
normal capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is required
by currently applicable Treasury Regulations to withhold 35% of any distribution
that is designated by the Company as a capital gains dividend. The amount
withheld is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. Because the Common Stock is publicly traded,
no assurance can be given that the Company will qualify as a "domestically
controlled REIT". If the Company does not constitute a domestically-controlled
REIT, a Non-U.S. Shareholder's sale or exchange of Common Stock will not be
subject to tax under FIRPTA if (i) the Company's Common Stock is "regularly
traded" on an established securities market (e.g., the NASDAQ Stock Market on
which the Common Stock is listed), and (ii) such Non-U.S. Shareholder owned
(actually or constructively) 5% or less of the Company's outstanding Common
Stock at all times during a specified testing period. Furthermore, gain not
subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in
the Common Stock is effectively connected with the Non-U.S. Shareholder's U.S.
trade or business, in which case the Non-U.S. Shareholder would be subject to
the same treatment as U.S. shareholders with respect to such gain, or (ii) the
Non-U.S. Shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and certain other
conditions apply, in which case the nonresident alien individual will be subject
to a 30% tax on the individual's capital gains. If the gain on the sale of the
Common Stock were to be subject to taxation under FIRPTA, the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain (subject to applicable alternative minimum tax,
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a special alternative minimum tax in the case of nonresident alien individuals,
and the possible application of the 30% branch profits tax in the case of
foreign corporations). IN ADDITION, NON-U.S. SHAREHOLDERS SHOULD BE AWARE THAT
LEGISLATIVE PROPOSALS HAVE BEEN MADE TO SUBJECT FOREIGN PERSONS TO U.S. TAX IN
CERTAIN CIRCUMSTANCES ON THEIR GAINS FROM THE SALE OF STOCK IN U.S.
CORPORATIONS. THERE CAN BE NO ASSURANCE THAT SUCH A PROPOSAL WILL NOT BE ENACTED
INTO LAW IN A FORM DETRIMENTAL TO FOREIGN HOLDERS OF THE COMMON STOCK.
OTHER TAX CONSEQUENCES
The Company, the Partnership, and the Company's shareholders may be subject
to state or local taxation in various state or local jurisdictions, including
those in which it or they own property, transact business, or reside. The state
and local tax treatment of the Company and its shareholders may not conform to
the federal income tax consequences discussed above. CONSEQUENTLY, PROSPECTIVE
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE
AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership. The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive share of
the Partnership's income and to deduct its distributive share of the
Partnership's losses only if the Partnership is classified for federal income
tax purposes as a partnership rather than as an association taxable as a
corporation. An organization formed as a partnership will be treated as a
corporation or partnership, rather than as a corporation, for federal income tax
purposes only if it (i) has no more than two of the four corporate
characteristics that the Treasury Regulations use to distinguish a partnership
from a corporation for tax purposes and (ii) is not a "publicly traded"
partnership. The four corporate characteristics are continuity of life,
centralization of management, limited liability, and free transferability of
interests. The Partnership possesses no more than two of those four corporate
characteristics.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). On November 29, 1995, the U.S.
Department of the Treasury issued final regulations (the "PTP Regulations")
relating to the classification of certain partnerships as publicly traded
partnerships. The PTP Regulations provide limited safe harbors from the
definition of a PTP. Pursuant to one of those safe harbors (the "Private
Placement Exclusion"), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (i) all
of the partnership interests were issued in a transaction that was not required
to be registered under the Securities Act of 1933, as amended, and (ii) the
partnership does not have more than 100 partners at any time during a taxable
year (taking into account as a partner each person who indirectly owns an
interest in the partnership through a partnership, grantor trust, or S
corporation (a "flow-through entity") if (A) substantially all of the value of
the person's ownership interest in the flow-through entity is attributable to
the entity's interest in the partnership and (B) a principal purpose of the use
of the tiered arrangement is to permit the partnership to satisfy the
100-partner limitation). The PTP Regulations generally are effective for all
taxable years of a partnership beginning after December 31, 1995. The
Partnership satisfies the Private Placement Exclusion.
The Partnership has not requested, and does not intend to request, a ruling
from the Service that it will be classified as a partnership for federal income
tax purposes. Instead, at the closing of the Offering, Hunton & Williams will
deliver its opinion that, based on the provisions of the Partnership Agreement,
certain factual assumptions, and certain representations described in the
opinion, the Partnership will be
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treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation. Unlike a tax ruling, an
opinion of counsel is not binding upon the Service, and no assurance can be
given that the Service will not challenge the status of the Partnership as a
partnership for federal income tax purposes. If such challenge were sustained by
a court, the Partnership would be treated as a corporation for federal income
tax purposes, as described below. The opinion of Hunton & Williams is based on
existing law, which to a great extent consists of administrative and judicial
interpretation. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in the opinion.
If for any reason the Partnership were taxable as a corporation, rather
than as a partnership, for federal income tax purposes, the Company would not be
able to satisfy the income and asset requirements for REIT status. See "Federal
Income Tax Considerations -- Requirements for Qualification -- Income Tests" and
"-- Requirements for Qualification -- Asset Tests". In addition, any change in
the Partnership's status for tax purposes might be treated as a taxable event,
in which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Distribution Requirements". Further, items of income and
deduction of the Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. Consequently, the
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing the Partnership's taxable income.
Income Taxation of the Partnership and its Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from the Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they do
not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
The Partnership's allocations of taxable income, gain and loss are intended to
comply with the requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department recently
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by section 704(c) of the Code and outlining several
reasonable allocation methods.
Under the Partnership Agreement, depreciation or amortization deductions of
the Partnership generally are allocated among the partners in accordance with
their respective interests in the Partnership, except to the extent that Code
section 704(c) requires otherwise with respect to the Contributed Hotels owned
by the Partnership. In addition, gain on the sale of a Contributed Hotel owned
by the Partnership will be specially allocated to the contributing Partner or
Partners (including the
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Company, if applicable) to the extent of any "built-in" gain with respect to
such Contributed Hotel for federal income tax purposes. The application of
section 704(c) to the Partnership is not entirely clear, however, and may be
affected by Treasury Regulations promulgated in the future.
Basis in Partnership Interest The Company's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership, and (iii)
reduced, but not below zero, by (A) its allocable share of the Partnership's
loss and (B) the amount of cash distributed to the Company, and by constructive
distributions resulting from a reduction in the Company's share of indebtedness
of the Partnership.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's interest in the
Partnership below zero, the recognition of such loss will be deferred until such
time as the recognition of such loss would not reduce the Company's adjusted tax
basis below zero. To the extent that the Partnership's distributions, or any
decrease in the Company's share of the indebtedness of the Partnership (such
decrease being considered a constructive cash distribution to the Company),
would reduce the Company's adjusted tax basis below zero, such distributions
(including such constructive distributions) will constitute taxable income to
the Company. Such distributions and constructive distributions normally will be
characterized as capital gain, and, if the Company's interest in the Partnership
has been held for longer than the long-term capital gain holding period
(currently one year), the distributions and constructive distributions will
constitute long-term capital gain.
Depreciation Deductions Available to the Partnership. Immediately after
the Offering, the Company will make a cash contribution to the Partnership in
exchange for an additional general partnership interest in the Partnership and
the Partnership will use a portion of such contribution to acquire the
Acquisition Hotels. To the extent that the Partnership acquired or will acquire,
as the case may be, the Hotels in exchange for cash, the Partnership's initial
basis in such Hotels for federal income tax purposes generally is or will be
equal to the purchase price paid by the Partnership. The Partnership plans to
depreciate such depreciable hotel property for federal income tax purposes under
the modified accelerated cost recovery system of depreciation ("MACRS"). Under
MACRS, the Partnership generally will depreciate furnishings and equipment over
a seven-year recovery period using a 200% declining balance method and a half-
year convention. If, however, the Partnership places more than 40% of its
furnishings and equipment in service during the last three months of a taxable
year, a mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year. Under MACRS, the Partnership
generally will depreciate buildings and improvements over a 39-year recovery
period using a straight line method and a mid-month convention. The Partnership
has acquired some of the Hotels in exchange for Units. In addition, the Company
acquired one of the Current Hotels pursuant to a merger of the corporation that
owned that Hotel into the Company. The Partnership's or the Company's, as the
case may be, initial basis in such Hotels for federal income tax purposes should
be the same as the transferor's basis in such Hotels on the date of acquisition
by the Partnership. Although the law is not entirely clear, the Partnership and
the Company intend to depreciate such depreciable hotel property for federal
income tax purposes over the same remaining useful lives and under the same
methods used by the transferors. The Partnership's tax depreciation deductions
will be allocated among the partners in accordance with their respective
interests in the Partnership (except to the extent that the Partnership is
required under Code section 704(c) to use a method for allocating depreciation
deductions attributable to the Contributed Hotels or other contributed
properties that results in the Company receiving a disproportionate share of
such deductions).
SALE OF THE COMPANY'S OR THE PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Company or the Partnership on the sale
of property held by it for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by the Partnership on the disposition of
the
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Contributed Hotels will be allocated first to the partners who contributed those
hotels under section 704(c) of the Code to the extent of such partners'
"built-in gain" on those Hotels at the time of the disposition for federal
income tax purposes. The contributing partners' "built-in gain" on the
Contributed Hotels sold will equal the excess of the Contributing Partners'
proportionate share of the book value of those Hotels as reflected in the
Partnership's capital accounts over the Contributing Partners' adjusted tax
basis allocable to those Hotels at the time of the sale. Any remaining gain
recognized by the Partnership on the disposition of the Contributed Hotels will
be allocated among the partners in accordance with their respective percentage
interests in the Partnership. The Board of Directors has adopted a policy to
which the Winston Affiliates have consented that any decision to sell a Hotel
will be made by a majority of the Independent Directors. See "Risk
Factors -- Conflicts of Interest".
The Company's share of any gain realized by the Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests". Such
prohibited transaction income also may have an adverse effect upon the Company's
ability to satisfy the income tests for REIT status. The Company, however, does
not presently intend to acquire or hold or allow the Partnership to acquire or
hold any property that constitutes inventory or other property held primarily
for sale to customers in the ordinary course of the Company's or the
Partnership's trade or business.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Keegan & Company,
Inc. and Raymond James & Associates, Inc. are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OF
UNDERWRITER COMMON STOCK
---------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co. ................................................. 750,000
Bear, Stearns & Co. Inc. ............................................. 750,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 750,000
Morgan Keegan & Company, Inc. ........................................ 750,000
Raymond James & Associates, Inc. ..................................... 750,000
J.C. Bradford & Co. .................................................. 250,000
Interstate/Johnson Lane Corporation................................... 250,000
Edgar M. Norris & Co., Inc. .......................................... 250,000
Scott & Stringfellow, Inc. ........................................... 250,000
Tucker Anthony Incorporated........................................... 250,000
------------
5,000,000
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Common Stock
offered hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $.35 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 750,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 5,000,000 shares of Common
Stock offered.
The Company, its officers and directors and certain stockholders have
agreed that during the period beginning from the date of this Prospectus and
continuing to and including the date 90 days after the date of this Prospectus,
not to offer, sell, contract to sell or otherwise dispose of any securities of
the Company (other than (i) pursuant to employee stock option plans existing, or
on the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus, (ii) Units issued in connection
with the purchase of the Affiliate Acquisition Hotels, and (iii) shares of
Common Stock issued to Promus pursuant to the $3 million Private Placement)
which are substantially similar to the shares of Common Stock or which are
convertible or exchangeable into securities which are substantially similar to
the shares of Common Stock, without the prior written consent of the
representatives except for the shares of Common Stock offered in connection with
the offering.
The Company and the Partnership have agreed to indemnify the several
Underwriters against certain liabilities under the Securities Act.
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EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995 and the consolidated statements of income, shareholders' equity and cash
flows for the period June 2, 1994 through December 31, 1994 and the year ended
December 31, 1995 and the financial statement schedule; the balance sheets of
the Lessee as of December 31, 1994 and 1995 and the statements of income,
shareholders' equity and cash flows for the period June 2, 1994 through December
31, 1994 and the year ended December 31, 1995; the combined balance sheet of the
Impac Acquisition Hotels (described in Note 1 to those financial statements) as
of December 31, 1995 and the combined statements of income, equity and cash
flows for the year then ended; and the balance sheet of Cary Suites, Inc. as of
December 31, 1995 and the statements of income and retained earnings, and cash
flows for the year then ended, all of which have been included in this
Prospectus; and the combined statements of income, capital deficiency and cash
flows of the Initial Hotels (described in Note 1 to those financial statements)
for the year ended December 31, 1993 and the five months ended June 2, 1994; and
the combined statements of income, partners' equity (deficit) and cash flows of
the Acquisition Hotels (the five hotels purchased by the Company in May 1995)
(described in Note 1 to those financial statements) for each of the two years in
the period ended December 31, 1994, all of which have been incorporated by
reference in this Prospectus; have been included or incorporated herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hunton & Williams. In addition, the description of
federal income tax consequences contained in the section of the Prospectus
entitled "Federal Income Tax Considerations" is based on the opinion of Hunton &
Williams. The validity of the shares of Common Stock offered hereby will be
passed upon for the Underwriters by King & Spalding, Atlanta, Georgia. In
rendering such opinion, King & Spalding will rely on the opinion of Hunton &
Williams as to certain matters of North Carolina law.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"ACMs" means asbestos-containing materials.
"Acquisition Hotels" means the 10 Hotels which will be acquired in
connection with the consummation of this Offering.
"ADA" means the Americans with Disabilities Act of 1990.
"ADR" means average daily room rate.
"Advisory Agreement" means the agreement between the Company and Winston
Advisors, Inc., which was terminated as of January 1, 1996.
"Affiliate" means (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, five percent (5%) or
more of the outstanding capital stock, shares or equity interests of such
person, or (iii) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trusts,
banks, trust companies, land trusts, business trusts, or other entities and
governments and agencies and political subdivisions thereof. For the purposes of
this definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
"Affiliate Acquisition Hotels" means the Hampton Inn -- Perimeter, Georgia,
Hampton Inn & Suites -- Gwinnett, Georgia, Homewood Suites -- Cary, North
Carolina and the Courtyard by Marriott -- Wilmington, North Carolina Acquisition
Hotels, which are being purchased by the Company from Winston Affiliates or
entities in which Winston Affiliates own an equity interest.
"Articles of Incorporation" means the Articles of Incorporation of the
Company.
"Award Date" means the date of the first Board Meeting following an annual
meeting of shareholders.
"Base Rent" means the fixed obligation of the Lessee to pay an annual sum
certain in the form of monthly rent payments under each of the Percentage
Leases.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means net income (loss) (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring or sales of properties, plus depreciation and
amortization and minority interest, minus capital expenditures and principal
payments on indebtedness.
"Choice" means Choice Hotels International, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Winston Hotels, Inc., a North Carolina corporation.
104
<PAGE> 110
"Company-Owned Hotel" means the Hampton Inn -- Cary, North Carolina Initial
Hotel.
"Current Hotels" means the ten Initial Hotels acquired in connection with
the IPO, plus eleven additional hotel properties, one of which was acquired on
August 16, 1994 and five of which were acquired on November 29, 1994 and on May
11, 1995.
"CPI" means the Consumer Price Index published by the U.S. Bureau of Labor
Statistics of the U.S. Department of Labor, U.S. City Average, All items for
Urban Wage Earners and Clerical Workers (1982-1984=100)
"Debt Limitation" means the limitation on indebtedness contained in the
Company's Articles of Incorporation limiting the Company's consolidated
indebtedness to 45% of its investment in hotel properties at cost.
"Directors' Plan" means the Winston Hotels, Inc. Directors' Stock Plan.
"ESAs" means the Phase I environmental site assessments obtained by the
Company on all of the Current Hotels prior to their acquisition and on all of
the Acquisition Hotels in connection with their acquisition.
"Equitable" means an affiliate of Equitable Real Estate Investment
Management, Inc.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" means entities that generally are exempt from
federal income tax (other than the tax on unrelated business taxable income
under Section 511 of the Code).
"Existing Line" means the Company's existing $50 million line of credit
with Wachovia.
"Follow-on Offering" means the Company's 2,700,000 share second primary
public offering of Common Stock.
"Founding Director" means an individual who was a member of the Board of
Directors at the closing of the IPO.
"Funds From Operations" means net income (loss) (computed in accordance
with generally accepted accounting principals), excluding gains (or losses) from
debt restructuring or sales of properties, plus depreciation and amortization
and minority interest, and after adjustments for unconsolidated partnerships and
joint ventures.
"General Partner" means the Company, as general partner of the Partnership.
"Homewood Development Hotels" means the three Homewood Suites hotels that
are currently under development by Promus and that the Company has agreed,
subject to certain conditions, to purchase upon completion. See
"Promus -- Homewood Development Hotels".
"Homewood Option Hotels" means up to twelve (subject to downward adjustment
under certain circumstances) Homewood Suites hotels that Promus has agreed to
provide the Company an option to purchase over the next four years. See
"Promus -- Homewood Option Hotels".
"Hotels" means, collectively, the Current Hotels and the Acquisition
Hotels.
"Hunton & Williams" means Hunton & Williams, legal counsel to the Company.
"IMIC" means Interstate Management and Investment Company, which is owned
by Mr. E.L. Pooser and which operates ten of the Current Hotels under agreements
with the Lessee.
"Impac" means Impac Hotel Group, Inc.
"Initial Hotels" means the ten Hotels acquired in connection with the IPO.
"Independent Director" means a director of the Company who is not an
officer or employee of the Company, any Affiliate of an officer or employee or
any Affiliate of (i) any advisor to the Company under
105
<PAGE> 111
an advisory agreement, (ii) any lessee of any property of the Company, (iii) any
subsidiary of the Company, or (iv) any partnership which is an Affiliate of the
Company.
"IPO" means the initial public offering of Common Stock by the Company,
which was completed in June 1994.
"Lessee" means Winston Hospitality, Inc., a North Carolina corporation,
which leases the Current Hotels from the Partnership and the Company pursuant to
Percentage Leases and which will lease the Acquisition Hotels from the
Partnership pursuant to Percentage Leases.
"Lessee Gross Operating Profit" means the gross revenues of a Hotel subject
to a Promus Management Agreement, less all operating expenses borne by the
Lessee (which does not include real property taxes and casualty insurance
premiums, which are paid by the Company) and less any amounts payable by the
Lessee for the period under the related Percentage Lease.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partners" means the limited partners of the Partnership.
"Line Availability" means the Company's borrowing availability under the
New Line.
"New Line" means the $125 million line of credit facility with a group of
lenders led by Wachovia that is scheduled to close contemporaneously or soon
after the closing of the Offering.
"NAREIT" means National Association of Real Estate Investment Trusts, Inc.
"Non-Founding Director" means a director who is eligible under the
Director's Plan and who is not a Founding Director or a Reelected Director.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
"Offering" means the offering of shares of Common Stock hereby.
"Operating Hotels" includes those Acquisition Hotels that had room revenues
for twelve months in 1995, including the Hampton Inn -- Duncanville (Dallas),
Texas; the Holiday Inn Select -- Garland (Dallas), Texas; the Comfort
Suites -- London, Kentucky; the Holiday Inn Express -- Abingdon, Virginia; the
Comfort Inn -- Greenville, South Carolina; and the Homewood Suites -- Cary,
North Carolina.
"Other Hotels" includes (i) those Acquisition Hotels that were not open in
1995, including the Hampton Inn -- Perimeter (Atlanta), Georgia, the Hampton Inn
& Suites -- Duluth (Atlanta), Georgia and the Courtyard by
Marriott -- Wilmington, North Carolina and (ii) the Homewood Suites -- Clear
Lake (Houston), Texas, which opened in September 1995.
"Ownership Limitation" means 9.9% of the Common Stock.
"Ownership Limitation Provision" means a provision of the Articles of
Incorporation restricting the ownership of shares of Common Stock to the
Ownership Limitation.
"Partnership" means WINN Limited Partnership, a limited partnership
organized under the laws of the State of North Carolina.
"Partnership Agreement" means the partnership agreement of the Partnership
as amended and restated.
"PCB" means polychlorinated biphenyls.
"Percentage Leases" means the operating leases between the Lessee and the
Company or the Partnership pursuant to which the Lessee leases the Current
Hotels and will lease the Acquisition Hotels.
"Percentage Rent" means rent based on percentages of room revenue from the
Hotels payable by the Lessee pursuant to the Percentage Leases.
106
<PAGE> 112
"Preferred Stock" means the preferred stock, par value $.01 per share, of
the Company.
"Private Placement" means the unregistered sale of $3.0 million in Common
Stock from the Company to Promus, which is scheduled to close contemporaneously
with the closing of the Offering.
"Promus" means Promus Hotels, Inc.
"Promus Management Agreements" means the management agreements between the
Lessee and Promus by which Promus will operate the Promus Hotels and any hotels
acquired by the Company under the Promus First Right of Refusal.
"Promus Option Hotels" means the twelve or fewer hotels that the Company
will have the option to buy from Promus if such hotels are developed.
"REIT" means real estate investment trust.
"REVPAR" means room revenue per available room, determined by dividing room
revenue by available rooms.
"Redemption Rights" means the rights of the Limited Partners to cause the
redemption of Units in exchange for shares of Common Stock of the Company or, at
the option of the Company, cash.
"Reelected Director" means an eligible director who ceases to be a member
of the Board but is subsequently reelected.
"Rent" means the greater of Base Rent or Percentage Rent.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Smith Travel" means Smith Travel Research.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means the Underwriters named in this Prospectus.
"Units" means units of limited partnership interest in the Partnership.
"Wachovia" means Wachovia Bank of North Carolina.
"Winston Affiliates" means Charles Winston, Robert W. Winston, III, his
wife Tracy Winston and trusts for the benefit of their minor children, John B.
Harris, Jr., Winston Hospitality, Inc., Winston Advisors, Inc., and any other
Affiliate of Charles Winston or Robert W. Winston, III.
"Winston Stock Incentive Plan" means the Winston Hotels, Inc. Stock
Incentive Plan.
107
<PAGE> 113
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Winston Hotels, Inc.:
Pro Forma Consolidated Statements of Income (unaudited) for the Year Ended
December 31, 1995 and the Three Months Ended March 31, 1996................... F-2
Pro Forma Consolidated Balance Sheet (unaudited) as of March 31, 1996............ F-6
Report of Independent Accountants................................................ F-8
Consolidated Balance Sheets as of December 31, 1994, December 31, 1995 and March
31, 1996 (unaudited).......................................................... F-9
Consolidated Statements of Income for the Period June 2, 1994 through December
31, 1994, the Year Ended December 31, 1995 and the Three Months Ended March
31, 1995 and 1996 (unaudited)................................................. F-10
Consolidated Statements of Shareholders' Equity for the Period June 2, 1994
through December 31, 1994, the Year Ended December 31, 1995 and the Three
Months Ended March 31, 1996 (unaudited)....................................... F-11
Consolidated Statements of Cash Flows for the Period June 2, 1994 through
December 31, 1994, the Year Ended December 31, 1995 and the Three Months Ended
March 31, 1995 and 1996 (unaudited)........................................... F-12
Notes to Consolidated Financial Statements....................................... F-13
Winston Hospitality, Inc.:
Pro Forma Statements of Income (unaudited) for the Year Ended December 31, 1995
and the Three Months Ended March 31, 1996..................................... F-21
Report of Independent Accountants................................................ F-25
Balance Sheets as of December 31, 1994, December 31, 1995 and March 31, 1996
(unaudited)................................................................... F-26
Statements of Income for the Period June 2, 1994 through December 31, 1994, the
Year Ended December 31, 1995 and the Three Months Ended March 31, 1995 and
1996 (unaudited).............................................................. F-27
Statements of Shareholders' Equity for the Period June 2, 1994 through December
31, 1994, the Year Ended December 31, 1995 and the Three Months Ended March
31, 1996 (unaudited).......................................................... F-28
Statements of Cash Flows for the Period June 2, 1994 through December 31, 1994,
the Year Ended December 31, 1995 and the Three Months Ended March 31, 1995 and
1996 (unaudited).............................................................. F-29
Notes to Financial Statements.................................................... F-30
Impac Acquisition Hotels:
Report of Independent Accountants................................................ F-33
Combined Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)... F-34
Combined Statements of Income for the Year Ended December 31, 1995 and the Three
Months Ended March 31, 1995 and 1996 (unaudited).............................. F-35
Combined Statements of Equity for the Year Ended December 31, 1995 and the Three
Months Ended March 31, 1996 (unaudited)....................................... F-36
Combined Statements of Cash Flows for the Year Ended December 31, 1995 and the
Three Months Ended March 31, 1995 and 1996 (unaudited)........................ F-37
Notes to Combined Financial Statements........................................... F-38
Cary Suites, Inc.:
Report of Independent Accountants................................................ F-42
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)............ F-43
Statements of Income and Retained Earnings for the Year Ended December 31, 1995
and the Three Months Ended March 31, 1995 and March 31, 1996 (unaudited)...... F-44
Statements of Cash Flows for the Year Ended December 31, 1995 and the Three
Months Ended March 31, 1995 and 1996 (unaudited).............................. F-45
Notes to Financial Statements.................................................... F-46
Schedules:
Schedule III -- Real Estate and Accumulated Depreciation for Winston Hotels,
Inc........................................................................... F-49
Notes to Schedule III............................................................ F-50
</TABLE>
F-1
<PAGE> 114
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)
These unaudited pro forma Consolidated Statements of Income are presented
as if (i) the acquisition of the Acquisition Hotels and the Current Hotels not
owned on January 1, 1995, (ii) the consummation of the Follow-on Offering, the
Private Placement and the Offering, (iii) the application of the proceeds
therefrom and (iv) the effective date for the Percentage Leases and the proposed
Percentage Leases for such Hotels had occurred as of the beginning of each of
the periods presented. Such pro forma information is based in part upon (i) the
Statements of Income of Winston Hotels, Inc., Impac Acquisition Hotels and Cary
Suites, Inc. included elsewhere in the Prospectus, (ii) the Statement of Income
of the Acquisition Hotels (the five hotels purchased by the Partnership in May
1995) incorporated herein by reference, (iii) unaudited financial information of
the Comfort Inn, Greenville, SC and the Homewood Suites, Clear Lake, TX prepared
by management of these two hotels but not included in this Prospectus and (iv)
the Base Rents as outlined in the proposed Percentage Leases for the Other
Hotels. The Pro forma Consolidated Statements of Income should be read in
conjunction with the Financial Statements listed in the Index at page F-1 of
this Prospectus. Consistent with the rules and regulations of the Securities and
Exchange Commission, separate audited financial statements of the Comfort
Inn -- Greenville, SC and the Other Hotels have not been included primarily
because of the limited operating results of these hotels in 1995. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
These unaudited pro forma Consolidated 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 the beginning of
each of the periods presented, nor does it purport to represent the results of
operations for future periods.
F-2
<PAGE> 115
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------
REVISED
HISTORICAL ACQUISITION HOTELS CURRENT
YEAR ENDED REVISED ---------------------- HOTELS AND
DECEMBER 31, CURRENT PRO FORMA CURRENT OPERATING OTHER ACQUISITION
1995 HOTELS(A) ADJUSTMENTS(A) HOTELS(A) HOTELS(B) HOTELS(B) HOTELS
------------ --------- -------------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage lease
revenue................. $ 17,148 $19,060 $19,060 $ 6,232(C) $ 2,164(C) $27,456
Interest and other
income.................. 442 442 442 442
------------ --------- --------- --------- --------- -----------
Total revenue......... 17,590 19,502 19,502 6,232 2,164 27,898
------------ --------- --------- --------- --------- -----------
Real estate taxes and
property and casualty
insurance............... 1,054 1,180 1,180 476(D) 374(D) 2,030
General and
administrative.......... 1,208 1,098 $ (57)(E) 1,041 (E) 18(E) 1,059
Interest expense.......... 2,555 2,723 481(F) 3,204 691(F) 446(F) 4,341
Depreciation.............. 3,854 4,552 4,552 1,860(G) 1,197(G) 7,609
Amortization.............. 117 126 126 29(H) 5(H) 160
------------ --------- ------ --------- --------- --------- -----------
Total expenses........ 8,788 9,679 424 10,103 3,056 2,040 15,199
------------ --------- ------ --------- --------- --------- -----------
Income before allocation
to minority interest.... 8,802 9,823 $ (424) $ 9,399 $ 3,176 $ 124 12,699
================ ========== ========== ==========
Income allocation to
minority interest....... 417 414 1,090
------------ --------- -----------
Net income applicable to
common shareholders..... $ 8,385 $ 9,409 $11,609
============= ========== ===========
Net income per common
share(I)................ $ 0.96 $ 0.95 $ 0.76
Weighted average number of
common shares and common
share equivalents....... 9,211 10,339 16,624
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FOR THE THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------------------------
HISTORICAL REVISED
THREE MONTHS ACQUISITION HOTELS CURRENT
ENDED REVISED ---------------------- HOTELS AND
MARCH 31, PRO FORMA CURRENT OPERATING OTHER ACQUISITION
1996 ADJUSTMENTS(A) HOTELS(A) HOTELS(B) HOTELS(B) HOTELS
------------- -------------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage lease revenue............ $ 4,540 $ 4,540 $ 1,548(C) $ 668(C) $ 6,756
Interest and other income........... 16 16 16
------------- --------- --------- --------- -----------
Total revenue................... 4,556 4,556 1,548 668 6,772
------------- --------- --------- --------- -----------
Real estate taxes and property and
casualty insurance................ 320 320 127(D) 133(D) 580
General and administrative.......... 424 424 18(E) 12(E) 454
Interest expense.................... 674 $ 114(F) 788 179(F) 114(F) 1,081
Depreciation........................ 1,167 1,167 465(G) 299(G) 1,931
Amortization........................ 31 31 7(H) 1(H) 39
------------- ------ --------- --------- --------- -----------
Total expenses.................. 2,616 114 2,730 796 559 4,085
------------- ------ --------- --------- --------- -----------
Income before allocation to minority
interest.......................... 1,940 $ (114) $ 1,826 $ 752 $ 109 2,687
================ ========== ========== ==========
Income allocation to minority
interest.......................... 80 231
------------- -----------
Net income applicable to common
shareholders...................... $ 1,860 $ 2,456
============== ===========
Net income per common share(I)...... $ 0.19 $ 0.16
Weighted average number of common
shares and common share
equivalents....................... 10,383 16,611
</TABLE>
F-3
<PAGE> 116
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
- ---------------
(A) The pro forma Current Hotels information for the year ended December 31,
1995 represents the Current Hotels as if all such hotels had been owned by
the Company and the Partnership since January 1, 1995 as assumed in Note 8
of the Notes to the Consolidated Financial Statements of Winston Hotels,
Inc., which are included elsewhere in this Prospectus. The pro forma
adjustments reflect the terms of the New Line for each period presented and
the related impact on amounts payable to Winston Advisors, Inc. for the
year ended December 31, 1995.
(B) The Operating Hotels information includes the Acquisition Hotels that had
room revenues for twelve months in 1995 (the four Impac Acquisition Hotels,
the Comfort Inn -- Greenville, South Carolina, and the Homewood Suites,
Cary, North Carolina). The Other Hotels information includes the three
Acquisition Hotels that were not in operation during 1995 and one
Acquisition Hotel that was in operation since September 1995. The Other
Hotels include the Hampton Inn -- Perimeter (Atlanta), Georgia, the Hampton
Inn and Suites -- Gwinnett, Georgia, the Courtyard by Marriott --
Wilmington, North Carolina, and the Homewood Suites -- Clear Lake, Texas.
(C) Represents lease payments calculated on a pro forma basis using the rent
provisions in the proposed Percentage Leases and the historical revenue of
the Operating Hotels for each period presented and one of the Other Hotels
for the three months ended March 31, 1996. Percentage Lease revenue in 1995
for the four Other Hotels represents the Base Rent required under the
proposed Percentage Leases since three hotels had no revenue during 1995
and one hotel had approximately three months of revenue during 1995.
Percentage Lease revenue for three of the Other Hotels in the three months
ended March 31, 1996 represents Base Rent required under the proposed
Percentage Leases for those hotels since two of those hotels had no revenue
during the three months ended March 31, 1996 and one of those hotels had
approximately one month of revenue during the three months ended March 31,
1996. See "Business and Properties -- The Percentage Leases".
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------
HISTORICAL ROOM PRO FORMA PRO FORMA
AND FOOD AND BASE PERCENTAGE TOTAL
BEVERAGE REVENUE LEASE PAYMENT LEASE PAYMENT LEASE PAYMENT
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING HOTELS:
Hampton Inn, Duncanville (Dallas),
TX.................................. $ 1,370 $ 221 $ 276 $ 497
Comfort Inn, Greenville, SC........... 1,989 309 347 656
Homewood Suites, Cary, NC............. 3,281 1,010 967 1,977
Comfort Suites, London, KY............ 1,050 165 318 483
Holiday Inn Select, Garland (Dallas),
TX.................................. 6,352 1,036 1,048 2,084
Holiday Inn Express,
Abingdon, VA........................ 1,181 187 348 535
---------------- ------------- ------------- -------------
Total Operating Hotels................ 15,223 2,928 3,304 6,232
---------------- ------------- ------------- -------------
OTHER HOTELS:
Homewood Suites,
Clear Lake (Houston), TX............ 320 484 484
Hampton Inn, Perimeter (Atlanta),
GA.................................. 574 574
Hampton Inn & Suites,
Duluth (Atlanta), GA................ 581 581
Courtyard by Marriott,
Wilmington, NC...................... 525 525
---------------- ------------- -------------
Total Other Hotels.................... 320 2,164 2,164
---------------- ------------- -------------
Total Acquisition Hotels.............. $ 15,543 $ 5,092 $ 3,304 $ 8,396
=============== ============ ============ ============
</TABLE>
F-4
<PAGE> 117
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------
HISTORICAL ROOM PRO FORMA PRO FORMA
AND FOOD AND BASE PERCENTAGE TOTAL
BEVERAGE REVENUE LEASE PAYMENT LEASE PAYMENT LEASE PAYMENT
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING HOTELS:
Hampton Inn, Duncanville (Dallas),
TX.................................. $ 285 $ 55 $ 39 $ 94
Comfort Inn, Greenville, SC........... 484 77 78 155
Homewood Suites, Cary, NC............. 855 252 267 519
Comfort Suites, London, KY............ 219 41 49 90
Holiday Inn Select, Garland (Dallas),
TX.................................. 1,691 259 329 588
Holiday Inn Express,
Abingdon, VA........................ 250 47 55 102
-------- ------------- ------ -------------
Total Operating Hotels................ 3,784 731 817 1,548
-------- ------------- ------ -------------
OTHER HOTELS:
Homewood Suites,
Clear Lake (Houston), TX............ 564 121 127 248
Hampton Inn, Perimeter (Atlanta),
GA.................................. 154 144 144
Hampton Inn & Suites,
Duluth (Atlanta), GA................ 145 145
Courtyard by Marriott,
Wilmington, NC...................... 131 131
-------- ------------- ------ -------------
Total Other Hotels.................... 718 541 127 668
-------- ------------- ------ -------------
Total Acquisition Hotels.............. $4,502 $ 1,272 $ 944 $ 2,216
=============== ============ ============ ============
</TABLE>
(D) Represents real estate taxes and property and casualty insurance to be paid
by the Partnership and the Company.
(E) Represents an estimate for incremental franchise taxes, legal, accounting,
printing and other expenses for each period presented and amounts payable
to Winston Advisors, Inc. under an Advisory Agreement for the year ended
December 31, 1995. The Company became self-advised and self-administered,
and terminated the Advisory Agreement as of December 31, 1995.
(F) Represents interest expense on amounts drawn on the line of credit at 7.5%
applied to the pro forma debt balance assuming this balance remained
constant for each entire period. In addition, pro forma interest expense
includes unused line of credit fees of 0.25%, plus $314 and $78 of
amortization of loan cost and fees, which are amortized over the term of
the New Line, and $145 and $29 of amortization of interest rate cap fees,
for the year ended December 31, 1995 and the three months ended March 31,
1996, respectively.
(G) Represents depreciation of the Acquisition Hotels and renovations thereto,
which is computed based upon useful lives of 30 years for buildings and
improvements and five years for furniture and equipment. These estimated
useful lives are based on management's knowledge of the properties and the
hotel industry in general.
(H) Represents amortization of capitalized franchise fees, which is computed
over a 10 year period.
(I) Net income per common share is computed by dividing income before
allocation to minority interest by the weighted average number of shares of
Common Stock and Common Stock equivalents outstanding for the period.
F-5
<PAGE> 118
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED, IN THOUSANDS)
This unaudited pro forma Consolidated Balance Sheet is presented as if the
acquisition of the Acquisition Hotels and the consummation of the Offering and
the Private Placement and the application of the net proceeds therefrom had
occurred on March 31, 1996. Such pro forma information is based upon the
Consolidated Balance Sheet of the Company. It should be read in conjunction with
the Financial Statements listed in the Index at page F-1 of this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
This unaudited pro forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of March 31, 1996, nor does it purport to
represent the future financial position of the Company.
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Investment in hotel properties..................... $ 124,283 $80,380(A) $ 204,663
Less accumulated depreciation...................... (6,200) -- (6,200)
---------- ----------- ---------
Net investment in hotel properties................. 118,083 80,380 198,463
Cash and cash equivalents.......................... 220 31(B) 251
Lease revenue receivable........................... 3,027 3,027
Deferred expenses, net............................. 1,172 351(C) 1,523
Prepaid expenses and other assets.................. 1,471 (1,062)(D) 409
---------- ----------- ---------
$ 123,973 $79,700 $ 203,673
========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks....................................... $ 34,500 $14,900(E) $ 49,400
Accounts payable and accrued expenses.............. 1,634 (270)(F) 1,364
Distributions payable.............................. 2,475 2,475
Amounts due to Lessee.............................. 1,457 1,457
Minority interest in Partnership................... 3,527 9,323(G) 12,850
Shareholders' equity:
Common stock..................................... 99 53(H) 152
Additional paid-in capital....................... 82,988 55,694(I) 138,682
Unearned directors' compensation................. (238) (238)
Accumulated deficit.............................. (2,469) (2,469)
---------- ----------- ---------
Total shareholders' equity............... 80,380 55,747 136,127
---------- ----------- ---------
$ 123,973 $79,700 $ 203,673
========= ========== =========
</TABLE>
F-6
<PAGE> 119
WINSTON HOTELS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
- ---------------
(A) Increase reflects purchase prices of the Acquisition Hotels ($72,751), cost
of renovations of the Acquisition Hotels ($6,275), capitalization of
estimated closing costs of the Acquisition Hotels ($734) and acquisition of
vacant land ($620).
(B) Represents assumed net proceeds from the Offering ($51,170 increased by $5
of offering costs paid as of March 31, 1996) and the Private Placement
($3,000) and assumed proceeds from borrowings under the line of credit
($14,900), less cash paid for the Acquisition Hotels ($61,046), less cash
paid for the acquisition of vacant land ($620), less cash paid for
franchise agreements ($75), less the costs of renovations of the Hotels
($6,275), less cash paid for closing costs of the Acquisition Hotels ($623)
and less cash paid for loan fees and costs anticipated to be incurred upon
obtaining an increase in the line of credit from $50 million to $125
million ($400).
(C) Change reflects an increase for the capitalization of franchise fees on the
Hotels ($337) and capitalization of loan fees and costs ($400) and
decreases for the capitalization of deferred acquisition costs ($371) and
deferred registration costs ($15).
(D) Represents a decrease for the capitalization of prepaid escrow against the
purchase prices of the Acquisition Hotels ($800) and franchise fees paid as
of March 31, 1996 ($262).
(E) Represents proceeds from assumed borrowings under the line of credit
($14,900).
(F) Decrease reflects payments of deferred acquisition costs ($260) and
deferred registration costs ($10).
(G) Represents value assigned to Partnership Units exchanged for investment in
hotel properties ($10,905) as adjusted to reflect dilution to the minority
interest in relation to the Company's interest in the Partnership ($1,582).
(H) Increase reflects the par value of Common Stock expected to be sold in the
Offering and Private Placement.
(I) Net increase reflects the gross proceeds from the Offering and the Private
Placement ($58,000) as adjusted to reflect dilution to the minority
interest in relation to the Company's interest in the Partnership ($1,582)
less the par value of the Common Stock issued ($53) and the estimated
expenses of the Offering ($3,835).
F-7
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Winston Hotels, Inc.
We have audited the accompanying consolidated balance sheets of Winston
Hotels, Inc. as of December 31, 1994 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the period June 2,
1994 through December 31, 1994 and for the year ended December 31, 1995. Our
audits also included the financial statement schedule of Winston Hotels, Inc. as
listed on the index on page F-1 and included in this Prospectus. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Winston Hotels,
Inc. as of December 31, 1994 and 1995, and the consolidated results of its
operations and its cash flows for the period June 2, 1994 through December 31,
1994 and for the year ended December 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
January 15, 1996
F-8
<PAGE> 121
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investment in hotel properties:
Land................................................... $10,913 $ 13,879 $ 13,879
Buildings and improvements............................. 72,143 103,264 103,742
Furniture and equipment................................ 2,861 5,753 6,662
------- -------- -----------
85,917 122,896 124,283
Less accumulated depreciation.......................... (1,176) (5,033) (6,200)
------- -------- -----------
Net investment in hotel properties....................... 84,741 117,863 118,083
Cash and cash equivalents................................ 1,114 2,496 220
Lease revenue receivable................................. 1,388 2,547 3,027
Deferred expenses, net................................... 737 841 1,172
Prepaid expenses and other assets........................ 134 222 1,471
------- -------- -----------
$88,114 $123,969 $ 123,973
======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks............................................. $28,600 $ 34,000 $ 34,500
Accounts payable and accrued expenses.................... 946 1,574 1,634
Distributions payable.................................... 1,514 2,785 2,475
Amounts due to Lessee.................................... 7 1,187 1,457
Minority interest in Partnership......................... 3,342 3,551 3,527
Commitments (Note 5)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding........ -- -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 6,775,114 shares in 1994 and 9,880,114
shares in 1995 and 1996, issued and outstanding..... 68 99 99
Additional paid-in capital............................. 55,805 82,988 82,988
Unearned directors' compensation....................... (331) (256) (238)
Accumulated deficit.................................... (1,837) (1,959) (2,469)
------- -------- -----------
Total shareholders' equity..................... 53,705 80,872 80,380
------- -------- -----------
$88,114 $123,969 $ 123,973
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 122
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD
JUNE 2, 1994 THREE MONTHS ENDED
THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------ ------------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Percentage lease revenue.................. $ 5,116 $ 17,148 $ 3,035 $ 4,540
Interest and other income................. 92 442 26 16
------------ ------------ --------- ----------
Total revenue..................... 5,208 17,590 3,061 4,556
------------ ------------ --------- ----------
Expenses:
Real estate taxes and property and
casualty insurance..................... 362 1,054 216 320
Advisory fee.............................. 58 509 97
General and administrative................ 281 699 130 424
Interest expense.......................... 218 2,555 538 674
Depreciation.............................. 1,176 3,854 745 1,167
Amortization.............................. 49 117 26 31
------------ ------------ --------- ----------
Total expenses.................... 2,144 8,788 1,752 2,616
------------ ------------ --------- ----------
Income before allocation to
minority interest............... 3,064 8,802 1,309 1,940
Income allocation to minority interest...... 187 417 79 80
------------ ------------ --------- ----------
Net income applicable to common
shareholders.................... $ 2,877 $ 8,385 $ 1,230 $ 1,860
=========== =========== ========= ==========
Net income per common share................. $ .43 $ .96 $ .18 $ .19
=========== =========== ========= ==========
Weighted average number of common shares and
common share equivalents.................. 7,073,159 9,210,883 7,216,539 10,382,685
=========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 123
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED TOTAL
------------------- PAID-IN DIRECTORS' ACCUMULATED SHAREHOLDERS'
SHARES DOLLARS CAPITAL COMPENSATION DEFICIT EQUITY
--------- ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares, net of
offering expenses............. 6,737,614 $67 $ 58,795 $58,862
Minority interest at closing of
initial public offering....... (3,364) (3,364)
Deficit assumed from acquisition
of Winston Affiliates'
interests..................... $(1,462) (1,462)
Issuance of shares to
directors..................... 37,500 1 374 $ (375) 0
Distributions ($.48 per
share)........................ (3,252) (3,252)
Unearned compensation
amortization.................. 44 44
Net income...................... 2,877 2,877
--------- ------- ---------- ------------ ----------- -------------
Balances at December 31, 1994... 6,775,114 68 55,805 (331) (1,837) 53,705
Issuance of shares, net of
offering expenses............. 3,105,000 31 27,183 27,214
Distributions ($.93 per
share)........................ (8,507) (8,507)
Unearned compensation
amortization.................. 75 75
Net income...................... 8,385 8,385
--------- ------- ---------- ------------ ----------- -------------
Balances at December 31, 1995... 9,880,114 99 82,988 (256) (1,959) 80,872
Distributions ($.24 per share)
(unaudited)................... (2,370) (2,370)
Unearned compensation
amortization (unaudited)...... 18 18
Net income (unaudited).......... 1,860 1,860
--------- ------- ---------- ------------ ----------- -------------
Balances at March 31, 1996
(unaudited)................... 9,880,114 $99 $ 82,988 $ (238) $(2,469) $80,380
========= ====== ========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 124
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD THREE MONTHS
JUNE 2, 1994 ENDED
THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------
1994 1995 1995 1996
------------ ------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 2,877 $ 8,385 $1,230 $1,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest......................... 187 417 79 80
Depreciation.............................. 1,176 3,854 745 1,167
Amortization of franchise fees............ 5 42 8 13
Amortization recorded as interest
expense................................. 25 154 10 57
Unearned compensation amortization........ 44 75 18 18
Changes in assets and liabilities:
Lease revenue receivable................ (1,388) (1,159) (578) (480)
Prepaid expenses and other assets....... (134) (88) 88 (187)
Current liabilities..................... 625 948 (273) (200)
------------ ------------ ------ ------
Net cash provided by operating
activities......................... 3,417 12,628 1,327 2,328
------------ ------------ ------ ------
Cash flows from investing activities:
Investment in hotel properties............... (85,585) (35,766) (288) (1,117)
Deferred acquisition costs................... (98) (77) -- (140)
Deposits on acquisitions..................... -- (1,062)
Payment for franchise fees................... (290) (216) -- --
------------ ------------ ------ ------
Net cash used in investing
activities......................... (85,973) (36,059) (288) (2,319)
------------ ------------ ------ ------
Cash flows from financing activities:
Net proceeds of public offerings............. 57,103 27,443 -- --
Purchase of interest rate cap agreements..... -- (261) (113) --
Increase in line of credit borrowing......... 28,600 5,400 -- 500
Line of credit fees.......................... (87) (130) -- --
Payment of distributions..................... (1,829) (7,261) (1,423) (2,668)
Distributions to minority interest........... (117) (378) (91) (117)
------------ ------------ ------ ------
Net cash provided by financing
activities......................... 83,670 24,813 (1,627) (2,285)
------------ ------------ ------ ------
Increase in cash and cash equivalents.......... 1,114 1,382 (588) (2,276)
Cash and cash equivalents at beginning of
period....................................... -- 1,114 1,114 2,496
------------ ------------ ------ ------
Cash and cash equivalents at end of period..... $ 1,114 $ 2,496 $ 526 $ 220
=========== =========== ====== ======
Supplemental disclosures:
Cash paid for interest....................... $ 43 $ 2,517 $ 529 $ 601
=========== =========== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 125
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION:
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of 6,371,000 shares of $.01 par
value common stock ("Common Stock") (including the underwriters'
over-allotment). The offering price per share was $10.00 resulting in gross
proceeds of $63,710. Net of underwriting discount and offering expenses, WHI
received approximately $57,103. Upon completion of the IPO, WHI utilized the
majority of the proceeds to acquire one hotel property and an approximate 93.4%
general partnership interest in WINN Limited Partnership (the "Partnership").
WHI is the sole general partner of the Partnership. The Partnership used a
substantial portion of the proceeds from WHI to acquire nine hotel properties
free of debt. The hotel property acquired by WHI and the nine hotel properties
acquired by the Partnership are hereinafter referred to as the "Initial Hotels."
Certain of the sellers of the Initial Hotels received all or a portion of their
consideration in shares of stock of WHI (an aggregate of 366,614 shares, of
which 194,182 shares were issued to affiliates of WHI (the "Winston Affiliates")
for their ownership interest and 172,432 shares were issued to a non-Winston
Affiliate) and units of limited partnership interest in the Partnership (433,956
units, all of which were issued to Winston Affiliates in exchange for a portion
of their ownership interest, representing an approximate 6.6% equity interest in
the Partnership). WHI and the Partnership (collectively the "Company") have
recorded the acquisition of the Winston Affiliates' interests in the Initial
Hotels at their historical cost basis. The Company began operations as a REIT on
June 2, 1994. During the period June 2, 1994 through December 31, 1994, the
Company acquired six additional existing hotels.
During the year ended December 31, 1995, WHI completed a follow-on offering
of 3,105,000 shares of Common Stock (including the underwriters'
over-allotment). The offering price per share was $9.625, resulting in net
proceeds to the Company of $27,443. The additional offering increased WHI's
ownership in the Partnership to 95.5%. With the proceeds from the offering,
existing cash and an additional $5 million of debt under its line of credit, the
Company acquired five additional existing hotels. The eleven hotels acquired
subsequent to the completion of the IPO are hereinafter referred to as the
"Acquired Hotels". As of December 31, 1995, the Company owned twenty-one hotels
(the "Current Hotels").
All of the Current Hotels are located in the Mid-Atlantic and Southeast
regions of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include
the accounts of WHI and the Partnership. All significant intercompany balances
and transactions have been eliminated.
Interim Unaudited Financial Information. The accompanying interim
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and generally accepted accounting
principles applicable to interim financial statements. In the opinion of
management, all adjustments and eliminations, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position of Winston Hotels, Inc. as of March 31, 1996 and the consolidated
results of its operations and cash flows for the three month periods ended March
31, 1995 and 1996, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
Investment in Hotel Properties. Hotel properties are recorded at cost,
reduced by approximately $7.7 million to reflect the historical carrying value
for the Winston Affiliates' interest in the Initial Hotels, and are depreciated
using the straight-line method over estimated useful lives of the assets of 5
and 30 years for furniture and equipment, and buildings and improvements,
respectively. Upon disposition, both the asset and accumulated depreciation
accounts are relieved and the related gain or loss is credited or
F-13
<PAGE> 126
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
charged to the income statement. Repairs and maintenance of hotel properties are
paid by Winston Hospitality, Inc. (the "Lessee").
The Company evaluates long-lived assets for potential impairment by
analyzing the operating results, trends and prospects for the Company and
considering any other events and circumstances which might indicate potential
impairment.
Cash and Cash Equivalents. All highly liquid investments with a maturity
of three months or less when purchased are considered to be cash equivalents.
Deferred Expenses. Deferred expenses consist of franchise fees and loan
costs, and are recorded at cost. Also included are acquisition costs and
registration fees related to hotels not yet acquired by the Company as well as
amounts paid for interest rate caps to minimize the exposure to rising interest
rates related to the line of credit (See Note 4). Amortization of franchise fees
is computed using the straight-line method over 10 years. Amortization of loan
costs, computed using the straight-line method over the two year commitment of
the related revolving credit agreement, and amortization of interest rate caps,
computed using the straight-line method over the term of the cap agreement, are
included in interest expense.
Revenue Recognition. The Company leases, pursuant to separate percentage
operating lease agreements ("Percentage Leases"), the Current Hotels to the
Lessee. Lease income is recognized when earned from the Lessee under the lease
agreements (see Note 5). Certain officers and shareholders of the Company own
100% of the outstanding stock of the Lessee.
Net Income Per Common Share. Net income per common share is computed by
dividing income before allocation to minority interest by the weighted average
number of common shares and common share equivalents outstanding for the period.
As a result of the redemption rights referred to in Note 7, units held by the
limited partners of the Partnership are common stock equivalents and the number
of shares issuable upon redemption are added to the common shares currently
outstanding. Additionally, the common stock equivalents of the qualified and
nonqualified stock option plans described in Note 7 are added to common shares
currently outstanding.
Distributions. The ability to pay regular quarterly distributions is
dependent upon receipt of distributions from the Partnership and the results of
operations of WHI's hotel property.
Income Taxes. The Company qualifies as a REIT under Sections 856 to 860 of
the Internal Revenue Code and therefore no provision for federal income taxes
has been reflected in the financial statements.
Earnings and profits, which determine the taxability of dividends to
shareholders, differ from net income reported for financial reporting purposes
due to the differences for federal tax purposes in the estimated useful lives
used to compute depreciation and the carrying value (basis) of the investment in
hotel properties. Additionally, certain costs associated with the IPO are
treated differently for federal tax purposes than for financial reporting
purposes. At December 31, 1995, the net tax bases of the Company's assets and
liabilities was approximately $3.4 million less than the amounts reported in the
accompanying consolidated financial statements.
For federal income tax purposes, 1995 distributions amounted to $.93 per
share, of which all is considered ordinary income.
Concentration of Credit Risk. The Company places cash deposits at
federally insured depository institutions. At December 31, 1995, bank account
balances exceeded federal depository insurance limits by approximately $2,278.
F-14
<PAGE> 127
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Reclassifications. Certain reclassifications have been made to the 1994
financial statements to conform with the 1995 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.
New Accounting Pronouncements. Effective January 1, 1996, the Company will
adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation." The impact of adopting this statement is not expected to be
material to the Company's consolidated financial statements.
Estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 1994 and 1995 and the reported amounts of
revenues and expenses during the period June 2, 1994 through December 31, 1994
and the year ended December 31, 1995. Actual results could differ from those
estimates.
3. ACQUISITION OF HOTEL PROPERTIES:
On August 16, 1994, the Partnership acquired an existing hotel for
approximately $4,600. This acquisition was paid with cash proceeds from the IPO
and was accounted for by the purchase method of accounting.
On November 29, 1994, the Partnership acquired five existing hotels for
approximately $31,742. This acquisition was paid with proceeds from borrowings
under the Company's lines of credit and available cash, and was accounted for by
the purchase method of accounting.
On May 18, 1995, the Partnership acquired five existing hotels for
approximately $33,107. This acquisition was paid with existing cash, the net
proceeds of the Company's May 1995 offering and an additional $5 million of
borrowings under the Company's line of credit and was accounted for by the
purchase method of accounting.
Results of operations for these hotels are included in the Consolidated
Statements of Income for the period in which they were owned by the Partnership.
4. DEFERRED EXPENSES:
At December 31, 1994 and 1995 deferred expenses consist of:
<TABLE>
<CAPTION>
1994 1995
---- ------
<S> <C> <C>
Franchise fees................................................. $290 $ 506
Line of credit fees............................................ 86 216
Interest rate caps............................................. -- 261
Acquisition costs.............................................. 192 84
Registration fees.............................................. 199 --
---- ------
767 1,067
Less accumulated amortization.................................. 30 226
---- ------
Deferred expenses, net......................................... $737 $ 841
===== ======
</TABLE>
During 1995, the Company entered into interest rate cap agreements to
eliminate the exposures to increases in 90-day LIBOR over 7.25%, and therefore
from exposures in interest rate increases under the collateralized line of
credit over 8.50%, on $30 million, for the period May 30, 1995 through May 30,
1997.
F-15
<PAGE> 128
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. COMMITMENTS:
During 1995, the Company incurred $509 in fees related to the advisory
agreement for management services provided to the Company by Winston Advisors,
Inc. ("Advisors"), a company 100% owned by certain Winston Affiliates. Under the
terms of this agreement, Advisors is paid an advisory fee of $100 per year, plus
additional fees based on increases in "funds from operations per share" as
defined in the agreement. These additional fees generally will be paid by the
issuance of additional shares of WHI's common stock. The fee and any additional
fees are payable in April 1996. This agreement provides for Advisors to
compensate executive officers of WHI. For the period from June 2, 1994 through
December 31, 1994 and the year ended December 31, 1995 total compensation to
these executives was $143 and $331, including imputed compensation of
approximately $117 to a Winston Affiliate for the period from June 2, 1994
through December 31, 1994.
During 1995, the Company's Board of Directors approved a plan for the
Company to terminate the advisory agreement and become self-advised as of
January 1, 1996. At that time, the Company's executive officers will become
salaried employees of the Company.
The hotel properties are operated by the Lessee under franchise agreements
and are licensed as Hampton Inn hotels (twelve), Comfort Inn hotels (eight) and
a Quality Suites hotel (one). The franchise agreements require the payment of
fees based on a percentage of hotel revenue. These fees are paid by the Lessee.
The Company has future lease commitments from the Lessee through 2005.
Minimum future rental payments under these noncancelable operating leases is as
follows:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Year ended December 31:
1996....................................................... $ 8,734
1997....................................................... 8,734
1998....................................................... 8,734
1999....................................................... 8,734
2000....................................................... 8,734
2001 and thereafter........................................ 33,682
-------
$77,352
========
</TABLE>
Under the terms of the Percentage Leases, the Lessee is obligated to pay
the Company the greater of minimum (base) rents or percentage rents. The Company
earned base rents of $2,583 and $7,853 for the period from June 2, 1994 through
December 31, 1994 and the year ended December 31, 1995, respectively, and
percentage rents of $2,533 and $9,295 for the period from June 2, 1994 through
December 31, 1994 and the year ended December 31, 1995, respectively. The
percentage rents are based on percentages of various levels of gross room
revenue. Due to the seasonality of the historical operations of the hotel
properties, reflecting higher occupancy during the second and third quarters,
and the structure of the Percentage Leases, which provide for a higher
percentage of the Lessee's revenue over a constant monthly amount being paid to
the Company as percentage rents, results of operations for the period June 2,
1994 through December 31, 1994, are not indicative of the results of operations
for a full year.
The Percentage Leases also require the Company to set aside reserves to
fund periodic improvements to the buildings and grounds, and the periodic
replacement and refurbishment of furniture, fixtures and equipment. These
reserves are equal to 3% of room revenues for the first year of the Percentage
F-16
<PAGE> 129
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. COMMITMENTS (CONTINUED):
Lease, and 5% of room revenues thereafter. These reserves amounted to
approximately $1,471 for the period ended December 31, 1995.
The Company owed the Lessee $7 and $1,187 at December 31, 1994 and 1995,
respectively, for additions to investment in hotel properties.
6. DUE TO BANKS:
In connection with the May 1995 acquisition of the five hotel properties,
the Company amended its line of credit with Wachovia. This amendment included an
increase of the line of credit to $50 million from $30 million, an increase of
the amount that may be borrowed for dividends, capital expenditures and working
capital to $8.3 million from $5 million, and an extension of the line of credit
through June 1, 1997. Interest on borrowings under the amended line of credit
will be set, at the Company's option, at (i) 30-day LIBOR plus 1.25%, (ii)
90-day LIBOR plus 1.25%, or (iii) the higher of (A) the bank's prime rate or (B)
the federal funds rate plus .5%. Interest is payable quarterly in arrears under
the first and second interest rate options and monthly in arrears under the
third interest rate option. As of December 31, 1995 the interest rate on the
outstanding balance under the line of credit was 7%. A commitment fee of 1/16%
per quarter on the unused portion of the line of credit was applied beginning
September 1995.
The agreement is collateralized by a blanket lien on the Current Hotels and
restricts the use of credit line proceeds to certain geographic areas with
respect to future hotel acquisitions. The agreement also requires maintenance of
certain financial ratios including liquidity and net worth. The unused portion
of the line of credit was $16 million at December 31, 1995.
In March 1995, the Company's Board of Directors and shareholders approved
an increase in the limitation of indebtedness from 40% to 45% of the purchase
prices paid by the Company for its investment in hotel properties. Assuming the
Company invests all future borrowings in hotel properties, it has additional
permitted borrowing capacity of approximately $45 million.
7. CAPITAL STOCK:
The Board of Directors is authorized to provide for the issuance of shares
of Preferred Stock in one or more series, to establish the number of shares in
each series and to fix the designation, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof.
Pursuant to the Partnership Agreement, the Winston Affiliates have certain
Redemption Rights which will enable them to cause the Partnership to redeem
their units in the Partnership in exchange for shares of Common Stock on a
one-for-one basis or, in certain circumstances, cash. The Redemption Rights may
be exercised by the Winston Affiliates at any time after June 2, 1995, in whole
or in part. The number of shares of Common Stock issuable to the Winston
Affiliates upon exercise of the Redemption Rights is 433,956 and has been
determined based on the cash value of their interests in the Initial Hotels
divided by the initial public offering price of $10.00 per share. The number of
shares issuable upon exercise of the Redemption Rights will be adjusted upon the
occurrence of stock splits, mergers, consolidations or similar pro-rata share
transactions, which otherwise would have the effect of diluting the ownership
interests of the Winston Affiliates or the shareholders of WHI.
WHI has issued 7,500 shares to each of its five initial independent
directors which shares will vest at a rate of 1,500 shares per year beginning on
June 2, 1994. The unvested shares are subject to forfeiture if the director does
not remain a director of WHI. Each director is entitled to vote and receive
dividends paid on such shares prior to vesting.
F-17
<PAGE> 130
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. CAPITAL STOCK (CONTINUED):
WHI has adopted the Winston Hotels 1994 Stock Incentive Plan (the "1994
Plan"). The 1994 Plan reserves a minimum of 700,000 (including 350,000 shares
subjected to shareholder approval at the May 28, 1996 annual meeting of
shareholders) shares for the benefit of certain employees of the Company or a
related entity of the Company or otherwise granted by the Board of Directors.
The 1994 Plan permits the grant of incentive or nonqualified stock options,
stock appreciation rights, stock awards or performance shares to participants.
As of December 31, 1995, 376,000 options were granted with exercise prices
ranging from $9.125 per share to $11.3125 per share. At December 31, 1995,
176,000 of the options were exercisable.
8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
These unaudited pro forma condensed statements of income of the Company are
presented as if the IPO and the Follow-on Offering and the acquisition of the
Current Hotels had occurred on January 1, 1994. 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, 1994, nor do they purport to represent the
results of operations for future periods (in thousands, except per share data).
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995
---------- ----------
<S> <C> <C>
Operating Data:
Percentage lease and other revenue............................ $ 16,611 $ 19,502
Real estate taxes and property and casualty insurance......... 1,192 1,180
Advisory fee.................................................. 100 399
General and administrative.................................... 550 699
Interest expense(A)........................................... 2,937 2,723
Depreciation.................................................. 4,436 4,552
Amortization.................................................. 126 126
Income allocation to minority interest........................ 306 414
---------- ----------
Income applicable to common shareholders........................ $ 6,964 $ 9,409
========== ==========
Net income per common share..................................... $ .70 $ .95
========== ==========
Weighted average number of common shares and common share
equivalents................................................... 10,314,070 10,339,258
========== ==========
</TABLE>
- ---------------
(A) Interest expense was calculated based on the weighted average interest rate
on all existing debt of 7.30% and 7.00% as of December 31, 1994 and 1995,
respectively, applied to the $37.1 million balance at December 31, 1994 and
the $35.2 million balance at December 31, 1995 due to banks.
9. NONCASH INVESTING AND FINANCING ACTIVITIES:
Excluded from the consolidated statements of cash flows was the effect of
certain noncash activities. The Company declared distributions of $1,514 in
1994, $2,785 in 1995 and $2,475 in March 1996 (unaudited), which were paid on
January 17, 1995, January 16, 1996 and April 16, 1996, respectively. Included in
amounts due to the Lessee are additions to investment in hotel properties of $7,
$1,187 and $1,457 (unaudited) at December 31, 1994, December 31, 1995 and March
31, 1996, respectively. The Company incurred $165 in registration fees, $94 of
acquisition costs, and $68 in investment in hotel properties which are included
in accounts payable and accrued expenses at December 31, 1994. Upon completion
of the follow-on offering in May 1995 and the increase in WHI's ownership in the
Partnership,
F-18
<PAGE> 131
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. NONCASH INVESTING AND FINANCING ACTIVITIES (CONTINUED):
the minority interest in Partnership increased by approximately $195 and was
recorded as a reduction of the net proceeds of the follow-on offering.
Minority interest of $3,364 for the limited partnership's units in the
Partnership, determined based on the limited partners' ownership interest in the
carrying value of the Partnership's equity at closing, has been reflected in
consolidation. These units were issued to Winston Affiliates in exchange for a
portion of their ownership interest, which was a deficit of $1,416.
Additionally, WHI issued 194,182 shares to Winston Affiliates in exchange for a
portion of their ownership interest in certain hotel properties which was a
deficit of $45. These units and shares issued to Winston Affiliates have been
recorded at historical basis and are reflected as a deficit assumed in the
Consolidated Statement of Shareholders' Equity, consistent with an "as if"
pooling. WHI also issued 172,432 shares of stock in exchange for a portion of a
non-Winston Affiliate's ownership interest in certain hotel properties, which
has been recorded at the IPO price of the shares ($1,724). Finally, WHI issued
37,500 shares of common stock to its five independent directors which were
valued and recorded at the IPO price of the shares ($375) with an offsetting
charge to unearned directors' compensation.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires the disclosure of estimated fair
value for financial instruments. Cash and cash equivalents are equal to their
fair value due to the nature of the financial instruments. The value of interest
rate cap agreements fluctuate with interest rates. As of December 31, 1995
interest rates related to the contract period were substantially below the
contract rates, and therefore these contracts were estimated to have nominal
current fair value as of that date. Due to banks consists of a line of credit
which reprices periodically to allow for the fair value to equal the carrying
value. The Company's remaining assets and liabilities are not considered
financial instruments.
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly financial data for the period June 2, 1994
through December 31, 1994 and the year ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1994 FOURTH THIRD SECOND(A)
---------------------------------------------- ------ ------ ---------
<S> <C> <C> <C>
Percentage lease revenue...................... $2,089 $2,308 $ 719
Interest and other income..................... 28 57 7
------ ------ ---------
Total revenue............................ 2,117 2,365 726
Operating expenses............................ 358 268 75
Interest expense.............................. 204 11 3
Depreciation.................................. 571 462 143
Amortization.................................. 22 20 7
Income allocation to minority interest........ 55 97 35
------ ------ ---------
Net income applicable to common
shareholders................................ $ 907 $1,507 $ 463
====== ====== =========
Net income per common share................... $ 0.13 $ 0.22 $0.08
====== ====== =========
Weighted average number of common shares and
common share equivalents (amounts in
thousands).................................. 7,211 7,143 5,952
====== ====== =========
</TABLE>
F-19
<PAGE> 132
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED):
<TABLE>
<CAPTION>
1995 FOURTH THIRD SECOND FIRST
--------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Percentage lease revenue..................... $4,023 $5,451 $4,639 $3,035
Interest and other income.................... 40 349 27 26
------ ------ ------ ------
Total revenue........................... 4,063 5,800 4,666 3,061
Operating expenses........................... 546 651 622 443
Interest expense............................. 702 711 604 538
Depreciation................................. 1,138 1,068 903 745
Amortization................................. 31 31 29 26
Income allocation to minority interest....... 65 143 130 79
------ ------ ------ ------
Net income applicable to common
shareholders............................... $1,581 $3,196 $2,378 $1,230
====== ====== ====== ======
Net income per common share.................. $ 0.16 $ 0.32 $ 0.29 $ 0.18
====== ====== ====== ======
Weighted average number of common shares and
common share equivalents (amounts in
thousands)................................. 10,376 10,366 8,731 7,217
====== ====== ====== ======
</TABLE>
- ---------------
(A) Includes 29 days of operations as a Real Estate Investment Trust.
12. SUBSEQUENT EVENTS (UNAUDITED):
The Company, through the Partnership, contracted to acquire 10 hotels (the
"Acquisition Hotels") for purchase prices aggregating approximately $73.4
million. In May 1996, the Company acquired five of the Acquisition Hotels for an
aggregate purchase price of approximately $28 million with borrowings under its
existing line of credit and an interim unsecured line of credit.
On April 25, 1996 the Company filed a registration statement on Form S-3
(the "Follow-on Offering") to sell up to 5 million shares of its common stock
(not including approximately 0.8 million shares subject to an underwriters'
over-allotment option) for which it expects to receive net proceeds of
approximately $51.2 million. The Company will contribute all of the net proceeds
of the Follow-on Offering to the Partnership and, after such contribution, will
own an approximately 91.1% interest in the Partnership. The net proceeds from
the sale of its common stock will be used to complete the acquisition of the
remaining five Acquisition Hotels, to repay certain indebtedness, to refurbish
certain of the Company's hotels and to transfer franchise licenses.
Additionally, the Company has entered into an agreement with Promus Hotel
Corporation ("Promus"), under which Promus will invest up to $15 million over
time in newly issued shares of the Company's common stock and the Company will
purchase existing or under development Promus-owned hotels (including one
Acquisition Hotel) at prices aggregating approximately $38.8 million over the
next few years.
In April 1996, the Company obtained a commitment from a group of lenders
led by Wachovia Bank for a $125 million line of credit ("New Line"). The
commitment is conditioned upon the closing of the Follow-on Offering. Amounts
outstanding under the existing line of credit will remain outstanding under the
New Line. Amounts outstanding under the New Line generally will bear interest at
LIBOR plus 1.75%. The Company initially will secure the New Line with 28 of its
hotels, and will initially be able to borrow up to $85 million. The amount
available to borrow 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 Company has obtained an interim unsecured
line of credit in the amount of $17.0 million, at a rate of LIBOR plus 1.75%, to
partially finance the acquisition of four of the Acquisition Hotels it acquired
in May 1996. The unsecured line of credit matures on July 1, 1996 and is
expected to be repaid from the proceeds of the Follow-on Offering.
F-20
<PAGE> 133
WINSTON HOSPITALITY, INC.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED, IN THOUSANDS)
These unaudited pro forma Statements of Income are presented as if (i) the
acquisition by the Partnership of the Acquisition Hotels and the Current Hotels
not owned on January 1, 1995, and (ii) the effective date of Percentage Leases
and the proposed Percentage Leases for such hotels had occurred as of the
beginning of each of the periods presented. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made. Such pro forma information is based in part upon (i) the Statements of
Income of Winston Hospitality, Inc., Impac Acquisition Hotels and Cary Suites,
Inc. included elsewhere in this Prospectus, (ii) the Statement of Income of the
Acquisition Hotels (the five hotels purchased by the Company in May 1995)
incorporated herein by reference, (iii) unaudited financial information of the
Comfort Inn, Greenville, SC and the Homewood Suites, Clear Lake, TX prepared by
management but not included in this Prospectus and (iv) the Base Rents as
outlined in the proposed Percentage Leases for the Other Hotels.
This unaudited pro forma Statement of Income is not necessarily indicative
of what actual results of operations of the Lessee would have been assuming such
transactions had been completed as of the beginning of each of the periods
presented, nor do they purport to represent the results of operations for future
periods.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------------------------------------------
ACQUISITION HOTELS
---------------------------------------------------------------------------------- CURRENT AND
CURRENT OPERATING OPERATING OTHER OTHER ACQUISITION
HOTELS HOTELS PRO FORMA HOTELS HOTELS PRO FORMA HOTELS HOTELS
PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA PRO FORMA
------------ ------------- ----------- --------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Room revenue..... $ 44,131 $13,159 $13,159 $ 320 $ 320 $57,610
Food and beverage
revenue........ 2,064 2,064 2,064
Other revenue,
net............ 1,208 476 $ (12)(C) 464 8 8 1,680
------------ ------------- ----------- --------- ---------- --------- -----------
45,339 15,699 (12) 15,687 328 328 61,354
------------ ------------- ----------- --------- ---------- --------- -----------
EXPENSES
Property and
operating
expenses....... 16,181 7,291 (141)(D) 7,150 179 179 23,510
Repairs and
maintenance.... 1,870 669 669 25 25 2,564
General and
administrative... 1,526 150(E) 150 100(E) 100 1,776
Franchise
costs.......... 3,967 917 917 10 16(F) 26 4,910
Real estate taxes
and property
and casualty
insurance...... 476 (476)(G) 80 (80)(G)
Management
fees........... 960 388 (56)(H) 332 3(H) 3 1,295
Interest
expense........ 1,724 (1,724)(I)
Depreciation and
amortization... 1,675 (1,675)(J) 474 (474)(J)
Percentage lease
payments....... 19,060 6,232(K) 6,232 2,164(K) 2,164 27,456
------------ ------------- ----------- --------- ---------- ----------- --------- -----------
Total expenses... 43,564 13,140 2,310 15,450 768 1,729 2,497 61,511
------------ ------------- ----------- --------- ---------- ----------- --------- -----------
Net income (loss)
(L)............ $ 1,775 $ 2,559 $(2,322) $ 237 $ (440) $(1,729) $(2,169) $ (157)
============ =========== =========== ========= ======== =========== ========= ==========
</TABLE>
F-21
<PAGE> 134
WINSTON HOSPITALITY, INC.
PRO FORMA STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------------------------------------------------------
ACQUISITION HOTELS
---------------------------------------------------------------------------------- CURRENT AND
CURRENT OPERATING OPERATING OTHER OTHER ACQUISITION
HOTELS HOTELS PRO FORMA HOTELS HOTELS PRO FORMA HOTELS HOTELS
HISTORICAL HISTORICAL(B) ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA PRO FORMA
---------- ------------- ----------- --------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Room revenue....... $ 10,709 $ 3,260 $ 3,260 $718 $ 718 $14,687
Food and beverage
revenue.......... 308 524 524 832
Other revenue,
net.............. 19 87 87 22 22 128
---------- ------------- --------- ----- --------- -----------
11,036 3,871 3,871 740 740 15,647
---------- ------------- --------- ----- --------- -----------
EXPENSES
Property and
operating
expenses......... 4,015 1,815 $ (70)(D) 1,745 260 260 6,020
Repairs and
maintenance...... 524 153 153 29 29 706
General and
administrative... 484 36(E) 36 $ 24(E) 24 544
Franchise costs.... 905 223 223 34 25(F) 59 1,187
Real estate taxes
and property and
casualty
insurance........ 127 (127)(G) 64 (64)(G)
Management fees.... 316 92 (5)(H) 87 50(H) 50 453
Interest expense... 401 (401)(I) 50 (50)(I)
Depreciation and
amortization..... 429 (429)(J) 129 (129)(J)
Percentage lease
payments......... 4,540 1,548(K) 1,548 668(K) 668 6,756
---------- ------------- ----------- --------- ----- ----------- --------- -----------
Total expenses..... 10,784 3,240 552 3,792 566 524 1,090 15,666
---------- ------------- ----------- --------- ----- ----------- --------- -----------
Net income (loss)
(L).............. $ 252 $ 631 $ (552) $ 79 $174 $(524) $ (350) $ (19)
======== =========== =========== ========= ======== =========== ========= ==========
</TABLE>
F-22
<PAGE> 135
WINSTON HOSPITALITY, INC.
PRO FORMA STATEMENTS OF INCOME -- (CONTINUED)
- ---------------
(A) Represents the Current Hotels as if they had been leased by the Lessee
since January 1, 1995. See Note 4 to the financial statements of Winston
Hospitality, Inc.
(B) Represents the historical operations for the year ended December 31, 1995
and the three months ended March 31, 1996 for the Impac Acquisition Hotels
and Cary Suites, Inc. which have been derived from the historical financial
statements included elsewhere in this Prospectus, and Comfort Inn,
Greenville, SC which have been derived from unaudited historical financial
statements provided by management of the hotel.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
IMPAC
ACQUISITION CARY OPERATING
HOTELS SUITES, INC. COMFORT INN HOTELS
----------- ------------ GREENVILLE, SC HISTORICAL
-------------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Room revenue............................ $ 8,006 $3,164 $1,989 $13,159
Food and beverage revenue............... 1,947 117 0 2,064
Other revenue, net...................... 411 24 41 476
----------- ------------ -------------- ---------
Total revenue 10,364 3,305 2,030 15,699
----------- ------------ -------------- ---------
EXPENSES
Property operating expenses............. 5,372 959 960 7,291
Repairs and maintenance................. 415 143 111 669
Franchise costs......................... 659 118 140 917
Real estate taxes and property and
casualty insurance.................... 299 98 79 476
Management fees......................... 303 0 85 388
Interest expense........................ 1,089 629 6 1,724
Depreciation and amortization........... 1,131 423 121 1,675
----------- ------------ -------------- ---------
Total expenses.......................... 9,268 2,370 1,502 13,140
----------- ------------ -------------- ---------
Net income.............................. $ 1,096 $ 935 $ 528 $ 2,559
========= ========= =========== ========
</TABLE>
F-23
<PAGE> 136
WINSTON HOSPITALITY, INC.
PRO FORMA STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------
IMPAC OPERATING
ACQUISITION CARY COMFORT INN HOTELS
HOTELS SUITES, INC. GREENVILLE, SC HISTORICAL
----------- ------------ -------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Room revenue............................ $ 1,955 $ 821 $ 484 $ 3,260
Food and beverage revenue............... 490 34 524
Other revenue, net...................... 76 11 87
----------- ------------ -------------- ---------
Total revenue 2,521 855 495 3,871
----------- ------------ -------------- ---------
EXPENSES
Property operating expenses............. 1,294 269 252 1,815
Repairs and maintenance................. 96 37 20 153
Franchise costs......................... 164 30 29 223
Real estate taxes and property and
casualty insurance.................... 81 24 22 127
Management fees......................... 71 21 92
Interest expense........................ 261 139 1 401
Depreciation and amortization........... 292 107 30 429
----------- ------------ -------------- ---------
Total expenses.......................... 2,259 606 375 3,240
----------- ------------ -------------- ---------
Net income.............................. $ 262 $ 249 $ 120 $ 631
========= ========= =========== ========
</TABLE>
(C) Represents elimination of the Acquisition Hotels interest income on loans
to affiliated companies.
(D) Represents elimination of expenses of the Acquisition Hotels which are not
expected to be incurred by the Lessee including certain professional fees,
corporate expenses and operating lease expenses for leased assets acquired
by the Partnership.
(E) Represents an estimate for the increase in general and administrative
expenses due to the increase in the number of hotels under management.
(F) Represents an increase in certain franchise fees of certain of the
Acquisition Hotels.
(G) Decrease reflects real estate taxes, personal property taxes and property
and casualty insurance to be paid by the Company and the Partnership.
(H) Change represents removing historical management fees for the Acquisition
Hotels, eight of which will be managed by the Lessee and reflecting
estimated management fees of the Holiday Inn Select, Garland (Dallas), TX
and the Homewood Suites, Houston/Clear Lake in accordance with the
provisions of the new management agreements for these hotels.
(I) Decrease reflects reduction of interest cost due to the repayment of
long-term debt, capital lease obligations and other indebtedness of the
Acquisition Hotels.
(J) Decrease reflects elimination of historical depreciation and amortization
expense. Depreciation and amortization are expenses of the Company and the
Partnership based on their cost basis.
(K) Pro forma amounts represent lease payments from the Lessee to the
Company and the Partnership and are calculated on a pro forma basis by
applying the rent provisions in the proposed Percentage Leases: (i) for
the Operating Hotels to their historical room revenues as if the
beginning of the period presented was the beginning of the lease year,
and (ii) for the Other Hotels by assuming Base Rents were paid by the
Lessee as if these hotels had been acquired and leases had commenced at
the beginning of the period presented (See footnote C to the Winston
Hotels, Inc. pro forma Statements of Income.
(L) The Lessee has made an election under Subchapter S of the Internal Revenue
Code. Any taxable income or loss is recognized by the stockholders.
F-24
<PAGE> 137
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Winston Hospitality, Inc.
We have audited the accompanying balance sheets of Winston Hospitality,
Inc. as of December 31, 1994 and 1995 and the related statements of income,
shareholders' equity and cash flows for the period June 2, 1994 through December
31, 1994 and for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Winston Hospitality, Inc. as
of December 31, 1994 and 1995 and the results of its operations and its cash
flows for the period June 2, 1994 through December 31, 1994 and for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
February 6, 1996
F-25
<PAGE> 138
WINSTON HOSPITALITY, INC.
BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $2,120 $2,249 $ 2,833
Accounts receivable:
Trade.............................................. 526 836 966
Lessor............................................. 7 1,187 1,457
Affiliates......................................... 26 79 226
Prepaid expenses and other assets..................... 52 117 104
------ ------ -----------
Total current assets.......................... 2,731 4,468 5,586
------ ------ -----------
Furniture, fixtures and equipment:
Furniture and equipment............................... 127 186 191
Leasehold improvements................................ 98 106 110
------ ------ -----------
225 292 301
Less accumulated depreciation and amortization........ 32 95 112
------ ------ -----------
193 197 189
------ ------ -----------
$2,924 $4,665 $ 5,775
====== ====== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade............................. $ 461 $ 450 $ 644
Percentage lease payable.............................. 1,388 2,547 3,027
Accrued salaries and wages............................ 147 607 429
Accrued sales and occupancy taxes..................... 186 219 369
Other current liabilities............................. 677 357 619
------ ------ -----------
Total current liabilities..................... 2,859 4,180 5,088
------ ------ -----------
Commitments (Note 3)
Shareholders' equity:
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding............................. 1 1 1
Additional paid-in capital............................ 49 49 49
Retained earnings..................................... 15 435 637
------ ------ -----------
Total shareholders' equity.................... 65 485 687
------ ------ -----------
$2,924 $4,665 $ 5,775
====== ====== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 139
WINSTON HOSPITALITY, INC.
STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JUNE 2, THREE MONTHS ENDED
1994 THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------
1994 1995 1995 1996
------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Room revenue.......................... $ 12,474 $ 39,677 $ 7,373 $10,709
Other operating revenue, net.......... 185 987 213 308
Interest income....................... 13 85 10 19
------------ ------------ ------- -------
Total revenue................. 12,672 40,749 7,596 11,036
------------ ------------ ------- -------
Expenses:
Property and operating expenses....... 4,746 14,324 2,675 4,015
Repairs and maintenance............... 608 1,870 328 524
General and administrative............ 782 1,526 341 484
Franchise costs....................... 1,107 3,565 623 905
Management fees....................... 23 784 155 316
Percentage lease payments............. 5,116 17,148 3,035 4,540
------------ ------------ ------- -------
Total expenses................ 12,382 39,217 7,157 10,784
------------ ------------ ------- -------
Net income.................... $ 290 $ 1,532 $ 439 $ 252
=========== =========== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 140
WINSTON HOSPITALITY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES DOLLARS CAPITAL EARNINGS TOTAL
------ ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Issuance of shares........................... 100 $ 1 $ 49 $ 50
Net income................................... $ 290 290
Distributions................................ (275) (275)
------ ------- ----- --------- -------
Balance December 31, 1994.................... 100 1 49 15 65
Net income................................... 1,532 1,532
Distributions................................ (1,112) (1,112)
------ ------- ----- --------- -------
Balance December 31, 1995.................... 100 1 49 435 485
Net income (unaudited)....................... 252 252
Distributions (unaudited).................... (50) (50)
------ ------- ----- --------- -------
Balance March 31, 1996 (unaudited)........... 100 $ 1 $ 49 $ 637 $ 687
====== ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 141
WINSTON HOSPITALITY, INC.
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JUNE 2, THREE MONTHS ENDED
1994 THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1995 1996
------------ ------------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 290 $1,532 $ 439 $ 252
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 32 63 15 17
Changes in assets and liabilities:
Accounts receivable -- trade........ (526) (310) (162) (130)
Prepaid expenses and other assets... (52) (65) (9) 13
Accounts payable -- trade........... 461 (11) 40 194
Percentage lease payable............ 1,388 1,159 578 480
Accrued expenses and other
liabilities...................... 1,010 173 73 234
------------ ------------ ------ -------
Net cash provided by operating
activities..................... 2,603 2,541 974 1,060
------------ ------------ ------ -------
Cash flows used in investing activities:
Purchases of furniture, fixtures and
equipment............................. (225) (67) (9)
Proceeds from sale of furniture, fixtures
and equipment......................... 3
Advances to Lessor and affiliates........ (33) (1,233) (674) (417)
------------ ------------ ------ -------
Net cash used in investing
activities..................... (258) (1,300) (671) (426)
------------ ------------ ------ -------
Cash flows provided by financing
activities:
Issuance of common stock................. 50
Distributions to shareholders............ (275) (1,112) (50)
------------ ------------ -------
Net cash used in financing
activities..................... (225) (1,112) (50)
------------ ------------ -------
Increase in cash and cash equivalents...... 2,120 129 303 584
Cash and cash equivalents at beginning of
period................................... 2,120 2,120 2,249
------------ ------------ ------ -------
Cash and cash equivalents at end of
period................................... $2,120 $2,249 $2,423 $ 2,833
=========== =========== ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 142
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION:
Winston Hospitality, Inc. (the "Lessee") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston Hotels,
Inc. ("WHI") (collectively the "Company"). Approximately 95.5% of the
Partnership is owned by WHI. The two shareholders of the Lessee (Robert W.
Winston, III and John B. Harris, Jr.) are also shareholders of WHI and/or
partners in the Partnership. The Lessee began operating ten hotels (the "Initial
Hotels") on June 2, 1994, and was operating, directly or indirectly through a
management agreement (Note 3), a total of sixteen hotels as of December 31,
1994, and twenty-one hotels (the "Current Hotels") as of December 31, 1995.
Each hotel is separately leased by the Company to the Lessee under a
Percentage Lease Agreement. These leases require minimum base rental payments to
be made to the Company on a monthly basis and additional quarterly payments to
be made based on a percentage of gross room revenue.
Twelve of the twenty-one hotels are licensed as Hampton Inns, eight are
licensed as Comfort Inns and one is licensed as a Quality Suites. All of the
hotels offer limited service. The cost of obtaining the franchise licenses is
paid by the Company and the ongoing franchise fees are paid by the Lessee.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.
Interim Unaudited Financial Information. The accompanying interim
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and generally accepted accounting
principles applicable to interim financial statements. In the opinion of
management all adjustments and eliminations, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Lessee as
of March 31, 1996 and the results of its operations and cash flows for the three
month periods ended March 31, 1995 and 1996, have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
Cash Equivalents. All highly liquid investments with a maturity date of
three months or less when purchased are considered to be cash equivalents. The
Lessee places cash deposits with federally insured depository institutions. At
December 31, 1995, bank account balances exceeded federal depository insurance
limits by approximately $1,900.
Fair Value of Financial Instruments. Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments",
requires the Lessee to disclose estimated fair values for its financial
instruments. The Lessee's financial instruments consist of cash and cash
equivalents whose carrying value approximates fair value because of their short
maturity. The lessee's remaining assets and liabilities are not considered
financial instruments.
Furniture, Fixtures and Equipment. Furniture and equipment are recorded at
cost and are depreciated using the straight-line method over estimated useful
lives of the assets of five and seven years. Leasehold improvements are being
amortized using the straight-line method over the terms of the related leases.
Upon disposition, both the asset and accumulated depreciation accounts are
relieved and the related gain or loss is credited or charged to the income
statement.
Repairs and maintenance of hotel properties owned by the Company are paid
by the Lessee and are charged to expense as incurred.
F-30
<PAGE> 143
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Advertising Cost. Advertising costs of $343 and $1,296 during the period
June 2, 1994 through December 31, 1994 and the year ending December 31, 1995,
respectively, are expensed as incurred.
Income Taxes. The Lessee has made an election under Subchapter S of the
Internal Revenue Code. Any taxable income or loss is recognized by the
shareholders and, therefore, no provision for income taxes has been provided in
the accompanying financial statements.
Reclassifications. Certain reclassifications have been made to the 1994
financial statements to conform with the 1995 presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
3. COMMITMENTS:
Under the terms of the Percentage Lease Agreements, the Lessee has future
lease commitments to the Company through 2005. Minimum future rental payments
under these noncancellable operating leases are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1996.......................................................... $ 8,734
1997.......................................................... 8,734
1998.......................................................... 8,734
1999.......................................................... 8,734
2000.......................................................... 8,734
2001 and thereafter........................................... 33,682
-------
$77,352
========
</TABLE>
The Lessee incurred minimum rents of $2,583 and $7,853 as well as
percentage rents of $2,533 and $9,295 for the periods ended December 31, 1994
and 1995, respectively. At December 31, 1994 and 1995, the Lessee owed the
Company $1,388 and $2,547, respectively, for rents under the terms of the
Percentage Leases.
The Lessee has entered into separate contracts with an unrelated party for
the management of ten of the hotels. The terms of these agreements provide for
management fees to be paid based on predetermined formulas for a period of ten
years through 2005. The contracts are cancelable under certain circumstances as
outlined in the agreements.
F-31
<PAGE> 144
WINSTON HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The unaudited pro forma statements of income of the Lessee are presented as
if the leases and the operation of the Current Hotels had commenced on January
1, 1994. The unaudited pro forma 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, 1994, nor do they
purport to represent the results of operations for future periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
------- -------
<S> <C> <C>
Room revenue....................................................... $39,964 $44,131
Other operating revenue, net....................................... 878 1,123
Interest income.................................................... 13 85
------- -------
Total revenue............................................ 40,855 45,339
------- -------
Expenses:
Property and operating expenses............................... 16,111 16,181
Repairs and maintenance....................................... 1,488 1,870
General and administrative.................................... 1,297 1,526
Franchise costs............................................... 3,517 3,967
Management fees............................................... 805 960
Percentage lease payments..................................... 16,483 19,060
------- -------
Total expenses........................................... 39,701 43,564
------- -------
Net income............................................... $ 1,154 $ 1,775
======== ========
</TABLE>
5. PROFIT SHARING PLAN:
On January 1, 1996, the Company adopted the Winston 401(k) Plan (the
"Plan") for substantially all employees, except any highly compensated employee,
as defined in the Plan, who have attained the age of 21 and completed one year
of service. Under the plan, employees may contribute from 1% to 15% of
compensation, subject to an annual maximum as determined under the Internal
Revenue Code. The Company will make matching contributions of a specified
percentage of the employee's contribution, currently 3% of the first 6% of the
employee's contribution, and may make additional discretionary contributions.
F-32
<PAGE> 145
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Winston Hotels, Inc.
We have audited the accompanying combined balance sheet of the Impac
Acquisition Hotels (described in Note 1) as of December 31, 1995, and the
related combined statements of income, equity and cash flows for the year then
ended. These combined financial statements are the responsibility of the
management of the Impac Acquisition Hotels. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Impac Acquisition Hotels
as of December 31, 1995 and the combined results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
February 21, 1996
F-33
<PAGE> 146
IMPAC ACQUISITION HOTELS
COMBINED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotel property, at cost:
Land........................................................ $ 945 $ 945
Buildings and improvements.................................. 8,862 8,862
Furniture and equipment..................................... 4,665 4,735
------------ -----------
14,472 14,542
Less accumulated depreciation............................... 3,267 3,536
------------ -----------
Net investment in hotel properties............................ 11,205 11,006
Cash and cash equivalents..................................... 378 306
Accounts receivable........................................... 354 356
Notes receivable from affiliates.............................. 395 664
Accrued interest receivable................................... 12 6
Deferred expenses, net........................................ 175 154
Prepaid expenses and other assets............................. 74 130
------------ -----------
$ 12,593 $12,622
=========== ==========
LIABILITIES AND EQUITY
Long-term debt................................................ $ 9,894 $ 9,833
Accounts payable, trade....................................... 531 812
Accrued expenses and other liabilities........................ 242 202
Notes payable to affiliates................................... 552 575
Distributions payable......................................... 61
------------ -----------
11,280 11,422
------------ -----------
Commitments
Shareholders' equity:
Common stock; no par value.................................. 741 741
Accumulated deficit......................................... (708) (849)
Partners' equity:
General partners............................................ 16 18
Limited partners............................................ 1,264 1,290
------------ -----------
1,313 1,200
------------ -----------
$ 12,593 $12,622
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE> 147
IMPAC ACQUISITION HOTELS
COMBINED STATEMENTS OF INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Room revenue......................................... $ 8,006 $1,851 $1,955
Food and beverage revenue............................ 1,947 442 490
Other revenue, net................................... 411 85 76
------------ ------ ------
Total revenue................................ 10,364 2,378 2,521
------------ ------ ------
Expenses:
Property operating expenses.......................... 5,371 1,261 1,293
Repairs and maintenance.............................. 416 94 97
Franchise costs...................................... 659 156 164
Real estate taxes and property and casualty
insurance......................................... 299 79 81
Management fees, related party....................... 303 70 71
Interest expense..................................... 1,089 266 261
Depreciation and amortization........................ 1,131 325 292
------------ ------ ------
Total expenses............................... 9,268 2,251 2,259
------------ ------ ------
Net income................................... $ 1,096 $ 127 $ 262
=========== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE> 148
IMPAC ACQUISITION HOTELS
COMBINED STATEMENTS OF EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS' EQUITY
--------------------
COMMON ACCUMULATED GENERAL LIMITED
STOCK DEFICIT PARTNERS PARTNERS EQUITY
------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994............... $741 $(516) $ 11 $1,516 $ 1,752
Net income............................. 468 6 622 1,096
Distributions.......................... (660) (1) (874) (1,535)
------ ----------- -------- -------- -------
Balance, December 31, 1995............... 741 (708) 16 1,264 1,313
Net income (unaudited)................. 34 2 226 262
Distributions (unaudited).............. (175) (200) (375)
------ ----------- -------- -------- -------
Balance, March 31, 1996 (unaudited)...... $741 $(849) $ 18 $1,290 $ 1,200
======= ========== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE> 149
IMPAC ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------
1995 1995 1996
------------ ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 1,096 $ 127 $ 262
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 1,131 325 292
Recognition of deferred management fees............ 17 4
Changes in assets and liabilities:
Accounts receivable.............................. 20 (71) (2)
Accrued interest receivable...................... (12) (2) 6
Prepaid expenses and other assets................ (40) 40 (56)
Accounts payable, trade, accrued expenses and
other liabilities............................. 26 (181) 241
------------ ----- -----
Net cash provided by operating activities..... 2,238 242 743
------------ ----- -----
Cash flows from investing activities:
Additions to hotel properties......................... (608) (108) (72)
Increase in notes receivable from affiliates.......... (411) (162) (449)
Payments received on notes receivable from
affiliates......................................... 261 130 180
------------ ----- -----
Net cash used in investing activities......... (758) (140) (341)
------------ ----- -----
Cash flows from financing activities:
Proceeds from issuance of notes payable to
affiliates......................................... 108 80 26
Principal payments on long-term debt.................. (292) (72) (61)
Payment on notes payable to affiliates................ (75) (43) (3)
Distributions to partners............................. (1,474) (366) (436)
------------ ----- -----
Net cash used in financing activities......... (1,733) (401) (474)
------------ ----- -----
Net change in cash and cash equivalents................. (253) (299) (72)
Cash and cash equivalents at beginning of year.......... 631 631 378
------------ ----- -----
Cash and cash equivalents at end of year................ $ 378 $ 332 $ 306
=========== ====== ======
Supplemental disclosures of cash flow information --
Cash paid during the year for interest................ $ 1,042 $ 268 $ 267
=========== ====== ======
Schedule of noncash financing and investing activities:
The Companies declared $61 of distributions in 1995
that were paid in January 1996.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 150
IMPAC ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION
The Impac Acquisition Hotels are a combination of the balance sheets and
statements of income, equity and cash flows of two limited partnerships and two
"sub-chapter S" corporations (collectively the "Companies") presented on a
historical basis. The Companies are related through common control. Each company
owns one hotel property.
The Companies combined in these financial statements consist of the
following hotel properties:
<TABLE>
<CAPTION>
COMPANY HOTEL LOCATION
-------------------------- --------------------------------------------------------
<S> <C> <C>
Dallas Lodging Associates Holiday Inn Select Dallas, Texas
I, Ltd.
A.B. Lodging, Inc. Holiday Inn Express Abingdon, Virginia
London Lodging Associates, Comfort Suites London, Kentucky
Inc.
Duncanville Lodging Hampton Inn Duncanville, Texas
Associates I, Ltd.
</TABLE>
The Holiday Inn Select and the Holiday Inn Express are operated under
franchise agreements with Holiday Inns Franchising, Inc. The Comfort Suites is
operated under a franchise agreement with Choice Hotels International. The
Hampton Inn is operated under a franchise agreement with Hampton Inn Hotel
Division of Embassy Suites, Inc.
On May 7, 1996, the Companies sold their investment in hotel properties to
WINN Limited Partnership. The sales agreements did not extend to any other
assets or liabilities of the Companies. The Companies plan to liquidate their
remaining assets, satisfy their liabilities and make final distributions to
their owners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents. All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash equivalents.
Interim Unaudited Financial Information. The accompanying interim combined
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and generally accepted accounting
principles applicable to interim financial statements. In the opinion of
management, all adjustments and eliminations, consisting only of normal
recurring adjustments, necessary to present fairly the combined financial
position of the Impac Acquisition Hotels as of March 31, 1996 and the combined
results of their operations and cash flows for the three month periods ended
March 31, 1995 and 1996, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
Fair Value of Financial Instruments. Statement of Financial Accounting No.
107, "Disclosure About Fair Value of Financial Instruments" requires the
Companies to disclose estimated fair values of its financial instruments. The
Companies' financial instruments consist of cash and cash equivalents, long-term
debt, notes receivable from affiliates, and notes payable to affiliates, whose
carrying value approximates fair value. The Companies' remaining assets and
liabilities are not considered financial instruments.
Concentration of Credit Risk. The Companies place cash deposits with
federally insured financial institutions. At times, deposits have exceeded the
amounts insured by the Federal Deposit Insurance Corporation. In addition,
amounts due from affiliates represent concentrations of credit risk.
F-38
<PAGE> 151
IMPAC ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and accounts deemed uncollectible are charged to
operations.
Investment in Hotel Properties. The hotel properties are stated at cost.
Depreciation is computed using straight-line and accelerated methods at rates
based upon the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements....... 31.5-39.5 years
Furniture and equipment.......... 5-7 years
</TABLE>
Maintenance and repairs are charged to operations as incurred. Additions
and major improvements are capitalized. Upon sale or disposition, both the asset
and related accumulated depreciation are relieved and the related gain or loss
is included in operations.
The Company evaluates long-lived assets for potential impairment by
analyzing the operating results, trends and prospects for the Company and
considering any other events and circumstances which might indicate potential
impairment.
Advertising Costs. Advertising costs of $497 were expensed as incurred.
Deferred Expenses. Deferred expenses consist primarily of franchise fees
and loan costs which are recorded at cost. Amortization is computed using the
straight-line method over the terms of the franchise and loan agreements.
Income Taxes. Each of the four companies are not tax paying entities for
income tax purposes, and thus no income tax expense has been recorded in the
combined financial statements. Income or loss is taxed to the owners in their
individual income tax returns.
Use of Estimates in the Preparation of Financial Statements. The
preparation of the combined financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of December 31, 1995 and the
reported amounts of revenues and expenses during the year ended December 31,
1995. Actual results could differ from those estimates.
3. LONG-TERM DEBT
At December 31, 1995 long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable in equal monthly installments of principal and interest
of $24, bearing interest at 9%, due January 1, 2000............... $2,543
Note payable in monthly installments of principal and interest at
30-day LIBOR plus 4.75% (10.47% at December 31, 1995), due June 1,
1997.............................................................. 4,300
Note payable in equal monthly installments of principal and interest
of $14, bearing interest at WSJ prime plus 2% (10.25% at December
31, 1995), due September 24, 1996................................. 1,375
Notes payable in monthly installments of principal and interest
based on a 20 year amortization and interest at the bank's prime
plus 2% (9.75% at December 31, 1995), due November 8, 1996........ 1,676
------
$9,894
======
</TABLE>
The debt is collateralized by the investments in hotel properties and
rents. A majority of the notes are guaranteed by certain partners and
shareholders.
F-39
<PAGE> 152
IMPAC ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
3. LONG-TERM DEBT (CONTINUED)
Aggregate annual principal payments for long-term debt at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996...................................................... $3,293
1997...................................................... 4,170
1998...................................................... 64
1999...................................................... 71
2000...................................................... 2,296
------
$9,894
======
</TABLE>
4. RELATED PARTY TRANSACTIONS
Management services were provided to the Companies by an entity related
through common ownership under the terms of management contracts expiring at
various dates through May 2003. Management fees expensed were $304 during 1995.
Included in accounts payable are $10 of unpaid management fees as of December
31, 1995.
The Companies receive all services related to the renovation of the hotel
properties from Impac Design and Construction ("IDC"), a Company related to the
Companies through common ownership. Included in accounts payable are amounts due
to affiliates of $93 related to these services. Payments to IDC for renovation
services during the year ended December 31, 1995 amounted to $561.
The Companies make loans to other companies related to the Companies
through common ownership. Included in notes receivable from affiliates at
December 31, 1995 is $321 of notes that bear interest at 7% and are due upon
demand. Interest income on these notes was approximately $15 during the year
ended December 31, 1995. The remaining notes receivable from affiliates of $74
at December 31, 1995, do not bear interest and are due upon demand.
At December 31, 1995, notes payable to affiliates consists of the
following:
<TABLE>
<S> <C>
Note payable to former shareholder in equal monthly installments of
$5, including interest at 7%, due September 19, 1996............. $507
Notes payable on demand to affiliates bearing interest at 7%....... 45
----
$552
=====
</TABLE>
Interest expense on these notes for the year ended December 31, 1995 was
approximately $53.
F-40
<PAGE> 153
IMPAC ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
5. COMMITMENTS
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of hotel franchise
agreements expiring at various dates through October 2011. Fees are computed
based upon percentages (generally 8% of gross room revenue).
Certain equipment is leased under noncancelable operating lease agreements
expiring at varying intervals through April 1998. Following is a schedule for
the future minimum rental payments required under these leases as of December
31, 1995:
<TABLE>
<S> <C>
1996........................................................ $33
1997........................................................ 25
1998........................................................ 2
---
$60
====
</TABLE>
Rental expense was approximately $36 for the year ended December 31, 1995.
F-41
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Winston Hotels, Inc.
We have audited the accompanying balance sheet of Cary Suites, Inc. as of
December 31, 1995, and the related statements of income and retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the management of Cary Suites, Inc. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cary Suites, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
March 8, 1996
F-42
<PAGE> 155
CARY SUITES, INC.
BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotel property, at cost:
Land........................................................ $ 330 $ 330
Buildings and improvements.................................. 7,073 7,084
Furniture and equipment..................................... 1,344 1,345
------------ -----------
8,747 8,759
Less accumulated depreciation............................... 742 841
------------ -----------
Net investment in hotel property.............................. 8,005 7,918
Cash and cash equivalents..................................... 269 376
Accounts receivable........................................... 125 145
Advances to affiliates........................................ 1,076 1,121
Advances to shareholder....................................... 110 110
Deferred expenses, net........................................ 216 208
Prepaid expenses and other assets............................. 6 12
------------ -----------
$9,807 $ 9,890
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt................................................ $6,640 $ 6,545
Capital lease obligation...................................... 60 56
Accounts payable, trade....................................... 118 49
Accrued expenses and other liabilities........................ 144 146
------------ -----------
6,962 6,796
------------ -----------
Commitments
Shareholders' equity:
Common stock, no par value, 100,000 shares authorized,
100,000 shares issued and outstanding.................... 1,655 1,655
Retained earnings........................................... 1,190 1,439
------------ -----------
Total shareholders' equity.......................... 2,845 3,094
------------ -----------
$9,807 $ 9,890
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE> 156
CARY SUITES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------
1995 1995 1996
------------ ---- ------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Room revenue.......................................... $3,164 $756 $ 821
Food and beverage revenue............................. 117 22 34
Other revenue, net.................................... 24 5 --
------------ ---- ------
Total revenue................................. 3,305 783 855
------------ ---- ------
Expenses:
Property operating expenses........................... 959 241 270
Repairs and maintenance............................... 143 32 36
Franchise costs....................................... 118 27 30
Real estate taxes and property and casualty
insurance.......................................... 98 33 24
Interest expense...................................... 629 242 139
Depreciation and amortization......................... 423 106 107
------------ ---- ------
Total expenses................................ 2,370 681 606
------------ ---- ------
Net income.................................... 935 102 249
Retained earnings, beginning of year.................... 255 255 1,190
------------ ---- ------
Retained earnings, end of year.......................... $1,190 $357 $1,439
=========== ===== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 157
CARY SUITES, INC.
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------
1995 1995 1996
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 935 $102 $249
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 423 106 107
Loss on sale of equipment............................ 4
Changes in assets and liabilities:
Accounts receivable................................ (26) 118 (20)
Other accounts receivable.......................... 60
Prepaid expenses and other assets.................. 1 (4) (6)
Accounts payable, trade, accrued expenses and other
liabilities..................................... 42 38 (67)
------------ ---- ----
Net cash provided by operating activities....... 1,439 360 263
------------ ---- ----
Cash flows from investing activities:
Additions to hotel properties........................... (32) (13) (12)
Proceeds from sale of equipment......................... 17
Advances to affiliates.................................. (891) (53) (45)
Payments received on advances to affiliates............. 42
Advances to shareholder................................. (110)
------------ ---- ----
Net cash used in investing activities........... (974) (66) (57)
------------ ---- ----
Cash flows from financing activities:
Principal payments on long-term debt.................... (362) (57) (95)
Payments on capital lease obligation.................... (23) (4) (4)
------------ ---- ----
Net cash used in financing activities........... (385) (61) (99)
------------ ---- ----
Net change in cash and cash equivalents................... 80 233 107
Cash and cash equivalents at beginning of period.......... 189 189 269
------------ ---- ----
Cash and cash equivalents at end of period................ $ 269 $422 $376
=========== ===== =====
Supplemental disclosures of cash flow information --
Cash paid during the period for interest................ $ 674 $242 $140
=========== ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 158
CARY SUITES, INC.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION
Cary Suites, Inc. (the "Company") was formed to own and operate a Homewood
Suites in Cary, North Carolina. The Company has entered into a contract to sell
their investment in hotel property to WINN Limited Partnership. The contract
does not extend to any other assets or liabilities of the Company.
The hotel is operated under a franchise agreement with the Homewood Suites
Division of Embassy Suites, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents. All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash equivalents.
Interim Unaudited Financial Information. The accompanying interim
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and generally accepted accounting
principles applicable to interim financial statements. In the opinion of
management, all adjustments and eliminations, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 31, 1996 and the results of its operations and cash flows
for the three month periods ended March 31, 1995 and 1996, have been included.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
Fair Value of Financial Instruments. Statements of Financial Accounting
No. 107, "Disclosure about Fair Value of Financial Instruments" requires the
Company to disclose estimated fair values of its financial instruments. The
Company's financial instruments consist of cash and cash equivalents, whose
carrying value approximates fair value, advances to affiliates and shareholder
whose carrying value approximates fair value because of their short maturities
and long-term debt, whose carrying value approximates fair value due to the
variable rates on the instruments. The Company's remaining assets and
liabilities are not considered financial instruments.
Concentration of Credit Risk. The Company places cash deposits with
federally insured financial institutions. At times, deposits have exceeded the
amounts insured by the Federal Deposit Insurance Corporation. In addition,
amounts due from affiliates represent concentrations of credit risk.
Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and accounts deemed uncollectible are charged to
operations.
Investment in Hotel Property. The hotel property is recorded at cost, and
is depreciated using the straight-line method over estimated useful lives of the
assets of 5 and 30 years for furniture and equipment, and buildings and
improvements, respectively. Upon disposition, both the asset and accumulated
depreciation accounts are relieved and the related gain or loss is credited or
charged to the income statement. Repairs and maintenance expenses are charged to
operations as incurred.
The Company evaluates long-lived assets for potential impairment by
analyzing the operating results, trends and prospects for the Company and
considering any other events and circumstances which might indicate potential
impairment.
Advertising Costs. Advertising costs of $78 were expensed as incurred.
Deferred Expenses. Deferred expenses consist primarily of franchise fees,
organizational costs and deferred lease expense which are recorded at cost.
Amortization is computed using the straight-line method over the terms of the
franchise and lease agreements. Organizational costs are amortized over five
years. Accumulated amortization was $64 at December 31, 1995.
F-46
<PAGE> 159
CARY SUITES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes. The Company has made an election under Subchapter S of the
Internal Revenue Code. Any taxable income or loss is recognized by the
shareholders and therefore, no provision for income taxes has been provided in
the accompanying financial statements.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. LONG-TERM DEBT
At December 31, 1995 long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable in equal monthly installments of principal and
interest of $78, bearing interest at the bank's prime plus 1.5%
(9.0% at December 31, 1995), due June 10, 1998.................. $6,240
Note payable to a stockholder due on demand and bearing interest
at prime plus 1%................................................ 200
Notes payable with interest due annually at 9% and principal due
February 14, 1999 or upon the sale of the hotel................. 200
------
$6,640
======
</TABLE>
The debt is collateralized by the investment in hotel property and rents.
Aggregate annual principal payments for long-term debt at December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 621
1997.............................................................. 427
1998.............................................................. 5,392
1999.............................................................. 200
------
$6,640
======
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company has made non interest bearing loans to a shareholder and other
companies related to the Company through common ownership. These advances are
due upon demand. In addition, the Company owes a shareholder $200 (Note 3).
5. COMMITMENTS AND SIGNIFICANT CUSTOMER
Franchise costs represent the annual expense for franchise royalties,
reservation and advertising services under the terms of hotel franchise
agreement expiring in 2014. Fees are computed based upon percentages (generally
8% of gross room revenue, except as discussed below).
F-47
<PAGE> 160
CARY SUITES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
($ IN THOUSANDS)
5. COMMITMENTS AND SIGNIFICANT CUSTOMER (CONTINUED)
The Company leases certain equipment under an operating lease agreement
that expires in 1996. Rent expense related to such lease was $17 for the year
ended December 31, 1995. Payments under this lease in 1996 will be approximately
$15. Certain equipment is leased under a capital lease agreement. Equipment
capitalized under this lease agreement is $61, net of accumulated amortization
of $33. Following is a schedule of the future minimum rental payments required
under this lease as of December 31, 1995:
<TABLE>
<S> <C>
1996................................................................ $21
1997................................................................ 21
1998................................................................ 21
1999................................................................ 6
---
Total minimum lease commitments..................................... 69
Less amount representing interest................................... 9
---
Present value of future minimum lease commitments................... $60
====
</TABLE>
The Company leases approximately 60% of its available rooms to one
corporate customer under an agreement that expires March 31, 2003. Revenue
earned under this lease agreement for the year ended December 31, 1995 was
$1,695. The Company's franchisor has agreed to waive the franchise fees related
to the rooms rented to this customer throughout the term of the lease agreement.
Minimum future rental income under this noncancelable operating lease is as
follows:
<TABLE>
<S> <C>
1996............................................................ $ 1,727
1997............................................................ 1,727
1998............................................................ 1,727
1999............................................................ 1,727
2000............................................................ 1,727
Thereafter...................................................... 3,885
-------
$12,520
========
</TABLE>
F-48
<PAGE> 161
WINSTON HOTELS, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
($ IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS
SUBSEQUENT TO CARRIED
INITIAL COST ACQUISITION AT CLOSE OF PERIOD
--------------------- ------------------ -------------------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ------------------------------ ------------ ------- ------------ ---- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn
Brunswick, GA............... * $ 716 $ 3,887 $ 0 $ 38 $ 716 $ 3,925 $ 4,641
Hampton Inn
Charlotte, NC............... * 833 3,609 0 1 833 3,610 4,443
Hampton Inn
Atlanta, GA................. * 680 4,065 0 11 680 4,076 4,756
Hampton Inn
Cary, NC.................... * 613 4,596 0 1 613 4,597 5,210
Hampton Inn
Jacksonville, NC............ * 473 4,140 0 0 473 4,140 4,613
Hampton Inn
Durham, NC.................. * 634 4,582 0 27 634 4,609 5,243
Hampton Inn
Boone, NC................... * 264 2,750 0 3 264 2,753 3,017
Hampton Inn
Southern Pines, NC.......... * 614 4,280 0 17 614 4,297 4,911
Hampton Inn
Wilmington, NC.............. * 460 3,208 0 28 460 3,236 3,696
Comfort Inn
Wilmington, NC.............. * 532 5,889 0 215 532 6,104 6,636
Comfort Inn
Raleigh, NC................. * 459 4,075 0 18 459 4,093 4,552
Comfort Inn
Fayetteville, NC............ * 1,228 8,047 0 313 1,228 8,360 9,588
Comfort Inn
Durham, NC.................. * 1,958 6,208 0 0 1,958 6,208 8,166
Comfort Inn
Chester, VA................. * 661 6,447 0 0 661 6,447 7,108
Hampton Inn
Hilton Head, SC............. * 310 3,969 0 227 310 4,196 4,506
Hampton Inn
Chester, VA................. * 461 2,238 0 0 461 2,238 2,699
Comfort Inn
Augusta, GA................. * 404 3,541 0 0 404 3,541 3,945
Comfort Inn
Charleston, SC.............. * 438 5,853 0 25 438 5,878 6,316
Quality Suites
Charleston, SC.............. * 912 11,224 0 0 912 11,224 12,136
Comfort Inn
Clearwater, FL.............. * 532 3,436 0 0 532 3,436 3,968
Hampton Inn
Raleigh, NC................. * 697 5,955 0 341 697 6,296 6,993
-- ------- ------------ ---- ------------ ------- ------------ --------
$* $13,879 $101,999 $ 0 $1,265 $13,879 $103,264 $117,143
============ ======== ============ ===== ============ ======== ============ =========
<CAPTION>
LIFE UPON WHICH
ACCUMULATED NET BOOK DEPRECIATION IN
DEPRECIATION VALUE LAND, LATEST INCOME
BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION COMPUTED
- ------------------------------ ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Hampton Inn
Brunswick, GA............... $ 206 $ 4,435 6/2/94 30
Hampton Inn
Charlotte, NC............... 191 4,252 6/2/94 30
Hampton Inn
Atlanta, GA................. 215 4,541 6/2/94 30
Hampton Inn
Cary, NC.................... 243 4,967 6/2/94 30
Hampton Inn
Jacksonville, NC............ 219 4,394 6/2/94 30
Hampton Inn
Durham, NC.................. 242 5,001 6/2/94 30
Hampton Inn
Boone, NC................... 145 2,872 6/2/94 30
Hampton Inn
Southern Pines, NC.......... 227 4,684 6/2/94 30
Hampton Inn
Wilmington, NC.............. 170 3,526 6/2/94 30
Comfort Inn
Wilmington, NC.............. 318 6,318 6/2/94 30
Comfort Inn
Raleigh, NC................. 193 4,359 8/16/94 30
Comfort Inn
Fayetteville, NC............ 297 9,291 11/29/94 30
Comfort Inn
Durham, NC.................. 224 7,942 11/29/94 30
Comfort Inn
Chester, VA................. 233 6,875 11/29/94 30
Hampton Inn
Hilton Head, SC............. 147 4,359 11/29/94 30
Hampton Inn
Chester, VA................. 81 2,618 11/29/94 30
Comfort Inn
Augusta, GA................. 69 3,876 5/18/95 30
Comfort Inn
Charleston, SC.............. 114 6,202 5/18/95 30
Quality Suites
Charleston, SC.............. 218 11,918 5/18/95 30
Comfort Inn
Clearwater, FL.............. 67 3,901 5/18/95 30
Hampton Inn
Raleigh, NC................. 118 6,875 5/18/95 30
------------- -------------
$ 3,937 $ 113,206
=========== ===========
</TABLE>
* These properties serve as collateral for the $50 million line of credit, which
as of 12/31/95, had an outstanding balance of $34 million.
F-49
<PAGE> 162
WINSTON HOTELS, INC.
NOTES TO SCHEDULE III
<TABLE>
<CAPTION>
1994 1995
------- --------
<C> <S> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of period............................... $46,843 $ 83,056
Acquisitions during period................................... 36,060 32,992
Additions during period...................................... 153 1,095
------- --------
Balance at end of period..................................... $83,056 $117,143
======== =========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of period............................... $ 0 $ 930
Depreciation for period...................................... 930 3,007
------- --------
Balance at end of period..................................... $ 930 $ 3,937
======== =========
(c) The aggregate cost of land, buildings and furniture and equipment for
federal income tax purposes is approximately $129,000.
(d) Refer to Notes 1, 2 and 9 to the financial statements of Winston Hotels,
Inc. for transactions with affiliates and the basis of the carrying
value as reflected in the financial statements.
</TABLE>
F-50
<PAGE> 163
[Inside Back Cover]
A PHOTOGRAPH OF THE EXTERIOR OF THE GARLAND (DALLAS), TEXAS, HOLIDAY INN SELECT
HOTEL APPEARS BELOW.
A PHOTOGRAPH OF THE RESTAURANT IN THE GARLAND (DALLAS), TEXAS, HOLIDAY INN
SELECT HOTEL APPEARS BELOW.
A PHOTOGRAPH OF THE BAR IN THE GARLAND (DALLAS), TEXAS, HOLIDAY INN SELECT HOTEL
APPEARS BELOW.
A PHOTOGRAPH OF THE EXTERIOR OF THE CLEARLAKE (HOUSTON), TEXAS, HOMEWOOD SUITES
HOTEL APPEARS BELOW.
A PHOTOGRAPH OF THE INTERIOR OF THE CLEARLAKE (HOUSTON), TEXAS, HOMEWOOD SUITES
HOTEL APPEARS BELOW.
A PHOTOGRAPH OF THE EXTERIOR OF THE DULUTH (ATLANTA), GEORGIA, HAMPTON INN &
SUITES HOTEL APPEARS BELOW.
A PHOTOGRAPH OF A ROOM IN THE DULUTH (ATLANTA), GEORGIA, HAMPTON INN & SUITES
HOTEL APPEARS BELOW.
A PHOTOGRAPH OF THE EXTERIOR OF THE PERIMETER (ATLANTA), GEORGIA, HAMPTON INN
HOTEL APPEARS BELOW.
<PAGE> 164
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Corporate Structure................... 16
Risk Factors.......................... 17
Acquisitions.......................... 28
Promus................................ 29
Use of Proceeds....................... 31
Price Range of Common Stock and
Distributions....................... 33
Capitalization........................ 34
Selected Financial Information........ 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
Business and Properties............... 50
Management............................ 73
Principal Shareholders................ 78
Shares Available for Future Sale...... 80
Partnership Agreement................. 81
Federal Income Tax Considerations..... 83
Underwriting.......................... 102
Experts............................... 103
Legal Matters......................... 103
Glossary.............................. 104
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
LOGO
5,000,000 SHARES
WINSTON HOTELS, INC.
COMMON STOCK
------------------
PROSPECTUS
------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN KEEGAN &
COMPANY, INC.
RAYMOND JAMES &
ASSOCIATES, INC.
- ------------------------------------------------------
- ------------------------------------------------------
